May 2007

Reuters, Thu May 31, 2007 6:10AM EDT

Unlike previous occasions, gold prices have not fallen sharply despite heavy selling by central banks in the past weeks, as the market has discounted these sales, analysts said.

“The market is used to central bank sales at the levels of recent years, but it still takes a lively interest in what central banks are doing and their actions can have an effect on sentiment,” said Jill Leyland, economic adviser to the World Gold Council, an industry-funded organization.

Gold prices have fallen about four percent in the past one month on a rise in the dollar and central bank gold sales.

“The market has adjusted to the increased supply from the standpoint that prices aren’t tanking. The more and more they sell now without the price getting hurt too badly, the less and less they will be able to affect the price in future,” said Neal Ryan, director of economic research at Blanchard & Co.

Read the entire article HERE

The snippet below is taken from today’s Peter Grandich Special Alert newsletter.

…I haven’t witnessed a more pronounced bearish mood in the gold market given the least amount of price decline since this secular bull market began five years ago. Not a day goes by where I don’t read yet another formerly bullish forecaster painting a gloomy outlook for gold for the foreseeable future.

The mood among retail speculators is so thick with pessimism you can cut it with a knife. Yet, here we sit this morning with gold still north of $650 and above key support of $640.

One shouldn’t simply discard this marked increased in bearishness. For starters, gold is now in the historically weakest seasonal period of May through August. It’s also been absolutely hammered – not only by aggressive central bank selling, but by a continuing pattern of strange selling on the Comex that almost always is concentrated around the 11 a.m. time frame. The fact that this is when most of the physical buying worldwide shuts down until later in the evening in Asia is no coincidence.

It’s easy to see why gold bulls like me may be scratching their heads wondering why the bullish boat has thinned out, especially when you read so much double-talk like we are currently hearing from a so-called gold expert on one of the most read gold bullion websites. This gentleman can not only talk well from both sides of his mouth, but I often wonder if he and I are looking at the same market?
Make no mistake about it; we remaining gold bulls are on the defensive until such time that gold breaks above the all-important $700 level. Gold must hold above $640 or we are all but certain to see a test of $600 or even $575. (Please put down the gun).
But even if that were to occur (though extremely unlikely), the fundamentals remain solid for gold and by sometime in 2008 (if not sooner), we should be testing the old highs of around $875.

I continue to like the bullish side of silver, platinum, palladium, uranium and cobalt. I’m now firmly on the bearish side of most base metals.

GoldMoney founder James Turk, editor of the Freemarket Gold & Money Report and consultant to GATA, writes in commentary posted today that the recent huge increase in central bank gold dishoarding has failed to break the gold price appreciably in any major currency. That dishoarding will pass as gold consolidates, Turk writes, and soon gold will be reaching record levels in all currencies.

Gold From Different Perspectives

European central banks continue to dump gold. A new report by Don Doyle and Neal Ryan of the Blanchard Economic Research Unit observes: “ECB banks have not sold this much gold in such a short time period in the life of the 2nd Central Bank Gold Agreement. In the last ten weeks, ECB banks have sold over 120 tonnes of gold into the market ($1.9 billion in euros or $2.55 billion in dollars). In the previous six months, ECB captive banks sold only 112 tonnes into the market.” Their full report is at this link:

Clearly, central banks are lining up to keep gold from climbing higher, and to keep it below the critical $700 level. Central banks, however, are only buying time. They are fighting a tidal wave of money fleeing from fiat currency into the safety and security of gold, which is the only money not dependent on some government’s or a central bank’s promise. This observation brings up an important point.

Because central banks can through their monetary policy control the buying power of their domestic currency, it is easy to accept the notion that they can control the value of all money, including gold. This notion, however, is incorrect because gold and national currencies are fundamentally different.

Central bank balance sheets show that national currencies are their liability, while gold they own is an asset. One does not have to be a chartered accountant to appreciate this difference. Central banks can control the value of their liabilities (i.e., their national currency) in various ways. But they cannot determine the value of gold, anymore than they can determine the value of a Picasso painting or any other tangible asset. Only the market can determine the usefulness of a tangible asset, and therefore its value.

Central banks can influence the market process, and right now by dumping their reserves, they are trying to convince the market that gold’s value is questionable. But the following charts show that the central banks aren’t fooling anyone. Gold is in a bull market, and in order to better appreciate the magnitude of the bull market that central banks are fighting, it is useful to look at gold in terms of different currencies.

Gold is not just rising in terms of US dollars. Gold is rising against all of the world’s major currencies. There hasn’t been anything like this since the great 1960-1970’s bull market in gold, or to phrase that period another way, the great 1960-1970’s bear market in fiat currencies.

