Gold Up, Oil Up, But Copper Down

Gold markets now have more certainty about the path of official gold sales for the next few years after the International Monetary Fund confirmed its sales approach late last week. This was after the major central banks of Europe promised not to disrupt the market when they sell gold in a statement issued early last month. Now the International Monetary Fund has approved the sale of a limited amount of its gold to help provide loans to poor countries and shore up its finances. This is part of a refinancing plan for the Fund. The Fund's executive board decided on Friday to sell 403.3 tonnes in a way that does not disrupt the sale of gold in commodity markets. That's about one eighth of the Fund's gold holdings. The head of the IMF, Dominique Strauss-Kahn said it would enable the fund to step up lending to poor countries and put the Fund's finances on a sound, long-term footing. "Earlier this year, the IMF agreed to mobilize $17 billion through 2014 for lending to low-income countries, mostly in Africa, that have been hard-hit by the global crisis. "A financing package, which includes resources linked to these gold sales, has been agreed to generate the additional new subsidy resources of SDR 1.5 billion needed to help cover the cost of concessional interest rates on increased concessional lending by the Fund," the IMF said. The IMF says it is ready to sell the gold to its member nations if any are interested or on the open market in phases over a period of time. "Transparency will play a key role in the gold sales, with the IMF set to inform markets before any sales on the gold markets begin. "Prior to any sales on the market, the IMF would be prepared to sell gold directly to central banks or other official sector holders if they expressed interest. "These sales to official sector holders would be conducted at market prices, and would shift official gold holdings without changing total official holdings," The IMF said in Friday's statement. This was after the announcement in early August of a renewal of the agreement between a group of major central banks, including the European Central Bank (ECB). The third Central Bank Gold Agreement covers a five-year period, in this case from September 27, 2009 (this week) to September 26, 2014. The announcement said that the agreement will be reviewed after five years. There were two important changes. First, the collective ceiling was reduced so that "annual sales will not exceed 400 tonnes and total sales over this period will not exceed 2,000 tonnes", 500 tonnes lower than the 2,500 tonnes five-year ceiling provided for in the second agreement. But because signatories to CBGA2 had significantly undersold the permitted annual ceiling in the final two years of the agreement, the new lower ceiling did not come as a surprise to market participants and has had no impact on the gold price. Second, the agreement stated that in recognition of the fact that the IMF intended to sell 403 tonnes of gold, these sales "can be accommodated within the above ceiling". In the event that the IMF is unable to arrange an off-market sale with another official sector institution, the sales will be conducted through the new CBGA3. This third agreement covered the 15 original signatories to CBGA2 (the European Central Bank and the national banks of Belgium, Germany, Ireland, Greece, Spain, France, Italy, Luxembourg, The Netherlands, Austria, Portugal, Finland, Sweden and Switzerland), together with the national banks of Slovenia, Cyprus, Malta and Slovakia, which all joined CBGA2 on (or in Slovenia's case) just prior to adopting the euro. With less gold to come onto the market through official sales in the next five years (and in a less disruptive way), and the rapid drop in hedging sales from producers, production and scrappage will become the most important variable supplies. It's actually good news because it introduces a note of certainty into an important part of the market for the next five years. Friday saw Comex December gold end a volatile session with a small loss as the US dollar rose a touch. December gold finished down $US3.20, or 0.3%, at $US1, 010.30 an ounce. It traded as high as $US1, 019.50. December gold hit an 18-month high at $US1, 025.80 an ounce on Thursday. The record intraday price for a front-month gold contract was $US1, 033.90 an ounce, set on March 17, last year. That left the metal with a tiny gain of 0.4% for the week. Gold open interest (or contracts to buy or sell gold that have not been closed) rose another 3,764 contracts to 478,172 on the Comex. That suggests the bulls see more upwards pressure. December silver lost 19 cents, or 1.1%, to end at $US17.07 an ounce. Comex Copper for December delivery fell 11 cents, or 3.8%, to $US2.7850 a pound as stocks rose for a 16th day. That was the biggest fall in New York this month. The London Metal Exchange reported that stocks not only rose for a 16th straight session to 327,700 tonnes, but that was also the highest they have been since May 22. In China, stocks overseen by the Shanghai Futures Exchange rose 7% last week to a five-year high. The rise in the value of the greenback also hit copper on the way down. Stocks are now doing what they have done for the last couple of years, begin rising in the closing months of a calendar year as Chinese buying slackens off. The question now will be: will China resume buying later in the year, or in the first quarter of 2010 (as it did in early 2008 and 2009) as prices fall to levels that allow the state buying group to start replenishing government stocks? Chinese copper imports fell 20% in August to be down for a second straight month. And, will that weakness show up in aluminium, zinc and tin. Lead probably won't see much in the way of a significant weakening because of the poisoning problems around several big smelters in China which has cut tonnage from reaching the market. Copper prices ended the week down 2.2%, the third week in a row there's been a fall. The down trend followed a seven-week rally. On the LME, copper for delivery in three months fell $US210, or 3.3%, to $US6, 175 a tonne ($US2.80 a pound). The heavy buying from China in the first 7 months of the years saw copper prices double: we could now see them fall sharply, despite claims that the economic recovery in the US and other economies can make up for the lower demand from China. Fat chance: China's imports dominate world demand like no other economy's. Aluminium, zinc, nickel, tin and lead also fell on the LME; is the trend on for base metals? The improved strength of the dollar hit oil prices on Friday. Nymex October delivery crude fell 43 cents, or 0.6%, to settle at $US72.04 a barrel in New York. That left it with a gain of nearly $US3 a barrel over the week. Prices are still up 62% so far this year. After having closed slightly above $US69 a barrel a week ago, the New York crude peaked at $US72.51 on Wednesday. In London, Brent North Sea crude for November delivery dropped 23 cents to end at $US71.32. Sugar prices had another sharp fall on Friday (after finishing weak the week before). But it was still up 1.7% over the week, after a 5.8% rise the week before. Lower demand from Indian buyers was blamed for the fall on Friday. New York March raw-sugar futures fell 0.69 cents, or 2.9%, to 23.24 US cents a pound on Friday. Futures prices have almost doubled this year as poor weather limited harvests in Brazil and India, the largest cane growers. India however is seeing growers switch out of sugar to rice, which is not as strictly controlled, while more land is being taken up for urban use. That has left production lower than demand for a second year in a row.