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Welcome to The Week in Gold! Through the courtesy of the World Gold Council, USAGOLD is pleased to offer these portions of the Weekly Gold Market Commentary, assembled from their staff's observations of the significant events that shaped each week's gold market.

WEEKLY GOLD MARKET COMMENTARY

3 November, 2003 The World Gold Council has suspended its daily and weekly gold market summaries with immediate effect. This action is a direct result of the continuing re-focus of the WGC as a commercially driven marketing organisation. The WGC will no longer disseminate news and information relating to the gold market in this format, as this information is readily available through other sources. We will retain our market expertise to focus on those initiatives which directly drive demand for gold in all its forms, and will continue to update relevant information on the gold market on our website, www.gold.org World Gold Council

Meanwhile the Diwali holiday (Festival of Lights, celebrating the triumph of light over dark, representing good over evil) took place last Thursday-Saturday (to be followed immediately by Ramadan). Last Thursday, the first day of the Festival, was the most auspicious day of the year for gold purchases. While the market for new gold has not picked up dramatically (there is a lot of scrap circulating in the region and also domestically in India), activity, was, nonetheless, busy in the souks.

Market factors
Equity weakness towards the end of last week was prompted largely by disappointing corporate results in the US, although the spillover to Asia on Thursday was vicious, with the Nikkei dropping by almost 5%. It was argued that this is a continuation of recent profit taking, given that the market was up by 40% since its lows in the spring this year. The Dow fell on Friday for its fourth consecutive day, although the close was reasonably constructive. A spate of merger (or merger proposal) announcements this morning are adding some further buoyancy after Asia and Europe produced good performance over the weekend and this morning.

Background news
The People's Bank of China's quarterly report, released today, echoes the comment made by President Hu to President Bush ten days ago, and by the central bank governor earlier today, in that it underlines the government's belief that stable yuan is important for the economic stability of the Asia region and for the rest of the world. The report did imply that the government will continue to study the liberalisation of controls over the currency. China's GDP growth in the first nine months of this year was an annualised 8.5%, while broad money supply is expected to overshoot the 16% target this year and reach 20%, a factor that is raising fears in some quarters of economic overheating.

The latest CFTC figures demonstrate increased speculative gold buying on COMEX in the week to October 21st, a period during which the price had swept down to $366/ounce before find good buying interest. Although there has been a noticeable increase in outstanding positions, they are still smaller than they were two weeks previously, just before the market's big washout. "As one dealer put it recently- they got out -- now they're coming back".

The more speculative money is by no means averse to taking profits and when the market was faced with what more than one bank described as a "wall" of trade selling towards the end of last week, there were plenty of short term operators who were more than happy to lock in their gains. This also generated some stale bull liquidation and would also have elected some stops, as the retreat on Thursday and Friday was rapid. It is worth noting also that lease rates are tightening up across the board, which may reflect opportunistic selling into strength.

To this end, the market has had some of the froth blown off it and now needs to pause for breath. The physical consumer in the price-sensitive buying regions (which account for more than 50% of offtake) has once again retreated and awaits a degree of price stability and the price has now fallen away to sit on the support offered by the 20-day moving average at just below $380/ounce. It should also be noted that while there are fundamental reasons to attract the longer-term investor into the gold market, currencies certainly had their say last week; in dollar and yen terms gold gained 3% (Friday p.m. fix ­ to-Friday pm fix), while in euro and Swiss franc terms the gain was only 1% each. Although the statement from the Swiss National Bank (see below) about its sales programme was merely an iteration of the status quo, the spot price did dip as some of the loose-handed holders in the market saw this as a signal to bail out and the market slipped towards $382/ounce. This was all in the London morning, but we then moved through under further liquidation in the US to test support offered by the 20-day moving average at $379/ounce.

Market factors
OPEC took the markets by complete surprise. The OPEC cut amounts to 3.7% of output and is effective on the 1st November. Some analysts are again bullish on the price, citing the forceful psychology of the cut and the fact that current inventories are below the norm for this time of year, and also querying whether Iraq will be up to more than two million barrels per day by early next year. The country is currently lifting only one million barrels daily.

