Blanchard research note: Gold defies bigger central bank sales


By Neal R. Ryan
Vice President and Director of Economic Research
Blanchard and Co. Inc., New Orleans
Wednesday, April 4, 2007

We've gotten our update on European Central Bank sales for the past week, and just as we figured, it was another week of massive increases in bank reserve gold selling. This past week's sales put roughly 17.5 tonnes of gold into the market. So in the last three weeks 45.5 tonnes of gold have flooded out of ECB banks into the gold market.

For a point of reference, in the previous three weeks, sales totaled only about 7 tonnes.

Considering past price action in periods when selling increased this dramatically, gold has held up well and even has made advances amid massive selling pressure.

The last two examples of similar selling collapsed gold prices. In September 2006, when more than 50 tonnes were sold into the market, prices fell nearly $30. And in May 2006, 75 tonnes were sold and prices fell more than $100 per ounce.

That gold has absorbed this increased selling and continued higher highlights two things.

First, the physical demand is quite robust. Second, central bank selling now is confirmed as the reason the gold market has not been reflecting the market conditions that should be pushing prices higher.

The wet blanket that has been thrown on the gold market should be lifted in coming weeks. We wouldn't be surprised to see major price spikes during the London open simply because the central bank gold supply dries up and continued demand forces prices higher.

Assuming that the Bank of France is the lone major seller left in the market, that bank is coming close to exhausting its allotment of sales under Central Bank Gold Agreement II. Germany has said that it will sell no gold in 2007. Spain and Portugal, after having sold massive amounts of gold in 2006, have sold no gold in five months.

This is significantly bullish. We're heading into the peak demand season and the supply/demand fundamentals will take control.

Today is also U.S. oil inventory report day. Significant draws from or additions to inventory figures will move energy and precious metals markets.

Iran has announced that it will be releasing the 15 British sailors. Interestingly, this news hasn't hurt the gold price.

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