Blanchard research note: Gold rose last week despite heavy ECB sales


By Neal R. Ryan
Vice President and Director of Economic Research
Blanchard and Co. Inc., New Orleans
Tuesday, March 20, 2007

GFMS reports that it expects the gold dehedging figure to pick up in 2007 from its forecast at the end of 2006. We've already seen about 3 million ounces dehedged in just the first quarter. GFMS now tags the expected reductions at 7.5 million ounces in 2007.

I feel pretty confident that at some point this year we will see another major gold hedge buyback announced by Newcrest or AngloGold. Both companies are sitting on millions of ounces hedged back at $300 per ounce. Institutional investors will put enough pressure on these companies to dump their foolish hedging positions. Buenaventura has already said it is amenable to further reductions.

Just out is news that the governor of the Chinese central bank, Zhou Xiaochuan, has said publicly that the China will stop accumulating foreign reserves. Let's hope we get more detail on this shortly, since it has massive implications for the markets.

Finally, European Central Bank gold sales for the past week have been updated, and, interestingly, more than 16 tonnes of gold was sold into the market last week by two ECB member banks.

The last time tonnage of this magnitude was sold into the market by ECB banks was the week of December 11-15, when prices declined $15 through the week. By contrast, gold prices increased in the past week, from March 12 to 16, by $4 per ounce.

There has been weakness in gold prices in weeks when significant amounts of gold hit the market via ECB sales, specifically the second week of September, when prices dropped $20 per ounce on sales exceeding $600 million, and in May 2006, when prices hit $730 and nearly $1.4 billion in gold was sold into the market over three weeks via ECB banks.

But last week is the first time in a number of significant sales weeks when prices have moved up in the face of major increases in gold sales. This is a signal of strong physical demand in the market.

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