Gold selloff driven by central banks, not investors


It was all just another market-rigging operation, but it came at a huge price. Now ALMOST EVERYBODY is starting to understand it.

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Bank of France Blamed
for Big Selloff in Gold

By Ambrose Evans-Pritchard
The Telegraph, London
Thursday, October 5, 2006

Central banks may have dumped far more gold on the markets over the last three weeks than officially reported, accounting for the sudden plunge in prices that has stunned investors.

Barclays Capital said Europe's banks had sold an extra 100 tonnes from reserves in a rush to meet a quota deadline on September 26 but had done so by selling through forward contracts that disguised the effect.

"We have been able to infer this from trading patterns. It has had a major impact on the markets," said Costanza Jacazio, the bank's gold expert. Barclays is one of the world's three top bullion traders.

"We suspect that the Banque de France has been involved," she said.

The huge sales would help explain why gold's brutal fall from $640 an ounce in early September to $559 this week, an effect compounded in recent days by hedge fund liquidation. It was up slightly yesterday at $569.75 in New York trading.

Gold typically rallies in September in the buildup to the Indian marriage season. While gold has undoubtedly been hit by the broader fears of a commodity slump, base metals have held up much better. The central banks have reported sales of just 393 tonnes of gold for the year, far below the 500 annual limit agreed under the Washington Accord, an agreement by 15 centrals banks in Europe.

Barclays said the group had in reality met the 500-tonne limit, with others snapping up the unused quota of the Bundesbank -- which has balked at selling in order assert its independence against Berlin's politicians.

"We believe this is actually very bullish for gold because it shows that the selloff was not driven by investors," said Ms. Jacazio.

Philip Klapwijk, chairman of the precious metals group GFMS, said bullion would soon resume its five-year bull market.

"The game is not over for gold. We've still got a big dollar devaluation ahead," he said.

"Hot money has left the market and we've seen chart-based selling as the fall triggered stop-losses. But at this level we are going to see support from miners like Barrick that want to cut their hedge books," he said.

Russia's central bank is also likely to buy on the dips. It plans to raise the gold share of its reserves from 3 percent to 10 percent, a move that would soak much of global mine supply. Russia's reserves are now world's third biggest at $267 billion, and rising at $12 billion a month.

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