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Blanchard Economic Research Note



-- Posted Tuesday, 15 May 2007 | Digg This ArticleDigg It!

CPI figures for April hit the wire this morning and showed inflation was moderating across the board, with the exception of gasoline prices.  Figures showed a .4% increase in CPI numbers versus analyst expectations of a .6% rise.  The markets should take this as another cue for the Fed to begin looking to ease rates instead of keeping them steady or possibly raising interest rates to combat inflation.  Gold and silver are already snapping back on the CPI data being released. 

We have a few more economic points coming this week that will show the other side of the coin, economic growth in the U.S. 

GFMS (who's statistics we use for our work) stated in a presentation this morning that they were expecting prices over $700 in the second half of the year with the return of significant investor demand.  They also went on to say that they expected all time highs of $856 per ounce to be tested in 2008.  While GFMS does believe that we will see a slight mine supply increase this year compared to last, they still believe that overall supply (central bank sales, scrap sales, mine supply) will be lower again in 2007, the third year in a row.

For most of the last two decades, South Africa, the US, Canada, Peru and Australia have been the top of the gold mining world in terms of annual production.  It is our belief that peak production for gold was achieved in 2001 at 2,645 tonnes (+85 million ounces).  That year, these five countries produced 1,330 tonnes and made up 50% of global production figures.  By 2006, global production has fallen to 2,470 tonnes (+79 million ounces) with these five countries producing 1,095 tonnes, comprising 44% of global production.  Only one country, China, has had any sizeable appreciation in mine production figures over the same five years, seeing production increase from 196 tonnes to 247 tonnes in 2001-2006.  The Chief Economist at the Chamber of Mines in South Africa, Roger Baxter, stated in an interview yesterday that he's hoping to see the rate of decline in mine production decreasing this year.  Not that there will be any increase in production, but that the 13% and 7.5% declines the past two years will moderate.  With production figures already showing nearly 9% in declines in the first quarter versus last year, this looks highly unlikely.

*******************************************************************

"Over the past five years, South Africa's gold output has fallen by an average of 6.8 percent a year, but we have managed to remain the world's top producer as over the same five-year period US output has fallen 5.4 percent a year, Canada 6.6 percent, Brazil 2.7 percent and Australia 2.8 percent. Global gold output fell by 3.8 percent last year and has fallen 1.4 percent a year over the past five years," said Baxter. 

*******************************************************************

ECB sales figures for the past week show that only one captive bank sold gold this past week and it was at a significantly lower tonnage than what we have seen in the past two months with sales only totaling 1.4 tonnes.  Hopefully we will see in the next few reports that this is the resumption of the lower sales trend.  While this past two months has been a wild ride for the gold market, testing and retesting the upper and lower ends of this $670-695 range, it's nice to be able to confirm why the market has had some trouble eclipsing the elusive $700 level.  We saw the Bank of Spain emerge on the scene to produce back to back months of the biggest set of sales in the CBGA II on record as well as having the Bank of France continue it's steady selling program.

To put the past two months in a bit of perspective, below are some quotes from the Virtual Metals/Mitsui hedge book round up on the first quarter of 2007.

"...in March, Spain offloaded a huge 40 tonnes, the largest gold sale for any month since the signing of the EGA II agreement.  Then in April it sold another 40 tonnes."

While the past two months have caused some serious heartburn for the market, it is still our belief and the belief of VM/Mitsui that the sales will still be significantly short for the calendar year in 2007. 

"Nevertheless, Virtual Metals believes that continued Spanish sales at this rate remains only a remote possibility, and as such they will fall back to a more normal level in coming months. Furthermore, with Germany not entering into gold sales this year, and no signs that the Italians are going to start gold sales, a full year figure of 500 tonnes or even something like our projected figure of 459 tonnes seems beyond reach. We therefore expect the rate of gold sales to slow, and full year sales to be similar to last year's 392 tonnes."

We saw this week that the IMF again trotted out the tired gold sales program.  There should be a decision coming from the committee within the IMF that fully supports this resolution to make a set of sales into the market totaling 400 tonnes.  We don't know anything more specific about the sales and really shouldn't worry about them until we get confirmation that the US Congress is on board.  (The US government controls 17% of the voting power and the IMF needs 85% approval to carry out a sale).  Should Harry Reid or another pro-mining concern in Congress block the sale, it doesn't matter who else votes in favor, it just won't happen.  So as much as Gordon Brown wants to send out the IMF gold hoard into the market, it's funny that this can be blocked by a Senator from Nevada.

*********************************************************************

We haven't needed economic turmoil or global war to achieve a higher gold price.  During the last five years, we've seen gold, silver and platinum prices each nearly triple while the global economy has boomed.  Inflation data, currency news, rate activity and energy prices will push around the market on the margins, but it has been the reversal of supply and demand in the market from the late 1990s that has gotten the market to this point and will take it into the next phase.  In the best case scenario, we believe mine supply will continue to be flat; central bank influence via sales and leasing is continuing to wane; and investors are returning to a market that was left for dead just several years ago. 

 

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 www.BlanchardGold.com or call the company toll free at 1-800-880-4653.


-- Posted Tuesday, 15 May 2007 | Digg This Article




 



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