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Blanchard & Co. research note: European central bank gold sales declining

Section: Daily Dispatches

By Neal R. Ryan
Vice President and Director of Economic Research
Blanchard and Co. Inc., New Orleans
Tuesday, March 13, 2007

The European Central Bank system today updated gold sales for the past week. There was a half tonne in sales -- 16,000 ounces of gold. I expect that at some point we'll see a pickup in selling by the central banks, but we're trending even lower in terms of weekly sales.

If such figures continue showing up in the sales update, we'll be 8-9 million ounces short of the Central Bank Gold Agreement sales quota instead of the 6-8 million ounces short I had expected. The lack of selling bodes very well for price increases. When gold gets back over $700, we'll probably see an increase in sales from the central banks, but there just aren't any more selling materializing at these prices.

Another important point to note is that the banks are slowly running out of gold they're willing to part with at any price. The Bundesbank has stated again that it will be selling no gold in 2007 and doesn't expect any sales in 2008. Good for them for having an outlook longer than one month.

The World Gold Council today has updated official bank activity today. We've been notifying clients of these changes for months now.

Russia has added 17.3 tonnes (560,000 ounces) of gold to reserves in the last six months.

Belarus has added 6.2 tonnes (200,000 ounces) of gold to reserves in the last three months.

Kazakhstan has added 7.6 tonnes (245,000 ounces) to reserves in the last three months.

Greece added 3.8 tonnes (123,000 ounces) in the last 3 months.

An unidentified ECB bank or banks added 14 tonnes (450,000 ounces) in February alone.

France has continued to be the lone major seller in the market as the central banks of Portugal and Spain seem to have finished selling programs.

In their call with analysts, officials of Buenaventura (the Peruvian mining company that slashed nearly 500,000 ounces from its gold hedge position yesterday) stated that they would consider further reducing their hedge position. The gold hedge market total is below 40 million ounces, with an unrealized loss of around $15 billion. While we obviously don't have 70 million more ounces to cut from the hedge total -- the cuts made from 2001 to today -- that 40 million ounces eventually should settle down to less than 20 million as mining companies sell into their hedge books. That means 20 million more ounces of demand into this market over the coming few years will continue to create a great floor for the gold market.

Finally, there lately has been a correlation between equity markets and the precious metals sector. I don't believe it is something that will continue as the markets finish shaking out. Investors can't keep retreating into cash, especially the dollar. I don't know when exactly it will happen, but if we continue down this path with stock market uncertainty, there will be a point when precious metals assets will "spit the bit" and head higher.

Supply/demand fundamentals of this market are dictating higher prices. The easy money is going to be made by investors in precious metals who recognize that this correlation will be a short-term occurrence and something that can be taken advantage of in expectation of higher prices.

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