Centennial Precious Metals, Inc: Serving Gold Coin & Bullion Investors Since 1973

4/4/05

A publication of USAGOLD-Centennial Precious Metals
Serving gold investors since 1973

"Joint intervention in gold sales that was needed to prevent a steep rise in the gold price, however, was not undertaken. That was a mistake. Through March the price of gold rose rapidly and that knocked the psychological props out from under the dollar."

Paul Volcker on the forex and currency markets in the early 1970s

European Central Bank gold sales further undermine euro credibility

No sooner had this Market Update featured a report on official-sector gold sales last week than the European Central Bank (ECB) announced a surprise: It had sold 47 tonnes of gold. The sales occurred between February 1 and March 11. The ECB also stated that its gold sales were now complete for the year.

In this era of supposed transparency in the official financial sector, one wonders why the primary central bank in Europe, the most powerful signatory in the European Central Bank Gold Agreement, would conduct a sale clandestinely, announcing it after the fact.

The bigger question is why the ECB felt compelled to sell gold at all.

Europe doesn't have a huge balance-of-payments problem as the United States does. It's not at war. Europe doesn't have a lack of currency reserves to tap for foreign payments. So why liquidate gold when the dollar is in severe trouble and gold is on the rise?

Forty-seven tonnes is a large amount to liquidate over so short a time (less than 45 days), and the sales no doubt damaged the gold price even though the intent of the Central Bank Gold Agreement is to prevent such stealth attacks on gold. In fact, the London Times linked the sales "to sharp drops and recoveries" in the gold price over the period.

To most observers the gold price seemed no worse for wear. Gold started February in the low $420s and reached its high for the period in the mid-$440s in March at about the time the ECB was winding up its gold sales. What might the gold price have done had the ECB kept its 47 tonnes in the vault? Would gold have gone through the important $450 figure? Or $460? Even $500 if it had gotten on a roll?

Not knowing what prompted the ECB to sell suddenly, we can only speculate as to what might have been going on behind the scenes. Was some bullion bank in trouble? Was there a severe shortage in the upper reaches of the gold market that had to be filled on a moment's notice? Just prior to the sales Germany had announced its refusal to sell more gold, Switzerland had concluded its sales, and France was supplying far less gold to the market than expected. Was the ECB moving to fill the breach?

Leaving aside the ECB's agenda, its gold sales are not without repercussions. They send the wrong message at the wrong time.

Europe and the euro are already reeling under significant alterations to the stability pact, which restricted budget deficits and created the impression that the ECB's member states were willing to make sacrifices for the economic stability of the union. Gold originally was added as a component of ECB reserves to give credibility to the new currency and substance to the claim that the euro would become a rival to the dollar.

By selling gold reserves, the ECB calls that commitment into question and fuels criticism that the euro and the ECB are no better than the dollar and the Federal Reserve. The other day an editorial in the Financial Times went so far as to say that "the euro does not have much to recommend it, other than not being the dollar."

Mysterious, ungrounded, and seemingly inexplicable and unnecessary gold sales are not likely to alter that assessment.

The Financial Times went on to say that problems with the dollar, yen, and euro present good reasons for selling all three currencies. The likely beneficiaries, in the newspaper's view? Gold and the Chinese renminbi.

Since we may have to wait years for China to revalue its currency, that leaves gold as the last solid repository for savings -- nothing new for the metal of kings and the king of metals.

An ABCs of Gold Investing UPDATE - Choosing a gold firm: With oil moving higher and stocks in trouble, we are receiving a steady stream of inquiries on buying gold. First-time buyers need to be careful in choosing a gold firm. In talking with a number of clients who are in contact with some of our competitors, we are hearing stories of aggressive telephone sales tactics and item pricing. Long ago, we decided to keep our staff small, our pricing competitive and our relationship with prospective clientele more laid back. You can contact us without worrying about being put on a call list. We are happy to answer questions and discuss your gold purchase in full, but we leave the ball in your court with respect to the follow-up. That might cost us a client now and then, but those who become clients do so in their own time and without being constantly bothered by one of our brokers. By this they become better clients who tend to stay with the firm for many years. (We have clients who started with us in the 1970s.) Most of our clientele are business and professional people fully capable of making up their own minds. They tend to gravitate to us because they find out we know what we are doing in the gold market and can apply that expertise to their gold portfolio. Contact us and discover the difference. And don't be like some who have caved in to the pressure and found out later that the great deal they thought they had wasn't so good after all. We have been a part of the gold business for over 30 years. We were just certified by the Better Business Bureau for over ten years of membership. Our volumes are large; our clientele well positioned based on their needs and goals. We look forward to working with you.