The dollar has come off its three-year low of below ¥111 (and veering close to $1.15 to the euro), and is now broadly stable against those two currencies. Treasuries remain defensive on fears that Asian central banks might put the brakes on their inward investment into the US as the dollar comes under pressure, a course of action that could effectively become a vicious circle for a time. In Dubai, US Treasury Secretary John Snow said that US economic growth is sustainable, but also that the government is committed to halving the budget deficit over the next five years.

Background news
The story in the press last week that the Swiss National Bank is to sell another 284 tonnes of gold from excess reserves by the end of September 2004 and another 130 tonnes in the year after that is merely an iteration of the bank's existing schedule for the disposal of 1,300t of gold over a five-year period and reflects no change in policy.

The European Central Bank has reported in its weekly statement that in the week to 19th September there was a disposal of 0.8t from a member bank, under the auspices of the Central Bank Gold Agreement.

The China Daily newspaper reports that in a recent national survey, roughly 20% of respondents said they would consider putting between 20% and 30% of their savings in gold. Any plethora of tunes can be played with numbers and this should not be read on a simple straight-line extrapolation, especially as the paper did not give details as to the distribution of the respondents and where the positive respondents live. Even so it is probably worth pointing out that individual bank savings in China were $1.28 trillion at the end of July. Two per cent of this equates to $25,600M.

The buying interest has again been largely from the professionals, both speculators and longer-term investors combined, but it was also noted at the start of last week that physical buyers had reappeared and were providing support for the market in the low $370s, suggesting that they were becoming accustomed to the higher range. Early on in the week, there were attempts to pressure the market through support points, but the physical interest and some investment-oriented bargain hunters prevented this, and the subsequent turn in trend may have extended the size and/or speed of the upward move, as shorts were covered in. Having rallied this far, the market is now facing sizeable selling orders at and above the highs, which coincide with the highs for the year-to date, registered in February, at $388-389/ounce.

The governor of the Dutch central bank, Nout Wellink, said over the week-end on the borders of the IMF meeting, "We had a brief discussion on gold ...We will come back to this issue at the beginning of next year ... Don't expect a fundamental change in the approach of the central banks... We will be transparent again, there will be no fundamental break in our approach".

Market opinion had been divided on the approach to the meeting about whether there would be a fully-fledged statement and a number of observers had suggested that this September was too soon for a firm deal to be reached, given that the current Agreement does not expire until next September. The comments that were made, therefore, were taken positively and were then compounded by the statement from the G-7 financial summit that made a strong call for more flexible exchange rates and this put pressure on the dollar. Gold ran up towards $388/ounce in Asian hours this Monday 22nd as the dollar slumped, before opening in London at just above $385/ounce.

Market factors
The key market factor was the G-7 meeting, certainly in terms of the degree of impact on sentiment. The G-7 communiqué did not mention any specific currencies, but market observers are suggesting that the aim is to weaken the dollar and that the governments of China and Japan were the implicit targets following the Japanese Government's intervention against the yen and the international debate about China's link to the dollar. The immediate reaction in the currency markets was for hefty pressure on the dollar, with the dollar:yen rate leaping to ¥111.37, the highest since December 2000, a gain of almost 2.5% on late Friday trade in the region of ¥114.

The communiqué said that exchange rates should reflect economic fundamentals and that "In this context, we emphasise that more flexibility in exchange rates is desirable for major countries or economic areas to promote smooth and widespread adjustments in the international financial systems, based on market mechanisms".

During the week the US produced a mixed bag of economic results, which once again generated the appropriate mix of views about the degree and sustainability of the US recovery. On balance, however, sentiment improved, and this was underpinned by the IMF's raising of its forecasts for the outlook for the US ­ despite a sheaf of caveats accompanying the forecasts.

