To the delight of gold miners and their shareholders worldwide, gold prices broke the US$300-per-oz. barrier in the last week of September as both the European Central Bank and the International Monetary Fund (IMF) unveiled new policies that will bring more predictability to the offloading of official-sector gold reserves.
Gold first showed renewed vigour on Sept. 21, following the open-market auction of 25 tonnes by the Bank of England. The auction was the second in a series that will see Britain sell off 415 tonnes of its 715-tonne gold reserve, replacing that gold with U.S. dollars, yen and euros. The announcement in May by the Bank of England of its proposed sales had already pushed the spot price of gold from the US$290-per-oz. range to a new 20-year low of US$253.20 per oz. reached during the summer.
During this recent auction, Britain’s gold was sold at only US$255.75 per oz. However, the auction was oversold by an unexpectedly high eight times, driving gold up US$3.45 to a London afternoon fix of US$258.85 per oz. on Sept. 21.
Throughout the rest of that week, gold prices continued to pick up momentum, finally climbing to an afternoon fix of US$270 per oz. on Sept. 24.
That rise only set the stage for two major announcements made on Sept. 26, in Washington, D.C., where the IMF and the World Bank were both holding annual meetings.
In the first announcement, the president of the European Central Bank (ECB), Wim Duisenberg, announced that the central banks of the Euro-system, along with the Banks of England, Switzerland and Sweden, were putting a cap on gold sales by limiting them to a maximum of 400 tonnes (12.9 million oz.) in any of the next five years.
In essence, the measure will limit gold sales to those that have already been announced, most notably Britain’s sell-off and Switzerland’s proposed sale of 1,300 tonnes of its reserves.
Specifically, the statement was issued by the ECB (which holds reserves of 747 tonnes gold) and the central banks of: Austria (404 tonnes of reserves); Belgium (249 tonnes), Finland (negligible), France (3,017), Germany (3,469), Ireland (negligible), Italy (2,457), Luxembourg (negligible), the Netherlands (1,012), Portugal (622), Spain (529), Sweden (147), Switzerland (2,590) and the United Kingdom (665).
Other major holders of gold reserves worldwide include the U.S. (8,139 tonnes), Japan (754), Russia (411), China (395) and India (358). Canada’s gold reserves have dwindled to 77 tonnes, even less than Poland or Romania.
The central banks also agreed not to increase their gold lending arrangements and derivative operations above current levels for the next five years.
The World Gold Council’s head of public policy studies said in a statement that these measures “will reduce dramatically the scope for rumour and speculation, which has been such a damaging feature of the gold market in recent years.”
The second major announcement came during a joint meeting of the IMF and the World Bank, where officials pledged “deeper, broader and faster” debt relief for 36 of the world’s poorest countries, making available US$100 billion that will be earmarked for health and education initiatives rather than debt payments.
In support of this, the IMF’s policy-making Interim Committee approved a plan for the organization to carry out what it calls “a one-time operation of a highly exceptional nature” to revalue up to 14 million oz. of its 103-million-oz. (3,217-tonne) gold reserve.
Under this proposal, a debtor country owing money to the IMF will purchase gold from the IMF’s reserves at the prevailing market price. The IMF, in turn, would reinvest the difference between the present book value of the gold (about US$48 per oz.) and the market price and then use the investment profits to pay for debt relief and a program of concessionary lending for poor countries.
The second step in the proposal has the debtor country immediately returning its newly bought gold to the IMF in settlement of that member’s financial obligations, the net effect being that the IMF’s gold reserves would remain unchanged.
The IMF’s deal cannot go ahead until there is 85% approval from the IMF board, a stipulation that effectively gives a veto to the U.S. Congress, which has a 17% weighting in IMF voting structure, and the Euro-zone, which has a 23% weighting.
The last IMF gold-sale proposal — selling gold on the open market to fund debt relief programs — was abandoned following heavy criticism that these sales would be counter-productive to the IMF’s aims by depressing gold prices and thus causing the poorest gold-producing nations to lose vital export revenue and gold-sector employment.
In light of these new developments, when trading resumed on Monday, Sept. 27, gold prices enjoyed their best single-day rally in 15 years, with the spot price soaring above US$283 per oz. in Asian trading as short-sellers presumably dove into the market to close out their positions.
Shares in gold producers quickly took off with gold prices, and most majors posted single-day advances of 20-35%, with many gold juniors advancing 50% or more.
The next day proved to be even more spectacular for gold, with prices hitting a high of US$327.30 on Tuesday afternoon’s Comex trading before closing at US$307.90 per oz. Adding to the bullish mood was the Bank of Japan’s announcement that it would not be selling any of its gold reserves.
With profit-taking across the board, the gains made by North American-listed gold majors on Sept. 28 were less pronounced, with shares rising another 5-15% in value.
Between Sept. 21 and 28,
During this period, the Toronto Stock Exchange’s gold and precious minerals index gained 26% to hit 6,806.89 points, or a 33% gain from Sept. 20.
Among juniors,
Finally, in a third consecutive day of extreme volatility, gold traded within a range of US$296-319 on Sept. 29, finally closing in New York at US$302 per oz. Most gold shares showed modest declines.
Another factor contributing to gold’s renewed strength has been the rapid rise in gold lease rates, a development that will discourage hedging by producers.
Three-month lease rates (expressed on an annualized basis) have soared from the 1-2% range before May 1999 to a stunning 7.6% on Sept. 29. Lease rates for platinum, palladium and silver have also ballooned, to 15.1%, 5.1% and 10.8%, respectively.
The strong sympathetic movement of platinum, palladium and silver has been somewhat overshadowed during gold’s moment of glory. Between Sept. 20 and 28, platinum rose $23.5 to US$399 per oz., palladium advanced $15 to US$377 per oz., and silver gained 32.5 cents to reach US$5.44 per oz.
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