- Written by Marc Courtenay
- Tuesday, 22 September 2009
You likely heard that the Central Bank Gold Agreement was extended by the signatory banks last month. This is the agreement where central banks around the world agree to limit sales and to do so in an orderly fashion so as to not disrupt prices.
While most writers focused on the fact that the agreement set a lower limit (400 tonnes per year, down from 500) – clearly a bullish indicator – I think there’s a more obvious fact many are overlooking that’s even more bullish.
In the first two 5-year agreements, CBGA signatories sold 4,000 tonnes of gold, or approximately 141 million ounces. This is an incredible amount of gold to dump on the market; it’s equivalent to almost two entire years of global production. Based on an average gold selling price over those 10 years of $600, this equals approximately $84.6 billion of gold.
This amount of sales should’ve had a hugely depressing effect on such a small market. After all, the gold market is smaller than the market cap of Walmart. If I had asked you in advance of those sales to estimate the price of gold once all the metal had hit the market, you probably would have said it would have lost half its value from its $252 levels (when the selling started), or more. In other words, a price around $125 per ounce.
But what happened during those 10 years? The gold price soared, rising from a 1999 low of $252 to its current price of $950, close to a quadruple. I wonder what the price would be if central banks had been hoarding gold, like us, instead of selling it?
Now that the CBGA has agreed to sell even less gold, the depressing effect sales have on the price will lessen. Add in the fact that sentiment among central banks is shifting from anti-gold to pro-gold, and I think it won’t be long before $1,000 is the new floor of the gold price and not the ceiling.
Yes, the fun is just beginning.
And while gold is likely to move up, gold-related investments – such as large-cap gold producers and near-producers – can give you even more of an upside. One of our current favorites is a stock that has been providing steady gains over the last year, even during times when the Dow and S&P dropped off a cliff… that’s why we call it “48 Karat Gold.” Learn more about it here.