LONDON Gold bugs are tantalised by the prospect of a third European central bank pact to limit sales of the precious metal, with the International Monetary Fund seen figuring heavily in a move that should underpin the investment case for bullion.
European central banks have agreed to regulate gold sales under the terms of two successive Central Bank Gold Sales Agreements (CBGA) starting in 1999, which have been key in supporting an eight-year bull market rally that saw prices top the $1,000 an ounce mark.
After months of uncertainty and dwindling yearly sales under the second CBGA, European Central Bank governing council member Nout Wellink stunned gold players on Tuesday by saying the bank intended to renew the pact, which is due to expire on September 26.
"Wellink's comment is the first indication that there will be a third agreement," said James Steel, an analyst at HSBC in New York. "The odds favour that because of the potential IMF sales, which they have stated would be done within the CBGA."
The IMF's potential disposal of 403.3 tonnes of gold, approved last year to beef up its financing firepower for troubled economies, has added a new ingredient to the mix of official sector sales along with China's shock announcement last week detailing significant bullion buying since 2003.
While the fund is not currently a signatory of the pact, it has stated it wants to make its gold sales under the umbrella of a wider agreement to avoid upsetting the market.
"I think that the current signatories would probably prefer to keep the signatories to the agreement to European central banks and the IMF doesn't qualify as one of those," said George Milling-Stanley, managing director of official sector at The World Gold Council.
"The consensus in the market would be that probably some form of association rather than the IMF becoming a formal signatory would be sufficient," he added.
Under the terms of the existing CBGA, in force since 2004, signatories can sell a maximum of 500 tonnes of gold per year -- but sales have fallen well short of the quota in recent years.
Sales slid to a record low 358 tonnes of gold in the fourth year of the pact, and just 91 tonnes in the final year to date.
Wellink declined to comment on the details of the new agreement, but analysts say the low level of sales suggests there is no need to raise the pact's 500-tonne annual quota.
In 2007 a committee formed to look at sustainable long-term financing of the IMF, known as the Crockett committee recommended the fund sell 12.97 million ounces of gold -- currently worth around $11.4 billion (7.5 billion pounds) -- to fund the adoption of a new income model.
It specified, however, that the sales should take place within the framework of a wider agreement to prevent the market from being flooded with bullion.
"They might come up with a quota for the IMF to sell within a third agreement," Standard Chartered analyst Daniel Smith said. "It would make sense, (given) the Crockett agreement that the gold would be sold without disrupting the market."
While sales under such an agreement are unlikely to have a significant effect on price, the longer-term psychological impact is significant.
Central banks were able to deflect criticism that their sales were disrupting the gold market, and prices benefited from the restrictions to supply, WGC's Milling-Stanley said.
"The announcement that there is going to be a third CBGA is helpful in that it helps the gold market, it helps the central banks to avoid criticism, and it is likely to help the IMF, provided the terms of Crockett are followed," he said.
But while the pact is being closely eyed, its potential effect on the market is also being weighed up with China's announcement that it had boosted its gold reserves by three-quarters since 2003.
The IMF has not commented on speculation that China could be a buyer of the 403 tonne it intends to sell but John Lipsky, IMF first deputy managing director, said the rapid increase in China's holdings was not surprising.
While China's bullion holdings have surged in tonnage terms, they actually fell as a proportion of China's almost $2 trillion total foreign exchange reserves, sparking speculation the Asian giant would seek more -- including that of the IMF.
The shift in official sector activity towards the buy side, and the limits placed on selling, will lend significant support to prices at a time when the market is grappling with a stock market bear rally and hints that the global economic downturn might be stabilising, analysts say.
"To have a major central bank buying bullion even at a very gradual pace I think is in fact more psychologically important than the actual bullion offtake itself," HSBC's Steel said.
"The whole issue of central bank activity in the gold market is supportive, as they realise the portfolio diversification value of gold."
For a Factbox on official sector gold sales, click on [ID:nLR150945]
(Additional reporting by Frank Tang in New York; Editing by Sue Thomas)