Mostly: Classical

[basserdan]

Gold Tumbles as Rumours of Central Bank Sales Circulate

By Jon A. Nones
09 Sep 2006 at 02:29 PM EDT

St. LOUIS (ResourceInvestor.com) -- Gold fell more than 2% last week, plummeting $22 in the last two sessions. Both Peter Grandich, Editor of the Grandich Letter, and analysts from Action Economics alluded to the possibility of last minute gold sales by central banks within the European Gold Agreement (EGA) to hit the quota by the September 26 deadline.

As of September 1, the 15 EGA central banks have reportedly sold roughly 340 tonnes. In order to hit the maximum amount of gold permitted by the agreement, the banks would have to sell about 160 tonnes in just under a month to hit the yearly quota of 500 ounces by the deadline. And the average amount of sales per month has been just 33.1 tonnes so far this year.

Matthew Turner, commodities analyst with Virtual Metals, told Resource Investor that there's been all kind of rumours circulating in the market, but nothing is concrete.

“Is there a possibility that the sales aren't being recorded? It's the only other explanation, possibly because of forward sales, but again there's no evidence,” he said.

If gold sales are going unreported, Turner said the Bundesbank is probably the favoured explanation as it did have an option to sell up to 120 tonnes this year. However, Bundesbank said in March they would not be taking up their option to sell 120 tonnes of gold this year, and have since reported it has “given it away,” he said.

France is just short of its 120 tonnes, and the Bank of Italy is another large holder whose intentions have never been revealed, but “I have to stress there is absolutely no evidence they have done anything,” Turner added.

The European Central Bank’s (ECB) Weekly Return has been showing sales weekly of less than 5 tonnes for the past month or so, according to Turner. The only two EGA signatories that it doesn't cover are Switzerland and Sweden, and “the former has finished its sales programme and the latter is only selling small amounts (10 tonnes),” he said.

Turner said there was possibly another 2 tonnes sold last week. Tuesday is the next day for publication of the ECB Weekly Return.

In last week’s edition of the Gold Monitor, Martin Murenbeeld, Chief Economist of Dundee Group of Companies, said a rising dollar and falling oil price “are worrisome for gold.”

These two charts indicate the dollar is ready to break upwards and oil ready to break downwards.



“Ergo, the reader has to be prepared for setbacks in the gold price for the near term on these two accounts,” he said.

Murenbeeld noted a lull on the geopolitical front right at the moment, as the August 31st UN-Iran deadline passed without notice. Furthermore, he said the seasonal factors for gold are not particularly supportive in September, but stronger from October through January.

However, he said September is historically a strong month for gold equities, while the fourth quarter is generally weak for gold equities.

According to Murenbeeld, gold has broken its 50-day average, and could now be heading for its 200-day average currently near $595.

South Africa's Standard Bank said on Friday that the fund community pummelled the market last week.

Comments from the Fed suggested the U.S. central bank should maintain a bias towards further rate increases fuelled further liquidation of gold. Also, a slipping oil price also added to the meltdown as funds continued to sell, the bank noted.

“For the bulls in the market support at $607 is crucial now and a break of this level will certainly initiate technical selling from the funds,” said Standard Bank.

In a market commentary, Nell Sloane of NS Futures said positive action in the dollar prompted waves of longs to exit gold positions this week. Some of the selling “might have been the result of deflation fears and perhaps even fears of slowing physical demand ahead,” she said.

“With the all of the precious metals trading down in sync recently, even bargain hunting buyers are discouraged from entering the market,” said Sloane.

Stories of rising gold production in South Africa added to the bearish sentiment as well, she said. South Africa's gold production rose by 1% in the second quarter of 2006, compared to the first quarter, despite the high number of public holidays.

Also, Gold Fields [NYSE:GFI] last week announced plans to invest $636.4 million in two major extension projects at its Kloof and Driefontein mines that could extend the life of these mines in South Africa to the middle of this century.

“With another new low for the move and little fundamental news flow to countervail the liquidation efforts, it is possible that December gold is destined to retest the late-August spike low of $615.5,” she said.

According to Sloane, with the market back below the 60-day moving average, it could suggest the longer-term trend could be turning down. The close under the 18-day moving average could indicate the intermediate-term trend could be turning down as well, she said.

Gold Price Activity

Gold for December delivery closed down $8.40 at $616.50 an ounce on the New York Mercantile Exchange on Friday after a low of $613.50.

Prices topped out at close to $648.50 on September 5, closing at $632.60 a week ago. Last week, the yellow metal dropped more than 2%. However, gold is still up $95.75 or 15.5% for the year.

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