-- Posted Wednesday, 2 May 2007 | Digg This Article
Central Bank Activity - Sales
Comprising nearly 13% of global supply via their annual sales and even the lowest of analyst estimates suggesting that their loan and swap activity is greater than annual mine supply, central bank gold activity is the largest supply side component of the market that is under the direct control of a handful of entities. While it is certainly true that individuals currently hold more gold than the banks (and this trend will never reverse), 20 central banks hold 90% of the bank gold reserves making the collective decisions of these banks much more influential in the marketplace than the decisions of billions of individual investors holding the equivalent of pennies on the dollar compared to bank holdings. While central bank influence on the gold market has dissipated in the past five years, it is still the most significant impact to the supply side of the market as mining companies can't ramp up enough supply to change annual production figures in a meaningful way.
Case in point, central bank sales in the past 6 weeks. ECB sales were updated today and showed another 12.3 tonnes of gold sold into the market in the past week by ECB captive banks. Remember, this is only an update of ECB banks, not anyone outside of the 14 banks in that union. Adding that 12.3 tonnes to the past 6 weeks of sales and the gold market has absorbed nearly 89 tonnes in the last 7 weeks. For reference, in the previous six months, central banks had sold 112 tonnes of gold into the market. The fact is, these sales have put the market under tremendous pressure, but have not tanked prices as has been the case in the past. While we've been saying it for weeks, now Numis Securities and Scotia Mocatta are on board as well. These increased sales levels are giving investors a great entry point because as last year showed, the sales will abate into the summer months.
Central Bank Activity - Loans
The only statistic that can't be quantified regarding central bank activity is the levels of loans and swaps that have been hitting the market at present. There are several positive changes on the way regarding this lack of information as UK politicians are pressuring the Bank of England to explain their lending activities and the IMF is implementing changes to accounting procedures which will eventually publish lending and swapping totals. As confirmed by GFMS and the LBMA, central banks are receiving next to no return on 3 or 6 month gold loans. Because of the lack of return on loans, these central banks have been entering into contracts that extend out a year and in some cases five years on the loan side of the market. While those lengths earn them an extra basis point, it also extends out the impact to price that those loans have in the marketplace. A three month gold loan might have had a net-net zero effect on the market on such a short term. A year to five year loan does not have the same impact. It might eventually be net-net zero impact, but it'll take a year to realize that impact. We know 89 tonnes have been sold into the market in the last 7 weeks. How many tonnes have been loaned into the market over the same time period? No one knows except the central banks and bullion banks doing the lending.
Nearly every producer reporting so far has missed their expected earnings and missed them significantly. We have several more major producers left to report this week. While this is bad news for the stocks with production figures continuing to slide and disastrous hedge positions finally being extinguished in the market, the lower production and increased dehedging in the marketplace is particularly supply side bullish for the market. Gold production has fallen over 8% in the last five years. Gold producers have shown no ability to reverse this trend as production figures are expected to be lower for the year as companies continue to run into the problems of higher costs, fewer exploration areas of size, and the delay in permitting to new projects. Reports out are guessing that this production trend might possibly begin turning around to increase by 2010-2012. Those increases are 4-6 years away assuming they ever come to pass, which we highly doubt.
While there was the expectation this year that the act of dehedging gold would slow in the marketplace, we have see the exact opposite take place as Lihir Gold, Gold Fields, Buenaventura and Barrick have all made major announcements to the market that they have closed out more hedges than expected and are amenable to further closures throughout the year. Though there seems to be a great deal of confusion in the market today, Barrick still has 9.5 million ounces of hedges to be closed out which are required to be covered beginning in 2009 according to their quarterly report. AngloGold has yet to report and has a hedge position currently over 10 million ounces. We have seen some significant reductions already this year and it looks like producers are finally genuflecting to investor interests to rid themselves of these legacy hedge positions. We expect to see some aggressive reductions moving through the remainder of the year.
The dollar's position is looking particularly tenuous at present with the dollar making all time lows against the Euro several times in the last week and the yen still appearing to be susceptible to some carry unwinding in the future. The current environment seems to be lending itself to tightening of interest rates by the ECB, Bank of England, Bank of China and possibly the Bank of Japan, while the United States is not in a situation in which to raise rates. So even if the US continues to hold rates steady and pushes off a cut, the dollar appears ready to begin declining again versus other currencies because of the growth and inflation being experienced around the globe. Still looming on the horizon is the potential for a currency and protectionist showdown with the Chinese government. No matter what the outcome, there are very few scenarios that will be positive for the dollar if the US pursues this fight.
The only statistic that can be updated on a weekly basis to gauge investment demand in the gold market is the inflow levels of the gold ETFs. The GLD ETF hit an all time high in terms of holdings 10 days ago. Less demand in the market? The statistics aren't bearing that out. More supply entering the market? Absolutely.
The increase in supply is a temporary phenomenon because of drastically increased bank sales. Sales will moderate and mine supply will still be slumping, dehedging will still be taking place and investor demand will still be increasing.
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 BlanchardGold.com or call the company toll free at 1-800-880-4653.
-- Posted Wednesday, 2 May 2007 | Digg This Article