New Central Bank Gold Agreement cuts cap 100 t/y - IMF gold sales not part
The third CBGA will be implemented on 27th September with the same signatories as those of the second CBGA. The IMF is not a signatory, but the statement issued by the European Central Bank notes that "The signatories recognize the intention of the IMF to sell 403 tonnes of gold and noted that such sales can be accommodated within the above ceilings". The use of the word "can" is clever, as it allows for a degree of flexibility.The ceilings in question revert to the 400-tonnes level that was promulgated under the first agreement (1999 - 2004). The full statement reads as follows:1. Gold remains an important element of global monetary reserves.2. The gold sales already decided and to be decided by the undersigned institutions will be achieved through a concerted programme of sales over a period of five years, starting on 27 September 2009, immediately after the end of the previous agreement. Annual sales will not exceed 400 tonnes and total sales over this period will not exceed 2,000 tonnes.3. The signatories recognize the intention of the IMF to sell 403 tonnes of gold and noted that such sales can be accommodated within the above ceilings.4. This agreement will be reviewed after five years.The reduction in the ceiling should not of itself be a surprise since the 500-tonne annual quota for CBGA2, implying a five-year maximum sale of 2,500 tonnes, has been nowhere near approached. By the end of July this year, total net sales from the signatories to CBGA2 amounted to 1,882 tonnes (of which just 140 tonnes had been sold in the fifth year-to-date of the programme), leaving a shortfall from the programme of up to 618 tonnes. A five-year target of 2,000 tonnes for the next programme thus makes perfect sense and may well be higher than required, especially as the attitudes towards gold of the official sector have shifted substantially since the start of the CBGA programmes. In a note published by Société Générale this month and compiled by GFMS Ltd, the research house estimated that while net official sector transactions in the first half of the year amounted to sales of 39 tonnes, comprising gross sales of 95 tonnes and gross purchases of 56 tonnes. Perhaps more pertinently, the second quarter was a period of "modest net purchases overall".So a 400-tonne per annum ceiling seems eminently workable. It is relevant at this point to note that the IMF, which has plans for sales of up to 403.3 tonnes for funding purposes, has not signed up to the CBGA3. This is not a negative development; if anything it is quite the reverse. It gives the IMF the flexibility to make its disposals as it sees fit, so that, should the Fund wish to make the disposal in one tranche then it could do so without distorting other signatories’ management of their own allocations. Such a course of action seems unlikely however. The original recommendation from the Crockett report (which came up with the proposal in the first place in early 2007 - although at this point the purpose was to use the funds to defray the IMF’s operating costs) was that these sales should be effected through a CBGA. Subsequent high-ranking officers of the IMF have affirmed that this will be the case.At this point, the recent comments from the IMF’s Director of Strategy, Policy and Review Department, Mr. Reza Moghadam, are especially pertinent. Mr. Moghadam said in late July that "We have committed as part of our new income model to have that gold sale, if done on the markets, to be done through the central bank sales mechanism". He also said that he expected the sales to take between two and three years to complete.This underlines the possibility that the IMF may yet sell some or all of this gold to another official sector entity. China and Russia have been in the headlines more than once in recent months by virtue of Russia’s programme of regular gold acquisition, while reported Chinese reserves were increased by 200 tonnes to 600 tonnes before the end of 2008 and they are automatically being suggested by market observers as potential counterparties.On balance, then, the net impact on market sentiment of the ECB’s announcement of CBGA3 should be neutral. If the IMF disposes of its gold into the free market, then the sales will be done gradually and under the auspices of CBGA3 (or even its successor, although it is much more likely that these sales will happen sooner rather than later) and the IMF will make use of quotas allocated to signatories that have no intention of using them to the full. A 400-tonne annual quota is workable and may well not be filled; and the IMF retains the option to sell off market if appropriate.