The Monetary Future: Central Banks of Europe Extend Landmark Agreement on Gold Sales

Thursday, September 17, 2009

Central Banks of Europe Extend Landmark Agreement on Gold Sales

On August 7th 2009, an ECB announcement was made concerning the third Central Bank Gold Agreement. Like the previous two agreements, this covers a five-year period, in this case from 27 September 2009 (immediately after the second agreement expires) to 26 September 2014. The announcement stated that the agreement will be reviewed after five years.

The third agreement started by reaffirming that "gold remains an important element of global monetary reserves", as was stated in the two previous agreements. See official gold reserves as reported by the World Gold Council.

There were two important changes. First, the collective ceiling was reduced so that "annual sales will not exceed 400 tonnes and total sales over this period will not exceed 2,000 tonnes", 500 tonnes lower than the 2,500 tonnes five-year ceiling provided for in the second agreement. However, because signatories to CBGA2 had significantly undersold the permitted annual ceiling in the final two years of the agreement, the new lower ceiling did not come as a surprise to market participants and had no impact on the gold price.

Second, the agreement stated that in recognition of the fact that the IMF intended to sell 403 tonnes of gold, these sales "can be accommodated within the above ceiling". The market also took this announcement in its stride, as the IMF had clearly stated beforehand that its planned sales would be conducted in a manner that would not add net new supply beyond what the market was already expecting from the official sector as a whole. In the event that the IMF is unable to arrange an off-market sale with another official sector institution, the sales will be conducted through the new CBGA3.

This third agreement covered the 15 original signatories to CBGA2 (the European Central Bank and the national banks of Belgium, Germany, Ireland, Greece, Spain, France, Italy, Luxembourg, The Netherlands, Austria, Portugal, Finland, Sweden and Switzerland), together with the national banks of Slovenia, Cyprus, Malta and Slovakia, which all joined CBGA2 on (or in Slovenia's case, just prior to) adopting the euro.

In both the previous agreements, signatories undertook not to increase their activities in the derivatives and lending markets above the levels of September 1999, when the first CBGA was signed. The new agreement includes no similar commitment, although central bank activity in these fields has been very limited in recent years.