Short & Sweet. . . . . . . . . . . . . . The big story having a major impact on all financial markets this past week was the report by Goldman Sachs saying we are likely to see 1970s-style oil price spikes and that the price could hit $105. Oil traded at $58 on Friday . . . . . .Last week we had the refinery explosions in New York and Texas. As the market closed on Friday, reports began to filter in that a large refinery was shut down in Venezuela due to a power failure and would not be back up for a week. It is becoming increasingly clear that we are vulnerable in more ways than one when it comes to energy production, and refinery shutdowns could become a major issue in the United States as prices rise and oil and gasoline storage stocks are drawn down . . . . . As mentioned here last week, the Bush administration appointed Ben Bernanke to head the president's Council of Economic Advisers. Bernanke is best known for his comments some years ago that the Fed would run the printing presses at full speed to ward off deflation. Some think he's next in line for chairman of the Federal Reserve . . . . . . . . . . "There's always a 'major concern' during the step back part [in gold market action]", says market commentator Peter Grandich, "and this time is no different. The latest hiccup is the belief that the terminally ill U.S. dollar has had a 'miracle' healing and has begun a long rise back to stardom. Now, I can give you a laundry list of reasons why such a belief is fantasy, not reality, but I will just rest my case on the words of Lyman Beecher who said, 'Never chase a lie. Let it alone, and it will run itself to death.'" . . . . . . . . . . . . The King Report: "Last week, the US Commerce Dept reported that sales of new homes surged 9.4% in February, a four-year high.  The bulk of the sales gain came from a 20.3% boom in the northeast. The price of new homes exploded 9.6%!  If the BLS and US government desired that the CPI reflected real inflation, home prices, instead of 'owners' equivalent rent' would be included in the CPI calculation.  The Feb CPI has 'owner's equivalent rent' up only 0.2%!  If actual home prices are substituted, the Feb would be a staggering 2.17% higher than reported last week!  Owners' equivalent rent, or imputed rent, is 23.158% of total CPI.  ([9.6% - .2%] X 23.158% = 2.17%)" . . . . . . . . "You're not going to see any substantial [gold] production increase until 2008 or 2009," says Pierre Lassonde, president of Newmont Mining. "Gold prices are going to continue to go up.". . . . . . . .China reiterated its position on the yuan on Friday. A Bank of China official responded by renewed pressure to revalue from the International Monetary Fund by saying "We have no interest in seeing the yuan strengthen." . . . . . . . . . . . . . . Blanchard and Barrick/J.P. Morgan failed to settle their lawsuit last week and the case is now scheduled to go to court in July. Blanchard says Barrick and J.P. Morgan are guilty of anti-trust violations designed to hold down the price of gold. A Reuters article says, "Blanchard wants the court to force Barrick and J.P. Morgan, as well as other bullion banks, to stop borrowing gold from central banks and selling it into the market -- a practice the dealer says depresses the price and has hurt other investors." . . . . . . . . The International Herald Tribune's Floyd Norris, a long-time observer of the economy and markets, thinks that Japan, China and other Asian dollar holders amount to a dollar cartel that buys the greenback to keep their currencies from rising. He thinks that pressures might be building on those dollar holders though that may break the cartel. "[T]hose central banks can be seen as a cartel trying to keep the dollar high, and in that light they might face the same risk that all cartels eventually face: cheating members. In this case, it is clearly to the advantage of the cartel to keep the dollar high. But each individual member might like to sell some of his dollar holdings without affecting the overall market. A recent spate of talk of diversification by central banks - meaning that they would buy more gold or euros or yen or pounds, rather than just dollars - could be a signal that members of the dollar cartel are at least starting to think about cheating. And, [Bridgewater Associates' Greg] Jensen argues, 'once a few of them start to cheat, it puts more pressure on the others.'" . . . . . . . . . AngloGoldAshanti said any gold sales by the IMF would be "perverse." "Such a scheme," they say, "was previously proposed in 1999; then it seemed to us perverse that an international body such as the IMF should act in a way that would negatively affect gold markets in order to reduce the debt burden of certain developing countries, many of which are significant gold producers." . . . . . . . . . . . . In Iraq, the best we can hope for is a quick stabilization and a return home of American troops. That does not appear to be likely anytime soon. Over the weekend a highly organized attack on the now infamous Abu Ghraib prison injured 44 U.S. soldiers. Associated Press reports that the Iraqi parliament "has struggled to form a new government. Last a session to choose a Parliament speaker "disintegrated in shouts and accusations." It could not be determined whether or not the attack - turned back by American forces - was designed to free inmates . . . . . . . . . . . . . . . . MK's Believe It or Not: The New York Times reports that there is a shortage of labor in China and that some company's are looking to relocate in other countries where labor is cheaper. MK

