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Global Watch - The Gold Forecaster
Sales... Russia... Indian Demand

Julian D.W. Phillips
Nov 28, 2005

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

Last week's Gold Sales [under the Central Bank Gold Agreement]

Two weeks ago saw two Central Banks selling 4.01 tonnes of gold during the week ending the 11th of November.

Last week [ending the 18th November] saw three banks selling 16.93 tonnes of gold, within the Central Bank Gold Agreement.

This brings the total sold to date in this the second year of the Central Bank Gold Agreement to 87.19 tonnes.

Extrapolated, this equals 600 tonnes a year. With the "ceiling" at 500 tonnes a year, were the sales to continue at this rate, sales for the year would have to stop at the end of July.

This is what happened in the first year of the agreement, which led to the 'quiet' period for gold [July / August] being a time when gold prices rose unexpectedly.

It awaits confirmation but the most likely candidates appear to be France, Holland and Portugal. France appears to be selling around 7 - 9 tonnes a week on a fairly consistent basis, to date. With a commitment to sell 600 tonnes in the entire 5 years of the agreement, France appears to be running ahead of itself. Will it spread these sales over the 5 years? Or will it sell as much as it can in this price region [+$500]. It is difficult to isolate sales policy without any public statement from the banks, so we are limited to the exercise of extrapolation. But this does help us with the estimation of future gold prices. As the tonnage being sold weekly has increased fourfold in the last week, it appears that when "high prices" [Not if the price goes higher still] are seen in the market place, the Central Banks will sell greater volumes.

The yearly limitation of the "ceiling" of 500 tonnes, then takes on a new aspect. Britain is still wincing from the humiliation of having sold its gold at around half the present price, a spectacular exercise in poor gold sales management, so if the present sales were achieved at levels way below the future average price of gold the same humiliation may well attend this Agreement. However, the yearly 'ceiling' affords a measure of protection against this, because each year another portion of 500 tonnes becomes available in the next year. So a policy of "averaging" up comes into affect, allowing the average sales price to be reached over a 5-year period. Still, at a time when gold is in the ascendancy the Central Banks can only hope that a fall in the gold price during or after this period occurs to give the appearance of wise sales of gold over the period. It is our belief that this will not be so and that they will be subject to wagging fingers as Britain is.

Russia may buy?
Last week we almost discarded talk of Russia buying gold, because the prospect of Russia increasing its gold reserves has been a repeated story and one that has not come to fruition so far. But during the week, we have had statements from Russia's most powerful man on the subject:

President Putin - "I think that the CB should pay more attention to precious metals on Russian territory when forming its gold and foreign-exchange reserves... The reserves are after all gold and forex reserves. Let's not be too restrained here."

Are we to take this as a direct instruction to the Central Bank of Russia? Only time will tell!

What does he mean? As we said last week, in the case of a gold producer such as Russia and South Africa, it is a relatively simple process to divert local gold production headed to the world market to their reserves. We were of the belief that Russia had produced 183 tonnes of gold last year but now revise that down to 168 metric tonnes [according to Natural Resources Minister, Yury Trutnev] This figure will increase to an annual 250 tons but only by 2015. Speaking about investments in the industry, Trutnev said they totaled about $16 million in 2004 and in 2005 - about $52 million. The ministry plans to invest up to $73 million in 2006 and more than $1 billion until 2010, he added. [These are not large amounts for this industry, so we would not call this a major expansion in production at all!]

If this gold production is trimmed to increase Russia's reserves we have to ask at what pace? If there is to be a meaningful increase the bulk of this production should be diverted to reserves and to double [to 10%] the reserves of gold in Russia, would require 691 tonnes or 4 years + worth of Russia's gold production [provided the gold price remained static]. Add this to the off-take going into Exchange Traded funds and you are getting close to matching the "ceiling" level of 500 tonnes potential sales from the European Central Banks. Such a drop in supply would require almost no increase in demand to send the gold price considerably higher.

We have to conclude therefore, that Central Bank supply and demand will remain a critical factor in the price of gold!

Indian Demand this week
India remains largely absent from the market still. With prices reaching levels 10% higher than they were last buying, we will have to wait for some time before they return to the market. It may well not be until the New Year is here IF prices have held these levels and not risen further?

(1-1/2 decade long dollar index chart) What sticks out is the violent decline in the Dollar Index from a 2001 high of 121.21 to an early 2005 low of just above the significant support of 80. With rising rates continuing in the US, this bear market rally looks have entered the final leg of this rally run-up.

There are a few upside targets where we should see this "bounce" top. Around 92-93 is the first target with a blow-off rally capable in the next month possible of extending this quickly to the 95-98 levels. The latter is difficult to foresee with the fiscal dangers the U.S. Dollar is encountering. That said, a violent fall in the U.S. Dollar may not be in the immediate horizon, but technically, it appears we have the likelihood of a year+ out of falling back to the major support level of 80. That is the battle line we have outline to you for over a year now and continues to be a major level to watch in the future.

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Nov 25, 2005
Julian D.W. Phillips

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