Where is the Price of Gold going?
Where is the Price of Gold going?
the price of gold to the Euro price of gold.
The Euro price of gold is the market price of gold, despite
the attention on the $ price of gold.
Central Banks appear to be selling around 8 tonnes of
gold a week only.
Argentina may well be buying the same amount each week.
Physical demand for gold is strong and steady and does
not reflect the $price of gold, but the price in the currency
of the buyer.
Why so much Fund buying and selling of gold you may well ask?
It is a stark contrast to the behaviour of the Hedge funds
ahead of the Iraq war, when they drove the gold price up from
$320 to $390, then all the way back again, once the war had
Notice, if you will, what the gold price does throughout
the day. Every time the $ changes its value against the Euro,
the price of gold changes moments later. Every time there
is a small change in the price of the Euro against the $,
dealers perform arbitrage transactions. An Arbitrageur simultaneously
buys and sell [or the reverse] gold in different markets [e.g.
Comex and London] in order to profit from price variations
between those markets. This means they buy/sell gold in the
Euros or $s and profit on the difference.
It takes moments and the profit may be only cents, but in
volume and many, many times during the day and a dealer can
make a tidy sum on a low risk basis, every day. But the Dealers
must know where the price is being made and must not hold
a risk position for any length of time.
Hence, at present, they have their eyes fixed on the physical
buying and selling of gold, and other fundamental factors
that really do dominate the price.
The Price of gold - what
For a moment, place yourself in the shoes of the European
Central Banks. They utilise the Euro, so will account for
any proceeds they achieve in that currency [except for Switzerland
who still use the Swiss Franc.]. So they will be motivated
by the Euro price of Gold not the $ price of gold.
A quick look at the Euro price of gold shows that it has
fallen from its recent peak of Euros 340 per ounce to Euros
333, before recovering to the present Euros 335 at present.
Certainly there is no 'spike' in the price here.
A careful look at the price at present shows that it is the
Euro price of gold, that dominates the market and has been
led, very strongly by the London "Fixing" price
of gold, that has dominated the market.
Central Bank Sales outweighed
Earlier this month we produced an article that highlighted
the silence of the participants to the Central Bank Gold Agreement
on actual gold bullion sales under that agreement. The only
sales that are definite were those in the table here. This
tiny amount is being sold at the moment, in the absence of
other sales. Only Switzerland and Holland are sellers:
|Switzerland has followed a
pattern of selling around 7 - 8 tonnes of gold per week.
This means that they will complete their sales by the
end of January 2005, if they stay true to form.
Because Holland has stated it is waiting for price 'spikes',
it may well be absent from the market at present. We have
no way of forecasting what they consider an appropriate
price at which to sell. What is clear is that they do
not have the amounts needed to manage the price of gold,
so will not be selling with the intention of 'capping'
the gold price. They have indicated that they will try
to get as much as they can for their gold. This should
therefore reflect a price 'spike' in Euros, which has
not happened of late.
|Will Germany jump into the
'gap'. This is neigh on impossible, at present, as the
laws of Germany have to be changed first, before the Bundesbank
can enter the market. From both the talk and the lack
of activity on that front, we will be given ample warning
before these sales are imminent.
|And France? They too, appear
to be taking an extremely low profile on this subject,
telling us that no announcement will be made until early
2005. Perhaps by then the subject will have faded away?
If the Central Banks who were party to the agreement are
not going to sell, their silence on the subject will be
consistent with their aim of acting in a manner that will
not disrupt the market.
Central Bank Purchases, may outweigh
Sales by Central Banks.
With the surprising, but persistent buying by the Central
Bank of Argentina, throughout 2004, to date, it could well
be that the activity of the Central Banks, netted out, is
that on balance they are buyers! With the net activity being
so far below last years sales of around 510 tonnes, a significant
drop in 'Official' supplies has and will continue to occur,
if not eliminated.
Physical Demand not $
It is now clear that the demand from the Indian sub-continent
could well top 900 tonnes this year.
The price in India is a Rupee price, not a $ price. The average
Indian buyer of gold is unconcerned by the $ or the Euro price.
It is a point of reference to the Rupee price only.
The jewellery manufacturers can import gold legally against
a letter of credit and the smaller Indian banks pay them a
premium for the U.S.$. This creates gold at a price lower
than London, despite transit costs etc. It can be as much
as $8 - $10 lower, even in U.S. $s! In Rupees, with that currency
gently strengthening, the gold price has held at a very even
level, whilst the $ price of gold has been rising a little.
As a result, there is unlikely to be even the slightest dent
in the demand for gold from India, particularly as we remain
in the festival season.
Where is the price of
With these factors playing on the gold price the pressure
is for a continued rise in the price of gold in all currencies,
faster in those that are weak and slower in those that are
strong. For sure, the price of gold is acting as a currency
Not the full picture.
There is much more to be said on the factors that drive the
gold price, which we have not covered here. To get the full
picture of these factors, and more importantly, how they interact
and synthesize to define the gold price in the main currencies,
one has to follow it on an on-going basis in our newsletter,
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