Wednesday, August 16, 2006 11:15:45 AM
central bank gold sales
about 109 tonnes short YTD to meet 500 tonne/yr "goal"
Slower Selloff By Central Banks Keeps Shine on Gold
By Charlotte Mathews
15 Aug 2006 at 11:21 AM EDT
JOHANNESBURG (Business Day) -- The failure of central banks to sell the full amount of gold they are entitled to in the current year of their sales agreement could be positive for the gold price in future, says the latest gold-hedging report by Virtual Metals Research and Consulting.
An important factor helping to stabilise the gold market in the past few years has been the voluntary signing of sales agreements - which limit how much gold signatories will sell each year - by a number of central banks.
In the year to this September, the signatories were permitted to sell 500 tons of gold but by the end of July they had sold only 331 tons. They cannot carry over the allocation from one year to the next.
Virtual Metals said it seemed unlikely the signatories would sell the full allocation this year - and if they did not, it would not only limit the amount of gold in the market at present but also affect future assumptions about sales by central banks. Previously, the banks had sold their full allocations every year.
Virtual Metals researcher Matthew Turner said reduced selling by central banks was not necessarily a general policy change, but largely reflected the dispute between the German government and the Bundesbank over using Germany’s gold reserves to cut the budget deficit. Once this was resolved, Germany could resume selling its allocation.
What was significant, though, was that other central banks had not taken up Germany’s sales allocation. In the past six months, the gold price has also been supported by big gold producers’ shrinking forward sales commitments.
Gold hedging in the second quarter of this year fell 5.1-million ounces, the largest quarterly decline in Virtual Metals’ records.
Turner said the rapid dehedging supported the gold market because it temporarily reduced supply into the spot market. However, gold producers could not continue dehedging at this pace.
Barrick Gold [NYSE:ABX; TSX:ABX], AngloGold Ashanti [NYSE:AU] and Newcrest [ASX:NCM] were responsible for 82% of the 10-million ounce decline in the global hedge book this year.
Apart from AngloGold, there were also small declines in the hedge positions of other South African producers - Harmony Gold [NYSE:HMY; JSE:HMY], Western Areas [JSE:WAR] and Metorex [OTC:MRXLF], the report said.
Forward selling of gold by producers, known as gold hedging, is a protection measure against a decline in the gold price. It is a controversial strategy, with those against saying shareholders buy gold companies’ stock to gain exposure to the gold price. Also, when the gold price rises, gold hedgers have to mark-to-market their hedge books, which has a substantial accounting effect, and the average gold price they receive will be below that received by nonhedgers.
The effect of producer hedging on the gold market as a whole was analysed by Anthony Neuberger of the London Business School in a May 2001 paper for the World Gold Council. He concluded that pro-ducer hedging probably depressed the gold price in the 1990s, but the effect was too small to explain all of the real decline in the gold price at that time
about 109 tonnes short YTD to meet 500 tonne/yr "goal"
Slower Selloff By Central Banks Keeps Shine on Gold
By Charlotte Mathews
15 Aug 2006 at 11:21 AM EDT
JOHANNESBURG (Business Day) -- The failure of central banks to sell the full amount of gold they are entitled to in the current year of their sales agreement could be positive for the gold price in future, says the latest gold-hedging report by Virtual Metals Research and Consulting.
An important factor helping to stabilise the gold market in the past few years has been the voluntary signing of sales agreements - which limit how much gold signatories will sell each year - by a number of central banks.
In the year to this September, the signatories were permitted to sell 500 tons of gold but by the end of July they had sold only 331 tons. They cannot carry over the allocation from one year to the next.
Virtual Metals said it seemed unlikely the signatories would sell the full allocation this year - and if they did not, it would not only limit the amount of gold in the market at present but also affect future assumptions about sales by central banks. Previously, the banks had sold their full allocations every year.
Virtual Metals researcher Matthew Turner said reduced selling by central banks was not necessarily a general policy change, but largely reflected the dispute between the German government and the Bundesbank over using Germany’s gold reserves to cut the budget deficit. Once this was resolved, Germany could resume selling its allocation.
What was significant, though, was that other central banks had not taken up Germany’s sales allocation. In the past six months, the gold price has also been supported by big gold producers’ shrinking forward sales commitments.
Gold hedging in the second quarter of this year fell 5.1-million ounces, the largest quarterly decline in Virtual Metals’ records.
Turner said the rapid dehedging supported the gold market because it temporarily reduced supply into the spot market. However, gold producers could not continue dehedging at this pace.
Barrick Gold [NYSE:ABX; TSX:ABX], AngloGold Ashanti [NYSE:AU] and Newcrest [ASX:NCM] were responsible for 82% of the 10-million ounce decline in the global hedge book this year.
Apart from AngloGold, there were also small declines in the hedge positions of other South African producers - Harmony Gold [NYSE:HMY; JSE:HMY], Western Areas [JSE:WAR] and Metorex [OTC:MRXLF], the report said.
Forward selling of gold by producers, known as gold hedging, is a protection measure against a decline in the gold price. It is a controversial strategy, with those against saying shareholders buy gold companies’ stock to gain exposure to the gold price. Also, when the gold price rises, gold hedgers have to mark-to-market their hedge books, which has a substantial accounting effect, and the average gold price they receive will be below that received by nonhedgers.
The effect of producer hedging on the gold market as a whole was analysed by Anthony Neuberger of the London Business School in a May 2001 paper for the World Gold Council. He concluded that pro-ducer hedging probably depressed the gold price in the 1990s, but the effect was too small to explain all of the real decline in the gold price at that time
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