No Hat For Me, Please

By Jon Nadler Apr 8 2008 2:29PM www.kitco.com

Good Afternoon,

Gold prices eased into a lower trading channel during the Tuesday session and the action was lackluster, mirroring the equally unexciting goings-on in crude oil and the US dollar. Participants observed a small rise in the US dollar (to 72.30 on the index) and a bit of a profit-taking slippage in oil prices (to just under $109). The trade was also mindful of Asian jewelry fabrication demand starting to put the brakes on once again in the wake of higher prices.

News that market analysts expect a US approval of the IMF's plan to sell 403.3 tonnes of its gold reserves was not playing too much of a direct role in today's decline. Still, the IMF announcement's net result is that more gold will come into the market in due course. Whether it will be mopped up by central banks or investment demand or find a home with fabricators is not known at this time. The sales are expected to be conducted in "an orderly fashion and spread out over time."

New York spot gold was $5 lower at last check, quoted at $915.00 per ounce as players digested the poor pending home sales data released earlier in the day. There was not much else in the way of immediate directional drivers on the scene at the moment. Silver lost 33 cents at $17.72 while platinum reversed some of yesterday's gains, dropping $15 to $2019.00 per ounce. Palladium on the other hand, rose $4 to $457.00 per ounce.

Risks of probing lower levels in metals remain in place as the markets try to find direction in the wake of recent drops. For the moment, the action continues to be dollar and US economic news-driven until either ECB or G-7 signals are intercepted as to where next on the currency and interest rate scene. The rate cut expectation fever in the US has calmed somewhat, with markets now giving 64% odds to a quarter-point cut at month's end. Gold needs to retain its string of recent closes above $900 as the first order of business. Today's dip to $907 gave bulls a mild case of the jitters.

Amazingly, some of my observations and musings regarding the future possibility of Fed intervention in the [commodity?] markets has given rise to further outlandish theories in Tinfoiltown. Some have even suggested that I have now joined the leagues, and am a card-carrying member. Far from it, folks. What the future holds, is unknown to me, as well as others. As for the past, and present, let me just leave you today with a little excerpt from the latest CPM Group Gold Yearbook. It regards the various treatments of working gold inventories versus official monetary reserves and it should lift the shroud of mystery and intrigue on some widely-held and long-standing conspiratorial misconceptions:

"When the People's Bank of China extricated itself from being the national market maker in gold, in 2001, it transferred 3.4 million ounces of gold from non-monetary reserves to its monetary reserves, boosting its reported stocks from 12.7 million ounces to 16.1 million ounces. Some gold market commentators saw the increase in Chinese monetary reserves and began to trumpet in 2001 that the Chinese central bank was adding gold to its reserves. In fact, it did not purchase any of this gold, but merely transferred the metal from working inventories used in the daily management of the domestic gold market, prior to 2001, to its monetary reserves once the central bank no longer was involved in the daily gold market activity.

Some central banks treat their working gold inventories in this way, so that their official monetary reserves do not fluctuate regularly due to the central banks' roles as national buyers and sellers of metal. Others do not segregate gold in this way. The U.S. Treasury, for example, reports small fluctuations in its monetary reserves when it loans gold to the U.S. Mint, an agency within the Treasury, for use as working inventories for the U.S. Mint's gold coin programs. The Mint borrows gold from the Treasury and uses this gold to strike gold Buffalo and Eagle bullion coins. As it sells the coins, it offsets with purchases of the same amount of gold on a daily basis. Thus, the amount of gold held within the Treasury remains unchanged. For reporting purposes, however, the Treasury reports that the gold that it has in monetary reserves fluctuates slightly, on the order of a few thousand ounces at a time, reflecting the ebb and flow of metal from official stocks and the inventories on loan to the U.S. Mint for the coin program.

These are the gold loans and swaps referred to in the U.S. Treasury's reports showing its monetary reserves, which some gold conspiracy theorists assume must be loans to private bullion banks or other central banks, rather than loans within the Treasury to its own Mint agency. Incidentally, gold conspiracy theorists also like to say, with no basis in fact, that they are convinced the U.S. government has sold off its gold stocks and that the gold no longer is in Fort Knox, the famous Treasury depository in Kentucky. They are partly right: Most of the U.S. government's gold is held at the U.S. Army's West Point facilities, and not at Fort Knox. There is gold at Fort Knox, as well as at the U.S. Mint's facilities located in Philadelphia and San Francisco, but most of the gold is at West Point. The conspiracy theorists who say it has been sold or leased, are wrong on that account. They also are wrong when they say it has not been audited in decades. The U.S. Treasury regularly audits its gold and keeps track of this metal down to the thousandths of an ounce. It does not make its internal audits available to the public, for security reasons among other issues, as do most other central banks, government treasuries, and private corporations."

Case closed. Save the tinfoil for where it is needed, please.

In the interim, back to the dollar/oil duet. Until closer to the week's end.

Happy Trading.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal