ECB sells 37 tons of gold in the last two months

It is unusual to have central banks comment on their gold sales. Their gold reserve policies have always been somewhat of a mystery to the market even with a Central Bank Gold Agreement in place since 2004. The ECB announced that they were engaged in active selling over the last two months but have now decided to stop for the rest of the gold agreement year which ends in four months. This caused a $10 rise in price. The reaction was more to the information that no more sales would be held for the rest of the Agreement year than to the past sales.

While European central banks have signed an agreement which has bound their behavior since September 2004 to limit the extent of sales, this activity always causes markets to take notice especially with more gold above the ground in vaults than in the ground. The ECB has sold about 60 tons of gold this Agreement year. Gold now represents about 16% of the total ECB reserves. Banks have usually been active in the lease market for gold where they have driven down yields to levels below short rates; nevertheless, the total central bank gold sales for this year have totaled 242 tons.

With the high price of gold, there is no reason why more sales from central banks will not occur especially if there is continued controlled world inflation. Central bank gold sales place a higher level of uncertainty in this market than would be expected from just the diversification behavior of investors.