Gold initially retreated on Monday after a US treasury official said the Bush administration supported the IMF's plan to sell 400 tonnes of gold, about 8% of their total reserves, as a means to offset a decline in revenue. This statement prompted a brief spate of profit taking that knocked gold down about 1%. Activity was consolidative for the remainder of the US session, but renewed selling pressure emerged overseas. Gold found support ahead of the 20-day moving average and is presently retracing earlier losses.

The IMF gold sales, must still be approved by the US Congress and an 85% majority vote of the IMF member countries. As the largest member nation of the IMF, the US has 17% of that voting power. The US exercised this power, blocking IMF gold sales in 1999 and again in 2005. Even with administration support, there is still some doubt as to whether Congress will fall in line.

Even if the gold sales get a congressional green-light, many believe that any negative impact on the market will be limited and short-lived. When the IMF sold 1,600 tonnes of gold between 1976 and 1980, it was readily absorbed by a rising market. Central banks don't have a very good track record of selling at the highs, just ask Gordon Brown, who managed to sell more than half of the BoE's gold reserves in 1999 right about at the lows. Brilliant!

George Milling-Stanley, the manager of investment and market analysis for the World Council, said that any amount sold by the IMF would likely be limited to quantities in line with the central bank accord. The Central Bank Gold Agreement allows Eurozone countries, along with Switzerland and Sweden to sell 500 tonnes in total per year through 06-Sep-09.

It is also widely anticipated that emerging economies, particularly those holding large amounts of dollar reserves, such as China and India would view the IMF sale as a great diversification opportunity. China in particular has huge currency reserves, well over $1 trillion, but only has about 600 tonnes of gold reserves. This could present an opportunity for China and others (Russia, Gulf States leap to mind) to hedge some of their sagging dollar holdings.

In fact the dollar, which has been generally consolidative since falling to record lows late last year, is looking increasingly vulnerable. The dollar index has fallen to a new low for the month and appears poised for renewed probes below 75.00. Such a move would put the all-time low at 74.48 (23-Nov) back in play. An eventual breach of the low would suggest potential toward 72.00.

The EUR-USD is threatening to regain the 1.4900 level, which would favor a challenge of the range and record highs at 1.4945/67. Penetration of the latter would bode well for an upside extension to the long standing 1.5000 objective, but potential at that point would be toward 1.5200. Gold is the classic hedge against a falling dollar.

The commodity currencies are up recently, with gains coming at the expense of the greenback. The C$ is back above parity. The A$ has reached a 3-month high, while the NZ$ surged to a new 25-year high. These currencies are benefiting from sharply higher commodity prices and favorable interest rate differentials. Rates in Australia and New Zealand are 7.0% and 8.25%, respectively. Quarter point rate increases are widely expected for each in March, while the US is expected to cut their benchmark rate between 25bp and 50bp. Currency flows follow yield, so look for this trend to continue.

Wheat surged to a new record high of $23 a bushel on Monday. Soybeans also reached a new record of $14.55, while corn notched impressive gains as well. Copper reached $8,485/t before succumbing to profit taking and aluminum neared $3,000/t before retreating into the range. The CRB index set a new record high of 402.79 in earlier trading. The sharp rise in commodity prices is having a marked impact on the global inflationary spiral. Gold is the best hedge against these price risks.

Gold Market Movers:

US PPI for Jan surged 1.0%. Core +0.4%. Both prints were well above market expectations.

US consumer confidence for Feb out at 10:00ET. Expected to drop to 82.0, versus 87.9 in Jan.

German Q4 GDP 0.3% q/q. Consumption plunged 0.8%.

IMF hopes to stabilize its finances by selling gold.

FDIC to add staff as bank failures loom

Stock index futures suggest a lower open on Wall Street.

Opinions expressed in commentary on the USAGOLD.com website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. Centennial Precious Metals, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD - Centennial Precious Metals does not warrant or guarantee the accuracy, timeliness or completeness of the information found here.

Pete Grant is the Senior Metals Analyst and an Account Executive with USAGOLD - Centennial Precious Metals. He has spent the majority of his career as a global markets analyst. He began trading IMM currency futures at the Chicago Mercantile Exchange in the mid-1980's. In 1988 Mr. Grant joined MMS International as a foreign exchange market analyst. MMS was acquired by Standard & Poor's a short time later. Pete spent twelve years with S&P - MMS, where he became the Senior Managing FX Strategist. As a manager of the award-winning Currency Market Insight product, he was responsible for the daily real-time forecasting of the world's major and emerging currency pairs, along with the precious metals, to a global institutional audience. Pete was consistently recognized for providing invaluable services to his clients in the areas of custom trading strategies and risk assessment. The financial press frequently reported his personal market insights, risk evaluations and forecasts. Prior to joining USAGOLD, Mr. Grant served as VP of Operations and Chief Metals Trader for a Denver based investment management firm.

-- Posted Tuesday, 26 February 2008 | Digg This Article