European Central Bank gold sales slow price increase

The recent gold price setback, just as many commentators were predicting a break-out through the $700 an ounce level, may be due to a variety of factors all working in concert, but the overall prognosis is still seen as positive for the price.

LONDON - 

The more often high levels of European Central Bank gold sales seem to take place just as the gold price appears to breaking out of its trading range, the more likely it seems to some market observers that this is all part of an effort to keep the gold price subdued and, to an extent, support the weakening US dollar.  Or could it just be a programme being set up by the bank members to maintain, or increase, sales levels up to the end of the current sales agreement which expires in September, allowing the banks to sell 500 tonnes of gold in the year?  Macro management or coincidence?

According to recent figures, ECB Banks sold 18 tons a couple of weeks ago, and it seems likely that sales will have remained high last week judging by the most recent dip back in the gold price, just as it seemed to be breaking out of its recent lower trading range.  Indeed, ECB bank sales could remain high up to the end of the Sales Agreement term.  Earlier in the year it seemed to be the consensus that ECB gold sales would end the period well below the 500 tonne agreement level.  Now gold watchers are not so sure.  There is definitely the chance that sales will remain high in the next two months as the end of September draws close.

The other major factor affecting price is, of course, the perceived strength of the dollar on international markets.  The recent apparent price breakout coincided with a sharp dollar downturn - then the fall back in levels occurred as the dollar regained some ground.  Overall though the dollar is weak and remains so, so gold is likely to show strength as the dollar weakens.

Dollar chart followers should perhaps beware.  While the dollar gold price charts suggest that gold is still in a bull market given that the price has, despite recent weakness, remained above key resistance levels, the gold price in Euro charts may not be quite so positive.  The goal posts are in a different place and varying daily with the toing and froing of the Euro:Dollar exchange rate!

So, is the current malaise in the gold price a function of macro management of gold and the dollar by the Central Banks, the weakness in general liquidity in the US following fallout in the domestic housing mortgage sector, a nervous response to the recent dive in the stock markets, or just a reaction to the ECB banks increasing sales levels up to the end of September as there is plenty of sales leeway left to fill under the agreement terms?

The answer is probably a combination of all of these factors.  But where does that leave the future of the price.  The dollar is continuing to look weak.  Nervousness in the fall of markets may stimulate the role of gold as a safe haven - or at least a safer haven than the stock markets in times of uncertainty as to whether the recent bull market has ended or not. 

The fact that the gold price has remained reasonably strong through a period of high Central Bank gold sales should be a defining factor in the future of the metal price.  If there is a belief that it will outperform the stock market, money will move into gold.  Again, as I have indicated before, I don't expect any huge gold price breakout, but I would view the general prognosis as cautiously positive - certainly as the dollar remains as weak as it is looking today. 

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