German threat spooks gold market
Price dips $5.20 an ounce, halting rally
Drew Hasselback
Financial Post, with files from news services
The gold rally finally ended yesterday when its price dropped more than $5 an ounce -- or about 2% -- after the German central bank surprised the market by saying it wants to sell some of its reserves.
The rally began in late January when the price of bullion climbed from below US$280 an ounce. It peaked as high as US$308 an ounce on Feb. 8.
Ernst Welteke, president of Germany's Bundesbank, said the central bank wants to dump some of its gold reserves in favour of better returning assets, such as government bonds.
The news sent a shiver through gold markets, which until yesterday appeared to have found a new support level of just under US$300 an ounce. Gold closed yesterday at US$293.20 an ounce, down US$5.20.
"We have significant gold reserves in the Bundesbank, and of course we are happy if the gold price rises," Mr. Welteke said. "I could imagine that we slowly sell some of this gold and reinvest the revenue in assets that pay interest."
In Toronto, John Ing, an analyst with Maison Placements Canada Ltd., said the German announcement caught the market off guard.
"This is surprising because Bundesbank said at the formation of the European Union that it would not sell gold," he said.
But he added Germany's intentions should not have sparked a panic because the Bundesbank is a party to a multinational agreement that limits bulk sales of gold.
Gold has been shrinking in importance as a hedge against inflation. Central banks have been shedding gold stocks in favour of other investments.
Such sales put pressure on the gold price. In 1999, Germany was among the 15 nations that signed an agreement limiting central bank gold sales to protect gold prices. The so-called Washington agreement prevents the 15 central banks from selling more than 400 tons a year.
"I think the market's reaction is more psychological than anything else," Mr. Eng said.
As of December, the Bundesbank held 111 million ounces of gold in its inventory. That is second to the 262 million ounces held by the U.S. government.
Germany sold 12 tons of gold last year and expects to sell another 11 tons this May through a special offering of gold coins.
Meanwhile, CPM Group, a New York-based precious metals consultants, issued a study yesterday saying the global gold supply from mines and scrap dealers should rise nearly 4% to 106.5 million ounces this year from last year.
A study released last week by the World Gold Council said demand for gold as an investment vehicle rose last year following Sept. 11.
dhasselback@nationalpost.com |
