European Gold Sales Halted

Source: Seeking Alpha, Brad Zigler (9/27/10)

"One thing is certain: Gold is overbought in dollar terms."

Readers puzzled by the euro's recent firmness versus gold now know the reason. European central bank sales of gold ground to a near-halt in September, according to a report from the World Gold Council.

The common currency's been the spoiler of gold's bull run in the last two inflation scorecards. Generally, reserve currencies have been yielding to bullion, but not the euro.

It turns out that central banks and the International Monetary Fund sold about 94.5 tons of bullion in the fiscal year ended Sunday, the smallest amount recorded during the tenure of the Central Bank Gold Agreement. The CBGA, originally signed in 1999, caps banks' collective gold sales.

Among the 6.2 tons sold by eurozone banks, Germany took the lead, followed by Greece and Malta, while the International Monetary Fund disposed of 88.3 tons. Notably, this year's eurozone bank sales are 96 percent below last year's 142 tons.

The banks, which had been swapping bullion for sovereign debt over the past decade, now seem more content to hold their gold reserves.

Gold notched new nominal highs against the US dollar last week, but failed to make records against other reserve currencies. The lack of sympathetic weakness in other lead currencies puts gold's current surge into question. It's clearly built upon the pileup of dollar doubts rather than universal bullion buying.

One thing is certain: Gold is overbought in dollar terms. Soon, there'll be a break. Without a profound change in US. economic prospects, of course, any decline is likely to be a short-lived, pressure-relieving blow-off, but the makings are there for a deeper plunge.

And that's a subject worthy of our future consideration.

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