Commodities | Jun 04 2007
By Greg Peel
Gold has tried several times to breach the US$700/oz level in 2007, and has not only failed but often seen a sharp decline following each failure. While an overly long and optimistic market has added to the extent of each pullback, it has been sales from European central banks that have really added the downward pressure.
Under the Washington Agreement, signatory European central banks, including the European Central Bank (ie the bank of the European Union) can sell up to 500 tonnes of gold before the end of September. Last year they only sold about 300t, and it was expected that this year they would fall short of the quota again – maybe even by more. When only 112t were sold in total in the first six months of this year-to-September, it looked like that might be the case.
But then there was a bit of a spree, and 120t were sold over a ten week period recently. Concerns were growing that the 500t limit might indeed be met this year, which would not be good news for the gold price. Because gold had slipped back to US$550/oz after the May 2006 blow-off, it was thought that perhaps the central banks were keen to make up their shortfalls by selling into a much healthier market this year.
But there was good news for gold bugs on Friday when the ECB announced it had sold 37t over the last two months but would now pull up stumps for FY07. Not only was this welcome news in itself, but the fact that the bank had revealed its plans was also well received. Central banks are under no obligation to pre-announce their selling intentions, and it is usually a week before the market finds out that central bank selling had indeed occurred the week before. This uncertainty has only exacerbated uneasy feelings across the market. However some banks, such as French central bank, do let the market know its intentions. Spain, on the other hand, has sold a whopping 80t recently without announcement, and that’s 25% of its reserves.
The response from the market was immediate, with gold rallying about US$10 to close over US$670/oz once more. This rally followed a US$7 rally the previous night, when the US dollar finally pulled back somewhat after its recent solid upward correction against the euro. Prior to Thursday, gold had been tenuously perched on a ledge just above US$650/oz. Had the ledge given way, technical analysts were predicting a fall back to as little as US$500/oz. On the flipside, they suggested a rally back over US$665/oz would reconfirm the bullish trend, so we might just be back into the pink once more.
While the gold market has been a frustrating and sometimes scary place to be of late, the fact remains that gold’s holding above US$650/oz in the face of such a barrage of central bank selling has been quite an achievement and a testament to many a bullish view. Bloomberg reports the MKS Finance SA gold refinery in Switzerland, which can produce up to 400t of gold jewellery and coins per year, is “fully booked” for the second consecutive month.
“Those who need immediate delivery have to be in a queue,” the chief trader told Bloomberg, “Demand from India, the world’s biggest gold consumer, and parts of Asia revived, especially after prices dropped.”
Can a battle-weary regiment of gold bulls regroup and steel itself for yet another assault on Hill 700? They probably need to be sure the Chinese stock market won’t collapse in the meantime.