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Afternoon Blanchard Economic Research Note

-- Posted Tuesday, 24 April 2007 | Digg This ArticleDigg It!

Few thoughts here following up on the sharp sell off this morning.

1.)  Metals futures contracts are rolling forward.  Traders have to shift into the new set of contracts with this month's contracts closing out tomorrow.  As we stated this morning, this should cause some significant price fluctuations just before and after the contract shift tomorrow.  We did not expect this much volatility, but it's the main driver behind price weakness today in our opinion.  Don't be surprised to see a major jump in prices tomorrow in prices when the new contracts hit the market.

2.)  US economic reports out this morning (April Consumer Confidence Index and March Existing Home Sales) both came in at worse levels than expected by economists.  The home sales data was the worst the market has seen in nearly 18 years.  This news started putting downward pressure on the dollar, which should have in turn helped precious metals prices greatly…obviously that did not happen.

3.)  Oil has tumbled nearly a dollar and a half in the last three hours, supposedly on the same technical level selling hitting the precious metals markets today.  This could shift once we get the supply figures tomorrow AM out of the EIA.  We've seen six weeks of much higher than expected draws in gasoline stocks and gas prices have risen sharply in response.  For a number of reasons, inflationary pressures being most important, if we have another week of larger than expected energy supply declines, the markets should roar tomorrow in the energy and precious metals markets.

4.)  The physical market in London has been inundated with sales out of ECB banks in the last 5 weeks.  76 tonnes to be exact.  On top of those sales needs to be included other central bank activity in the gold market via loans and swaps.  No data currently exists to quantify what those loan and swap levels could be, but it's safe to assume that some lending and swapping is taking place as well.  The gold market has been flooded with CB gold over the past 5 weeks from sales and lending and held up remarkably well, increasing nearly $50 per ounce.  It is still our opinion that the Bank of France is the lone, major seller left out in the market with some other banks selling a bit here and there which is augmenting the overall sales levels. 

As tough as completely counterintuitive moves like today can be to stomach, we believe that the gold market is heading to a tipping point.  The options expirations and contract rolling can certainly jostle the market on a day like today as prices are knocked down just to be reset in new contracts the next day, but ultimately it is the physical side of the market that will drive the prices to test new highs. 

The truth is that CB's are simply running out of gold they can sell into the market.  We think this past five weeks of drastic sales increases is akin to a 'last gasp' of selling the market will see for some time.  Assuming the Bank of France holds true to their 500-600 tonne sale mark for the current Central Bank Gold Agreement, they are running perilously low on supply to sell in the remaining 16 months of the agreement period.  No other central bank has appeared on the scene to become a large seller and other banks have voiced that they would sell no gold this year. 

The possibility of increasing mine supply is turning into a moot point as there is new information hitting the markets nearly daily about falling supply figures from Australia, Canada, United States, Chile and South Africa. 

Central bank sales have been the wet blanket on top of the market, keeping us from the $700 level over the past few weeks.  It's not a lack of follow through or investor interest that we're experiencing right now, it is five straight weeks of a massive supply infusion from CB sales that has kept prices from jumping.  We might see another week or two of higher than average sales over the next two reports, but we believe where the market would have tanked in the past under such selling pressure, seeing the market digest and trend higher in the face of these sales is still the single most bullish factor in favor of considerably higher prices in the coming months.


Blanchard and Company, Inc. is the largest and most respected retailer of American rare coins and precious metals in the United States, serving more than 450,000 people with expert consultation and assistance in the acquisition of American numismatic rarities and gold, silver and platinum bullion. The Blanchard Economic Research Unit is a key source of precious metals market analysis and continues to be an important resource for financial and consumer media throughout the United States. Blanchard and its predecessor companies have called the New Orleans area home for more than 30 years. For more information about the company, visit or call the company toll free at 1-800-880-4653.

-- Posted Tuesday, 24 April 2007 | Digg This Article


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