Central bankers look to renew Washington Agreement

Gold ended a tough week on Friday, Jan. 16, ahead of the U.S. long weekend, at US$406.20 per oz., and this was better than seemed likely after prices had fallen US$12 on the previous day. The absence of U.S. trading allowed gold to steady on Jan. 19, but the short-term trend appears, as with the euro, likely to remain lower for now. The latest data from the Commodity Futures Trading Commission reveals that, as of Jan. 13, speculators had reduced their net-long futures-only position in gold by 27.2 tonnes, to 333.5 tonnes, though, interestingly, the futures and options net position actually rose by 4.6 tonnes to a fresh record high of 428.9 tonnes. The extent of these long positions reflects the potential for gold prices to correct significantly lower.

A raft of the official sector comments about gold provided the precious metal with a rather mixed level of support. A report in the Financial Times quotes Austrian Central Bank Governor Klaus Liebscher as being “very optimistic” that Europe’s central banks can renew a 5-year agreement. “It is wise to renew the pact . . . and many of my colleagues see it that way,” said Liebscher. The report added he was confident that a new deal would have been negotiated “by the spring.”

Meanwhile, in Germany, the debate about gold sales continues, though it should be noted that this debate centres around the use of the proceeds from the gold sales rather than whether the gold should be sold. A report in Der Spiegel on Jan. 17 suggested that proposals by Bundesbank President Ernst Welteke to use sales from the German central bank’s gold reserves to fund education projects have hit opposition in both the Bundesbank and the finance ministry. Der Spiegel reported that five out of the eight Bundesbank board members were against the idea of using gold sales to create a special education fund, saying it was the government’s responsibility to pay for education, not the central bank’s. The source added that he sees adequate re-serves as important instruments to keep for possible interventions on the foreign exchange.

However, Bundesbank sources told Reuters that the board wanted to secure an option allowing it to sell up to 400 tonnes of gold over the next five years but had not yet reached agreement about what to do with the proceeds of any sale. Welteke recently said no decision had been taken on whether Germany would sell gold but that it wanted the option to do so if required.

Der Spiegel also reported that Finance Minister Hans Eichel was against the idea of devoting the proceeds of gold sales for education purposes, a move that would require a change to the law that covers the Bundesbank. Instead, finance ministry officials would prefer to see any revenue from gold sales added to Bundesbank profits, where it would be available for the general budget.

Finally, former Malaysian Prime Minister Mahathir Mohamad told an economic conference in Saudi Arabia that the country should sell oil for gold, not dollars, to avoid being “short-changed” by a decline in the U.S. currency. “The price of oil is US$33, but the U.S. dollar has declined by 40 per cent against the euro, so you’re effectively getting US$20,” said Mahathir, “so you’re being short-changed.” Saudi Arabia, the world’s biggest oil exporter, has justified higher world oil prices by saying they are necessary to compensate for the slide in the U.S. currency. Mahathir suggested countries tally their total annual imports and exports and settle the difference at the end of the year in “gold dinars.”

— The opinions presented are the authors’ and do not necessarily represent those of the Barclays group. For access to all of Barclays’ economic, foreign-exchange and fixed-income research, go to the web site at barclayscapital.com.