The IMF to some extent set the scene for G-7, as it suggested that the dollar is overvalued and that the twin deficits are going to have to be addressed (see below).

The International Monetary Fund is now projecting a 2.6% growth rate this year and 3.9% for 2004. Previous forecasts were 2.2% and 3.6% respectively. The revision stems in large part from fiscal and monetary stimulus along with improvements in local sentiment. There are however some words of caution over the likely slowdown in the housing boom, and the slack in the economy that may give rise to a constraint on investment. A further risk is the fact that the dollar is still overvalued for the medium-term and that a correction in the U.S. current account could combine with a disorderly fall in the dollar's value. The current account deficit in the first half of the year was $277.4 Bn, or approaching 5% (annualised) of GDP, and is funded largely by sales of government and corporate paper. The budget deficit is projected for next year at a minimum of $525Bn, or 4.7% of GDP.

Background news
The Swiss bank Lombard Odier Darier Hentsch launched its "World Gold Expertise Fund" on August 7th, 6-1/2 weeks ago and has said that the fund has already attracted over US$150M. The fund invests in four different managers who all focus on gold equities. The bank also recommends that investors, who should be seeking diversification in their portfolios, should be putting at least 5% of their investment into gold as a long-term hedge against risk.

Those commentators that have been warning about the speculative length in the market have been able to point to some profit taking and latterly stale bull liquidation, especially as the retreat on Friday was set against a sliding dollar and uncertain equities. We started this week (September 15th) with prices testing the $375/ounce and looking nervous.

The underlying tone is a blend of a number of different features. Views are mixed about the recent performance of the equity markets, with some commentators pointing to a string of good economic numbers in the US and Japan (despite last Friday's US data, see below) and suggesting that the economic recovery will be vibrant, while others are concerned that the equities are already discounting too strong an improvement. The spectre of the twin deficits continues to cast its shadow over the dollar, and this contrasts with concerns over the European Union and its poor economic performance, exacerbated by strains in the system, notably among countries that are running deficits in excess of the guidelines laid down by the Stability Pact.

The market is still cognisant of the speculative "overhang", and of the fact that the physical market is still adjusting to higher price ranges, while also aware that bargain hunting is appearing on dips.

In short, gold is consolidating under a range of conflicting influences, and while short term traders are taking profits, longer term interests remain friendly.

Market factors
The Swedish stock market gained more than one percent this (Monday) morning following the 56% "No" vote in the referendum over joining the single currency. European officials have, so far, maintained a broadly lowkey response to the vote.

The fixed-income market was volatile in the US last week as the market gets to grips with the idea that it will be some months before the FOMC considers raising rates, with March futures suggesting very little chance of a cut by then and some observers suggesting that it could be no earlier than June before rates start to rise. At the longer end, a ten-year note was trading this morning at 4.28% ahead of an auction this week of $13Bn in 10-year notes (and also of $16Bn in five-year notes).

Background news
The new free trade pact (or Closer Economic Partnership Arrangement) that has been signed recently by China and Hong Kong is expected to raise Hong Kong's imports of gold jewellery from elsewhere as part of its entre-pôt role with China. The general manager of the Hong Kong Jewellers' Association expects the pact, which becomes effective in January 2004, to allow for an increase of up to 2-3% in Hong Kong jewellery imports, although the growth is likely to take time. Under the CEPA, most Hong Kong-manufactured goods will have to have a minimum of only 25% of domestic content in order to quality for zero import tariffs. The Jewellers' Association has submitted a request to China's Ministry of Commerce, applying for the cancellation of import licences for gold jewellery that carries a certificate of origin. At the moment only a limited number of companies are allowed to import jewellery to China and a lot of Hong Kong jewellers manufacture their goods on the mainland under toll agreements.

The Xinhua News Agency is reporting that Chinese gold mine production in the first six months of this year was 72.46t, up by five tonnes on the equivalent period of last year.

