Jun 20, 2007

Unprecedented dishoarding by central banks fails to push gold down

Neal Ryan's daily gold market note for the Blanchard Economic Research Unit today added up the desperation of the world's central banks to prop up the U.S. dollar system by rigging markets. Ryan finds central bank gold sales of more than 240 tonnes in just the last four months, dishoarding at an unprecedented rate. "Seeing the gold price hold above the $640 level during this period of increased sales should be the best demonstration of just how robust the physical demand side of the market is at present," Ryan writes...

Just announced this morning was a set of new metal ETF investment products for the Italian trading bourse, set to launch tomorrow. These ETFs are set to be backed by physical metal holdings and will be offered in gold, silver, platinum and palladium. Interestingly, ETF Securities stated in the release that the metal backing the ETFs will not be available for loan into the market, a concern many market pundits have become keenly aware of due to some loopholes in existing metal ETFs. While only time will tell as to how successful each of these ETFs will be on each new market bourse they enter, in tight markets like platinum and palladium, these investment vehicles have the ability to create a real squeeze in the supply available to the market. Even minor success in a handful of new offerings will create more demand than the platinum and palladium markets can currently handle and should push prices higher. Again, the only way for the average US investor to play these PGM markets is to buy the physical metal, futures contracts or a handful of mining stocks. There are no PGM ETFs available in the US.


We are now eleven days away from South African gold production going offline. Keep this issue on the radar over the next week and a half. It will seem like the issue came out of nowhere when it's the top market news item of the week. Currently, the labor union's wage demands and mining company's offers are no where near each other and losing this supply from the market at the same time central bank sales are slinking back off the market will drive prices higher over the summer months.


The ECB weekly financial update showed that this past week, one captive ECB bank sold 1.5 tonnes of gold into the market, continuing the drastically reduced sales trend over the past three weeks from the previous three months. This also confirms that ECB organizational sales have not yet shown up in market figures, despite already having been announced as finished.

Using updated IMF and BIS data on Central bank gold activity in the last four months, we're finally getting a grasp of the much larger picture of what has been happening behind the scenes in the gold market; with both ECB captive bank activity and outside of ECB banks.

While the Bank of Spain sales, Swiss National Bank announcement and the ECB bullion sales activity has been well documented the last few weeks in the market, what hasn’t been so apparent is the amount of sales coming in from other entities within the market over this same period of time including the Bank of International Settlements, National Bank of Indonesia and Bank of England. (The BOE was not a signatory to the second CBGA, so their sales as well as the BIS and Indonesian sales do not fall under the CBGA 500 tonne annual quota).

Spain: 108 tonnes

ECB: 37 tonnes

France: 29.1 tonnes

Indonesia: 23.3 tonnes

BIS: 22.7 tonnes

UK: 6.5 tonnes

Sweden: 3.3 tonnes

Assorted other central bank sales and ECB sales in June: 10.6

Neither the Bank Of England or the Bank of International Settlements has updated the market as to why they're now selling gold reserves. As is usually the case, the market wasn't aware of the Indonesian or BIS sales that fall outside of ECB reports until they were updated a few months after the fact. Because central banks outside of the ECB typically update sales and purchase activity on a 3 month lag, we still may yet find out about other sales that have taken place in the last four months in the market.

240.5 tonnes of sales in 4 months. To put that figure in some perspective; In 2005, central banks sold 674 tonnes (21.6 million ounces) of gold into the market, representing over 16% of that year's supply side of the market, sales averaging 56.1 tonnes per month. 2005 was the largest year for central bank sales in the last several decades. In the past four months, the market has absorbed 60.12 tonnes per month…possibly even more if some additional sales reports show up in the next few months.

At the risk of sounding repetitive, we feel the need to underline just how important it is to see the gold price hold up while digesting these massive sets of sales. At no point in time has the gold market had to absorb this much supply coming from central banks in such a short period. Seeing the gold price hold above the $640 level during this period of increased sales should be the best demonstration of just how robust the physical demand side of the market is at present.

Blanchard and Company, Inc. is the largest and most respected retailer of American rare coins and precious metals in the United States, serving more than 450,000 people with expert consultation and assistance in the acquisition of American numismatic rarities and gold, silver and platinum bullion. The Blanchard Economic Research Unit is a key source of precious metals market analysis and continues to be an important resource for financial and consumer media throughout the United States. Blanchard and its predecessor companies have called the New Orleans area home for more than 30 years. For more information about the company, visit www.BlanchardGold.com or call the company toll free at 1-800-880-4653.

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