Mike Kosares: Don't fear central bank gold sales

By Michael Kosares
Centennial Precious Metals, Denver
www.USAGold.com
Thursday, June 21, 2007

Those who say that the price of gold has been kept in check or driven down by central bank gold sales are looking in the wrong direction for an explanation of why gold has remained relatively rangebound.

Though these sales contribute in a limited way to holding the gold price in check, they are a minor back-and-fill operation more than a major policy-driven attempt to keep the price down.

The mere threat of sales and warnings about them from the press are as much factors in the market as actual sales (which, by the way, usually occur in the background, with little effect on the price).

Those who dwell on central bank sales allow the convenient explanation to divert their attention from the more complex circumstances affecting gold.

In the end, the result of all this activity is to present more opportunities for the more fundamentally attuned, so we shouldn't mind it too much.

Many years ago I wrote a magazine article titled "The Myth of Central Bank Gold Sales." It was an attempt to counter the mainstream press' view that all central banks were dumping gold. Nothing could have been further from the truth. Only a few central banks at any given time are sellers, and those sales generally are forced by circumstances -- that is, a poor balance-of-payments position, an attempt to meet Maastricht Treaty requirements, the need for a gold lender of last resort, etc. Gold sales (and leases) now are regulated by the Central Bank Agreement on Gold and so already are a known quantity in the gold market.

Few in the inner sanctum of the gold business believe that central banks sell gold because they want to get a better return on their reserves. Those who work in the physical market where mass tonnages are traded see the gold reaching the market as a blessing. One wonders where they would be if the central banks couldn't be induced to sell gold.

Some analysts recently attempted to tell us that central banks were again flooding the market with gold. This too was slightly wide of the plate. In reality, the amount of gold reaching the market so far this year is the same as last year. If the most recent bout of sales was an attempt to drive down the price of gold, it has met with limited success at best. As of this writing, gold is down 5.4 percent from its peak in April but up 2.5 percent on the year -- and gold's traditionally good months are still ahead of us.

To whatever extent central bank sales have dampened the price, they also have presented buying opportunities for those who see through the veneer and understand the real reasons for gold ownership -- as a means to long-term asset preservation and hedge against currency debasement.

We now are in the usual seasonal doldrums in gold, and if the past performance of this bull market holds true, 2007 still could be a good year.

Central bank activity in the gold market is regulated, essentially bullish, and an inducement to buy, not sell.

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