The latest clearing figures from the London Bullion Market Association (LBMA) show that August clearing transfers in gold were up marginally from the July levels. The daily average transfer was up 5% from 13.0M ounces to 14.3M ounces, with value rising to a daily average of $5.1Bn. [Randy's Note: It might be useful to contrast the daily average this month of 14 million ounces transferred with the daily averages seen six years ago -- over 40 million ounces.]

Risk management remains an important feature of the market's recent moves in price, but, particularly given that the equity markets were solid last week, trading patterns also clearly suggest that as well as investment activity driven by concern over external market forces, there is some sizeable technically-driven buying and very possibly defensive (or covering) orders being executed. After a steady start to the week, in the same $360-365/ounce range that had prevailed for the previous couple of weeks, Wednesday's strong close in New York, which was consolidated on Thursday, certainly helped matters on Friday, as did renewed weakness in the US dollar and further nervousness in the bond market.

The physical market, as is its wont in these conditions, has withered somewhat and Wednesday's move was prompted by professional activity, set against a backdrop of thin trading conditions, which drove prices higher just (i.e. about an hour) in advance of the options expiry on Wednesday. The move took out resistance at $365/ounce then triggered stops and prices ran to $374/ounce before correcting. The body of support that had built between $360 and $365 gave the market some confidence and the $370/ounce level has not been tested since.

By the start of this week $380 was under attack in Asia as the dollar remained under pressure, but buying momentum fell away at these levels and some trade selling and profit taking did bring prices down towards $375/ounce once more.

The UK was closed last Monday for a bank holiday and the US markets are closed today (Monday September 1st) for Labor Day. The week bounded by these two holidays is usually seen in the financial markets as the last week of summer and volumes, all other things being equal, are expected to start to build up again as of tomorrow.

Market factors
The US equity markets are generally buoyant, although market views are torn between whether rising interest rates are threatening to undermine stock valuations, and whether the weight of money that has recently gone out of bonds will yet find its way into equities or back into other sectors. Over the week, the Dow was up by 0.7%, its fifth consecutive weekly gain. The bond market remains nervous, with a benchmark ten-year Treasury note yielding 4.47% at the close on Friday, and treasury futures are pricing in another 25 basis point cut in fed funds during the first quarter of next year. The dollar is still under pressure, especially following the announcement from the Japanese Ministry of Finance that it had not intervened in the currency markets last month.

US Treasury Secretary John Snow is in Asia this week, starting in Tokyo, and it is thought that he will call on the Japanese authorities to curb their intervention against the yen, despite the MoF report that there was none in August. The Japanese spent approximately nine trillion yen in foreign exchange intervention between January and July.

Background news
The Chief Executive of the National Commodity and Derivatives Exchange in India (NCDEX) has said that the exchange will be operational by October 7th. The exchange is in the process of enrolling an initial 200 commodity traders and trading will take place in 40 centres across India. Meanwhile the Managing Director of the National Multi- Commodity Exchange of India (NMCE) has said that the Indian Forward Markets Commission is currently considering the Exchange's proposal for gold and silver futures contracts. The plans are to launch three-month contracts in 100g of gold and 30kg of silver with price quotes for 10g and one kg respectively.

The Business Standard newspaper of India is reporting that Benchmark Mutual Fund in India is looking to launch an open-ended fund to be listed on the National Stock Exchange of India Ltd, and quite possibly on others. The fund has yet to be approved by the regulators. Each unit will have a face value of Rp 100 (currently equivalent to $2.18, which would buy 0.2g of gold) or the equivalent of one gramme of gold (currently approx Rp 500), and will be issued at a premium equivalent to the difference between the allotment price and the face value.

The latest Commitment of Traders Report from the Commodity Futures Trading Commission (week to 26th August) shows that large-scale speculators added over 40 tonnes to their gross long positions, while there was also some short covering as some traders took a view on the price (which at that point was $360/ounce). In the smaller scale sector there were additions to both long and short side positions. The combined net position among COMEX speculators now stands at 426 tonnes long, equivalent to five weeks' fabrication demand (basis 2002 offtake figures from GFMS).

