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• Arbitrageurs
'smooth' the price of gold to the Euro price of gold.
• The
Euro price of gold is the market price of gold, despite the attention on the
$ price of gold.
• Central
Banks appear to be selling around 8 tonnes of gold a week only.
• Argentina
may well be buying the same amount each week.
• Physical
demand for gold is strong and steady and does not reflect the $price of gold,
but the price in the currency of the buyer.
The
Arbitrageurs!
Why so much Fund buying and selling of gold you may well ask? It is a stark
contrast to the behaviour of the Hedge funds ahead of the Iraq war, when they
drove the gold price up from $320 to $390, then all the way back again, once
the war had started. Why?
Notice,
if you will, what the gold price does throughout the day. Every time the $
changes its value against the Euro, the price of gold changes moments later.
Every time there is a small change in the price of the Euro against the $,
dealers perform arbitrage transactions. An Arbitrageur simultaneously
buys and sell [or the reverse] gold in different markets [e.g. Comex and
London] in order to profit from price variations between those markets. This
means they buy/sell gold in the Euros or $s and profit on the difference.
It
takes moments and the profit may be only cents, but in volume and many, many
times during the day and a dealer can make a tidy sum on a low risk
basis, every day. But the Dealers must know where the price is being made and
must not hold a risk position for any length of time.
Hence,
at present, they have their eyes fixed on the physical buying and selling
of gold, and other fundamental factors that really do dominate the price.
The
Price of gold - what is it?
For a moment, place yourself in the shoes of the European Central Banks. They
utilise the Euro, so will account for any proceeds they achieve in that
currency [except for Switzerland who still use the Swiss Franc.]. So they
will be motivated by the Euro price of Gold not the $ price of gold.
A
quick look at the Euro price of gold shows that it has fallen from its
recent peak of Euros 340 per ounce to Euros 333, before recovering to the
present Euros 335 at present. Certainly there is no 'spike'in the price
here.
A
careful look at the price at present shows that it is the Euro price of gold,
that dominates the market and has been led, very strongly by the London
"Fixing" price of gold, that has dominated the market.
 Central
Bank Sales outweighed by purchases.
Earlier this month we produced an article that highlighted the silence of the
participants to the Central Bank Gold Agreement on actual gold bullion sales
under that agreement. The only sales that are definite were those in the
table here. This tiny amount is being sold at the moment, in the absence of
other sales. Only Switzerland and Holland are sellers:
• Switzerland
has followed a pattern of selling around 7 - 8 tonnes of gold per week. This
means that they will complete their sales by the end of January 2005, if they
stay true to form.
• Because
Holland has stated it is waiting for price 'spikes', it may well be absent
from the market at present. We have no way of forecasting what they
consider an appropriate price at which to sell. What is clear is that they do
not have the amounts needed to manage the price of gold, so will not be
selling with the intention of 'capping' the gold price. They have
indicated that they will try to get as much as they can for their gold. This
should therefore reflect a price 'spike' in Euros, which has not
happened of late.
• Will
Germany jump into the 'gap'. This is neigh on impossible, at present, as the
laws of Germany have to be changed first, before the Bundesbank can enter the
market. From both the talk and the lack of activity on that front, we will be
given ample warning before these sales are imminent.
• And
France? They too, appear to be taking an extremely low profile on this
subject, telling us that no announcement will be made until early 2005.
Perhaps by then the subject will have faded away?
• If
the Central Banks who were party to the agreement are not going to sell, their
silence on the subject will be consistent with their aim of acting in a
manner that will not disrupt the market.
Central
Bank Purchases, may outweigh Sales by Central Banks.
With the surprising, but persistent buying by the Central Bank of Argentina,
throughout 2004, to date, it could well be that the activity of the Central
Banks, netted out, is that on balance they are buyers! With the net activity
being so far below last years sales of around 510 tonnes, a significant
drop in 'Official' supplies has and will continue to occur, if not eliminated.
Physical
Demand not $ price driven
It is now clear that the demand from the Indian subcontinent could well
top 900 tonnes this year. The price in India is a Rupee price, not a $
price. The average Indian buyer of gold is unconcerned by the $ or the Euro
price. It is a point of reference to the Rupee price only.
The
jewellery manufacturers can import gold legally against a letter of credit and
the smaller Indian banks pay them a premium for the U.S.$. This creates gold
at a price lower than London, despite transit costs etc. It can be as much as
$8 $ 10 lower, even in U.S. $s! In Rupees, with that currency gently
strengthening, the gold price has held at a very even level, whilst the $
price of gold has been rising a little. As a result, there is unlikely to be
even the slightest dent in the demand for gold from India, particularly as we
remain in the festival season.
Where
is the price of Gold going?
With these factors playing on the gold price the pressure is for a continued
rise in the price of gold in all currencies, faster in those that are weak
and slower in those that are strong. For sure, the price of gold is acting as
a currency itself.
Not
the full picture.
There is much more to be said on the factors that drive the gold price, which
we have not covered here. To get the full picture of these factors, and more
importantly, how they interact and synthesize to define the gold price in the
main currencies, one has to follow it on an ongoing basis in our newsletter,
"Gold-Authentic Money". Should you wish to get this picture,
please see the subscription details below.
By
: Julian D. W. Phillips
Gold/Silver Forecaster – Global Watch
GoldForecaster.com
Please subscribe to
www.GoldForecaster.com for the entire
report.
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