Gold price hinges on exchange rate

Gold was surprisingly resilient on the Friday (Jan. 30) before pressday, with good support holding below US$400 per oz. and closing on its high at US$402.20.

However, we expect heightened volatility to continue, with gold being even more sensitive than normal to changes in the euro/U.S. dollar exchange rate. We see the exchange rate trading in a 1.2320-to-1.2525 range, bearing in mind the fact that in January each swift rise was followed, a few days later, by an equally swift decline. Only a recovery above 1.2530 would signal a test of trend-line resistance at 1.2690.

Several news events have competing bullish and bearish implications for the gold price. Overall, we believe the yellow metal will find increased fund support as a result of this recent deluge of news, notwithstanding that the direction of the euro-U.S. dollar exchange rate will remain the major determinant for most short-term speculators.

— Bundesbank President Ernst Welteke says the German central bank will place the proceeds from gold sales over the next five years into an interest-paying fund, allowing the government to spend the money yielded from the investment. The gold proceeds could be placed in a fund that would pay 5% interest annually, yielding between 200 million euros (US$248 million) and 250 million euros every year. The Bundesbank chief says the plan aims to preserve the value of the central bank’s gold, adding that he doesn’t know when a new agreement on gold sales will be reached but that it would be “appropriate” if such an accord were completed six months before the current pact (signed in 1999) expires in September.

The Bundesbank says it would like an option to sell 120 tonnes of gold per year under a new accord. A central bank spokesman says this decision had been flagged earlier but that it is now now official, and that Bundesbank will soon enter talks with Germany’s government about how to deal with gains made from the sales. Under the terms of the 1999 agreement, 15 European central banks agreed that annual gold sales would not exceed approximately 400 tonnes, with total sales over the 5-year period set at 2,000 tonnes.

— AngloGold (AU-N) posted a 6% fall in net profits for 2003, blaming lower gold production. The South African producer earned US$312 million (250.3 million euros), down from US$332 million in 2002, as annual gold output fell to 5.6 million oz. from 5.9 million oz. Although the average gold price received during the year rose nearly 20% to US$363 an ounce, the advantage was offset by total cash costs jumping 42% to US$229 per oz., due largely to the impact of rand and Australian dollar appreciation.

— Papua New Guinea-based Lihir Gold (LIHRY-Q) says unaudited gold production in the December 2003 quarter was 160,065 oz., pushing its production for the year to 550,772 oz., as forecast. The cash cost was US$273 per oz. in the last quarter and US$301 for the year.

— Japan’s finance minister, Sadakazu Tanigaki, was recently asked if Tokyo would be bringing its gold reserves more in line with other nations. He responded that his ministry will carefully consider whether to change the composition of its US$673.53 billion in foreign reserves, including the weighting of gold in that total. We do not believe that any imminent purchase of gold is likely.

— The Norwegian Central (Norges) Bank sold 16 tonnes from its gold reserves in January, receiving about 1.5 billion Norwegian crowns (US$219.2 million), which has been invested as part of Norges Bank’s foreign exchange reserves. Furthermore, Norway could sell its remaining gold bars at a later date, though it says it will keep seven gold bars and a large number of gold coins (which it hopes to show in a Museum exhibition!).

— The Indian government says it will allow jewelry exporters, domestic bullion traders and citizens to import gold and silver directly without going through intermediary agencies. We believe that this could result in a significant increase in bullion import demand as more domestic traders use the current arbitrage between letter-of-credit interest rates and forward U.S. dollar/Indian rupee rates.

— The opinions presented are the authors’ and do not necessarily represent those of the Barclays group. For access to all of Barclays’ economic, foreign-exchange and fixed-income research, go to the web site at barclayscapital.com.