May 10, 2007

Who's more afraid?

Lovers of the yellow metal all around the world were disappointed once again earlier today as traders exited positions in gold after the U.S. dollar strengthened, pushing prices down.

The chart below is another near-miss of not "crossing the streams", as they used to say on Ghostbusters - a strong three-day trend that saw a reversal just short of the $690 mark.

On the yearly chart below, the high from last May is now just two days from scrolling off the screen. It was May 12th, 2006 that the London PM fix was $725 after a close at $715.50 the day prior. These were the only daily closes over $700 for the entire year.

There were only ten closes over $675 for all of 2006. So far, a little over four months into 2007, there have been almost twenty.

So, why hasn't the psychologically important $700 level been taken out yet? According to this report from Resource Investor, central bank gold sales are somehow involved.

If you look at the yearly price chart above along with the CBGA (Central Bank Gold Agreement) sales below, the recent price action in March and April shows tremendous strength.

After starting the year slowly, more than 100 tonnes have been sold in just the last two months versus 112 tonnes during the six months prior. The report goes on to explain:

If sales remain at 12.5 tonnes per week on average for the rest of the year, CBGA signatories will hit their 500-tonne quota. However, most analysts remain sceptical that this pace will continue (see last week’s full coverage by RI).

“While we continue to believe that these elevated sales levels have been the reason behind the gold market's inability to eclipse the $700 level, we also believe that the sales should begin to taper off and still fall substantially short of the 500 tonne quota level for the ECB calendar year,” noted Neal R. Ryan, VP and director of economic research at Blanchard & Co.

After a day like today and two months like March and April, it's not clear who's more afraid of the gold market right now - new buyers or central bank sellers.