While Spain and Switzerland continue to sell gold, Russia and smaller banks are looking to buy...

WHAT LOOK TO BE persistently high gold sales by the signatories of the Central Bank Gold Agreement in Sept. '07 – the first month of the fourth year of their five-year agreement – it's worth contemplating what lies ahead for central bank gold sales from here.

   In the week ending 26th October 2007, the decrease of €126 million in gold and gold receivables reported by the European Central Bank reflected sales of gold by two Eurosystem central banks – consistent with the Central Bank Gold Agreement of 27th September 2004 – of 7.25 tonnes approximately.

   It would seem that the Swiss are the larger of the two sellers, with either the French or the European Central Bank as the other seller. If the past is indicative of the present, the Swiss will continue selling at this pace until they have completed their pre-announced sale of 250 tonnes in the first quarter of next year.

   Each week of these high sales gives us more certainty on that. Indeed, data compiled here at Gold Forecaster [1] paints a dramatic picture of central bank gold sales going forward into the new year.

• The tonnage remaining for sale is now down to just over 650 tonnes all told, and we have two more years of sales still remaining;
• More announcements can be made, but we only expect unplanned sales from Spain to the extent of 100 tonnes;
• We know that the remaining Swiss sales are around 6 to 8 tonnes per week, with only around 100 tonnes remaining. So we guesstimate around 17 weeks or less before these sales are exhausted.

   If the Spanish repeat their past performance of the 2006-2007 CBGA year, their sales will be out of the way by May 2008, leaving 550 tonnes for the duration of the agreement. Portugal did not sell gold last year so may not sell any more, taking 100 tonnes out of this 550 tonnes leaving 450 tonnes for the duration.

   The balance of the announced sellers have set a pattern of steady sales spread over the years. With present demand failing to dent the rise of the Gold Price [2], it seems likely that such a drop in sales will add impetus to future Gold Price [3] rises.

   The second dramatic factor we've uncovered is that in the final quarter of the last CBGA year (Sept. 2006 to Sept. 2007) Russia began its long awaited purchases of gold for its reserves.

   As we forecast, these took the form of buying local gold-mining production before it hit the open market. President Putin made it clear to the Russian Central Bank that he wanted gold reserves up to 10% of reserves, but he had not been obeyed to date. The start of these gold purchases signals that this policy may have begun.

   If so, Russian production at just over 200 tonnes to 250 tonnes per year will be the initial target of the buying. This is important because at a time when new gold supplies to the market are set to fall after next year, such buying can be taken off the above sales. So whether it is 88 tonnes or the entire 200 tonnes and more that Russia says it needs, central bank gold sales would net out – overall – at between 0 amd 200 tonnes in the next two years.

   There are now great pressures on central banks to stop selling gold and to follow the example of Russia. The prospect of currency crises is growing by the day, spreading fear of the value that currencies will have goiong forward. In the past such pressures have forced central banks to turn to Buying Gold [4].

   As the latest example of such pressures, just take a look at Hong Kong. With the US Dollar waning fast, and currency pressures mounting across the globe, investors have never needed safe-havens for their wealth more than today.

   At the front safe havens sit Gold Bullion Investment [5] and silver. Many feel that the pressure may be short-term, but we believe it is systemic and growing worse by the day. As the hemorrhaging of US Dollar's value continues, smaller central banks are fighting to stop their currencies from rising – so as to protect the competitiveness of their own currencies.

   If this pressure persists these banks will be forced to take more regulatory measures, such as imposing controls on inflows. The latest reported incident of these is in Hong Kong.

   Hong Kong's de-facto central bank stepped in four times last week to defend the Hong Kong Dollar's peg to the US Dollar, injecting about HK$6.2 billion (some US$800 million) into the red-hot market, selling the local Dollar to buy the ailing greenback. As the US Dollar weakens, so this intervention will continue.

   Under Hong Kong's currency board system, the HK Dollar is pegged at 7.80 to the US Dollar, but it is allowed to trade between 7.75 and 7.85. When the Hong Kong Dollar reaches the limits of its trading band, the monetary authorities can be expected to intervene. But with the cut in US interest rates adding more upward pressure, Honk Kong will react by releasing more local currency, so importing inflation and allowing more "hot money" into their own local system.

   Short-term investments can leave as quickly as they arrive, contracting the money supply when they leave and leaving instability and eventual loss of control over the money supply behind them should such action reach extremes. Inflow Capital Controls are another way of coping with this problem...or perhaps a strong revaluation of the currency plus a departure from the US Dollar peg.

   The HK Dollar has been rising against the US Dollar as investors pour money into the soaring Hong Kong stock market. The HKD hovered near 7.75 to the USD all morning last Wednesday, before the Hong Kong Monetary Authority began buying greenbacks to keep the local currency within the trading range. Last week's moves follow two interventions by the HK Monetary Authority last week, its first such actions in more than two years, causing speculation that Hong Kong might widen the peg, or drop it all together.

   The Hong Kong government is "totally committed" to the linked exchange rate mechanism. This is usually a prelude to actions to fully control the situation along the line we mention here. We can only conclude that the tumbling US Dollar is encouraging dramatic and sustained intervention from smaller central banks in the currency market.

   In their reserves, there will probably be no new announcements of central bank gold sales. Rather, those banks Buying Gold [6] could soon overtake those still left selling it.