Client Bulletin Board . . . . . . . Many thanks to all of you who have called in to express your appreciation for the USAGOLD website. One caller last week told us while placing an order that he'd been with us from the first day of operation in 1997. It's been nearly eight years already. . . . . . . . . . . If you are thinking about a Gold IRA contact George Cooper, Extension #106. We do rollovers. . . . . . . . . . . . Those of you looking for an item with a better risk-reward ratio than gold itself might want to take a look at the $20 Liberty MS 64 grade. Jonathan Kosares, Extension #110, has some interesting information, graphs, etc. on the potential. It looks like a good buy and our price is attractive . . . . . . . . . . . .Last week, we sold out of a Special Offer of (500) 1930 Uruguay 5 peso gold coins in less than 24-hours. And we had to turn back a few buyers. Be on the look out for future offers . . . . . . . . . . . . . . . Received word recently that Borders and Barnes and Noble put in notable orders for "The ABCs of Gold Investing: How to Protect and Build Your Wealth with Gold". The book is selling very well . . . . . . . . . . . . . . The most requested item in our Gold Classics series is "The Nightmare German Inflation" and with what's going in the United States today it's not hard to guess why. We still have some hard copies available. Contact Jill at extension #104 if you would like to receive a copy. . . . . . .If you have an investment club meeting coming up and would like to pass out signed copies of "The ABCs of Gold Investing," please let Jill Snyder know at Extension #104. We will price the books at our cost and pick up the shipping.

The Coming Gold and Silver Confiscation
This is a subject of rather heated debate between precious metals investors. Will the government seize gold and silver? Will they outlaw the possession of them in various forms? The reason it raises the hackles is because some see it as a marketing ploy to persuade investors to buy numismatic coins of high value. After all, why pay $100 for a coin with $5 silver content? I agree that makes no sense at all from a silver or gold investment point of view. One is buying rarity not metal which may be a good idea, but it has nothing to do with precious metals investing. Nevertheless, New Era Investor holds to the view that such an event will happen in the years ahead as monetary crisis eventually envelopes the fiat system of world central banking.

New Era Investor

Editor's Note: The main premise of the monograph "How You Can Survive a Potential Gold Confiscation" published by USAGOLD-Centennial Precious Metals is that those concerned with the possibility of another gold call-in can hedge with pre-1933 European gold coins which sell at low premiums to the gold price. You do not have to buy high-priced numismatic coins to gain the same protection. The reasons why are much too lengthy to publish here.

We invite you to request a free copy of the monograph by contacting us: 1-800-869-5115 Ext. #106
admin@usagold.com

Asia "will retaliate" over Wolfowitz appointment
Pimco's highly influential fund manager, Mohamed El Erian, says there will be a backlash to the appointment of Paul Wolfowitz as head of the World Bank. Some primary buyers of U.S. Treasuries, particularly in Asia, may decide to discontinue buying. "China," he says, "will be particularly annoyed."

Full article/The Daily Telegraph

Oil prices spread to grapes, TVs, pizza
Christie Baker, owner of Flowers on the Green, recently had to hike the cost of a delivery in Guilford, Conn., from $6 to $8 to make up for the higher cost of gas. In La Jolla, Calif., Domino's just increased the amount it pays delivery drivers by a nickel a trip: They now get 95 cents to transport a large pepperoni, but it's still not enough to cover the cost, says assistant manager Donald Cunningham. And at Meyers Moving & Storage in New York City, they're now charging $15 more an hour to move from an apartment on the East Side to the West. Owner Guy Drori says the rates may go up again come summer. The hike in oil prices is beginning to ripple through the economy, pinching consumers at places far beyond the gas pump.

Full article/The Christian Science Monitor

GoldmanSachs predicts rocketing oil price
Think gasoline and heating oil are expensive now? Get this: Analysts at Goldman Sachs said yesterday that there was a good chance crude oil would nearly double in price in the next two years, topping $100 a barrel. "The strength in oil demand and economic growth, especially in the United States and China ... has surprised us," the six Goldman analysts wrote in a research report. What they called a "super spike" period is beginning, they said, which could drive oil prices toward $105 a barrel in 2007.

Full Article/Newsday

Gold's annualized returns:

2002: +14.4%
2003: +17.3%
2004: +12.6%
2005: +3.0% (through 3/18/05)

2002-2004 based on average annual prices.