but the chinese are buying gold ... , page-91

The investment case for gold
Reuters Last updated 12:00 13/08/2009SharePrint Text Size Relevant offers

Market DataDividend faces watering down Contact Energy shrugs off weakness to close higher S&P cuts rating for two firms Contact Energy profit sinks Things 'happening' for GPG Inflation-proof bonds would protect economy Investors' pain behind Credit Sail's fall ‘We goofed on derivatives risk’- Berkshire Cavotec projects rekindled Investors eye China media A revamped third five-year pact to limit sales of European central bank gold, complete with a lowered ceiling for planned disposals, is seen boosting the investment case for bullion and extending its multi-year rally.

The European Central Bank surprised markets last week with the announcement of a third Central Bank Gold Sales Agreement restricting official sales of the precious metal to 400 tonnes per year.

While markets had widely expected a new pact to replace an existing agreement, which expires in September, the banks' decision to cut their sales quota by 100 tonnes per annum was received by gold bulls as a potentially positive surprise.

The first CBGA was introduced in 1999 to fight against a barrage of sales that had helped send gold to multi-year lows around $250 an ounce.

The spot price is now hovering just above $950, having vaulted the $1,000 mark to record highs as financial markets floundered, with limits on official sales seen as one of the bedrocks of price stability.

"Central banks are not such a danger for the gold price as they used to be in the 1990s," Commerzbank analyst Eugen Weinberg said.

"It was expected that there would be a renewal, but the renewal itself took some insecurity out of the market," he said, adding: "It wasn't expected that they would reduce the selling volume by 100 tonnes a year."

The 19 signatories of CBGA 3 have consistently undersold the existing 500-tonne quota in recent years.

Sales in the final year of the second pact had reached only 140 tonnes by July, and signatories have sold only 1,867 tonnes of their 2,500-tonne quota in the last five years, according to the World Gold Council.

Analysts say had it not been for 403 tonnes of sales planned by the International Monetary Fund -- which is not itself a signatory, but whose sales will take place under the umbrella of the new agreement -- a fresh pact might not have been necessary.

Of the four biggest global gold holders, Switzerland has already announced it has no plans to sell more gold in the near future. France recently came to the end of a gold sales programme and is said by analysts to be unlikely to sell much more gold.

Italy and Germany are also said to be unlikely to sell.

"To (reach 400 tonnes a year), certainly on a consistent basis, you would need sales from either Germany or Italy, and there are no signs of that at the moment," said Stephen Briggs, an analyst at RBS Global Banking & Markets.

ENHANCED STANDING

Analysts say the trend for falling sales under successive agreements reflects a change in the attitude of central banks towards gold, with many increasingly seeing the metal as a key strategic asset in a time of global financial market downturn.

"In the current environment, it is just too obvious that gold has an important function in the monetary system," said Axel Merk, portfolio manager of the $415 million (252 million pound) Merk Hard and Asian Currency Funds in California.

Ad Feedback "We just don't know what would happen to currencies in this environment."

George Milling-Stanley, managing director of government affairs at the industry-sponsored World Gold Council, said the third CBGA was positive for the spot market.

"The attitudes of the central banks right now are a very solid reaffirmation of the...value that gold can bring to a properly balanced portfolio of reserves," he said.

"Sales under CBGA 3 will likely undershoot the 400 tonnes. It is just a ceiling, not a target."

SELLERS, BUYERS

The most likely sellers under the new pact are the smaller central banks, and, in the case of a major appreciation of the euro gold price, the European Central Bank, which may have to make sales to keep its gold holdings at or around 15 percent of its total reserves.

The main seller is likely to be the IMF, but the fund's 403 tonnes of sales will still leave scope for a major shortfall beneath the pact's 2,000-tonne sales ceiling over the five-year duration of the agreement.

Official sector attitudes towards gold have changed to such an extent that central banks in Asia are said to be considering gold purchases, rather than sales.

China's central bank said in April that it had built up its gold reserves by 454 tonnes since 2003 to 1,054 tonnes, making it the world's sixth largest holder of the precious metal.

While European central banks are unlikely to consider increasing the gold weightings of their reserves, analysts said, sales are also unlikely to gain fresh momentum.





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