| Central banks hold on to their gold |
| 09.01.12 11:36 | |
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Prices may have been impacted by paper gold Gold prices have been choppy in recent months, falling from an intra-year high of $1,921/oz in September 2011 to around $1,650/oz at present. Following the sharp correction, apprehension has risen over the source of the selling and whether it signals an end to a multi-year bull market. Declining gold quotations have been accompanied by a reduction in net non-commercial positions on CME, which tend to represent market participants with a shorter-term investment horizon. Through 2H11, assets under management at physical ETFs, typically bought by longer-term investors, have held up, suggesting markets have not gone through a broad re-assessment of gold's fundamentals. Central banks don't sell gold During the recent price declines, there has also been apprehension that some central banks, particularly in the European periphery may have sold gold reserves to see the respective nations through the current difficult time. Substantial gold sales from the official sector would have been a remarkable deviation from a trend of net purchases that set in during 2009. Although there is a lack of high frequency data on reserve holdings, the ECB weekly financial statement is to some extent an exception. Mirroring comments from European officials, these accounts show that gold assets under management have held steady. Gold liquidity may have increased through swaps A drawback of the ECB statement is that reported gold holdings do not split out temporary transactions. These can be important for the gold market as transactions like swaps can add to gold liquidity. The economics of swaps tend to be influenced by GOFO, LIBOR and ultimately lease rates. For a host of reasons, well endowed central banks have in recent years been somewhat less active in the swap market. However, it is perceivable that some monetary authorities - and also commercial banks - may have utilised gold holdings (the latter more likely through gold held in unallocated accounts) to see themselves through temporary funding squeezes. We will have a detailed look into these transactions in an upcoming Global Metals Weekly. Miners still de-hedging; this may change We note that lease rates are also influenced by hedging. Given that miners have been de-hedging in recent years, demand for leased gold has been low. Acknowledging recent high price volatility, but also considering high margins, we believe the mining industry may increasingly consider protecting themselves against downside risks, while leaving themselves exposed to further price gains, which are our base case, mirrored by a 12-month target of $2,000/oz.. source: Bank of America ML |
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