St. LOUIS (ResourceInvestor.com) -- Spanish central bank governor Miguel Angel Fernandez Ordonez said on Tuesday that the Bank of Spain plans no more significant gold sales in 2007 after unloading 150 tonnes this year - the bulk of its planned bullion disposals. Although the gold price hit a fresh 16-month high today, analysts remain cautious on trading this immediate news.
Philip Klapwijik, chairman of GFMS, told RI that “this is bullish news but not entirely unexpected ... we certainly felt that sales could obviously not continue at this year's elevated rate.”
Spain has been the largest seller of gold this year with about 165 tonnes, representing more than 40% of the 400 tonnes of total gold sales. The Bank of Spain has sold 239 tonnes since it began its sales campaign, having reduced gold holdings by 46% in volume terms.
But many bullion investors ran with Spain’s news this morning believing it will further improve sentiment in the bullion market.
“Much will be, and much is being, made of this announcement by Spain. The gold market uber-bulls have had a heyday with this news, and at first blush we can understand that newly wrought enthusiasm,” said Dennis Gartman, editor of the Gartman Letter, in today’s update.
Final spot bid settlement in New York Tuesday was at $715.00, up 30 cents. The metal is now honing in on the 26-year high of $730 an ounce it hit in May 2006, but still about $130 below its all-time high of $850 reached in early 1980.
Most of the price movement of late has been underpinned by the weakness of the dollar ahead of Tuesday’s Federal Reserve meeting.
The Fed reduced interest rates from 5.25% to 4.75% - the first reduction in four years - and more than the quarter percentage point that many economists had expected.
After the decision, the dollar caved to 79.13 on the index after opening at 79.60, while December gold futures jumped as high as $733.30 an ounce in electronic trading on the New York Mercantile Exchange.
“Now, with bullishness ruling, the Spanish news can only add fuel to the fire, even though it is more the removal of a negative than outright positive news,” said Klapwijik.
Also on Tuesday, the European Central Bank (ECB) reported that two Eurosystem signatories consistent with the Central Bank Gold Agreement of 27 September 2004 decreased gold holdings in the amount of EUR 38 million ($52.7 million) in week ending 14 September 2007, reflected sales of 2.3 tonnes.
Signatories within the Central Bank Gold Agreement of 27 September 2004 have now reported total gold sales of about 345 tonnes for this agreement year with just one week remaining. The World Gold Council calculates total gold sales, reported and not yet reported, to be about 400 tonnes.
“We doubt that the 500 tonne CBGA limit will be hit this year but they could get fairly close,” said Klapwijik. “We were expecting around 480 tonnes. Maybe that could even turn out to be a little aggressive given the news from Spain but you never know. Still 10 days to go!”
This year the Bank of Spain, France and the ECB have been the main sellers. Behind Spain, France has been the second largest seller with 99 tonnes sold, while the ECB has sold a total of 60 tonnes.
In contrast, Germany’s Bundesbank, the world’s second largest gold holder with about 3,400 tonnes, has sold no substantial gold in 2007 and has yet to decide about 2008.
The Bundesbank and the Ministry of Finance have been at odds with one another for some time over selling German gold. In February 2006, the Bundesbank affectively blocked the German government’s hopes to sell gold to fund research and development projects. Gartman, however, believes the Germans will not remain out of the gold market indefinitely.
“It is illogical not to think that German gold sales loom once the new year's worth of Washington Agreement gold sales are permissible, and once the Bundesbank and the Ministry of Finance work out their differences. Angela Merkel will make certain that's done,” he said.
Gartman urged caution since he suspects that Spain was selling gold because Germany was not this year. Germany has nearly 8 times as much gold as Spain - 15 times more in per capita terms. So and if Germany enters the market, we could see much higher amounts of gold sales next year.
Klapwijik said it looks as if Germany is not going to sell a "strategic" quantity for at least the time being, but “we would not rule out such sales forever or in the very long run.”
He noted that the Germans are "overweight" with gold as a percentage of reserves at over 60% and the fiscal position has improved. Sales in Germany's case are more likely if the government can convince the bank that its fiscal position is rapidly improving.
Possibly offsetting Spain’s announcement, the Swiss National Bank revealed plans in June to sell 250 tonnes of gold reserves over the next two years. The Swiss sold 14 in June and 34 in July. With 42% of its total reserves in gold, the bank intends to lower its gold holdings by 20% to 1,040 tonnes.
“Clearly the Swiss are providing and will continue to provide some offset to Spain's presumed absence from the market. Likewise, one assumes, the Banque de France,” said Klapwijik.
In addition, the Italian parliament in late July approved a reserve plan allowing the government to look into using the Bank of Italy's substantial gold reserves at about 2,452 tonnes to cut the country's huge debt. The plan aims to cut Italy's debt to 103.2% of gross domestic product (GDP) in 2008 from 105.1% of GDP this year - about EUR27 billion ($36.9 billion).
However, Klapwijik said he did not think that Italy is poised to start selling as indicated by the government.
“The subject has been raised by some politicians but it is the Banca d'Italia's call and they have said nothing about gold sales,” he added.
GFMS expects the quota maximum to be undershot and possibly sales to come in a bit closer to 400 than 500 tonnes next year. However, Klapwijik said this will depend largely on whether big holders like Italy and Germany sell material quantities or if France and Switzerland accelerate their remaining sales.
“For the next two years of the agreement in aggregate, though, I think it is unlikely that we will see 1,000 tonnes sold,” he concluded.
