Two Signs That Gold Fundamentals Are Improving

Source:

". . .beyond the traditional inverse relationship between gold and the dollar, the fundamentals are improving."

The rise in gold on Monday was attributed to a falling dollar. However, beyond the traditional inverse relationship between gold and the dollar, the fundamentals are improving. Over the last week, two developments in the gold market have lent support to the yellow metal.

Reports from India were suggesting that gold purchases during the all-important Akshay Tritiya festival could be down as much as 60%. This would be consistent with the amount of gold that has been imported into India this year, which has been running at a pace 50% below last year.

However, the World Gold Council (WGC) released an estimate of the amount of gold that was purchased during the Indian Akshay Tritiya, saying it was much higher than expected. The WGC estimates that 45 tons of gold was purchased in 2009 vs. 48.9 tons in 2008. This represents an 8% decrease in volume while gold prices have increased by 25%. Moreover, the 2008 Akshay Tritiya festival was observed over two days in 2008, giving buyers more time to shop.

Reports from major jewelers had suggested sales were down as much as 50%, but the WGC estimate soundly disputes those reports. An 8% drop in tonnage coupled with increased purchases in Dubai from Indian ex-pats makes the festival sales bullish for gold.

On a separate, but related note, Nout Wellink of the ECB said that the central bank would renew the Central Bank Gold Agreement (CBGA) that is set to expire in September. This is the first indication that a third agreement was even on the table, although it was widely expected. The CBGA limits central bank gold sales to 500 tons per year. Yet recently, central banks have sold less than 100 tons per year.

In light of the proposed IMF gold sales this new agreement takes on particular importance. The IMF Crockett Commission suggested that IMF gold sales be subject to the CBGA even though the IMF is not a signatory to the agreement. This is just one more piece of evidence that the 400 tons of gold the IMF has proposed selling will not be dumped on the market. Most important is the psychological impact on the gold market; a third CBGA lends support to the bullion price.

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