Gold Focus: Putting Central Bank Sales Into Perspective

The gold price has fallen sharply over the past few months, and the market has been gripped by fears of large ongoing future sales by central banks. The importance of future central bank sales has been overdone by the market, for several reasons.

1. The size of the announced sales are small relative to the market.
    
2. The volume of total central bank gold being sold annually into the market actually is falling and likely to be much lower in the future than it has been in the past.
    
3. The weakness in the gold price has not reflected central bank deliveries, but rather speculative selling, which far outweighs any central bank volumes.
    

This briefing reviews some of these points.

1. The Bank of England sales are small relative to the total gold market.< >28,342,157 ounces per day: average London Bullion Market Association transaction volume, January – May 1999.

• 4,074,926 ounces per day: average gold turnover in the Comex gold futures contract, January – May 1999.
• 271,000 ounces per day: average daily 1999 mine production (based on 250 business days/year).
• 80,000 ounces per day: average daily 1999 secondary recovery from scrap.
• 419,200 ounces per day: average daily 1999 fabrication demand for gold.
• 45,200 ounces per day: average daily 1999 investment demand.
• 45,600 ounces per day: average daily 1999 central bank sales.
• 803,000 ounces: Bank of England sales, once every 40 business days.

2. Central bank sales are in the midst of a secular decline

Central bank sales averaged 13.4 million ounces per year from 1992 through 1998. The range was from 7.0 million ounces to 20.0 million ounces.

Sales were accelerated during this time by the run-up to European Monetary Union, on 1 January 1999.

Central bank sales declined from 20.0 million ounces in 1997 to 14.6 million ounces in 1998, and may total less than 10.0 million ounces in 1999. CPM Group's earlier projection of 11.4 million ounces of gold sales for 1999 may have been too high. So far this year central banks have sold very little gold on a net basis. Even including the Bank of England's 2.4 million ounces of projected sales in 1999, it is unlikely that total net disposals will be as high as the levels seen over the past seven years.
 

3. The Bank of England chose transparency for a reason.

Over the past several years, rumors of unreported gold sales by several central banks have been floated by bankers and dealers in the market, in an attempt to scare producers into hedging, other central banks into selling, and investors into liquidating long positions.

The Bank of England chose to announce its sales and hold public auctions expressly to mitigate such activities.

The assumption was that gold market participants would be able to analyze the information about the prospective sales, conclude that they were not large by gold market standards, and act accordingly, limiting any downward price effect.

A further assumption was that gold proponents would publicize the fact that these sales would be small and unlikely to push gold prices significantly lower. Instead, those with a vested interest in higher gold prices have played into the hands of the shorts, by saying the sales (a) would depress prices, (b) would devastate the market and production worldwide, and (c) were suggestive of a government conspiracy to drive gold prices lower.

Two Final Points

An ineffective way to market a product to investors, or to encourage them to hold equities of producers of that product, is to suggest that major world governments are conspiring against it.

One comment repeatedly made has referred to the suspicious occurrence of central bank announcements whenever gold prices appear to be rising. While many of the announcements' timings appear to have been purely coincidental, an argument could be made that some monetary authorities have waited until the gold market was looking healthier before releasing possibly damaging information, rather than making such statements when gold prices are low and more vulnerable to speculative short selling. In other words, some central bankers may have tried to time their announcements to limit the damage to the gold price, but critics have nonetheless accused them of trying to scuttle potential price rallies.