Banks renew Washington agreement

European central banks announced earlier this month that they would continue to limit the sale of their gold, while increasing the limit slightly.

The new Central Bank Gold Agreement covers the 5-year period beginning next Sept. 27, and limits sales by the signatories (the European Central Bank plus 15 other central banks in Europe) to a total of 500 tonnes annually. It commits the banks to review the agreement once it expires in 2009.

The previous agreement — called the Washington Agreement, because it was signed at a Washington meeting of the International Monetary Fund — caused gold prices to rise about US$55 per oz. in the space of seven days and created a crisis in gold hedge markets. Both Ashanti Goldfields (ASL-N) and Cambior (CBJ-T) had margins called on their gold hedge accounts, forcing both companies to sell assets in order to meet cash requirements.

The original Washington agreement limited sales by the signatories to “approximately 400 tonnes” per year between September 1999 and September 2004. The banks also agreed not to increase the amount of gold each was leasing, and not to increase their position in gold futures or options over the same period. The new agreement keeps the cap on the banks’ use of leases, futures and options to September 1999 levels.

The national banks of the 12 countries using the euro (Austria, Belgium, France, Finland, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain) are all signatories, as are the Swiss National Bank and the Riksbank of Sweden. Greece, which acceded to the euro in January 2001, is a new member of the agreement.

The Bank of England, which had signed the 1999 agreement, has stayed out of the new pact, but at the time of the European announcement, the British government formally stated it planned no further gold sales. The Treasury has not held a gold auction since March 2002.

In late February, Financial Secretary Ruth Kelly, the junior cabinet minister with responsibility for the banking system, replied to a written question from the Opposition that “The Government currently [has] no plans to sell holdings of gold from their International Currency Reserves. We remain firmly committed to transparency, so if our plans were to change in the future, we would announce this publicly.”

The 15 signatories held about 14,018 tonnes (450 million oz.) of gold in early 2004, and the U.K. held a further 313 tonnes; the total represents about 45% of known official gold holdings.

Official-sector sales under the first agreement ran to 1,693 tonnes, with currently planned sales, largely by the Swiss and Dutch, likely to bring the total to the 2,000-tonne limit. The biggest year for gold sales was 2002-2003, when banks covered by the agreement sold 418 tonnes of gold. The Swiss, British, and Dutch treasuries were the largest sellers through the period, with the Swiss National Bank accounting for 927 tonnes up to late 2003.

The Swiss central bank had announced a program of gold sales in May 2000, under which it would sell 1,300 tonnes of gold. New sales under the first Washington Agreement will bring the bank’s total to 1,170 tonnes, with the remaining 130 tonnes to be sold under the renewed agreement. The bank has not indicated that it will sell any more gold after that 1,300-tonne quota.

The Nederlandse Bank had reserved a quota of 95 tonnes for the final year of the agreement and had previously arranged to sell a further 65 tonnes after the 5-year period ended. It has not announced plans to sell any more gold.

Germany’s Bundesbank sold about 29 tonnes, mainly through coin issues, during the Washington Agreement but has sought a 600-tonne quota under the new agreement. Portugal, with about 517 tonnes in official reserves, and Spain, with 523 tonnes, are possible sellers, but France and Italy — the two largest European gold holders after Germany — have historically been unwilling to sell gold reserves.