May 23, 2007

Blanchard Research: Gold market having problems digesting high ECB sales levels

Recent weakness in the gold price has been due in part to sales levels from ECB banks which have totalled over 120 tonnes in the past ten weeks.

Author: Neal Ryan
Posted: Wednesday , 23 May 2007

NEW ORLEANS (Blanchard & Co.) -

It's always tough to work on a lag in the markets, but sometimes with the flow of information in the physical side of the metals markets, that's the way it has to be for investors.

So we know last week that 16 tonnes of gold came tumbling out of the GLD ETF...and we now know that ECB banks sold nearly 18 tonnes of gold the same week. The ECB updated yesterday that two captive banks in the system sold 17.7 tonnes of gold last week (or $280 million euros).

It appeared that maybe the increased selling was slowing down last week with sales of only about 1.5 tonnes, but in reality, the ECB captive banks have yet to finish the massive increased selling into the market that began in March of this year.

Forget about prudent timing, the market is having trouble digesting these sales.

The market isn't collapsing, but the price is certainly being kept from rising as the injection of supply is sopping up the increased demand in the marketplace. For a point of reference, ECB banks have not sold this much gold in such a short time period in the life of the 2nd CBGA. In the last ten weeks, ECB banks have sold over 120 tonnes of gold into the market ($1.9 billion in euros or $2.55 billion in dollars). In the previous six months, ECB captive banks sold only 112 tonnes into the market.

The gold cascading out of the central bank vaults is also helping to explain why all of the rampant dehedging in the marketplace hasn't caused prices to jump considerably. With five months to go in order to fill the annual sales quota of 500 tonnes, ECB banks are still roughly 268 tonnes short of filling the quota. We still strongly believe that even with the ramped up selling in the past three months, the annual quota will not be met this year, the second time in the last two years.

On to another topic...sometimes the market analyst crew gets very cushy sending out missives without listening to what the miners think. While miners and executives rarely give price targets or clear market prognostications, it's important to hear what they have to say about the markets because in the end, they are the ones that find the product and without their efforts, the whole analyst crew would be out of a job. Pierre Lassonde, former Newmont President and Chairman of the World Gold Council, is quoted as saying the gold price will hit $750 before the year end and then Gold Fields Chief Executive Ian Cockerill, speaking in Perth, made some pretty bold statements about hedging practices, exploration efforts and the like.

These are the guys exploring and producing. If they're saying that there are no major new mineral finds and exploration budgets are still paltry...maybe they deserve a listen. It's going to be their actions that dictate the prices over the coming years.

Neal Ryan is Vice President and Director of Economic Research for Blanchard Economic Research Unit (

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