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I Think I'm Turning Japanese
By Jon Nadler

The US Fed, the ECB, and the Banks of England, Switzerland, Canada, and Sweden's Riksbank got a hold of a gigantic kitchen sink this morning. They aimed it squarely at the global credit crisis which is now spreading faster than the Andromeda Strain and hoped to deal it a knockout blow. The 952-point massacre in Japan's Nikkei may well have been the trigger for the launch button being pushed today. The world appears set to fall into the "Japan Syndrome" any day now...Fine, just make it quick we say.

As one would expect, the dollar fell in the wake of this massive concerted action. The decline, however, was rather marginal when seen in the context of its recent moves. The euro was trading at 1.369 What else fell? Well, oil for one. Black gold swiftly slipped to near $88 per barrel and then tried to subsequently recover , while copper, nickel, zinc, and lead sank further on demand fears.

Gold continued to benefit from the flight to safety and liquidity. However, its battle to overcome the $925 resistance point appears difficult thus far, even in the wake of these apparently desperate attempts by officialdom to keep the fabric of the markets from ripping apart. Thus, after a brief visit to $917.50 earlier in the morning, bullion prices opened the midweek NY session with a $20.00 gain at $907.00 per ounce. Today would be the ideal day to really make a stab at much higher values. Silver advanced 24 cents to $11.80 but platinum declined $12 to $1003 while palladium rose $1 to $196 per ounce.

Amid this turmoil and uncertainty, one has to ponder what gold's role might become where it historically has mattered most; in the vaults of the globe's central banks. Will they sell? Will anyone buy? Has the dishoarding campaign come to a halt, or will a newfound respect for the shiny stuff yield an accumulation trend? Our friends at the London-based VM Fortis Group recently sent out their opinion on the matter, and we relay it here -courtesy of Mineweb:

"VM Group - says a shortfall in central bank gold sales expected to continue during the last year of CBGA II, suggests continued slow central bank gold sales regulated under a probable third Central Bank Gold Agreement.

The Virtual Metals Research Consulting Group (VM Group) estimates that total central bank gold sales under the second Central Bank Gold Agreement (CBGA II) are likely to reach only 360t - 140t lower than the 500t permitted for the year and the lowest seen during the CBGA's nine years of operation.

This had major implications for the 2008/9 final year of CBGA II, as one of the countries with stated sales plans, Switzerland, will have finished its programme and another, the Netherlands, appeared to have done so. That left France, Germany, Sweden and Austria as potential gold sellers.

In this final year, France had about 120t left to sell, Sweden was likely to sell 10-15t, Germany would only sell coins, while Austria might not sell again. The VM Group said that collectively the potential sellers, France, Germany, Sweden and Austria, had about 150t to sell during this period.

The European Central Bank remained a wildcard and could again be a seller. This could mean another 60-80t gold sales, but still meant that sales for the year would likely amount to 210-230t - the lowest amount sold in a CBGA year under the various CBGA agreements.

The VM Group said there obviously were ways in which more gold could be sold. The International Monetary Fund has said it wanted to sell 403t as part of a financing package, but it was likely to spread out these sales to avoid disturbing the market. The VM Group said the result was that only a small amount of IMF sales could take place in the next CBGA year.

Another option was that one of the central banks that have sold gold, but has not said how much they planned to sell and over what period, will start to sell again. However, the VM Group argued that if these countries, including Spain, Portugal and Belgium, did not sell when they had the opportunity to in the 2007/2008 CBGA year, they were unlikely to do so in the 2008/9 year.

It said a similar argument could be made against Italy - a large holder of gold - deciding to sell.

A change in attitude towards gold?

It said its view on central bank gold sales had always been that the banks would continue to sell gold indefinitely and at the current rate of 400-500t. The view was based on the fact that almost every portfolio diversification argument showed that European central banks had too much gold, while the rate of sales was calculated according to a central banks estimate of how much sales the market could bear.

However, the VM Group said the recent shortfall in sales suggested it had to refine this view.

The big question was whether recent reluctance to sell reflected only a temporary pause in response to higher prices or whether it represented a longer-term change in attitudes towards gold.

Although the case for the latter would have been strengthened by recent financial turmoil, it was almost impossible to know with any certainty, said the Group. However, they noted that the vast majority of gold was still held by European central banks and the US Treasury, reflecting the international economic order of the late 1960s.

For gold to have a future as a reserve asset it needed those central banks which have little gold and a lot of foreign exchange to want to acquire gold, but these banks outside of Europe have not shown any signs of doing so. If these banks did not acquire gold, then the long-term trend for net official sector sales remained intact, said the VM Group.


The Group felt that the CBGA agreement would almost certainly be renewed by or before September 2009.

Factors that were taken into consideration in this respect was the fact that the gold market had become accustomed to these sales pacts that arose from the need to cope with structural weakness in the market.

The report said that removing such a pact with the existence of many more actors on the buy-side and perhaps a smaller volume to sell, would boost gold's status as a reserve asset, giving holders greater flexibility in how they bought and sold it. But on the other hand, if the gold market sees a major downturn in the years during which a CBGA II might exist (2009-2014) then the absence thereof could exacerbate any bear market.

"Ultimately, it all might come down to how many central banks express an interest to sell, in particular the larger holders such as France and Italy. Germany's Bundesbank reiterated that it will not use any of its allocation during the current final year of CBGA II, so we are quite likely to again see sales far under 500t.

The report concluded that unless central banks were really changing their minds about gold's position within their reserves, this implied a slowdown rather than an ending to official sector reserves sales.

"This would ultimately translate into an almost certain renewal of the agreement by or before September 2009," said the VM Group."

While this sector's future behavior may still be unclear, that of today's global individual investor certainly is not in question. Given the background picture and its potential implications, the proverbial man in the proverbial street seeks to ensure that some gold is present in his basket of assets. Cash may be king, but gold is emperor to many. A favorite motto, frequently heard at metals workshops, has been "If you buy gold for the right reasons (i.e. not to make money, but to keep it) there is no such thing as the wrong time, or price." By all means, none of this implies that 90% of what you have ought to be in bullion. However, look at some of the above-mentioned central banks -stodgy, conservative, occasionally not very bright, but still hanging on to a few bars in the basement. All but Canada, of course. With our measly 3 tonnes in reserve, we trail behind....Bangladesh in gold holdings. O Canada..., Oh, Canada.

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