European Central Banks renew sales pact and Boost Gold
Europe agreed to renew their pact to cap sales of gold for another five years causing gold prices to boost.
This reaffirmed gold’s status as a key reserve asset. Also, the new Central Bank Gold Agreement reduced the maximum amount of gold that can be sold by the signatories.
Under a new deal to replace the current five-year pact, the limit for sales has gone down to 2,000 tons from 2,500 tons. Annual sales are now capped at 400 tons, down 25% from 500 tons – a quota that was not reached in recent years.
Gold sales were first capped by European in 1999 in an attempt to reduce market volatility. Their agreement to prevent markets being flooded with the gold has been an important factor in its rally over recent years.
Because of the recent economic plummet, gold’s status as a safe-haven asset has also helped boost the price of gold.
The new deal and its tighter sales quotas help cement a view that the days are over of central banks’ anti-gold stance and the kind of big sales announcements – notably by the Bank of England at the end of the 1990s – that led to wild swings in prices.
The World Gold Council welcomed the new deal. “The announcement is a clear endorsement of gold’s role in today’s global economic and financial architecture and a reflection of the success of the previous Central Bank Gold Agreements,” said chief executive, Aram Shishmanian.
“The agreement to limit the sale of gold over the five-year period to 2,000 tons demonstrates that, at a time of continued market volatility and inflationary fears, gold’s unique investment qualities provide the necessary hedge and protection that central banks are seeking.
“The reduction in the annual ceiling on sales … reflects an acknowledgment of the fact that the central banks’ appetite for sales is diminishing.”
Investing in the US
In the worst financial crisis since the great depression, the U.S. government has responded with $13.5 trillion in pledged or potential outlays. Meanwhile, rising unemployment and slumping corporate profits are crimping the U. S. Treasury’s tax revenue.
Because the credit worthiness of the U. S. government is raising concern, it’s no surprise that the eagerness of foreign governments and investors for dollar-denominated investments has diminished.
The dollar’s standing as the world’s de facto reserve currency is impaired. Nations are looking to diversify their foreign exchange reserves away from the dollar and showing a liking for gold. The combination of liquidity circulating through the U. S. economy and a tanking dollar stokes inflation. Gold is being sought out as a safe-haven by investors who sense the threat of inflation.
Gold Price Outlook
Gold is once again approaching the psychologically important $1,000 per ounce mark. Rallies in the price of gold have peaked in the $900-1,000 per ounce range three times since the start of 2008. I believe gold will crack the four-figure mark in 2009 and move on to exceed its 2008 highs. Given the state of the U. S. economy and the monumental challenges ahead, the $1,000 per ounce figure can well become a support or floor for a long time to come.