Ted Butler: Break on through to the other side

Section:

By Lewa Pardomuan
Reuters
Monday, February 7, 2005

http://www.reuters.co.za/locales/c_newsArticle.jsp?
type=businessNews&localeKey=en_ZA&storyID=7553117

SINGAPORE -- Gold sales by the International Monetary Fund for third-
world debt relief could weaken bullion prices over the longer run
but any dip could be temporary because of strong demand at lower
price levels from Asian buyers.

Ministers from the Group of Seven industrialized nations said over
the weekend the IMF would consider using its gold reserves to cut
the debt of the world's poorest nations. The fund is the world's
third-largest gold holder with reserves of around 3,217 tonnes.

Gold, which fell $1 an ounce on Friday to 415.20 in New York on talk
of the IMF gold sales, dipped to a near-four-month low of $413.50 an
ounce in Asia on Monday before recovering to around $414.50.

Yukuji Sonoda, a precious metals analyst at Daiichi Commodities in
Tokyo, believes gold is nearing its bottom at around $410 and would
soon rebound because of buying interest from India, the world's
largest gold consumer.

"The market is over reacting. The outcome of the G7 meeting is not
surprising," said Sonoda. "End-users in Japan, China and also India
are very comfortable with this price level," he added.

IMF sales would potentially increase the supply of gold on world
markets at a time when the yellow metal has lost some of its lustre
of late. Gold has fallen around nine percent since hitting a 16 1/2-
year high of $456.75 an ounce in December.

Purchases from investors has saved gold from its lowest levels
because of its popularity as jewellery and is often bought as an
investment that can be sold in times of trouble.

British Finance Minister Gordon Brown, the host of the G7 meeting,
is a strong proponent of the plan to use gold reserves to help
eradicate the $12 billion debt owed by the world's poorest nations.
He first proposed revaluing IMF gold stocks with off-market sales in
2004.

Under a 1971 agreement, most IMF gold is valued at $40 to $50 an
ounce, or about one-tenth of current market prices.

But the United States, the world's largest holder of gold bullion,
is not keen on the plan and the country has a de facto veto power on
IMF gold sales because of its voting weight at the fund.

Analysts did agree that gold could prove lacklustre on the markets
with talk of gold sales from the IMF and central banks weighing on
the market.

In a recent Reuters poll, analysts forecast that gold prices will
average $430.00 an ounce this year, up four percent on 2004's
average price of $413.56.

"The whole idea of the IMF revaluing its gold or selling some gold
isn't dead yet," said Martin Mayne, associate director at N.M.
Rothschild in Sydney.

Analysts said the IMF plan could also encourage central banks to
dispose of their holdings even quicker.

Europe's central banks signed a gold agreement, which came into
effect in September 2004, to cap their total gold sales at 2,500
tonnes in the 2004-2009 period, compared with 2,000 tonnes in the
previous five years.

"I think it will encourage European central banks to look at their
holdings. The full quota of the latest Washington call hasn't been
made yet," he said.

Germany has said it will not use its full gold sale quota this year,
leaving room for France and Italy to come up with a different plan,
particularly if they believed the IMF would be selling gold in
coming years, said Mayne.

The Bundesbank has an option to sell 120 tonnes of gold per year
between 2004 and 2009, for a total of 600 tonnes. But it announced
in December it would sell just eight tonnes in the first year and
make its option available for others.

Germany is the world's second largest holder after the United States
with around 3,433 tonnes.

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