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Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: maceng2 who wrote (95591)	7/24/2003 6:59:11 AM
From: maceng2	Read Replies (1) \| Respond to of 116764

Central banks to extend gold sales pact /edit: [{"Germany would be motivated to sell gold because it could probably earn a better return from a switch to other investments, he noted"}... This looks like a serious game of chicken all round. Who will end up owning all the worthless stuff? -g- pb] By Kevin Morrison Published: July 23 2003 22:47 \| Last Updated: July 23 2003 22:47 news.ft.com Europe's central banks are expected to extend their four-year-old gold sales agreement when it comes up for renewal next year. The low returns to be made from lending gold to market participants hedging forward sales and the budgetary pressures on Germany and other leading economies will encourage the banks to continue sales of the precious metal. The banks will also want to retain the stability of the gold price created by the restrictions imposed by the sales pact. The current agreement, which expires in September 2004, allows for 400 tonnes of gold to be sold each year. One central banker told the Financial Times recently that he thought there was room for an increase in gold sales. Some analysts expect the new pact to allow the sale of 500 tonnes a year over a five-year period, or 2,500 tonnes in total. This would allow additional banks - from Greece and the European Union accession countries - to join. The original arrangement was signed in September 1999 in response to increasing concerns that unco-ordinated central bank sales of gold were adding volatility to the market and pushing prices lower. The gold price fell to a 20-year low of $252 a troy ounce when the Bank of England announced its gold sales in the summer of 1999. The current pact has proved successful in adding order to the market. Gold rose to about $320 shortly after the agreement was reached. After a brief subsequent fall it has risen steadily for the past two years. Although the gold price has firmed, the rate central banks can charge borrowers such as gold miners - which use it to hedge forward sales of the metal - has fallen. The miners have needed less gold as they have unwound their long-term hedge positions. One-month gold deposits rates are zero, against more than 3 per cent at the time of the agreement. In addition, the creation of the European Central Bank has narrowed the remit of the eurozone's national central banks. "There is no need for the central banks to hold gold because they do not have a currency to defend and all monetary decisions are made by the ECB," said Frédéric Lasserre, head of commodities research at Société Générale. Germany will play a key role in any future agreement. Gold accounts for an estimated two-fifths of its foreign exchange reserves. It is the largest holder among the 15 signatories to the gold agreement, whose members, all European central banks, hold about 40 per cent of the world's official gold reserves. This is a lower percentage than before the agreement. However, "central banks are still very important to the gold market," said Robert Pringle, managing director of public policy for the World Gold Council. The central banks hold 22 per cent of the 147,000 tonnes of the world's gold that is in circulation, in the form of jewellery, in industrial uses and in official or investment holdings. Apart from Germany, the central banks of France and Italy, which are also running large budget deficits, have large gold holdings. Central banks are not allowed to sell assets or reserves to help finance government budgets, as this would breach the Maastricht treaty. "However, there are also ways that funds can transfer from the central banks to the treasury, such as dividend payments," said Matthew Turner, an analyst at Virtual Metals, a consultancy. Germany would be motivated to sell gold because it could probably earn a better return from a switch to other investments, he noted. Mr Pringle said central bank sales were part of a long-term trend which will further reduce the banks' role in the international gold market. "I think there will be a day when they will be able to conduct buying and selling activity without disrupting the market too much," he said.