CENTRAL BANK GOLD SALES AND U.S. DOLLAR INFLUENCES, 1981-2008

When reinvestigating the gold situation in 2003/2004 I discovered that Central Bank gold sales and the indexed value of the U.S. Dollar were regarded in the “gold community” as major factors in the gold markets and industry. Although not “new” to me, their importance seemed to be much, much greater than when I was doing my initial studies in 1981-1993.

Total world gold production in 1971 was 1,446 mt, declining to 1,283 mt by 1981. At that time, those production amounts represented about 1 pct of above-ground (already mined) gold stocks, much of which was held by Central Banks. Obviously, Central Banks could wipe out the new mine production at any time if they were willing to sell large amounts of their holdings at ridiculously low prices. However, prior to the 1990's, they showed no interest at all in selling at levels that would be injurous to the gold mining industry.

The following table shows Central Bank gold sales, South African gold production and the annual average gold prices for the years 1981-2008:

YEAR

CENTRAL BANK GOLD SALES (MT)

SOUTH AFRICAN GOLD PRODUCED (MT)

GOLD PRICE ($/TR OZ)


YEAR

CENTRAL BANK GOLD SALES (MT)

SOUTH AFRICAN GOLD PRODUCED (MT)

GOLD PRICE ($/TR OZ)

1981

-276

656

460


1995

167

522

384

1982

-85

663

376


1996

279

495

388

1983

142

678

424


1997

326

493

331

1984

85

680

361


1998

380

464

294

1985

-132

671

317


1999

478

449

279

1986

-145

638

368


2000

489

428

279

1987

18

602

447


2001

504

394

278

1988

-155

618

437


2002

545

395

310

1989

434

606

381


2003

617

375

364

1990

198

603

384


2004

497

342

410

1991

100

599

362


2005

659

297

445

1992

622

611

344


2006

389

275

603

1993

468

618

360


2007

498

255

695

1994

130

584

384


2008

375

220

872

SOURCES: Central Bank gold sales from Gold Fields Mineral Services and CPM Group publications. South African gold production from South African Chamber of Mines (www.bullion.org.za). Annual average gold price from Kitco (www.kitco.com).

Graphic for above table



In studying the data in the table, it is obvious that someone did not like the high gold prices of 1987/1988. After being net buyers of 432 mt during 1985-1988, they turned around and sold 434 mt in 1989. Then, they really got serious with sales of 622 mt in 1992 (11 mt more than South Africa's production in that year) and 468 mt in 1993. The South Africans “took the hint” and began their production cutbacks in 1992/1993 (the “rationalization plan”).

The year 1996 marks the beginning of the South African gold industry's “nightmare”. In the four years of 1996-1999 the Central Banks sold an average of 366 mtpy, nearly 77 pct of South Africa's production average. The South Africans complained to the U.S. Government and the result was the Washington Agreement of September, 1999 in which all of the major Central Banks agreed to set a limit on annual sales of their gold. Unfortunately for the South Africans, the 500 mt limit agreed upon was larger than South Africa's production; a major reason that the agreement did not really help in arresting the decline.

After studying the 28 years of data in the above table, I cannot accept any “apologists” argument that the Central Banks are not directly responsible for South Africa's production decline. For the nine years of 1987-1995 Central Bank sales average 220 mtpy and South Africa's production averages 596 mtpy. For the ensuing 13 years of 1996-2008 Central Bank sales average 464 mtpy and South Africa's production averages 376 mtpy. The difference between the two time periods is a 244 mtpy increase in Central Bank sales and a 220 mtpy decline in South African production—not coincidental, and totally unnecessary, in my opinion.

For the 2004 “revisit” I multiplied the actual Central Bank purchases or sales in a given year by the average gold price for that year. The results revealed that, from 1981-2003. the Central Banks purchased 793 mt of gold at an average price of $406/tr oz and sold a whopping 5,969 mt at an average price of $335/tr oz. This was over a 23 year period of time where the gold price averaged $361. The Central Banks certainly have demonstrated that they are masters of “selling low/buying high”... although I don't believe this shows the best stewardship of the people's gold.

Certain groups in the “gold community” place a lot of energy and faith in the supposed dollar/gold correlation (ie., dollar up in value, gold price down and vice versa). I've studied this data (shown in the table below) twice now since 2003 and still fail to see where it is really telling me anything. If the dollar is down, what is it down in terms of? Canadian dollars? Well, then the gold price in Canadian dollars is up. So what?? Where is the anchor? Thats why it was so important to see in 2005 that the price of gold was beginning to go up in terms of every major currency, not just in dollar terms. I personally think that the dollar issue is a “short term trader” issue and not fundamental to intermediate and long term trends in the gold industry. As such, it really is a minor issue in the larger, more important picture. Enough said.

YEAR

GOLD PRICES ($/TR OZ)

NOMINAL BROAD DOLLAR INDEX (Jan. 1997=100)


YEAR

GOLD PRICES ($/TR OZ)

NOMINAL BROAD DOLLAR INDEX(Jan. 1997=100)

1981

460

40.34


1995

384

92.65

1982

376

46.84


1996

388

97.45

1983

424

52.81


1997

331

104.42

1984

361

60.12


1998

294

115.88

1985

317

67.16


1999

279

116.03

1986

368

62.35


2000

279

119.43

1987

447

60.43


2001

278

125.07

1988

437

60.93


2002

310

126.75

1989

381

66.91


2003

364

119.28

1990

384

71.41


2004

410

113.63

1991

362

74.35


2005

445

110.72

1992

344

76.92


2006

603

108.53

1993

360

83.78


2007

695

103.4

1994

384

90.87


2008

872

99.83

SOURCES: Annual average gold prices from Kitco (www.kitco.com). Nominal broad dollar index from U.S. Federal Reserve (www.federalreserve.gov)

Graphic for above table



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