The latest figures from the Swiss National Bank suggest that in the nine-day reporting period to August 29th, the Bank sold just over six tonnes of gold as part of its disposal programme. These disposals fall under the auspices of the Central Bank Gold Agreement and are taking place over a period of five years. Swiss sales to date amount to just under 862t from a proposed total of 1,300t.

Most rallies in the market were politically driven, although last Monday (18th) investors may also have marked the bloated federal budget deficit number released by the Treasury. The price responded early in the week to the suicide bombing in Baghdad and the bomb in Jerusalem, at the start of this week (London was closed on Monday for a public holiday) the markets had to contend with the bombing in Mumbai.

The gold market absorbed 20 tonnes of sales from a European Central Bank last week in remarkably sanguine manner given the time of year, although the lease rates did tighten fractionally (the market was reporting "sizeable selling interest" towards the highs in the middle of last week). The reaction in the spot price subsequent to the announcement (this Tuesday August 26th) was for a quick dip to $359/ounce from $361 before regaining composure. Following the CFTC figures at the end of last week, some dealers remain concerned about the speculative length in the market, pointing to the fact that the speculative net long position is now at a record high of 279.9 tonnes (see below).

Market factors
The US federal budget deficit for July was $54.2Bn, compared with $29.2Bn in June. The market had been expecting $42.0Bn. The cumulative federal deficit for the fiscal year to date (ends September 30th) is $324Bn, against $146Bn for the equivalent period last year. The yield curve eased marginally over the course of the week.

Background news
The latest Commitment of Traders report from the Commodity Futures trading Commission for the week to August 19th, during which time gold had oscillated between $356 and $362/ounce but ended broadly unchanged around $360, shows the following results. The gross long position among the large-scale speculators surged, while the smaller­scale operators were more circumspect. The net long position (up 100t in a fortnight) is attracting widespread market comment and imbuing an air of caution.

Note that "large-scale speculators" are those with open positions of 200 contracts or more at any one time (in any contract month), so small-scale speculators are, by definition, smaller. "Commercials" would tend to be commercial users of gold that hedge their positions on the Exchange, i.e. jewellers, manufacturers of electronic components, etc.

As a result of its first marketing exercise, The Multi-Commodity Exchange (MCX) in India has received 300 applications for membership from 90 different towns or cities in India. The exchange has so far approved 110 members from 40 cities. Gold and silver will be among the first contracts to be listed.

The latest figures from the Swiss National Bank imply that gold disposals in the ten days to 20th August amounted to 8.8t, bringing the cumulative total under the disposal programme to almost 856t. The government is selling 1,300t over a period of five years in a programme that falls under the auspices of the Central Bank Gold Agreement.

The Swiss Government is again addressing the issue of what to do with the funds raised from its gold disposals. The government is selling 1,300 tonnes over a period of five years, under the auspices of the Central Bank Gold Agreement. The latest proposal is to put the proceeds of the sales into a fund, and then distribute the interest thereon, one-third to the government and two-thirds to the Cantonal authorities. Swiss voters last year projected two proposals; one was for the money to go into a humanitarian scheme and the other for the funds to go into the State pension scheme. This latest proposal also needs to be put to the electorate. Among Swiss politicians, the centre-right Christian Democrat and Radical parties are in favour, while the right-wing Swiss People's Party and the centre-left Social Democrats are against.

The International Council on Mining and Metals (ICMM) has reported that fifteen of the world's major mining and refining companies have signed an agreement not to explore nor mine at sites that carry United Nations World Heritage site status ­ of which there are 754. Among the gold miners that have signed the agreement are AngloGold, Newmont, Placer Dome and Freeport and Rio Tinto.

GFMS reports in its quarterly hedging survey that the global hedge book declined in the second quarter by 5.2M ounces (161.7t), resulting from reductions in both options and forward exposure. The decline in options was especially noticeable among North American companies.

International Assets Holdings Corp., a NASDAQ quoted financial services firm, is to commence trading in precious metals, offering spot forward and Over the Counter options products to small and medium-size producers, consumers and recyclers of gold, silver and platinum.

