Gold bulls retreat as central bank sales bite
Fri May 25, 2007 5:20PM EDT
reuters.com
NEW YORK (Reuters) - Heavy gold sales from European central banks over the past two months have taken a toll on bullion investor sentiment, despite robust jewelry demand and as top miners say production may take a hit this year.
Prices of the precious metal have struggled this year to duplicate the double-digit growth of 2005 and 2006 even though market fundamentals were tight. Larger-than-usual government sales have flooded the market with excess supply.
Analysts said other reasons the gold market is less bullish include competition from surging stock markets, heavy sales by investment funds and a seasonal slowdown in physical buying as India's wedding season winds down.
"There have been unusually large central bank sales over the past couple of weeks, and that's weighed some pressure on the market," Bill O'Neill, co-founder of commodity consultant LOGIC Advisors said.
Over the past two months, the European Central Bank sold more than its fair share of gold to diversify holdings and to take advantage of lofty prices. The Bank of Spain sold 2.6 million ounces of gold from its reserves in March and April. The Bank of France said it had sold 105 tons of gold in 2006 and would not comment on the pace for this year.
In total, gold and gold receivables held by euro-zone central banks fell by an astounding 1.46 billion euros since the beginning of April, ECB data showed.
The sale was consistent with the 2004 Central Bank Gold Agreement, which came into force in September 2004 and bound banks to cap total sales at 2,500 tons in the 2004 to 2009 period, compared with 2,000 tons in the previous five years.
Analysts said the huge government sales flooded the market with extra bullion supply, and also dampened buying sentiment.
John Reade, head of precious metals strategy at UBS, said ECB gold sales picked up strongly in March and April from a slower pace in the six months prior to March.
"I think the most important thing that central bank (sales) do is in the way that they altered sentiment rather than the actual flows to the market," Reade said.
On Friday, spot gold traded at $655 an ounce. So far this year, it has gained just 3 percent from its 2006 finish of $636.30, dwarfed by a 23-percent rally in 2006 and a 18-percent growth in 2005.
MINERS OUTLOOK BULLISH
Neal Ryan, director of economic research at Blanchard & Co., said he had not seen ECB sales that had matched the magnitude of selling in the past couple of months.
Blanchard & Co.'s Ryan said central bank activity was the main reason for the disconnect between gold prices and tight market fundamentals: lower mine production and increased demand.
On Tuesday, Greg Wilkins, chief executive of No. 1 Barrick Gold Corp. (ABX.TO: Quote, Profile, Research, said at the Reuters Global Mining and Steel Summit that he expected the gold miners would be challenged to maintain the current production level.
"We should be in a fairly robust gold environment for some time to come," Wilkins said.
South Africa's Gold Fields Ltd. (GFIJ.J: Quote, Profile, Research and Harmony Gold (HARJ.J: Quote, Profile, Research, the world's fourth- and the fifth-largest gold producers, also said this week that flat output and lack of discovery should help prices.
On the demand side, a report showed that jewelry buying, which represents nearly three-quarters of total bullion demand, rallied 17 percent year-on-year in the first quarter, industry-sponsored World Gold Council said last week.
UBS' Reade said the fundamentals for gold remained bright and gold prices were well supported at $600 an ounce. |
