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Lack Of Gold Rally On Iraq Purchase News 'Horrible' Sign -Analysts

By Debbie Carlson and Allen Sykora of Kitco News
Tuesday March 25, 2014 12:01 PM

(Kitco News) - News reports that Iraq bought $1.56 billion of gold this month offered limited support to prices Tuesday, analysts said.

Bloomberg News first reported Iraq purchased 36 metric tons of gold in March, the largest purchase by a nation in three years. According to the story, the Central Bank of Iraq bought gold to support the Iraqi dinar against foreign currencies. The International Monetary Fund’s website said as of August, Iraq held about 29.8 tons of bullion.

Normally fresh news about a significant purchase of gold by a central bank should support values since central banks are considered long-term gold holders, but April gold futures on the Comex division of the New York Mercantile Exchange as of 11:40 a.m. EDT were up a modest $1.80 an ounce at $1,313 after trading softer earlier in the session.

“This is a horrible sign,” said Sterling Smith, futures specialist at Citibank Institutional Client Group, referring to the market’s inability to rally more strongly after the Iraq news.

Steve Scacalossi, director, head of sales, global metals at TD Securities, agreed.

“News that Iraq has purchased some $1.5 billion of gold - over 1.1 million ounces – (this) month - has not helped at all.  The market sentiment is if a million ounces was purchased and we are now lower, what a bearish sign,” he said.

Smith said the small price gains gold is seeing Tuesday can be explained by other factors, such as copper strength following sharp a recent sharp selloff, some short covering after gold fell about $80 from its high earlier this month and reports that China may increase some spending.

Looking back at a price chart, it’s possible that Iraq’s purchase helped propel prices above $1,350 earlier in the month, Smith said.

“It’s possible that they started late February and into March and that may have been why prices moved above $1,350,” he said.

April Comex gold settled Feb. 28 at $1,321.60 and on March 12 settled at $1,370.10, the first time it rose above $1,350 since late October. The contract rose as high as $1,392.60 on March 17, but since then fell sharply.

Prices are now back under the February last-day settlement price and are testing recent technical-chart prices support, analysts said.

“Gold really needs to hold $1,300. It’s critical,” Smith said.

Longer-Term Price Support

Not all analysts viewed the developments bearishly. Phil Flynn, senior market analyst with Price Futures Group, said the Iraqi gold news will be a longer-term supportive feature for the market even if the news did not prompt an immediate sharp surge higher. For the near term, he added, the market seems more focused on the future of U.S. Federal Reserve monetary policy.

“It seems that central-bank (gold-buying) activity is secondary in the minds of a lot of traders,” Flynn said. “But it was definitely an eye-opening purchase. It shows you that Iraq is trying to diversify their economy away from (U.S.) dollars, which they’ve had quite a few of because of their booming oil production.”

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Flynn, who is also a veteran energy-market analyst, pointed out that Iraq is suddenly flush with cash with the country’s oil output at the highest level in more than 30 years. Meanwhile, he continued, Iraq’s central bank is likely concerned that the U.S. dollar has not been faring particularly well lately.

“Because they’re sitting on quite a few dollars, they are looking to protect themselves,” he said.

He described Iraq as playing “catch-up” to other central banks that have been buyers in recent years.

“I wouldn’t be surprised if they continued to diversify some of their holdings into gold in the future, because they’re getting a lot of dollars because of their oil exports,” Flynn said.

“It’s another supportive story,” Flynn later added. “When people scratch their heads and say ‘I don’t know why anybody would want to own gold,’ maybe they should call central bankers like in Iraq and the rest of the world and say ‘why are you buying gold?’ Central bankers realize it is a store of value in a world of currency fluctuations.”

By Debbie Carlson and Allen Sykora of Kitco News; dcarlson@kitco.com and asykora@kitco.com
Follow Debbie Carlson on Twitter @dcarlsonkitco



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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