Prices rallied at the start of the week towards $362/ounce ahead of the FOMC statement, but this met little follow-through in Asia as the Nikkei was showing independent strength. After steadying around $360/ounce, the market slipped on Wednesday towards $356/ounce (again, this was in Asian hours) as investors digested the FOMC statement. At this stage, however, gold met good buying as the financial markets started to react nervously to good economic numbers and the bond market weakened again. Heightened political tension also played its role, as US and other western countries were warned of potential attacks on airliners in Saudi Arabia.

The overall tone remains constructive as, although economic figures are prima facie improving in the US, there is still a degree of scepticism about the robustness of the economy and investors are factoring a degree of risk into their outlook. The level of speculative participation in gold on COMEX bears witness to this. On the other hand, investors are also looking at a range of industrial commodities in anticipation of an economic turn around. The markets remain thin and were particularly choppy towards the end of last week after parts of the US and Canada suffered their power outage on Thursday.

In a press interview the IMF's chief economist, Kenneth Rogoff, has said that there is a case for China to loosen its close ties to the US dollar, but as the Chinese economy is still in transition (from controlled to open) the actual direction in which the renminbi might move is unclear. He said that China's entry to the World Trade Organisation "would tend towards driving down the yuan", while local strong productivity and growth would tend to drive it up.

Background news
The Managing Director of the Royal Mint of Malaysia has said that the Mint is raising its output of gold dinars in response to good local and overseas demand. This month it expects to produce 4,000 pieces, and next month's output of 8,000 pieces is already fully booked. The dinar is being launched for private sale this month and is available to the public in two weights; the dinar and the quarter dinar. Half-dinar, two dinar and four dinar coins will be made available in time. A one-dinar coin is of 22-carat purity, with a fine gold content of 4.22g in accordance with Islamic law. These dinars deliberately resemble those minted during the reign of Caliph Umar-Al-Khattab. He ruled from 634 to 644 A.D. and was the first Muslim leader to have coins struck.

The Dubai Metals and Commodities Centre (DMCC) expects that its first gold refinery should be on stream within the next six months. This is the Al Ghurair Giga Gold (GGG) refinery, with an annual capacity of 100 tonnes of gold. The refinery is being built in conjunction with Mintek of South Africa and expects at the outset to take 99.5%-pure metal from South Africa and upgrade to 99.99% (or "four nines") purity. ARY Gold is relocating its 100tpa refinery (currently in Sharjah) to the DMCC, as is Emirates gold in Dubai. The combined capacity of these three is 300tpa at present although there are proposals to raise this to 500tpa.

The Managing Director of MCX, the Multi-Commodity Exchange in India, said yesterday that the Exchange is in the process of appointing trading members and is "set to launch futures trading from the first week of October". Gold and silver will be among the first contracts to be listed. The exchange has signed agreements with two local banks for money clearing processes. Trading members will communicate through a satellite-based communication system.

Meanwhile the Reserve Bank of India is looking at ways of allowing banks to hedge gold price risk via commodity exchanges. As outlined in our recent note on Indian deregulation there are now four national level-multi commodity exchanges in India and trading in gold is expected to start within the next few months. There are independent proposals to allow banks to offer gold-backed schemes to their clients, whereby the client would deposit funds and receive gold at the maturity of the deposit period (not unlike Gold Accumulation Plans); some banks are believed to be in discussion with the RBI with a view to hedging the gold-related price risk through commodity exchanges and it is hoped that clearance may be received by December.

The London Bullion Market Association (LBMA) has reported a fall of 14% in the volume of gold transferred during July, to a daily average of 13.6M ounces. This is a new low, reflecting to some extent the reduction in outstanding hedges on miners' books and associated derivative activity.

