Global Watch - The Gold Forecaster
CB gold sales/Indian demand/Venezuela

Julian D.W. Phillips
Oct 10, 2005

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

Central Bank Gold Sales

Well, here we are, more than a week after the second year of the Central Bank Gold Agreement began. Whilst we are not in a position to accurately monitor Central Bank gold sales until after the event, we have seen no sign of such sales. Gold prices have not reflected any new supplies, with prices either rising or consolidating. That gold sales will take place we are certain, it is just a case of when. We would guess that those in the banks, responsible for selling what appears to be far less than the 500 tonnes 'ceiling' this year, have also been charged with getting the best price possible.

In those dealers shoes, it would seem likely that they would wait for 'spikes' in the price, that quick, dramatic leap in prices that go well beyond market expectations and drop back just as quickly. Sales in that environment would make Central Bank sales seem wise, despite the absence of good investment reasons for doing so and provided the price doesn't turn the 'spike' into a jump to a new 'floor' level. Difficult call, but one that would explain their seeming absence from the market, at present.

Indian Demand this week

What Buddhists believe are inauspicious days, are over and the festival seasons have begun this week and will continue until the festival of light (Deepavali) on the 1st of November. After that the Indian Gold market traditionally bids goodbye to the year, as there will be only a little buying of jewellary for almost the next 40 days.

However, jewellery demand is only lukewarm at present, leaving gold workers idle and dealers nervously watching for customers. But the year to date has been good so far except for September. Right now both manufacturing and retail activity is dull, at best.

Strangely, gold prices are at enormous discounts in all stores in India (Around 2% discount on International Prices). Anecdotal evidence links it to the illegal transfer of money from Dubai. You will find in Dubai the majority of Indians are from Kerala State. With elections due in Kerala in the next few months, politicians are withdrawing their "parked money" for spending on the elections. We await validation of these stories as a very thin line in India separates fact and fiction.

But for India as a whole the year looks terrific, so far. Indian demand has surged almost 33% and should reach 850 tonnes of imported gold, because of higher incomes and good farm output, after good monsoons, according to the World Gold Council.

Consumption, excluding recycled gold, rose 57% to 508 tonnes in the first half of the year, from 322 tonnes during the previous year. This will leave the second half demand figure at 342 tonnes.

Venezuela moves its $ to the Bank for International Settlements

Venezuela has moved its rising reserves to Europe, although it appears that they have not switched them into the €, yet?

Venezuela, the world's fifth-largest oil exporter, has seen the level of its international reserves rise to $31 billion in recent weeks, from $24 billion at the start of the year and from about $15 billion in 2003. Traditionally the country has held its reserves in a portfolio of US Treasuries, euro-denominated bonds, gold and cash. The President of Venezuela, Snr Chavez, has long insisted that the level of reserves is too high and that the money would be better used for "domestic social programmes". But in recent weeks he has also embarked on a range of international financial "projects", such as the purchase of at least $1 billion in Argentine sovereign debt.

Venezuela has transferred about half of its $30.4 billion of foreign reserves out of U.S. Treasuries and U.S. banks into banks in Europe. Domingo Maza Zavala, a director at the central bank, informed the media that during the past four months 60% of the bank's roughly $24 billion in operational reserves, or about $14.4 billion, had been liquidated and the funds deposited at the Bank for International Settlements in Basel, Switzerland. Most of the $14.4 billion transferred was previously invested in U.S. Treasuries, or held on deposit at U.S. banks.

We have heard talk from several nations that they wish to diversify from the U.S.$. Now we have evidence of an important oil producer with rapidly rising U.S.$ reserves moving them away from U.S. influence. We have not had any reports that they have switched out of the U.S.$ to the €, but with so much aggression from Venezuela towards the U.S. of A., the question has to be put, will they switch these reserves to the € and then more dramatically, will they price their oil in the €? Whilst many will dismiss this is a difficult dictator, from a banana republic, thoroughly anti-States, performing again, we feel that one has to place the incident into context.

Chavez' fears are that the Bush administration could "confiscate" some of Venezuela's assets if bilateral relations were to deteriorate. Could this fear be shared by Russia or China? Of course not, we respond, but is it wise for any nation to leave itself open to such dangers? As it is, ownership of so many U.S. assets, liquid or otherwise is now out of the ownership control of the U.S., but still under U.S. control through government powers, such as the power Chavez fears. Add to that the dangers facing the U.S. $ and prudence starts to shout for attention.

Of particular note is that the switch to European protection has taken place, albeit, seemingly, without any foreign exchange activity. Did Venezuela see the task of 'switching' to the € as too difficult and damaging, or are the present moves preceding such action?

Venezuela's foreign exchange reserves in the U.S.$ are still billowing up and will keep on doing so. What will the angry Snr Chavez do then?

When a storm approaches and is almost on us, we see the occasional lightening strike before it really hits. Is this one of those strikes?

Oct 7, 2005
Julian D.W. Phillips

321gold Inc