European central banks to shun fresh gold sales limits

LONDON: European central banks are unlikely to renew an agreement to limit gold sales when their current pact expires next year, a leading gold market consultant said, after selling evaporated over its previous term.

The amount of gold the region's central banks can sell in any given period has been capped by a series of Central Bank Gold Agreements (CBGAs) since 1999, after a spate of disposals by the official sector, including a 395-tonne tonne sale by the Bank of England, shook up the bullion market.

But George Milling-Stanley, an independent consultant and former managing director of government affairs with the World Gold Council, said he saw little chance of signatories opting to extend a ceiling on bullion sales for a fourth time.

"I would have to say at this point the chances are pretty slim that there will be another agreement," he said.

"The real reason why we got a third CBGA was because the International Monetary Fund wanted to sell within the context of an existing sales structure, rather than disrupting the market."

"Given that there is no prospect of IMF sales at this point that need to be accommodated, my sense from the central bankers in Europe that I talk to is that no one has any interest in major sales at the moment."

Central banks moved from being net sellers of gold to net buyers on an annual basis in 2010 for the first time since 1989. Gold buying from the official sector rose to a 48-year high of 536 tonnes last year, according to metals consultancy GFMS.

Much of that interest came from central banks in Asia and the developing world, which traditionally held a lower proportion of their reserves in gold than central banks in Europe.

At the end of 2008, South Korea held just 0.1 percent of its forex reserves in gold, against a 64 percent weighting in German reserves and 62 percent weighting in Italian holdings.

Some analysts have suggested that letting any agreement lapse would send an unwelcome signal to the wider market that more bullion sales from Europe's gold-heavy central banks may be on the way.

Milling-Stanley disagreed. "The only thing that would make them sign an agreement was if they felt it would be market disruptive not to, and I don't think that at this point it would," he said.

STRUCTURE IN PLACE

"I am hopeful that the 15 years in which we've had this structure in place has educated the market into the belief that if the central banks wanted to sell gold, they have a structure in place to do so, and that if there isn't an agreement, it's because central banks don't want to sell gold," Milling-Stanley said.

"If the central banks made that clear to the market I don't think it's going to be disruptive."

Central bank buying was one of the factors that sent gold prices to record highs at $1,920.30 an ounce in late 2011. Prices have since fallen back, however, and have struggled to break back above $1,800 an ounce in the last year.

Several leading forecasters, including Goldman Sachs and Credit Suisse, have said gold's 12-year bull cycle could be topping out.

Prices are more than five times higher than they were when the first CBGA was signed by 15 central banks, including those of Germany, Italy and France as well as the European Central Bank, in 1999.

That limited sales to 400 tonnes of gold per year, for a five-year period. Signatories struggled to stay within those limits, selling an average of just over 400 tonnes a year and exceeding its limit twice in five years.

With gold now held in much more esteem as a reserve asset after the financial crisis boosted volatility in the currency markets, sales have since fallen well short. Excluding IMF sales, signatories have sold an average of just 4.7 tonnes a year under the current CBGA.

"There is still among most European central banks, even in those that are facing major economic problems, a sense that selling gold would undermine the faith in the government and the country," Milling-Stanley said.

"People feel better about buying the bonds of a country if there is gold that might potentially be unlocked to back them in the event of a crisis happening."