European central banks agree third gold deal

The International Monetary Fund (IMF) became a de-facto signatory of the European central banks' gold agreement on Friday.

Nineteen European central banks signed up to the third gold agreement - all sixteen members of the eurozone plus the European Central Bank, the Riksbank and the Swiss National Bank.

The agreement says that the central banks can sell up to 400 tonnes per year - 100 less than under the existing agreement - for the next five years. It added that "the signatories recognise the intention of the IMF to sell 403 tonnes of gold and noted that such sales can be accommodated within the above ceilings."

"The IMF is, if you like, a sub-signatory to the agreement," Jon Spall, a director at Barclays Capital, told CentralBanking.com.

In a departure from previous agreements, the new deal frees up central banks to participate in gold derivatives and lending markets by removing caps on gold leasings and the use of gold futures and options.

The second agreement, which expires on 26 September, was expected to be renewed after Nout Wellink, the president of the Netherlands Bank, said in late April that the ECB planned to do so.

However, no formal announcement was made in March, as happened in 2004 for the second agreement. The IMF's planned sales, which the US Congress backed in June, particularly its statement that it wanted its sales to be "coordinated with current and future central-bank gold agreements." were widely thought to have been a key factor in the delay.

John Reade, a metals strategist at UBS, told CentralBanking.com: "What has slightly complicated this has been the IMF's proposal. Whether the IMF has explicitly said so or not, they indicated that they envisaged selling this under a central-bank gold agreement."

The Fund's proposed sales were also seen as pivotal in central banks' desire to renew.

Spall said: "Had the IMF not been interested in selling then there may not have been a third agreement. The signatories have been getting nowhere near close enough to selling what they could have done."

"There might have been a debate as to whether a third agreement was needed or not as it seems that the current signatories are coming to the end of their disposals," Reade said.

GFMS, a precious metals consultancy, earlier this week put combined sales for signatories of the second agreement at 92 tonnes over the first half of this year, down 43% year-on-year and 17% lower than in the second half of 2008, and said it expected sales in the second half of the year to stay at the low end of the spectrum, with net supply forecast to reach about 100 tonnes.

GFMS added that it expected sales from signatories to remain "very subdued". "This is mainly due to the unwillingness of the four largest bullion holders within the group - Germany, France, Italy and Switzerland - to embark on any new or large-scale sales programmes," the consultancy said. The Swiss National Bank said on Friday it had no plans for gold sales for the "foreseeable future".

Spall said: "Besides the IMF's plans, where is the other 1,600 tonnes of sales over the next five years going to come from? The other 1,600 is wiggle room if matters change. If you look at the Bundesbank, when [Ernst] Welteke was in charge it looked like there was interest in selling but when [Axel] Weber took over it was taken off the agenda."

For several large reserve holders in Europe, gold dominates their holdings. As of August 2008, gold at market prices accounted for more than 60% of Italy's and Germany's reserves and 60% of France's. Recent months have seen the cash-strapped Italian government look at unrealised gains on gold holdings as a source of income.

In some sense the agreement has also been a victim of its own success. Markets no longer fear official-sector sales could drive down the price of gold as was the case in 1999 before the first agreement was signed.

Spall said: "Central banks have recognised the peculiarities of the gold market. It is a small, emotional market. I doubt the central banks want to mess this up."

However, Reade argued an agreement could only bolster market sentiment. "An agreement takes away uncertainty which can only reduce volatility," he said.

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