Gold faces uphill battle on new c.bank fear
By Derek J. Caney
SCOTTSDALE, Ariz, March 29 (Reuters) - After languishing in a range between $282 and $296 an ounce for the better part of the last two weeks, gold prices caved last Friday under the threat of central bank sales, epitomizing the uphill battle gold prices have faced for the last nine months.
Since October, gold prices have plummeted more than $25, or 8.3 percent, largely on the fear that central bands would start unloading their deteriorating gold assets.
Now as gold and silver executives converge here for the Gold Institute annual meeting, they are facing a bullion price of around $280, hovering near its lowest level in six months.
"The sentiment in this market is what's keeping prices down," said Thomas McNamara. "The market simply ignores anything that is remotely bullish. But we believe gold is undervalued and we're still bullish."
It doesn't even take an announcement of central bank sales to send gold tumbling. On Friday, near-term lease rates firmed sharply, raising speculation that heavy borrowing was ensuing ahead of a sale of gold reserves from one of the world's central banks.
"The lease rates were one of the signs that maybe one of the central banks was getting ready to do something," said Carlos Perez-Santalla, a broker with Hudson River Futures. "The selling was coming from all over the place."
But such rumors have been commonplace for months. Many in the market convinced themselves that the nascent European Central Bank or the individual members' central banks would sell their reserves after the ECB announced that it would carry 15 percent of its reserves in gold, even as European Union officials have downplayed the possibility of such sales for the foreseeable future.
Then two weeks ago, the gold market took another beating as the threat of gold sales out of the International Monetary Fund's reserves reached a crescendo, as U.S. President Bill Clinton advocated such sales to fund debt relief for poorer countries.
His remarks came on the heels of French President Jacques Chirac announcement that he would not oppose such sales. Since then Canada and Japan have announced their support, joining the U.K. and the German finance ministry. Germany's central bank Bundesbank, however, has been one voice of caution, saying it has made no decision regarding support of such sales.
Still the threat of such sales was responsible for the last leg down. "The definition of a bear market is one in which the market ignores any potentially bullish news and hammers the market on anything negative, and that's what we have," one trader said.
"The main problem with gold sales by the IMF is that it potentially hurts the people they are trying to help," another gold trader said. "Many of these countries seeking debt relief are economies that are dependent on the mining industry, namely gold, particularly in Africa. The last thing these countries need is widespread gold selling knocking down the prices they get for their exports."
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