The Hindu Business Line : European central banks' gold sales unlikely to affect prices

CENTRAL banks in Europe numbering 15 that renewed the gold sales agreement on September 27 have decided that their annual sales over the next five years will not exceed 500 tonnes and total sales over the period will not exceed 2,500 tonnes.

This marks a 100-tonne per year increase over the previous agreement (Central Bank Gold Agreement - CBGA) that came to an end late last month. What will be the effect of the new agreement on the gold market, particularly on prices? Although under normal circumstances the availability of an additional 100 tonnes would have a softening effect on gold prices, according to GFMS (Gold Fields Mineral Services) Analytics the prospect of additional supplies into the market is unlikely to have any major impact considering the robust activity of the physical gold consumers in 2004. Fabrication demand and bar hoarding are forecast to expand by approximately 20 per cent in dollar terms as compared with 2003.

If one took the simple annual average prices over the period 2000-03, using a forecast $404 per ounce for 2004 and a conservative $400/oz for 2005, the dollar value of the gold potentially sold under CBGA during 2005 rises to $6.43 billion from $5.24 billion in 2004 and an average of $ 2.23 billion or 53 per cent over the period average.

According to GFMS Analytics, the sales have to be put in the context of the physical market as a whole, which in 2004 amounted to demand of approximately $50.89 billion and $41.82 billion over the period average.Against this background, the increased flow of metal supply from the new CBGA in its first year of operation amounts to only 2.3 per cent of the 2004 market and 2.8 per cent of the market over the period 2000-04, it is argued.

Renewal of CBGA would sustain a sense of order in the market and the additional metal that may be freed up for consumption is not expected to put an onerous weight on the market's shoulders.