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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.
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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:
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
Final pointsThis 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
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