Gold News

The CBGA Reaches Its End

Europe's big central banks seem to have lost their appetite for selling Gold today...

THE UNDERLYING PRINCIPLES of the Central Bank Gold Agreement laid out the attitude of European central banks towards gold, writes Julian Phillips of

   The agreements started as the Euro entered the foreign exchange markets for the first time in 1999. And all central banks prefer paper money to Gold because of the control it gives the bank over money.

Gold has a habit of undermining the credibility of paper money, as it reflects poor money management in falling values of the paper, as a result of this control. So it was almost incumbent on the European central banks – and their new headquarters and masters at the European Central Bank (ECB) in Frankfurt, Germany – to support the new Euro and frown on the monetary role of gold.

They were not so inclined, however, to frown on its value as a reserve asset. This function can be supportive of a paper currency and a nation in times of crisis.

Now the Euro has been established as an international and particularly European currency, there was no need to frown upon Gold any more. In fact, it is clear that the secondary role of gold as a "reserve asset" should be supported.

Central Bank Gold Sales: Defending the Euro

The "Washington Agreement" was the first of the two gold sales agreements and lasted for five years. During that time gold recovered and looked robust, so it could be said that the sales did not do their intended work.

But when the "Central Bank Gold Agreement" began for another five years, it was felt that the Euro still needed the support of these sales.

This time round, however, it was management of the US Dollar which became questionable. Its role as the world's reserve currency and the position of the Euro as an alternative to the US Dollar came to the fore.

During the last few years, therefore, the Euro has climbed against the Dollar and gained a strong reputation as a better-managed global currency. It provides the means of exchange for over 400 million Europeans in their daily lives. It is designed to monetarily unite a set of diverse economies that Europe has been for well over a couple of thousand years. It has done a remarkable job to date.

So politically, there is little need for further central-bank Gold sales now. Not from the European Central Bank (ECB) at least, nor its members.

   This has always been the opinion of the Italian central bank, whose history with the Lira was dismal and whose respect for gold was enormous. And Germany backed off from selling gold, even in the face of battles with government ministers showing little respect for gold.

Central Banks Unwilling to Sell Gold

The Bundesbank President, Axel Weber, made no bones about it saying that gold was "a useful counter to the swings in the Dollar". So Germany has sold no gold in the open market during the second agreement, selling only five tonnes a year for coin production purposes.

The Banque de France, France's central bank became an unwilling seller as the Governor lost his battle with then Finance Minister, now President of France, Nicholas Sarkozy.

Switzerland, basing the value of its gold on its currency equivalent value, focuses on the proportion of gold in its reserves. So as the Gold Price rose the Swiss National Bank reasoned that they had too much relative to the value (in Dollars, at least) of the currencies it holds.

Such is the trust in paper that the Swiss have sold 1,200 tonnes and then opted to sell another 250 tonnes. May we assume that they rather enjoy the declining Dollar and the falling income the SNB makes from its lower interest rates? No doubt as time goes on they will live to regret this decision as they see the value of currencies decline much further against Gold. But as is typical of the Swiss authorities, they said they would sell and they are and will do so until they have sold their commitment, but it is being done with a slack hand at the moment.

Britain, meanwhile, did not enter the second Central Bank Gold Agreement of 2004, primarily because it had already sold half of its reserves before that second agreement began. Since then, as the price of Gold has climbed to almost four times the level that then chancellor, now prime minister Gordon Brown orders its sales, so his reasoning has looked ridiculous.

Indeed, the price achieved by Britain – an average starting at $270 per ounce – is now known as the "Brown Bottom", as it was the lowest price the market saw since pre-1980.

Spain was quite a seller of gold, too. This appears due to the poor state of that nation's currency reserves and it ongoing international liabilities, not because of their desire to get rid of gold as was the impression given at the time.

The other European central banks, still holding large stocks of Gold Bullion as an overhang from the international Gold Standard of the early 20th century, also appear to be losing their enthusiasm for selling gold. With sales down to such a small level now, it seems that even the "announced sales" may well not happen.

Is that because Gold is now the best-performing asset in central bank reserves? As the global economy has dark clouds forming above it, the times when gold comes into its own as an international asset approach again. Now is the time to retain gold, not sell it.

Hence, the total gold sales of the entire number of signatories to the Central Bank Gold Agreement have declined to a trickle of around 0 to two tonnes a week, which the market barely notices.

What About IMF Gold Sales?

If European Central Bank selling does dwindle to a halt well before the end of the five-year CBGA agreement, then the role of gold in the monetary system would be well confirmed and gold's value as a retainer of value would have been re-established.

However, the Central Bank Gold Agreement would stand in tatters and would have confirmed that central banks want to keep the gold they have. This would most certainly prompt other private or institutional investors to Buy Gold as well.

But then along came the International Monetary Fund (IMF) earlier this year, yet another mentor of global finance with its own balance sheet in a mess.

The gold the IMF had acquired from Brazil and Mexico at the end of the 20th century was still under the control of its board and not in the possession of a single particular nation anymore. This makes it easier for the members to agree to sell it.

It is important to emphasize this point: the IMF wants to sell this gold to shore up its own finances, not for any paper money support. The sales, if the casting vote of the US Congress approves them, will have no monetary or anti-gold reason behind them. They are to bail out an institution in trouble, that's all.

However, so as not to cause a ripple in the Gold Market, the IMF has already stated that it will work under the confines of the Central Bank Gold Agreement (CBGA). We assume they will work in the same way and under the same 'ceiling' – so alongside any signatory sales, total sales will not go above the 500-tonne limit.

The reality seems even less threatening to the Gold Price than that, in fact, as they talk of the sales being conducted over several years. This means that they will occur at such a low level that they will not even send a ripple over the price.

We certainly don't believe that there is any collusion between the IMF and the signatories of the Central Bank Gold Agreement to try and dent the Gold Price through these gold sales.

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JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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