Gold accordingly had a positive week last week, with the upward move gaining momentum over the course of the week as doubts grew about the robustness of the US economic recovery. The CFTC report on Friday that there had been reasonably substantial long liquidation on COMEX in the week to last Tuesday August 5th (a period during which price had dropped from $364/ounce to $349/ounce) also helped sentiment, despite the fact that there is still a large outstanding net long speculative position on the exchange. Also helping the market is the strength in gold equities, which generally tend to lead the metal when there is a change in trend, or a move (up or down) underpinned by strong investor sentiment.

Trading conditions have been quiet, very largely for seasonal reasons, and moves in thin conditions should always be viewed with caution. There was, however, evidence of physical bargain hunting when the spot price dipped towards $352/ounce last Friday, and this was then followed through to some extent in Asia over the week-end. The US economy remains the primary focus, although the Far East is still particularly responsive to political tension and the explosion in Jakarta last week, while not having an ostensible impact on the market, has nonetheless heightened political nervousness.

Market factors
The dollar is currently trading at three-week lows against the yen, but remains stronger against the euro. Japanese investors are repatriating funds and this is taking its toll on the exchange rate between the two currencies.

The US Treasury quarterly refunding (a record $60Bn) was mixed. The first auction, of $24Bn of three-year notes, was disappointing and met only weak demand, while the auctions of the five and ten-year notes were both well-supported. In each of the latter cases, more than twice as much volume was bid for as was available. This partly reflects investors' expectations that the yield curve, which has steepened recently, may have to flatten off.

The second auction, US$18Bn in five-year notes yielding 3.3%, was well taken (cover ratio of almost 2.5) while the auction for $18Bn of ten-year notes, yielding 4.37%, was also easily absorbed. At the close on Friday, a ten-year note in the secondary market was yielding 4.27%, although this has subsequently increased as the markets are on the defensive ahead of the FOMC meeting tomorrow (Tuesday 12th).

The IMF, however, has issued a clear warning, in its annual review of the US economy, that if the US doesn't do something about its budget deficit then the economy will continue to fail to meet its potential. The Fund said that the budget deficit could reach 6% of GDP in 2003, that the economic recovery has been uneven and that risks still persist to the downside.

Jean-Claude Trichet, the next President of the ECB, said last week that European rates are at an historic low level and that French growth should be better in the third quarter than it was in the second; he would not, however, be drawn on the direction of the next ECB rate change.

Background news
The development of the Indian market for gold and silver futures trading is continuing apace. The National Commodity and Derivatives Exchange (NCDEX) has asked Brink's Inc (which is active in transport and storage of precious metals) to help set up a backup support system and warehousing facilities. The NCDEX expects to start futures trading in gold and silver by this October.

The Dubai gold and jewellery group has reported its "best ever" June and July, with a 34% growth in sales volumes yearon- year. The boost has been driven partly by favourable gold prices, but also by a considerable increase in the number of foreign visitors and aggressive marketing. Mr. Tawid Abdullah, chairman of the group, said that the value of total gold sales in 2002 was US$1.3Bn and he is looking for an increase to $1.5Bn this year.

The figures from the Swiss National Bank for the reporting period to August 8th imply that the bank sold approximately 7.5 tonnes of gold in that time. This takes the bank's sales, which fall under the auspices of the Central Bank Gold Agreement, to a cumulative total of just over 846t, from a proposed total of 1,300t over five years.

Virtual Metals has released its Gold Hedging Indicator for the second quarter. The organisation calculates that on a net delta basis (i.e. adjusting for market impact of option positions etc as well as forward sales), the global hedge book contracted by 5.0M ounces or 156 tonnes in the quarter, to 73.2M ounces or 2,278t. Over the period that Virtual Metals has covered so far (the past two years), the size of the book peaked (on a quarterly basis) at 101.8M ounces in the third quarter of 2001 (3,166t), and the decline from the top has therefore been 28.6M ounces or 890t.

