central banks set to renew gold pact

  1. SCD
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    Central banks set to renew gold pact

    By Tony Major and Andreas Krosta in Frankfurt

    Published: January 18 2004 21:59 | Last Updated: January 18 2004 21:59

    European central banks are likely to renew their five year agreement restricting gold sales in the spring, well ahead of its expiry in September, in a move that could prolong the two year bull run in bullion prices.

    The new agreement is also expected to raise the limit on aggregate annual sales by the 15 participating central banks, which include Germany, France, Italy and the UK, from 400 tonnes to more than 450.

    Klaus Liebscher, governor of the Austrian central bank - a signatory to the accord - said he was "very optimistic" that a new gold agreement would have been "negotiated by the spring". In an interview with the Financial Times, he said the talks were "not yet in the end phase. But he indicated Europe's central bankers were supporting a renewal of the agreement. "It is wise to renew the pact... and many of my colleagues see it that way."

    His comments will help to reassure gold investors, who have seen its price rise by 20 per cent in each of the past two years on geopolitical tensions and a sliding dollar. Analysts believe gold, which hovers just above the $400 an ounce level, could now touch $450 later this year.

    Mr Liebscher said he thought "sales of 450 tonnes a year or a little more" would not be a problem for the market as long as it was forewarned. Analysts said the renewal of the pact at these levels would be positive. The pact has a big influence on the gold price, and many had expected the central banks to seek a bigger increase in sales.

    "A limit on annual sales of between 450 and 500 tonnes would be positive for the market," said Paul Walker of Goldfield Mineral Services. "This is at the lower end of expectations."

    Europe's central banks, which hold more than 14,000 tonnes of gold, have been offloading bullion for years to diversify their reserves and to provide easy means for governments to fund budget gaps. But in the 1990s a selling binge by central banks drove the price sharply lower.

    The gold pact, signed by the ECB, and central banks of the euro-zone, Sweden, Switzerland and the UK in 1999, helped to rebuild confidence by preventing undisciplined selling.

    Under the first agreement, the biggest sellers were Switzerland, the Netherlands and the UK. But the German Bundesbank, which has some 3,400 tonnes of gold in its reserves, has recently indicated it now wants to sell about 400 tonnes. The Bank of Italy is also thought to be keen to sell some gold.

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