When will Asian central banks buy into gold?

Section:

By Steve Johnson
Financial Times, London
Sunday, December 4, 2005

http://news.ft.com/cms/s/9c6d7db6-64fe-11da-8cff-0000779e2340.html

Middle Eastern oil exporters have rediscovered their love of the US
dollar in the past year, helping fuel the currency's rally to two-
year highs against the euro, yen and sterling.

The position marks a sharp turnround from the third quarter of 2004,
when the proportion of bank deposits held in dollars by members of
the Organisation of the Petroleum Exporting Countries slumped to a
record low.

By the middle of this year, the proportion of OPEC deposits held in
dollars had rebounded from 61.5 percent to 69.5 percent, with the
share held in euros falling from a high of 24 percent to 16
percent, according to figures released on Monday by the Bank for
International Settlements.

The data will reinforce the view that the dollar's surprise strength
this year has been partly caused by OPEC's recycling of
petrodollars. The currency has risen 13.5 percent to $1.17 against
the euro when most commentators had forecast a fourth straight year
of losses.

Oil exporters have become financial kingmakers as real oil prices
have leapt 170 percent in real terms since 2001 to 25-year highs.
The US Department of Energy estimates OPEC oil revenues will total
$430bn this year, up 27 per cent from 2004.

BIS attributes the sharp rise in the proportion of dollar deposits
to the stabilisation of the dollar and the 300-basis point rise in
US interest rates since June 2003, which has lifted the return on US
deposits. In contrast, the European Central Bank only initiated its
first rate rise of the cycle last week.

While this may seem an obvious factor, BIS found that the currency
composition of OPEC deposits had become much more sensitive to
changes in interest rate differentials than before. BIS found that
many oil-producing nations had been net sellers of US Treasuries
since 1997, instead buying corporate and agency bonds and equities
with higher risks and rewards.

Meanwhile Marvin Barth, currency economist at Citigroup, reported
anecdotal evidence of strong OPEC buying of Japanese and European
equities. However, he argued that high oil prices would ultimately
weaken the dollar by redirecting global savings from Asian countries
such as China and Japan, which keep the bulk of their reserves in
dollars for use in currency intervention, to the oil exporters,
which, even now, are not as dollar-focused. Moreover, if interest
rate differentials are key to OPEC behaviour, the start of the
eurozone tightening cycle could end the dollar's newfound popularity.

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