Good Morning,

Gold prices fell to an overnight low of near $1096 per ounce following news that the IMF has decided to sell the remaining 191.3 tonnes of metal from the previously planned 403 tonne disposal. After finding a few willing buyers (India, Mauritius, Sri Lanka among them) the IMF -while still hoping for someone to step up and take some of the remaining balance- decided that its quest to reduce its dependence on lending income was more pressing than waiting around for an official sector buyer to materialize. Thus, the on-market sale of the bullion will commence 'shortly' according to the IMF statement issued yesterday afternoon.

Thus, the advance beyond the $1126 price area -a move that appeared quite promising yesterday- came to a quick halt and gold retreated to the $1100 zone as the afternoon and overnight hours rolled on. Participants digested the IMF news and the anticipation of a possible good showing in the US leading economic indicators' data release due today (one that could therefore engender further US dollar strength) and the market turned nervous with prices darting around quite frequently.

As the New York spot markets opened for business, gold prices were still showing signs that jitters were not in short supply, even as the metal tried to find support at or near the previous resistance figure of $1105 an ounce. Spot gold started the session up $0.40 at $1107.20 as against the US dollar at 80.53 on the trade-weighted index.

The euro (earlier) slid to a near nine-month low once again (last seen at 1.358 against the greenback) as officials in Europe squabbled over the subject of Greek assistance and as the US Fed indicated that it further economic stimulus measures will be unwound. Silver started off with a 1 cent gain, quoted at $15.90 per ounce, while platinum and palladium also fell; the former losing $17 to $1511 and the latter slipping $3 to $431 the troy ounce. Rhodium market time unchanged at $2350.00 the ounce.

The IMF news is disturbing for two reasons, said Matthias Detremmerie, the founder of Belgium's Goldessential.com. First of all, as no one seems eager to buy more of the IMF gold. After the 200 tonnes purchase by the Indian Reserve Bank in 2009, everyone touted China as a big potential candidate to soak up the rest. It seemed almost as a sure thing that the gold would be sold back-to-back. The 'revelation' that no central banks are interested seems to question the investment case for gold. This was one of the main reasons why gold was boosted to over $1,100 an ounce in the first place.

Mr. Detremmerie added that: Secondly, the sale implies more supply on the open market. Although the IMF has reiterated sales would be phased, and framed in the CBGA - which limits official sales to 400 metric tons per year -, to limit market disruptions, it will certainly push the CBGA sales this year - currently estimated at less than two metric tons since September  - higher.

Big as the IMF news might be for the day, the prime mover in metals this morning still appears to be the on-going muscle flexing by the US dollar (or, should we say, the on-going atrophying of the euro?) Technical analysis of another kind, as offered by Mizuho Bank opines that platinum may rally towards the $2,000 an ounce mark, and that it is presenting a good buying opportunity after its recent drop. More specifically, Mizuho analyst Nicole Elliott feels that if the noble metal manages to close at higher than the $1,555 an ounce level at the end of a [unspecified] month, the bullish momentum should increase.
A momentum that is evidently not increasing is the one that we have been assured of in a plethora of newsletter analyses and prognostications ever since India found itself adopting nearly half of the gold being offered by the IMF. We are of course referring to the 'imminent' stepping up to the IMF gold plate by various and sundry Asian central banks - a vision that was being essentially guaranteed (in writing) by hard money publications. So, what happened? Nothing - that's exactly the point. The Wall Street Journal's Andrea Hotter sums up the surprise (which we warned might develop) and says that:
Sales of gold by the International Monetary Fund have hit a serious stumbling block: There are no more official takers. It had all started so well. Having announced to great fanfare in September that the IMF's Executive Board had approved gold sales totaling 403.3 metric tons - over 12 million troy ounces - there initially seemed to be no shortage of interest from the world's central banks.
The Reserve Bank of India bought 200 tons in October, followed in November by the Bank of Mauritius with two tons and the Central Bank of Sri Lanka with 10 tons. But there have been no further IMF gold sales since then. Gold prices are at near historical highs above $1,100/oz, around $50/oz higher than when India bought gold and at similar, to slightly lower levels than when Mauritius and Sri Lanka bought.
And with 191.3 tons of gold left to sell, the IMF has been forced to eat humble pie. Late on Wednesday the IMF said: Prior to any sales on the gold market, sales were first made exclusively to interested central banks, thus shifting gold within the official sector. Now the IMF will begin sales of the remaining gold on the market.
Ouch. Central banks had first refusal - but they couldn't find any at current prices. Even China, which has just 1.5% of its foreign exchange reserves in gold and has been widely touted as a future buyer for diversification purposes, wasn't interested. All this on the same day that the World Gold Council issued its quarterly gold demand trends report, highlighting the role of central banks as net buyers. And here's the really good bit, the WGC added that central banks would be a continued source of support for the gold price going forward. Whoops.
None of this means central banks can't buy any of the IMF's gold in future - it just means right now, they won't. So it's more egg on its face for the WGC, an organization formed and funded by the world's leading gold companies to, among other stated goals, promote the role of gold as a reserve asset in the official sector. - reinforcing that very view this morning, a statement from Sri Lanka. Its central bank is unlikely to buy more gold from the IMF right now as the island nation has already reached its required reserve level - its governor said on Thursday.
Indeed- as promised in yesterday's post- we were hoping today, to highlight the positive angle via which the WGC viewed last year's slowdown in central bank gold disposals. In its Gold Demand Trends publication, the organization spoke of the supply of gold from the official sector as: all but [having] dried up during 2009. Net sales of 44 tonnes compared with sales of 236 tonnes the previous year and an annual average of 444 tonnes over the five years to 2008. The net sales were wholly concentrated in the first quarter of 2009, which was followed by three subsequent quarters of net purchasing, albeit at very modest levels. Sales of gold under the auspices of the Central Bank Gold Agreement (CBGA) were virtually non-existent during the fourth quarter, amounting to less than 2 tonnes.  
The shift in the central bank sector marks a fundamental change in sentiment. In recent years, investors were focusing on the future supply that may come on to the market from the official sector. However, the emergence of a number of purchases among the central bank community, as well as the clear reduction in supply from signatories to the Central Bank Gold Agreement, has greatly reduced such speculation.

Well, we are back to speculating. Evidently, so are the speculators. The risk that, for example, Italy might have to reach for some that gold in its basement at a time when the very Father of the Euro -Robert Mundell - fears that its current fiscal condition poses an existential threat to the common currency and to the  economic cooperation zone is manifest. All eyes may still be on Greece and its credit odyssey, but such eyes would do well not to ignore some of the other farm animals present in the 'pen.'

Happy Trading.

Jon Nadler
Senior Analyst
 Kitco Metals Inc.North America
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