On Wednesday, January 16, the Bank of England held the "penultimate" Gold Auction of the series which was first announced in May 1999. This Auction was for 20 Tonnes of Gold. The next Auction, also 20 Tonnes of Gold, will take place on March 5 and will be the LAST in the planned series.
Before reading further, you might like to re-aquaint yourself with the genesis of these Gold Auctions. We covered the original announcement of the Bank Of England Gold auctions in the Early May 1999 issue of The Privateer - #373, published on May 9, 1999.
The BOE announced its Gold Auction plans on May 7, 1999. The previous day (May 6), Gold had closed in New York at $US 290.70. The Auction announcement took $US 7.00 off the Gold price which closed at $US 283.70 on May 7.
The first BOE Auction took place on July 6, 1999. The previous day, (July 5), Gold had closed in New York at $US 264.70. On July 6 when the Gold was actually Auctioned, Gold closed down $US 6.90 at $US 257.80. Gold did not regain its July 5 level until September 23, 1999, the day after the announcement of the Washington Agreement by the European Union. FOUR TRADING DAYS after that, Gold had soared more than $US 40 to $US 308.10
The relevant item here is the FACT that it was the announcement and then the undertaking of actual Auctions of PHYSICAL Gold by the Bank of England that forced $US Gold down to 20 year plus lows. Please grasp this clearly. The Bank of England has sold a large proportion of their Gold holdings at ROCK BOTTOM prices. The purpose of the Bank of England's Gold sales was to PRODUCE ROCK BOTTOM PRICES for Gold.
The precursor of the Bank of England Auctions were the U.S. Treasury/IMF Gold Auctions of the late 1970s. They were held for precisely the same reason, and they failed completely. The reason why these Auctions have "succeeded" - to the extent that Gold has yet to regain and hold the $US 300 level it dipped below for the first time in 18 years in November 1997 - is because of the huge Gold derivatives markets which have been developed since the early 1980s.
But this latest Bank of England Auction was ominous, if you are a Central Banker, that is. Gold had spiked to $US 290 (its highest level since right after nine-one-one) in Asia on January 16, the morning of the Auction. The London AM fix was almost $US 288. The price was hauled down so that the BOE could post a "settlement" price of $US 283.50. Oh yes, the "bid to cover" ratio was a "shocking" 1.4/1. Sotto Voce: "Let's keep the amount of those bids down boys, that way we'll REALLY disappoint em."
Right after the Auction, the spot future price began to rise again. By the close in New York on January 16, Gold was all the way back up to $US 287.60 - more than FOUR DOLLARS above the BOE's "settlement price".
The rest of the week has been a concerted effort to get the spot future price back down to the "settlement price". Successfully, as it turned out. Spot future Gold closed on Friday, January 25 at $US 283.40. The BOE is in the "black", by U.S. ten cents. What a triumph!
On March 5, the LAST planned BOE Auction takes place. This will complete the process of the BOE "divesting" itself - at least in public - of 415 Tonnes or 58% of its Gold. Note, we do not say its Gold "RESERVES". The BOE, like the Fed, has no Gold "reserves". Neither the BOE nore the Fed recognize Gold as an OFFICIAL "reserve". Neither Pounds nor Dollars are CONVERTIBLE into Gold.
For more than 2 1/2 years, the most notable CONCRETE example to back up the perpetual "threat" of Central Banks "selling off" their Gold has been the Bank of Engand Auctions. In public, the BOE has "sold off" 395 Tonnes, with 20 Tonnes to go.
There will come a point where two things will dawn on some portion of the investing public, outside AND inside the U.S.. First, the BOE Auctions have NOT decimated the $US price of Gold, they have merely helped to prevent a steeper UPTREND in $US Gold than the one which has now been intact since the end of April 2001. Second, these Auctions are nearing an end, and on March 5 - THEY WILL BE OVER. Unless, of course, the BOE decides on some more or some other Central Bank (can you think of any candidates?) decides to pick up the slack.
The Gold price "action" surrounding the latest BOE auction is the best example yet of the many that keep popping up. The strain of keeping down the Gold price is becoming harder and harder. More important, it is getting more and more obvious.
March 5 is just over six weeks from now. That is how long the world's Central Banks have to come up with another "red herring" to replace the BOE auctions. And every time the pressure mounts, the potential for it to (you should pardon the expression) "blow off" increases. Stay tuned.