Tuesday, July 06, 2010

CB gold agreement dead? Does it matter?

The CME Final for Friday indicates that on volume of 131,211 lots (12.52% above estimate) open interest crashed 14,990 lots - 46.62 tonnes or 2.54%. Aug gold of course rose $1. This means that in two consecutive days open interest has plunged 30,097 lots, 93.6 tonnes or 4.97%. Since last Thursday saw the massive $39.20 drop in August gold, the suspicion arises that Friday’s open interest drop reflects misreporting on Thursday. In any case a substantial adjustment has just occurred and it is possible that today’s CB news was instrumental – see below.

Indian ex-duty premiums: AM $4.86, PM 62c, with world gold at $1,207 and $1,210.96. Ample and too thin for legal imports. The rupee softened 0.2% to close at $1= R46.89 (Monday R46.78) but the stock market gained 0.99%.

The PM reading seems a little sluggish although gold did spike some $6 in the afternoon which is never popular. Maybe the Indians have decided not to chase Asian afternoon rallies – very wise as it turns out.

Local Vietnam gold, as reported earlier stood at a $20.90 premium to world gold of $1,205.20 early this morning (Monday $16.78/$1,212.60).

Shanghai gold closed at a 36c premium to world gold of $1,207.84 on volume equivalent to 3,696 NY (Monday $38c/$1,212.44). The Yuan weakened against the $US for the second day running. Mitsui speaks categorically of the precious metals being

"well supported by Chinese buying"

but it does not show up in the Shanghai statistics.

TOCOM continued nibbling. On day session volume equivalent to 10,632 NY contracts, open interest rose 4.465 tonnes (1,435 NY) and the public added 0.494 tonnes to their long. The active contract closed down 18 yen and world gold lost 75c during the session.

The news of the day, of course, was the discovery by the Virtual Metals analyst (Matthew Turner) that the BIS engaged in what appears to have been the biggest gold swap in history prior to the end of their FY end on March 31st. Thebulliondesk.com (first of the wire services to report) says:

"In its 2010 annual report, the BIS said that "gold, which the bank held in connection with gold swap operations, under which the bank exchanges currencies for physical gold," stands at 8,160.1 million in special drawing rights, equivalent to 346 tonnes this year, up from nil in 2009.

While the data is relevant to the end of BIS’ 2010 financial year in March, data posted to the International Monetary Fund and carried by Bloomberg show the swap still growing in April, analyst Andy Smith of Bache Commodities noted.

To now, this implies a swap of about 380 tonnes from the end of 2009, he said in a report."

The new Washington Agreement, which started at the end of last September, allowed signatories to engage in gold derivative transactions for the first time in a decade. Very convenient.

Although none of the major bullion banks (actual or potential CB counterparties) will want to discuss this, the high probability is that much of this gold was actually sold into the market. Very likely this accounts for the contra-seasonal slump of gold in December, which it will be recalled was neither preceded by the usual loss of physical premiums nor accompanied by the usual open interest action.

This in effect means the end of the Washington Agreement restraint on CB gold selling, at a time when several signatories are in bad shape. Most likely this is what caused the selling pressure in gold today, especially after the NY open.

In fact, CB selling programs impact the gold market in an unpredictable way. Some will remember that the announcement of a similar size Dutch sale in early ’93 was followed by the best gold rally of that dismal decade. Here too, a large amount of metal has apparently been absorbed. And the lesson of the CB gold selling/"mobilization" panic of earlier in the 90s is that the Eastern physical market will absorb any amount of gold, at a price. Unlike the ‘90s of course, CB selling is being caused by intrinsically very gold friendly developments.

CB announcements are of course usually after the fact and generally untrustworthy. Physical premium tracking has become more important than ever.

The 113, 575 lots of estimated volume at 11 AM includes some 40,000 lots done pre open, about half done on Monday.