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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Germanys Central Bank Decides to Hold on to Gold Reserves

Commodities / Gold & Silver Oct 11, 2007 - 11:01 AM GMT

By: Gold_Investments

Commodities Gold
Gold was up $3.10 in New York yesterday, from $736.70 to $739.80. It has continued to strengthen in Asian and early European trade. Gold was trading at $746.40/ 746.90 at 1200 GMT.


The dollar's continuing weakness, continuing high commodity prices and near record oil prices above $80 per barrel are inflationary and conducive to higher gold prices. From a contrarian standpoint, the fact that most market participants are expecting a sell off and pullback, is bullish and there may be a surprise to the upside. There is resistance at $750 but should we have a close above $750 gold may rally surprisingly quickly to pschological resistance at $800.

Germany's Bundesbank announced that they would only sell a minimal 8 tonnes of gold bullion in 2008. The 8 tonnes being sold is for gold coin minting purposes. The Bundesbank, the world's second largest gold holder with about 3400 tonnes, also sold a minimal amount of gold in 2007. There are no plans for any further sales as part on the fourth annual quota of the Gold Agreement," the Bundesbank told Reuters in a statement after a meeting of its executive board. The remainder of the Bundesbank's rights to sell gold under an agreement between central banks would be offered to other central banks in the agreement, the Bundesbank added.

Reuters said that the Bundesbank has refused to sell its reserves as they do not want to hand the German government a budget windfall. This may be the case be it is also likely that the astute German central bankers realise that the global reserve currency of today is under extreme pressure and in the event of a run on the dollar and a global monetary crisis it would be wise to retain their gold reserves.

Continuing sales would be very short sighted. Conversely, Asian and emerging market central banks are likely to continue to increase their purchases.

The central bank of Cyprus will keep all its foreign reserves untouched upon entry into the eurozone, officials have said. Previously, the Central Bank had maintained a reserve as a buffer to prop up the Cypriot pound in case of need. But though this purpose should technically expire once the island joins the eurozone, the Central Bank plans to keep all its reserves intact.

The European Central Bank (ECB) is in charge of the conduct of foreign exchange operations and the holding and management of the official foreign reserves of eurozone countries. All gold and foreign exchange reserves of the national banks remain their assets but, under the Maastricht treaty, are at the disposal of the ECB. Official eurozone reserves total over €40 billion, of which over 30 per cent are gold reserves of the Bundesbank and around 20 per cent of the Banque de France.

The Bundesbank holds 3,422.5 tonnes, worth about $80.5 billion at $732 an ounce. Euro zone central banks, including the European Central Bank, held 186.2 billion euros worth of gold at the end of September. The signatories of the agreement are Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Slovenia, Spain, Sweden, Switzerland, Greece and the European Central Bank. Given increasing maroeconomic, systemic and monetary risk it is likely that many western central banks will continue to reduce their gold sales.

Forex and Gold
The USD has continued to sell off Thursday and is trading at 1.4205 against the EUR. It is flat against the GBP at 2.043.

This morning the U.S. dollar is down to 78.04 (from 78.40 yesterday and 78.83 the day before yesterday). Support is at its all time record low at 77.657. Should support fail at this level the dollar will likely sell of aggressively to 75.00.

Silver
Spot silver was trading at $13.67/13.69 (1200 GMT) and it is trading in unison with gold if even slightly stronger.

PGMs
Platinum was trading at $1396/1401 (1200 GMT).
Spot palladium was trading at $378/383 an ounce (1200 GMT).

Oil
Oil prices rose in Asia, extending overnight gains on news of a surprise strike at Chevron in Nigeria and another fire at BP's oil field in Alaska. Light, sweet crude for November delivery climbed 31 cents to $81.61 a barrel in Asian electronic trading on the New York Mercantile Exchange by mid-afternoon in Singapore. The contract rose $1.04 to settle at $81.30 a barrel Wednesday in New York.

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