Commentary courtesy of:
Kevin Morrison,
Financial Times, London

Sept. 27th- European central banks have been big sellers of gold over the past six years but this year they appear to have lost their desire to sell the metal even though gold prices have been much higher.

Signatories to the Central Bank Gold Agreement, mainly European central banks, are estimated to have sold 400-420 tonnes of the 500 tonnes they are permitted to sell each year under the latest five-year pact.

Yesterday was the end of the second year of the second five-year pact and was the first year that official sales have fallen below 500 tonnes since the first pact -- introduced to steady the price of gold -- started in September 1999.

Philip Klapwijk, executive chairman of GFMS, the metals consulting group, said the shortfall was likely to be repeated over the next three years of the current agreement.

"When you look at the signatory countries it is hard to see who is going to step in and take the sales up to 500 tonnes," he added.

France accounted for about 30 percent of CBGA sales, up until the end of July, followed by Switzerland (15 percent), the Netherlands (14 percent), the European Central Bank (12 percent) and Portugal (9 percent). Other sellers included Spain, Belgium, and Austria.

France is forecast to sell a maximum of 344 tonnes by September 2009 while the Netherlands is expected to sell another 43 tonnes over the next three years. Switzerland has no plans to sell more gold.

No other signatories are likely to step in either. With the exception of about nine tonnes of gold coin sales in the past two years, Germany, the biggest holder of gold among the signatories, has not sold any of its 3,423.5 tonnes of gold, after a dispute between the Bundesbank and the German finance ministry. Likewise, Italy has given no indication that it plans to dispose of any of its 2,451 tonnes. GFMS forecasts that the shortfall from the gold sales pact could be as much as 855 tonnes over the five years of the current pact.

"I can't see the renewal of a new agreement, because what is the point? Most of the signatories would have sold what they wanted to," Mr. Klapwijk said.

Even though European central banks are reducing their gold sales, there has still been no sign of other central banks purchasing, with Mongolia's purchase of nine tonnes of gold this year being the largest central bank buy order.

Mr. Klapwijk said European central banks, which account for about 43 percent of world central bank gold holdings, will be in a different situation in 2009 compared to today. "In 1999, they had too much gold and the price was looking wobbly. In three years' time, they would have sold what they wanted to, and prices should still be reasonably firm," he said.

However, CBGA signatories have made a late rush in offloading gold in the past two months, contributing to the 7 percent decline in gold prices over that period. Until the end of July, signatories to the CBGA had sold only 331 tonnes, according to GFMS.

Gold was trading at $591.10 a troy ounce yesterday. Bullion prices have dropped about20 per cent since reaching a26-year peak of $730 in mid-May.

David Holmes, director of precious metals at Dresdner Kleinwort, said the decline in gold prices from their peak was a reflection of speculative investors exiting commodities markets.

He said the shortfall of central bank gold sales would normally have been positive for gold prices, as central bank gold sales have traditionally helped fill the gap between gold mine output and fabrication demand.

He said high gold prices this year had triggered a slump in global gold jewellery demand. GFMS has forecast that gold mine output this year will drop below jewellery demand for the first time since the early 1980s.

GFMS is forecasting gold jewellery demand to fall 18.6 per cent to 2,205 tonnes this year, less than projected gold mine production of 2,524 tonnes.

"The impact of lower central bank gold sales has been neutralised by the drop in jewellery demand, and lower gold sales in the future are unlikely to have an effect on prices until there are signs of a pick-up in jewellery demand," said Mr. Holmes.