Are central banks buying gold under the Washington Agreement?

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Are Central Banks Buying Gold Under The Washington Agreement?

Central banks have been announcing for more then a decade the sales of large portions of their ‘worthless' gold. With the Washington Agreement in 1999, a bit of transparency came back into the market. At least, that's what everybody thought. Central banks have become increasingly transparent, except for gold (that's my experience). Although gold is by some central bankers considered as a worthless asset, which they should sell as soon as possible, the same central bankers are reluctant about telling the real holdings when it comes to gold.

The IMF accounting method, by including swaps, repo's and deposits as gold reserve, could be justified, IF the true positions were also mentioned in the annual report. However, in almost every annual report, there are no statistics about the amount of swaps, repo's or deposits for the large gold countries.

The smaller countries are more honest when it comes to gold positions. In almost every case, the gold stock has been moved for safety reasons or has been put on deposit (primarily in the U.K.). Without the statistics from the United States, Germany or other big holders, it is hard to really know what's going on. It has been this lack of transparency that keeps the gold bugs busy. 

There is however one country that reports its gold positions the way it should be: Portugal.
The Portuguese do mention the amount of swaps and deposits in there annual report. When we use the data from 1999 till now, we can see some very important changes. Changes, that may also apply for other countries, however we can't be sure. I have put these positions together, and the following came from it:


 

There have been some VERY interesting movements over the last couple of years, when we look a bit closer. Let me first explain what a sight account is. Gold sight accounts are offered by the BIS to customer central banks. A central bank deposits cash, and the BIS purchases the amount of gold. Sight account holders can withdraw the equivalent amount of gold anytime. So the sight account can be considered as a ‘real' gold holding, as is the gold in their vault. 

These two have no impact on the market like a deposit or a swap. These positions are sold in the market, and increase the supply for the market. 

It is important to understand that swaps and deposits impact the supply and demand in the gold market. When a swap/deposit position is opened for a central bank, the supply of gold increases. When that position is closed, it ‘eats' supply. 

What can be seen from the table above:
1. In 1998 Portugal did have ‘gold reserves' at the amount of 624.8 tons. At that time a hefty 57.7% or 360.8 ton was sold in the market through swaps and deposits. In 1999 Portugal had 70.6% or 428.2 tons of gold temporarily sold to the market (extra supply). 

2. The central bank of Portugal reduced their swap and deposits from the 1999 high of 428.2 tons to 132.4 tons in 2004. In order to do this, they had taken almost 300 tons of gold from the market. At the same time, the Washington Agreement made it possible for the Portuguese to sell 144 tons. However, the amount of gold in their vault didn't change and the gold on the sight account increased dramatically from 5.8 tons in 1999 to 157.2 tons in 2004.

Conclusions
  •  In 1999 the central bank of Portugal had 70.6% or 428.2 tons of it's gold in the market (extra supply) with swaps and deposits.
  • The Washington Agreement didn't supply the market with gold, but closed a portion of the swap positions. In other words, the gold was gone, but the Portuguese didn't want the gold back and it was ‘sold' under the Washington Agreement.
  • They improved the real gold position (sight account and bullion in the vault) from as little as 30% in 1999 to 71% in 2004(increase in gold sight account).
  • From 1999, the Portuguese actually took 145 tons of gold from the market. They closed more swaps then they sold under the Washington Agreement. The swapped position was partially replaced by buying for the sight account and selling under the WA.
  •  In the annual report before this period, it is mentioned that the amount of swap are increased. The amount in 1997 was (if my calculations are correct) 180 tons. So my guess is that gold swaps are relative new. Another interesting point from the Washington Agreement is the following: The signatories to the agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period. Do you see anything about swaps?
  • The deposits didn't change much, and even increased in 2003. The lease rates are much looked at (swaps not), and increasing lease rates may give the market an idea something is up (tightness in the market). In order to keep the lease rates low, gold is needed to keep them low.

Final points
This smells like a international escape from bad gold positions (LTCM?) or too try to save what's left. With the certain ‘overhang' from the Washington Agreement (and pre announced U.K. gold sales), the market knew there was a significant overhang in the years to come (even now with 2000 tons of gold to be sold in the remaining years of the Washington Agreement). As these figures show, there is a possibility that the overhang was only on paper (on central bank balance sheets). 

The data from the Portuguese show that they actually took gold from the market. In order to keep the market quiet and scared, they could have used the tactic of a huge gold overhang. We saw in 1999 real panic in the gold market after the announcement of the WA, and that's the last thing they could use(notional value OTC derivatives for  gold was 33,951 tons). My guess is that the WA stabilized the gold market (and the derivatives market), and gave the central banks the time they need to fix their positions without extreme price rises. It looks like the ECB got the gold picture and tries to save what's left the WA however suggests something totally different. 

If all central banks disclosed the data like the Portuguese, the true story would be in the open. So why don't they, gold is after all a worthless asset right?


Keep on digging greetz
Mihaly
m.schroth2@chello.nl

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