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Europe's central banks seen queuing up to sell gold

September 26th, 2005. - LONDON, (Reuters) By Clare Black

Europe's central banks are expected to sell the full quota of 500 tonnes of gold again in the second year of a pact that regulates sales of the precious metal, analysts said. And with prices not far from their highest for nearly 18 years, that could incite them to frontload sales in the next few weeks. Spot gold prices hit their firmest since January 1988 last week at $475 an ounce and a record high in euro terms of 389 euros scored on Sept. 22.

"I think there's a big chance of front-loading...the incentive is even greater in year two...there's a pretty good chance that sales between next week and the end of the year will be above the pro-rata amount," said Stephen Briggs, metals economist at SGCIB. Gold was trading around $460 on Monday, compared with New York's late quote on Friday of $462.90/463.60. Europe's Central Bank Gold Agreement (CBGA) will enter its second year on Tuesday. The pact, agreed last year, raised the limit on gold sales by its 15 signatories over five years to 2,500 tonnes at a rate of 500 tonnes a year, from 2,000 in the previous 1999-2004 period. Analysts said the first year went pretty much as expected, with banks selling all but three tonnes of the total amount. The Bank of France caused some confusion with the totals, due to a

17-tonne transfer to the Bank for International Settlements which it said did not count towards the pact as it was a transaction between central banks. Most analysts believed the 2,500-tonne total will be met in full by 2009: eight out of 12 analysts polled by Reuters said European central banks would have no problem filling the quota."It is not just the speed at which they sold gold over this first year...it is also the number of central banks that have taken the opportunity to offload bullion -- ten of them in total," Matthew Turner, analyst with UK consultancy Virtual Metals, said in a paper focusing on the agreement.

POLITICAL CLOUD

"The key countries are still Germany and Italy and I think you've got to have at least one of those selling in a major way if you're going to get anywhere near the 2,500 tonnes," Jill Leyland, economist with industry-sponsored body World Gold Council, said. Germany, the world's second biggest holder of gold with reserves in excess of 3,400 tonnes, has still not said when or whether it will sell. In December 2004, the Bundesbank said it would sell 8 tonnes to mint gold coins, but would not use any more of its allocated 120 tonnes and pass this option to another Eurozone bank. With the German economy in paralysis after an inconclusive outcome to this month's election, it was not expected to make a rapid decision. "If there is a coalition between the two big parties, I think Buba is not going to sell," said Wolfgang Wrzesniok-Rossbach, head of precious metals marketing at Germany's Heraeus."

If it's a CDU-FDP Greens government starting with reforms, I could imagine there might be sales and if there's a SPD-led government, they will never sell." Virtual Metals' Turner said he still expected the Bundesbank to sell 600 tonnes of gold during the second agreement. Italy, which holds just over 2,400 tonnes of gold in its reserves, sold nothing under the first CBGA or in the first year of the new pact. Renato Brunetta, economic advisor to Italian Prime Minster Silvio Berlusconi, told Reuters that Italy may sell some of its gold to help slash its debt pile, but this was knocked down by Italy's central bank governor Antonio Fazio who said the central bank had no plans to sell gold. It has since said nothing. "Indeed it is not clear as to whether or not Fazio will still be governor when a decision needs to be made. If Italy does sell we expect the amount to be similar to the other huge holders, France and Germany," Turner said. France, with some 2,800 tonnes of gold, did not sell under the first pact, but announced it will sell 500 to 600 tonnes during the second and appears to have sold gold regularly most weeks since the start of the second agreement.

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