Mostly Gold

[amarksp]

Blanchard analysis-Central Bank Gold Sales

Out of the office starting later this afternoon to begin the holidays and hope that everyone has a great vacation. We're going to have a few data points out on Friday that should move markets…on Monday. Markets across the globe except for the Treasury market that has some note auctions on Friday will all be closed.

So why's the precious metals market heading higher today on seemingly little bullish news?

For the same reason the market wasn't performing the last three weeks. The selling pressure from bank sales has abated and precious metals have become a more direct reflection of market circumstance we're currently seeing.

Been running some figures on the recent ECB sales and thought you'd like to see them, consider this the extended note before the vacation!

Since they announced their selling program with the CBGA II signing, the Bank of France has sold 380 tonnes of gold (using rough numbers total is actually 379.85). When they signed the agreement in 2004, they announced that over the 5 years of the 2nd agreement, they would sell 500-600 tonnes of gold.

By my calculations, they've got 120-220 tonnes of sales left to push out into the market over the next 28 months of the 2nd agreement to reach the low or high end of their announced sales. Broken out that's 4.2 to 7.8 tonnes of sales a month. Sales have averaged 26 tonnes a month in the latest CBGA II fiscal year. We believe that number is set to fall drastically.

Switzerland's done with their selling program, the Bank of England didn't even sign the 2nd agreement, Spain and Portugal seem to be finished selling after dumping millions of ounces on the market in the last two years, and the Netherlands are finished their announced sales as is the Bank of Denmark.

France is the only announced seller left out in the market of any size. Other banks are certainly selling a tonne here or a tonne there, but France is the only bank transacting in any volume. Germany has said they won't sell any gold reserves in 2007 and have yet to decide about 2008. Italy has made no announced plans to sell and has not sold one tonne of gold over the life of both agreements (I'd have to say knowing the little bit I do about their cash management acumen and fractured governmental system, any agreement on selling from them is remote).

So…what's it all mean?

In my mind, it means we've got one remaining seller left out in the market of any size who was more than likely behind the major sales in the last 3 weeks. We'll get an update on who sold the gold in a month. It also means that after purging over 11 million ounces from their reserves in two and a half years, the Bank of France is nearly done with their announced program and only have between 3.8 to 7 million ounce left to sell.

Unless Germany makes an announcement about 2008 or Italy changes their routine and begins selling, there are no more captive ECB banks who either have any gold sales announced or own enough gold in reserve to transact at the same levels that France has been selling in the last 3 years.

We're not only going to see CBGA II sales miss the mark this year by over 150 tonnes, we're going to see CBGA II sales for 2008 and 2009 miss the mark by 200-300 tonnes each. Supply side thoughts for further down the road, but one that is looming very large on the horizon. We're talking another 6-10% drop in both 2008 and 2009 in supply into the market.

We've seen significantly lower mine production in the last five years, we've watched 75 million ounces of gold get dehedged off of the market (with 40 million left to go), investment demand has picked up some(we still believe it will grow another 25-50% in the coming years), outside of the ECB captive banks, central banks made net additions to gold holdings in 2006…Seeing central bank sales dry up like this while so many other supply/demand factors are coming into play is a major, major bullish signal for the market. Central Bank activity (or lack thereof) and supply/demand factors are what will push gold past $800 this year and into the four digit range in the next several years. See the coming trend, understand it and prepare for it.