CBGA Heebie-Jeebies


By Jon Nadler

Apr 28 2009 3:18PM


Good Afternoon,

Gold prices slid at the steepest angle seen in three weeks on Tuesday, mainly on fears that the flu pandemic will push the global economic green shoots back into the ground for an unknown additional length of time. Also on participants' minds, was the news that a revamped CBGA document will see the light of day any moment and that it will not be the same ol' familiar tune. Finally, the market's tally of the just-passed Indian festival gold offtake showed continuing anemia and fingers were squarely pointed at (high) gold prices having been the prime culprit for such slack buying.

With the Indian festival season support clock having run out, gold promptly fell back to under $900 today. Even a slipping dollar (now at 85.28 on the index) and only small further erosion in crude oil prices (now at $49.72 per barrel) did not help the yellow metal for this session. Gold is thus now vulnerable to a resumption of its former (pre-China news hoopla) trend and such vulnerability has already borne fruit in overnight declines to the sub- $895 level. Darn. Just when the 'to da moon Esther!' choirs were getting fired up again...

Fed monetary policy decision is on the front burner this afternoon, as is the release of first quarter US GDP data. Next week's US bank stress-test results are leaking into news here and there and one or two have suggested that at least Citi and/or BofA might need more capital. Consumer confidence rose (make that 'jumped') from 26.9 in March to 39.20 this month. What do they know? How do they feel? Why? No one has clear-cut answers. Yet. But Senator Specter switching to the Democratic Party? Take that Joe Lieberman 'independent democrat' - No nebulosity there in that switcharoo.

Spot gold lost $13 as of the last pulse-taking of the NY session, and was quoted at $893.00 per ounce. A large hole developed in the silver market, and was promptly filled with a 39-cent drop by the metal, down to $12.51 an ounce. Whoa, platinum. Or, woes, platinum. It fell another $53 !) to $1087 an ounce. Palladium lost $11 of its own, to fall to $213.00 per ounce.  News that could not have helped the market in any way, also came from GFMS this morning:

"Gold scrap supplies probably exceeded 500 metric tons in the first quarter, about the same as global mine production, researcher GFMS Ltd. said. Scrap supplies will be “much lower” in the second quarter unless prices rise “aggressively,” GFMS Chairman Philip Klapwijk said today in a presentation in Zurich. Scrapping will expand this year after jumping 27 percent to a record 1,218 tons in 2008 as higher prices encouraged sales, GFMS said this month."

Put those numbers into the perspective spectrometer, and what do you get? Scrap supplies that equal mine production. Scrap supplies that equal investment demand. Scrap supplies that no one can point to and say "Aha! Sinister sellers!" - and they are coming still. People need cash. The price of gold is high. A+B = C. Case closed. So long as prices maintain near here or rise further, this is not a phenomenon that is likely to go away. Looks like those lingerie/jewelry parties have had some success. Take away lesson? At a price, there will be gold ready to be mobilized. The question is really only how much and at what price points. Thus far, you can see the ratios. And, in this environment cash is king. People will sell anything for it.

And now, for the story that might make...tomorrow's headlines.

LONDON * DowJones  "A fresh five-year Central Bank Gold Agreement is expected to be announced imminently with some changes to the existing agreement likely, including new members and the amount that can be sold, industry participants told Dow Jones Newswires Tuesday.

As it did in March 2004, the European Central Bank is expected to make the announcement by press release. ECB Governing Council member Nout Wellink, who is also the head of the Dutch Central Bank, said that the ECB does plan to renew the current five-year pact, which expires in September.

Market participants took this as a de-facto announcement, with a formal statement expected in the near future. A spokesman for the ECB declined to comment. A decade ago, 14 European central banks signed up to a five-year pact to sell no more than an agreed sum between them each year. This number now totals 17, with the pact adhered to on an informal basis by the U.S., the Bank of

International Settlements and the International Monetary Fund. The amount that can be sold by signatories is a total of 500 metric tons of gold in each agreement year, which runs from September. Given the changes to the economic backdrop and to the membership of the euro zone since the last CBGA was signed, the new five-year pact is unlikely to resemble the last.

It's possible that the 500-ton annual sales limit could be raised; it was upped by 100 tons when the second five-year pact was signed in 2004. The appetite for gold from non-signatories such as China has increased of late as it diversifies its massive foreign exchange reserves away from the U.S. dollar. Last week, China admitted to buying 454 tons of gold since 2003, taking its gold reserves to 1,054 tons.

It's also possible that new euro-zone members could join or some could opt out. The new additions since the last CBGA was signed are Slovenia (admitted 2007), Cyprus and Malta (admitted 2008) and Slovakia (admitted 2009). In 2004, Greece signed up to the CBGA after being admitted to the euro zone in 2001, while Slovenia joined the current agreement after qualifying for euro zone membership and just before adopting the euro as its currency.

While Cyprus, Malta and Slovakia may join, World Gold Council data shows they collectively held just 49.2 tons of gold at the end of March. However Slovenia signed up with just 3.2 tons, and analysts said new signatories from the euro zone shouldn't be ruled out. Given the recent Group of 20 developed and developing countries' statement of intent to use IMF gold sales to help raise money for poorer nations, analysts said the IMF could sign up to the next CBGA more formally."

Meanwhile, some states in the US are not hanging around waiting for such official position shifts. They are not even waiting for the US dollar to finally kick the bucket it has been expected to kick now...forever. They are printing their own currency. Take the "Berkshare" please. Just take it, will you? Now - the real question: What is the price of an ounce of gold in Berkshares?


Lookin' good, good lookin'!


PS- Kitco does not accept these notes (note they are printed too, darn!) for gold purchases. Try to local Borders store.


Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal
Direct: 1 (514) 875-4820 ext. 1360
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