Bullion: Central Bank Sales Big Burden on Gold

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"In six short years, the tables have turned dramatically for gold."

From 1998 to early 2002, gold prices stayed mostly below $300 per ounce with heavy central bank selling, low inflation, and little interest from investors. That all changed in April of 2002, thanks to 9/11 and a strong trend of consolidation among gold producers.

Prices eventually traded their way to $1,000 per ounce by March of 2008 before they got hit with selling in the financial panic of 2008. Prices rebounded in November of 2008 with some buying gold as a safe haven and some buying as an inflation hedge. Prices are currently strong with critical support at $850?

Earlier this year, investors bought gold as a safe haven from economic troubles. Then, as the economic news improved, many bought gold with expectations for higher inflation ahead. Those expectations were disappointed on July 8th when prices closed below the 125-day average, but on July 15th prices jumped back above the average—an impressive sign of strength.

In six short years, the tables have turned dramatically for gold. In 2001, the production costs of gold were roughly $160 per ounce as prices dipped to $270. Then in early-2008, production costs rose to $400 to $500 an ounce as prices briefly hit $1,000. Much of the credit for gold's rise can go to the consolidation that has taken place in the mining industry. This activity led to more disciplined production decisions while the U.S. economy and dollar stumbled.

The heaviest burden on gold prices typically comes from central bank sales. In September of 2004, a new five-year agreement limited sales to 500 tons per year. However, bank sales did not reach their limit in 2008 and some are guessing that banks are no longer eager to sell their gold. On April 8, 2008, the IMF let it be known that it may sell 13 million ounces of gold over several years to raise cash.

On May 20, 2009, the World Gold Council said that world gold demand was up 38% in the first quarter of 2009 from a year ago, thanks to big jump in investment demand.

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