CBGA III Bullish For Gold

Early August provided some good news for gold bulls in the form of a second, five-year renewal of the landmark Central Bank Gold Agreement (CBGA), now approaching its 10th anniversary.

• On Aug. 7, the European Central Bank plus 18 central banks of individual European countries (not including the U. K.) released a joint statement renewing the CBGA and re-emphasizing that “gold remains an important element of global monetary reserves.”

It’s worth listening to, as the CBGA signatories’ gold reserves total roughly 12,000 tonnes, or about 40% of the 29,698 tonnes (955 million oz.) of gold held worldwide in official reserves.

The CBGA III signatories — the same bunch as for CBGA II, except for the addition of Slovakia — have pledged that, beginning Sept. 27, 2009, they will cap their combined annual gold-reserve sales at 400 tonnes (12.9 million oz.) over the next five years and total sales over this period at 2,000 tonnes.

This 400-tonne limit represents about 17% of current annual, global gold mine production, and is 100 tonnes per year less than the ceiling imposed by CBGA II, or the same as the level imposed by the original CBGA.

Most interestingly, the signatories said they “recognize the intention of the International Monetary Fund to sell 403 tonnes of gold and noted that such sales can be accommodated within the above ceilings.”

The signatories’ inclusion in their 400-tonne-per-year cap of sales from the non-signatory IMF is a frank admission that there really aren’t too many sellers these days among the CBGA signatories, who have only sold 140 tonnes in the last year of CBGA II, far short of the 500-tonne limit.

In fact, over the five-year life of CBGA II, only 1,867 tonnes of the 2,500-tonne quota was sold. Only Sweden and France have been selling much this year, while Germany and Italy have turned away from sales in recent years and former big seller Switzerland came out with a separate declaration on Aug. 7 that it has “no plans” to conduct further sales. The U. K. has been quiet after boneheadedly selling half its substantial hoard at the very bottom of the market.

In effect, it looks like the IMF sales will in large part be the CBGA III sales, at least for the first couple of years.

The 403 tonnes that the IMF plans to sell is 12.5% of its 3,217.3 tonnes of gold reserve in June, behind only the U. S. (8,134 tonnes) and Germany (3,413 tonnes), and ahead of Italy (2,452 tonnes), France (2,451 tonnes), China (1,054 tonnes), Switzerland (1,040 tonnes), Japan (765 tonnes), Netherlands (613 tonnes), Russia (537 tonnes) and the European Central Bank (501 tonnes).

The IMF hopes to have a formal vote to authorize gold sales before its October meetings (Oct. 6-7), with the gold to be sold over two to three years. The IMF will use profits from sales over US$850 per oz. to boost concessional lending to developing countries and to create an endowment for future IMF funding.

Given how the IMF’s sales proceeds will be used, there is a strong incentive for the CBGA III signatories to hold off and not sell gold at the same time as the IMF.

Taking the longer view, it’s remarkable that the CBGA signatories have sold almost 4,000 tonnes of gold over the past decade and yet gold prices have still powered upwards from around US$250 per oz. a decade ago to more than US$900 an oz. today, making it one of the longest and strongest gold bull markets in modern times.

We’re now seeing the era of massive European central bank gold sales drawing to a close, along with its depressing effects on the gold price.

As central bank sentiment around the world decisively shifts from anti-gold to pro-gold, the US$1,000 ceiling on gold prices will become the new floor, and gold will set out on the second leg of its historic bull market.

The fun is just beginning.

• Scottish gemologist Campbell Bridges, 71, was hacked to death in mid-August by a mob armed with machetes, clubs and spears after he, his son and four employees were stopped at a makeshift roadblock in Kenya’s Taita Taveta district.

Britain’s The Independent reported that the killing was the culmination of a feud with squatters who were stealing stones from a mine owned by the Bridges family in Tsavo National Park.

Bridges discovered the gemstone tsavorite — a deep green garnet –in 1967, and helped pioneer the broad acceptance of tanzanite as a commercial gemstone.