Bullion rally unchecked by rising supplies
Central banks sold about 460 tonnes of gold during the latest Central Banks Gold Agreement year that ended on Wednesday, according to data from the industry-backed World Gold Council. This is 16 per cent more than the 396 tonnes sold last year and the second largest disposal of official sector gold reserves since the CBGA agreement began in 1999. Such an increase in supply could be expected to depress the price of bullion, but the yellow metal has enjoyed a strong run of late, and last Friday hit a near 28-year high of $739 a troy ounce. It has risen about 15 per cent so far this year.
Signals that some central banks, in particular the Bank of Spain, may reduce their selling after hefty bullion disposals over the past few years are likely to underpin gold prices, analysts say. This comes at a time when they already believe gold is well placed to rally further, possibly returning to its all-time nominal high of $850 an ounce reached in January 1980.
Nick Moore, of ABN Amro in London, says gold is in demand for a number of reasons, including dollar weakness; the risk of an inflation spike as oil trades around $80 a barrel; lower US interest rates; financial turbulence; and limited supply, in particular from South Africa, whose production has fallen to an 85-year low. The prospects of rising demand from the forthcoming wedding season in India, Christmas in North America and Europe and the Chinese new year in February are also likely to push up prices.
Dollar weakness has probably been the single most important factor, as the yellow metal has become cheaper for buyers in other currencies. But analysts note that gold has not just been rising in dollar terms, but also when measured in euros and yen.
Nevertheless, James Gutman of Goldman Sachs warns that gold continues to function like a currency, and expectations for it to act as hedge against geopolitical and systemic risks or inflation are misplaced. The Bank of Spain sold 149 tonnes of gold in the year ending on Wednesday, or more than a third of the total disposed of by the CBGA signatories over the period.
Jill Leyland, an economic adviser to the World Gold Council, said that unless any other major central bank seller emerged, CBGA sales were unlikely to reach the 500 tonnes limit for the rest of the agreement period, which ends in September 2009. “This would be price supportive,” she said.
Nevertheless, analysts warn that some central banks, such as those of Italy and Germany, could still sell large amounts of gold before the agreement expires. Both banks have sold only limited quantities because of disagreements with their governments on how to spend any profit from the sales. The International Monetary Fund might also sell gold from its reserves as part of a new funding model for the institution. But analysts said that approval for the sales was unlikely as it needed the politically challenging consent of the US Congress.
By contrast, David Holmer, head of precious metals analysis at Dresdner Kleinwort, expects some oil-rich countries’ central banks to be gold buyers in the near future. Russia and Qatar are already purchasing gold for their official reserves.
[source~http://www.ft.com/cms/s/0/e4826692-6c73-11dc-a0cf-0000779fd2ac.html]
