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The CB Gold Agreement - running out of stock?

Julian D.W. Phillips
Jul 26, 2005

Excepts from the "Global Watch - The Gold Forecaster."

We have heard of more reports of gold sales under this agreement to the amount of around 20 tonnes, seemingly from Spain. This leaves around 33 tonnes left to go from this year's allotment, over the next two months.

The funds must be alive to this fact and certainly in a position to pick up this amount for a speculation. If they do then the resources of the signatories of the Central Bank Gold Agreement will be exhausted well before the end of the C.B.G.A. year-end on the 26th of September.

More and more are watching this space to see if these signatories do keep their agreement, despite the danger of seeing supplies to the market drop to the extent that we could have an impressive 'spike' in the gold price until the 26th September.

We are informed that the B.I.S. has sold 20 tonnes and the Philippines 25 tonnes, in June, but these sellers are not party to the agreement. Is this gold price management? It would appear so particularly if they are acting in concert with the C.B.G.A. signatories, then de facto evidence is present of gold price management. We are disturbed by the present lack of transparency in who will and who is selling their gold amongst the signatories, which gives rise to these comments.

However, if the signatories are simply working within their agreement, then they will not sell more than their 'ceiling' quota and will permit the gold price to 'spike' upwards as their gold runs out. With the present physical demand being sufficient to hold the prices in the late-$420 area, small additional fund activity to the extent of about 40 tonnes should be sufficient to prove this point one way or another.

If a price 'spike' does not occur in this time and there is evidence of funds increasing their long positions to that extent, then we would expect reports from the C.B.'s to confirm their activities, which would confirm this manipulation in the next two months.

The future of De-Hedging to 2006
We have seen de-hedging drop in tonnage terms for the first half of this year, to finish the year, we forecast, not too far above 100 tonnes. We are getting confirmation of this in the form of statements from AngloGold Ashanti's director Kelvin Williams.

In the face of what they believe will be a robust gold price for the next eighteen months [giving adequate reasons for de-hedging remaining positions], they tell us that AngloGold Ashanti has little volume left in terms of hedge commitments. The group's hedge for 2005 was 17% of total expected gold production in 2006, he added. At the end of June, AngloGold Ashanti's net delta hedge was 321 tonnes, 333 tonnes at the end of March 2005. They then confirmed that there would be no material reductions in the volume of hedge positions in the coming six months to 18 months.

Barrick, also committed to lowering its edge book shed only 6 tonnes in the second quarter of the year, dropping the book to 205 tonnes or 9% of reserves. The policy appears to have been right in the shareholders eyes as the company achieved an average price of $424 an ounce compared with $372 an ounce in the second quarter of 2004.

If we take 2004 de-hedging levels, we see 210 tonnes in the first half of the year, so this implies a drop in demand by 160 tonnes or thereabouts. With gold prices holding their own in the face of higher Central Bank sales for the first half of this year new demand has taken the place of de-hedging to the extent of over 200 tonnes [absorbing, as it has inceased C.B. sales]. This appears to have been physical and investment demand. We do believe both these demand sources will continue to grow and agree that this will keep the gld price robust.

Why isn't India as globally overwhelming as China?
It is abundantly clear the when the markets look at China they separate the economy from the Political side. We do not believe that this allows an accurate picture of the economy to be painted, as we brought out in our last issue. Bluntly expressed, the Chinese economy is driven and tightly controlled by the Chinese Communist Government. They want a high level of growth and will get it. They have made it clear they would like to see an investment diversification from bank deposits to a portfolio that includes gold. Whilst slow about bringing this about to date, we do expect to see that happen over time, in line with the development of a distribution system that permits easy access to physical gold across China. To help appreciate fully the nature of the Chinese economy a contrast with India, a nation with a similar population and a dynamic growth of its own should be made. This we have done by repeating and broadening a dialogue we had recently.

"... India has developed (Far less than China) without much foreign aid or direct investment and doesn't need global exports beyond its foreign exchange requirements for oil and defence related imports. In all other respects India has already developed to a high degree of self-sufficiency. With Indian a common feature of Boards of Directors, Analyst and professional across the entire globe, we can source our oil and defence requirements through our technical and managerial workforce employed across entire globe.

Whilst China has become a leader in manufacturing, India has developed its human resources, which are family orientated, making these India's main strength (India will overtake China's population by 2020).

The Knowledge and Service Economy has lent India an upper hand in the community of nations. Our workforce in the knowledge and service economy is highly skilled, efficient, productive, largely disciplined and enormously hardworking, capable of putting in long hours of work, both day or night and it can do this in English, French, and German. This renders India a class apart as a knowledge and service economy. Our economy is soon to excel in Bio-chemistry.

India has resisted the cultural swamping by companies such as Lever, P&G, Coco-cola, Pepsi, McDonalds, which, although they have established a huge presence, have succeeded only in penetrating the surface of India amongst a very small sector of the population, despite years of campaigning. Even in consumer items, Indians largely prefer home made items, verses branded items and this after years of advertising to change them. The Indian people are difficult to manipulate as well as to govern. They look to no State sponsored incentives, or Finance or other government support for its development."

Reply
"... I do believe that India will grow more solidly and more sustainably than elsewhere. The penetration of the global economy by ex-patriate Indians is a fact of life in most, if not all developed economies, across the globe.

There is a major difference between Indians and Chinese. It is why I believe the Indian gold market to be the most mature in the world. You think for yourselves, you are family orientated and refuse to accept the yoke of government or banking. This makes your people individually valuable. The Chinese bow to the State, even to the extent of limiting their offspring to one child, so they can get State support for the child. They will obey, as a nation, even the most outrageous of orders from the Central Government. They will stay silent and inactive in the face of unacceptable government policies and atrocities against themselves. They have a culture similar to ants in an anthill, subject to a central authority on which they allow themselves to depend. Indians walk their own road and accept government only where they approve of it.

China can be harnessed by a Central Government into an unreasoning army, or factory force, or whatever the government wants, as we saw under Mao Tse Tung. It is this they bring to the table under the cloak of Capitalism. This could not happen in India. India poses no Imperial danger to the outside world, China does. Chinese government representatives are all over the resource centres of the world contracting for them, offering free loans or grants to get into the action. They would not hesitate to bring Chinese workers even into Africa to develop resources for themselves. India does not operate like that and appears to respect other nations and they have no ambitions on the global stage other than for its people.

On the global stage China is a present and future overwhelming presence in the globe, as a nation. India does not. It sees itself contributing, not taking.

But both countries believe that gold is real money!

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Julian D.W. Phillips

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