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Central bank policy issues like to sway the markets this week

Section: Daily Dispatches

By Michael Kosares
Centennial Precious Metals, Denver
Sunday, April 3, 2005

No sooner had this Market Update featured a report on official-
sector gold sales last week than the European Central Bank (ECB)
announced a surprise: It had sold 47 tonnes of gold. The sales
occurred between February 1 and March 11. The ECB also stated that
its gold sales were now complete for the year.

In this era of supposed transparency in the official financial
sector, one wonders why the primary central bank in Europe, the most
powerful signatory in the European Central Bank Gold Agreement,
would conduct a sale clandestinely, announcing it after the fact.

The bigger question is why the ECB felt compelled to sell gold at

Europe doesn't have a huge balance-of-payments problem as the United
States does. It's not at war. Europe doesn't have a lack of currency
reserves to tap for foreign payments. So why liquidate gold when the
dollar is in severe trouble and gold is on the rise?

Forty-seven tonnes is a large amount to liquidate over so short a
time (less than 45 days), and the sales no doubt damaged the gold
price even though the intent of the Central Bank Gold Agreement is
to prevent such stealth attacks on gold. In fact, the London Times
linked the sales "to sharp drops and recoveries" in the gold price
over the period.

To most observers the gold price seemed no worse for wear. Gold
started February in the low $420s and reached its high for the
period in the mid-$440s in March at about the time the ECB was
winding up its gold sales. What might the gold price have done had
the ECB kept its 47 tonnes in the vault? Would gold have gone
through the important $450 figure? Or $460? Even $500 if it had
gotten on a roll?

Not knowing what prompted the ECB to sell suddenly, we can only
speculate as to what might have been going on behind the scenes. Was
some bullion bank in trouble? Was there a severe shortage in the
upper reaches of the gold market that had to be filled on a moment's
notice? Just prior to the sales Germany had announced its refusal to
sell more gold, Switzerland had concluded its sales, and France was
supplying far less gold to the market than expected. Was the ECB
moving to fill the breach?

Leaving aside the ECB's agenda, its gold sales are not without
repercussions. They send the wrong message at the wrong time.

Europe and the euro are already reeling under significant
alterations to the stability pact, which restricted budget deficits
and created the impression that the ECB's member states were willing
to make sacrifices for the economic stability of the union. Gold
originally was added as a component of ECB reserves to give
credibility to the new currency and substance to the claim that the
euro would become a rival to the dollar.

By selling gold reserves, the ECB calls that commitment into
question and fuels criticism that the euro and the ECB are no better
than the dollar and the Federal Reserve. The other day an editorial
in the Financial Times went so far as to say that "the euro does not
have much to recommend it, other than not being the dollar."

Mysterious, ungrounded, and seemingly inexplicable and unnecessary
gold sales are not likely to alter that assessment.

The Financial Times went on to say that problems with the dollar,
yen, and euro present good reasons for selling all three currencies.
The likely beneficiaries, in the newspaper's view? Gold and the
Chinese renminbi.

Since we may have to wait years for China to revalue its currency,
that leaves gold as the last solid repository for savings -- nothing
new for the metal of kings and the king of metals.


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