Have Central Banks lost their desire to cut gold reserves?

Russia's announcement Tuesday that it will buy some 15.6 tonnes of gold further reinforces a growing trend among central banks - a distinct lack of selling.

Indeed, if anything the trend is exactly the opposite, underlined by the massive purchase of some 200 tonnes of the IMF's gold by the Reserve Bank of India.

So where does this leave the third, and latest Central Bank Gold Agreement (CBGA) that sets out the timetable for official gold sector sales?

Consultancy, VM Group, in collaboration with BNP Paribas, asks this exact question in its latest Yellow Book report on the gold sector. It points out that there are only two major changes between CBGA 3 and CBGA 2: the ceiling on central bank gold lending has been dropped and the annual sales limit has been reduced from 500 to 400t/year.

As the VM Group points out, while not a signatory, the IMF is the only significant confirmed seller of the yellow metal. Which makes the statement that the IMF's sale can be "accommodated within the above ceilings" a huge understatement.

 "At present the IMF with its remaining 201.3t of gold (Sri Lanka bought 2 tonnes) is the only confirmed seller apart from Germany, which (once again) says it will only be selling a token amount (6.5t) for the manufacture of gold coins. And even the IMF might find another buyer.

But even if they don't, as matters stand today, the new CBGA promises to put into the market only 207.8t of gold, sufficient to cover just half a year and ten days of the annual limit."

And, it is clear that this decline in selling has been going on for some time.

The important question to ask is why is this the case? According to the VM Group, the recession has had a massive influence.

"The slowdown in official sector gold sales has coincided with the onset of the recession. Pity the poor central banker who is responsible for overseeing his or her country's official gold reserves.

Political pressure to sell gold - as was the case in the UK.s decision to sell gold, in 1999 - can result in all kinds of unintended consequences, not the least of which is helping to create a fretful bear market into which the gold will be flung, without too much (apparent) concern as to the effect on prices (or the national coffers).

"Yet when it might be considered more opportune to sell gold - such as in November 2009, when the price (in dollar terms, at least), has been almost daily setting new records - politicians begin to remember why their predecessors acquired gold reserves in the first place, to fend off currency collapses . and official sector gold sales go into reverse gear."

All of this, of course, excludes the IMF which is expected to conclude its gold sales programme (in order to get rid of 403 tonnes of gold by the end of next year most probably by selling to Central Banks who now seem very eager to buy gold.

According to the VM Group, the IMF's plan is being justified by the Fund as a matter of necessity, not ideology, nor even the faintly spurious phrase, .portfolio management.

The idea was to create an endowment fund to ensure the IMF's continued ability to fund its running costs. Its traditional source of income, interest on its loans, dried up in the boom years. Now of course the boom years have gone and the IMF is seeing a resurgence of lending so the case for an endowment is less strong."

So what does this all mean, according to the Yellow Book, all of this must be seen as good for the gold price.

In what is an almost comical display of poor timing, the banks look to be selling during what could well be the strongest bull market for gold in many years. A fact the VM group says "speaks volumes about the rationale for such sales - it's always about government fiscal policy, not portfolio management."

The group says, "We are currently entering into a new, much more conservative, era of fiscal policy, in which governments (and therefore their central banks) are determined not only to be cautious, but to be seen to be cautious.

The "withholding" of gold by the official sector, apart from the IMF, will be one factor that helps firmly underpin prices in the coming months and, quite possibly, in the years ahead."

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