Importantly, though gold has retreated somewhat as a result of recent central bank selling, the above charts show the impact from this central bank dishoarding has been minimal. As large as central bank intervention has been, gold prices have hardly flinched. They remain within the pennant formations formed over the past year that are consolidating the tremendous gains gold achieved from August 2005 through to May 2006.

This current bout of central bank selling will eventually pass. When it does, we’ll look back at it as we now look back on British chancellor Gordon Brown’s decision in 1999 to sell one-half of that country’s gold reserves, and describe this selling as Mr. Brown’s decision is now being described – a colossal blunder.

So I continue to expect that gold will soon exceed US$700, and for that matter, it will also exceed C$800, £350, EUR510, SFr 840, ¥83,000, A$850 and R30,000.

Jason Hommel: Why Silver will Soar

Recent weakness in the gold price has been due in part to sales levels from ECB banks which have totalled over 120 tonnes in the past ten weeks.

Author: Neal Ryan
Posted: Wednesday , 23 May 2007

NEW ORLEANS (Blanchard & Co.) –

It’s always tough to work on a lag in the markets, but sometimes with the flow of information in the physical side of the metals markets, that’s the way it has to be for investors.

So we know last week that 16 tonnes of gold came tumbling out of the GLD ETF…and we now know that ECB banks sold nearly 18 tonnes of gold the same week. The ECB updated yesterday that two captive banks in the system sold 17.7 tonnes of gold last week (or $280 million euros).

It appeared that maybe the increased selling was slowing down last week with sales of only about 1.5 tonnes, but in reality, the ECB captive banks have yet to finish the massive increased selling into the market that began in March of this year.

Forget about prudent timing, the market is having trouble digesting these sales.

The market isn’t collapsing, but the price is certainly being kept from rising as the injection of supply is sopping up the increased demand in the marketplace. For a point of reference, ECB banks have not sold this much gold in such a short time period in the life of the 2nd CBGA. In the last ten weeks, ECB banks have sold over 120 tonnes of gold into the market ($1.9 billion in euros or $2.55 billion in dollars). In the previous six months, ECB captive banks sold only 112 tonnes into the market.

The gold cascading out of the central bank vaults is also helping to explain why all of the rampant dehedging in the marketplace hasn’t caused prices to jump considerably. With five months to go in order to fill the annual sales quota of 500 tonnes, ECB banks are still roughly 268 tonnes short of filling the quota. We still strongly believe that even with the ramped up selling in the past three months, the annual quota will not be met this year, the second time in the last two years.

On to another topic…sometimes the market analyst crew gets very cushy sending out missives without listening to what the miners think. While miners and executives rarely give price targets or clear market prognostications, it’s important to hear what they have to say about the markets because in the end, they are the ones that find the product and without their efforts, the whole analyst crew would be out of a job. Pierre Lassonde, former Newmont President and Chairman of the World Gold Council, is quoted as saying the gold price will hit $750 before the year end and then Gold Fields Chief Executive Ian Cockerill, speaking in Perth, made some pretty bold statements about hedging practices, exploration efforts and the like.

These are the guys exploring and producing. If they’re saying that there are no major new mineral finds and exploration budgets are still paltry…maybe they deserve a listen. It’s going to be their actions that dictate the prices over the coming years.

Neal Ryan is Vice President and Director of Economic Research for Blanchard Economic Research Unit (

It’s been four years since Warren Buffett warned that the global financial system was held hostage to ticking “time bombs” and at risk of a “megacatastrophe“.

He was of course talking about financial derivatives, i.e. the options, swaps, forwards and more-exotic investment tools that have blossomed into a $400 (plus)-trillion global market. He warned they had created a “daisy chain risk” that one Long Term Capital Management-style pratfall would topple the whole global house of cards.

Well, here’s a related “ominous” newsitem.

Credit Default Swaps Spur Fastest Derivatives Growth

By Hamish Risk
Bloomberg News Service
Monday, May 21, 2007

LONDON — The global derivatives market grew at the fastest pace in at least nine years during 2006 as the amount of contracts based on bonds more than doubled to $29 trillion, the Bank for International Settlements said today.

Derivatives covering bonds and loans rose by $15 trillion last year, the Basel, Switzerland-based bank said on its Web site. The total amount of over-the-counter contracts whose value is derived from price changes of bonds, currencies, commodities, and stocks, or events like interest rates or the weather rose 39.5 percent to $415 trillion, the biggest jump since the BIS began compiling the data.

Morgan Stanley, Bear Stearns Cos. and Deutsche Bank AG depended on credit derivatives to report first-quarter profits that beat analyst forecasts. Federal Reserve Chairman Ben S. Bernanke said last week that the contracts “increased the resilience” of financial markets, while warning that they may be exploited by investors to profit from insider trading.

