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Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: hunchback who wrote (33630)	5/11/1999 12:46:00 AM
From: Alex	Respond to of 116912

Nice find hunchback. The following is a bit dated, but still interesting................ Central Bank Gold Sales: Cause or Effect? Periodically the gold market receives a shock in the form of news that some central bank somewhere recently sold off some of its gold reserves. Almost invariably, this news hits the streets weeks, or even months, after the event has occurred. This delayed effect illustrates the psychological nature of this activity. The fact is, the London Bullion Market clears over 900 tons of gold every day. The U.S. Federal Reserve is believed to hold a grand total of between 258 and 261 tons in its reserves--and it has larger holdings than any other central bank. So, central bank sales are not the actual reason that the price of gold is low. The reason that the price of gold is low is because the U.S. dollar (the world's reserve currency of choice) has been strong. Gold is negatively correlated to the dollar. Central banks have been heavily favoring the dollar as a reserve asset since 1995. Another reason that the price of gold is low is that competing investments have performed well. Stocks and bonds have produced returns for investors over the past several years. This has given both individual and institutional investors little incentive to move to gold. Gold is negatively correlated to stocks and bonds, so it makes sense that the price of gold is low. However, it does not make sense for investors to ignore gold because problems exist in the world that could weaken the dollar and erode the value of stocks and bonds. To paraphrase Barron's, "We're not calling a top, just reminding investors that there will be one." If the dollar was not strong, central banks might not be selling gold. In fact, there is a strong possibility that some Asian central banks will add gold to their reserves in the future since gold held its value when their currencies collapsed in 1997 and 1998. The chart shown below from CPM Group shows central bank gold transactions from 1960-1999. Notice that central banks were net buyers of gold as recently as 10 years ago. What happened to cause that? The U.S. dollar collapsed and the U.S. stock market crashed. The price of gold rose above $500 in late 1987. The following year, central banks were buying gold. If the dollar collapses and U.S. stocks perform another pratfall along the lines of the one that occurred in Q31998, don't be surprised if central banks start buying gold. Also, notice that the trend from 1997 to 1999 is toward less central bank selling. <Picture> BUT HERE IS THE MOST IMPORTANT SECTION OF THE CHART: Take a look at the years 1977, 1978, and 1979. During each year central banks were selling gold. Nevertheless, gold prices were rising! The average price of gold in 1976 was $124.71 per ounce. In 1977 the average price of gold was $148.22 per ounce--an increase of 19%, despite a hefty increase in central bank sales. The trend continued. In 1978 the average annual price of gold was $193.58 per ounce--an increase of 31% over 1977, once again despite an increase in central bank sales. In 1979 the average price of gold was $306.63 per ounce--a whopping increase of 58% over 1978, despite increasing central bank sales. Finally, in 1980, central banks started buying gold and the average price of gold hit $612.29, more than double the year before.The banks kept buying for three more years and didn't really become active again until they started buying heavily in 1988, in the wake of 1987's tumultuous events in the U.S. stock market and the U.S. dollar. The moral of the story is that central bank sales are a symptom of market conditions, not a cause of market conditions and central bank sales do not automatically mean falling gold prices. economicresearch.net