St. LOUIS (ResourceInvestor.com) -- The Swiss National Bank surprised the gold market on Thursday with plans sell 250 tonnes of gold reserves over the next two years. With major gold sales already this year from Spain, France and the ECB, some analysts believe higher gold prices could lead to more sales by central banks.
“High prices will more than likely scare some more supply out of the central bank vaults, but that's in the future,” said Neal R. Ryan, VP and Director of Economic Research for Blanchard & Co. “Looks like the future is now with the Swiss Bank announcement.”
Swiss National Bank directorate member Thomas Jordan told reporters that the proceeds will be used to increase foreign currency reserves. The share of gold in Switzerland's currency reserves has risen to 42% from 33% since mid-2005 due to the increase in gold prices, and Jordan said the sale would return the share of gold in the currency reserves to their previous level.
Matt Turner, commodities analyst with Virtual Metals, told RI it was significant that the bank said gold as a percentage of reserves had gotten too high, since many European countries have a higher share of gold reserves.
Greece has 80% of its reserves by value in gold, Portugal 79%, Italy 66%, Germany 63%, Netherlands 56% and France 56%. If these banks were to reduce their reserves to 30%, Germany would have to sell 1,802; Italy 1,341; France 1,273; Switzerland 394; Netherlands 311 and Portugal 235 tonnes.
He said today’s announcement was indeed a “big surprise,” because “everyone thought that the 1,295 tonnes they sold between 2000 and 2004 was it for a while.” This was 40% of their reserves at the time.
Ryan confirmed that the bank “hadn't made any noise about new sales until today and hadn't sold anything in the last few years.”
According to the Swiss Bank, the sale will occur at regular intervals over a period of two years to minimize the impact on the gold market. Once completed, the central bank will hold 1,040 tonnes of gold, a reduction of 20% from current levels.
The Swiss National Bank, one of 16 banks within the Central Bank Gold Agreement (CBGA) of 27 September 2004, is the world's fourth biggest holder of gold after the European Central Bank system, the United States and the International Monetary Fund (IMF).
The U.S. has just more than 8,000 tonnes of gold in reserves with no immediate plans to sell; the IMF has about 3,200 tonnes and alluded to the possibility of selling 400 tonnes; the CGBA signatories have about 12,600 tonnes but have rapidly increased gold sales in the last three months.
Although the last two weeks have seen slower announced sales, signatories have sold about 170 tonnes in a little more than three months. This amounts to the biggest collective dumping of gold on the world market since the original 1999 CBGA, which now limits the amount of sales to 500 tonnes per agreement year.
Last year, European central banks failed to sell their full, allotted 500-tonne quota into the marketplace, missing the mark by more than 100 tonnes, or 20%, for the first time since the agreement was put in place.
According to weekly reports by the European Central Bank (ECB), CBGA gold sales for 2006-2007 are now at about 248 tonnes with about three-and-a-half months remaining in the agreement year ending September 27. So far this year, chief sellers have been Spain, France and the ECB.
The Bank of Spain has cuts its reserves by 108 tonnes from March to May, representing 25% of its total reserves. Finance Minister Pedro Solbes told to the Spanish parliament last week of his intentions “to sell gold, an unprofitable asset, to reinvest in bonds, which are more profitable.”
France has sold 91 tonnes so far in this agreement year. Turner said he expects the bank to sell another 30 or 40 before the end of September.
The ECB has sold a total of 60 tonnes this year, a sum of 37 tonnes in the last two months and 23 tonnes completed on 30 November 2006. At today’s numbers, the total percentage of gold in reserves is now down to about 16% of total reserves.
However, Germany has announced no sales will take place in 2007 and has yet to decide about 2008, Italy has sold no gold in the life of either agreement and Switzerland and the U.K. have now completed announced sales programs.
Therefore, some analysts believe central banks could once again miss the 500-tonne quota this year if no other major sellers emerge.
“As long as Germany and Italy stay out I think there's a possibility it will still undershoot, but the gap is getting smaller,” said Turner.
But he added that if other banks follow the increased sales trend, “then it's possible that we will see 500 tonnes a year in the next two years, with sales mainly from France, Switzerland, the ECB, some more from Spain.”
Ryan said that unless other entities emerge as major sellers, current announced sales should be 50% short of the allowed quota for the next two and a half years.
“It's my firm belief that unless Germany or Italy makes a major sales program announcement or the Bank of Spain decides to sell all of their gold, there is just no way the ECB members can hit their allotted sales figures. ... No one's got that much gold to transact anymore,” he said.
In any case, the recent increase in sales could help to explain the slide in gold prices of nearly $40 an ounce from mid-April to today’s $655.70.
“As we've seen with the increases in the months past, sharp increases in sales can impact prices considerably, but over the long term, if the sales are still short of quota, the market will be dealing with less and less supply,” said Ryan.
However, Jon Nadler, analyst for Kitco.com, said the amount sold by the Swiss, even if carefully spread out, will still mean more gold on the European scene than was expected in the short to medium term.
“At the end of the day, ... this is still part of a generalized move out of bullion and into yielding assets on the part of the official sector. Let's hope they at least retain as much as any prudent individual should hold in gold,” he said.