“Derivatives are now a major contributor to investment bank earnings,” said Jerry Del Missier, co-president of Barclays Capital in London, the biggest underwriter of European bonds last year. “Credit derivatives will continue their high growth path for a long time yet, and that growth rate will be higher than any other market.”

The actual money at risk through credit derivatives increased 93 percent to $470 billion last year, the BIS said. The amount at stake in the entire derivatives market is $9.7 trillion, according to the BIS, which was formed in 1930 to monitor financial markets and regulate banks.

The market, started by Salomon Brothers Inc. in 1981 when the firm arranged for International Business Machines Corp. and the World Bank to swap debt payments in Swiss francs and German marks for dollar obligations, has become Wall Street’s most- profitable activity.

Morgan Stanley, the world’s second-biggest securities firm by market value, said a jump in revenue from credit products helped spur a 70 percent increase in first-quarter profit to an all-time high. Bear Stearns, the fifth-biggest U.S. securities firm, said credit derivatives trading contributed to an 8 percent increase in first-quarter profit. Deutsche Bank reported record revenue from trading debt and credit derivatives, helping lift first-quarter profit by 30 percent.

Contracts on bonds took off in the 1990s when New York-based JPMorgan Chase & Co. led banks creating credit-default swaps. The contracts allow bond investors to hedge against the risk of a company or country defaulting on interest payments or speculate on its creditworthiness.

Derivatives helped investors hedge their risks and contained a decline in bond prices during 2005 when the credit ratings on debt of Ford Motor Co. in Dearborn, Michigan, and Detroit-based General Motors Corp. was reduced to below investment grade.

The contracts also limited the fallout from Greenwich, Connecticut-based Amaranth Advisors LLC’s record $6.6-billion loss last year and this year’s slump in the U.S. subprime mortgage market, said Anshu Jain, head of global markets at Deutsche Bank in London.

“We have been through several market corrections in the past few years and in each case, markets have recovered,” Jain said in an e-mail. “In retrospect, people think the market has been characterized by calm, continuous, and even benign conditions. Derivatives are a big part of explaining that phenomenon.”

In a separate report, a group of central bankers, finance ministries, and financial regulators known as the Financial Stability Forum called on hedge funds to improve risk management to prevent shocks to the financial system. The group’s secretariat is based at the BIS.

The forum’s report, dated May 19, said there has been “some erosion in counterparty discipline recently,” citing the competition among banks for hedge fund business. The world’s more than 9,000 hedge funds move money in and out of markets faster and in larger quantities than mainstream funds, raising concerns about the stability of global markets.

Banks and hedge funds say it’s cheaper and easier to use credit-default swaps than buying or selling the underlying securities. Investors who buy the contracts are paid the face value of the underlying debt in exchange for the defaulted notes should the company fail to adhere to debt agreements.

Interest-rate swaps remain the biggest part of the derivatives market, growing 15 percent to $292 trillion, compared with 38-percent growth the previous year, the report said. The contracts allow companies to switch between fixed-rate and floating-rate interest payments.

Growth in the overall derivatives market outpaced the previous record increase of 39.2 percent in 2003.

Foreign-exchange derivatives rose 28 percent to $40.2 billion in 2006. Contracts based on commodities such as gold and oil expanded by 27.7 percent to $6.9 trillion.

The BIS surveyed 62 institutions for its semi-annual report.

* * *

China shops for foreign uranium properties as possible domestic shortage looms

The possibility of domestic uranium shortages has the China National Nuclear Corp., the nation’s largest nuclear power plant builder, in discussions with numerous foreign uranium explorationists.
Author: Dorothy Kosich
Posted: Monday , 21 May 2007


China’s largest nuclear power plant builder said it is in discussions with companies in Australia, Kazakhstan and Mongolia because of a potential domestic uranium shortage.

The Wall Street Journal reported Sunday that London-based UraMin (AIM, TSX: UMN) has been negotiating with China National Nuclear Corp. (CNNC). Lui Xuehong, Vice President of the CNNC’s overseas uranium exploration unit, told the Power & Alternative Energy Summit that discussions are also ongoing with companies in Canada, Niger and Algeria.

Liu specifically referred to UraMin’s “good assets in Africa,” which include acquired or pending mineral rights in Namibia, South Africa, Mozambique, Botswana, Chad and the Central African Republic.

“We will participate in overseas exploration of uranium by buying mining rights of deposits or taking a stake in a particular project,” Liu told the conference.

Shanghai Daily reported that China needs to add two reactors a year to meet its target of generating 4% of its power from nuclear plants by 2020. China National Nuclear plans to spend US$52 billion to build domestic reactors by 2020.

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