The upward move the previous week was driven by a combination of factors including political tension in Liberia, a coquettish silver market, concern over the bond market and an improving technical picture in gold. Last week silver ran out of energy, and while the tension has not abated in Liberia, neither has it worsened appreciably. The bond market is still giving cause for concern and while this remains a supportive factor for gold, as does the patchy nature of the US recovery, the market ran too far too fast a fortnight ago, the technical picture became over-extended and then deteriorated and the market has now paused for some consolidation. Some fresh physical bargain hunting has appeared since Friday, when spot prices dipped late in New York to the $346/ounce level. There has been a retracement towards $350/ounce but this is again putting up resistance.

Market factors

Note the rapid turnaround in the ten-year bond yield over the past month.
Note also how the gold:bond yield lead:lag relationship has broken down.
This, in both the short and long term context, will be the subject of a forthcoming note.

There was an enormous amount of information released on the US economy last week. The majority of the numbers released suggested that the economy is on the road to recovery but the key figure, that of employment, was released on Friday and undermined the rest of them. It is potentially also significant that consumer confidence, which stems to an extent from the state of the labour market, dropped in July. The dollar was strong for much of the week on the back of figures such as the GDP, consumer spending and the Chicago NAPM, but gave back a lot of its gains on Friday and over the weekend as the markets absorbed the employment figures, and generally came to the view that while there is a recovery underway, it is not solidly underpinned and there is still room for uncertainty.

The bond markets remain unsettled following their hefty sell-off and the fact that this quarter's refunding exercise (which takes place this week) will be at a record level. The US Treasury is to sell US$60Bn of three, five and 10-year notes. This follows spending overshoot and revenue shortfalls that stem from the Middle East conflict along with recent tax cuts. The Administration now expects that the federal budget deficit for this fiscal year will exceed $450Bn (compare with last quarter's estimate of $304Bn). Last year's GDP was US$10.45 trillion and economists are (currently) forecasting growth this year of approximately 2.8%. This projects 2003 GDP at US$10.74 trillion; the forecast deficit therefore stands at 4.2% of forecast GDP.

Latest figures from the European Central Bank show that there was some seven billion euros of inward portfolio investment flow into the euro zone during May (while direct investment produced a 0.3 billion euro outflow). This has been attributed in the main to bond purchases and is not considered to be underpinned by economic activity or investment in equities.

Background news
The latest figures from the Swiss National Bank show that in the reporting period to the end of July, the bank disposed of approximately 9.9t of gold under its ongoing programme of gold sales, which falls within the auspices of the Central Bank Gold Agreement. This brings cumulative Swiss sales since the start of its programme (May 2000) to approximately 839 tonnes from a proposed total of 1,300t.

The move was largely dollar-driven, aided by the technical picture and silver's additional strength. This looks predominantly like professional interest; the physical market is a little more cautious and has been selling into the rally. There has also been talk of some professional selling, which may go some way to explain the small increase in the lease rates -- not that they could, by any stretch of the imagination, be termed high. The chart overleaf, however, does show that the fundamental strength in the market, while partially catalysed by dollar weakness, was bolstered by the earlier buying interest and gold has scored gains in all the major currencies this week. This is not unusual after a good rally.

Gold then spent the week-end consolidating the rally sustained on Thursday. The physical markets in the Far East initially responded to the rally with some selling (around $362/ounce), but support was uncovered just below the $360/ounce level and prices stabilised thereafter. The market ran out of steam on the approach to $365/ounce and is now looking for further guidance from the currencies, which means that the US' economic figures this week are in the spotlight.

Background News
Mr. Gwede Mantashe, general secretary of South Africa's NUM, has said that the threatened strike has been called off (although there is the possibility of some isolated action here and there), with the mining companies offering a wage increase of 10% across the board for the first year of the two-year agreement. The offer for the second year is inflationplus- one percent, with a minimum increase of 7%.

The latest commitment of Traders figures from the CFTC show a sizable increase in the net long position among COMEX speculators in the week to July 22nd (a period during which prices rose from $343/ounce to $352/ounce); in both the large and small-scale sectors, there was an increase in longs as well as some short covering.

The technical side of the market has also been something of a constraining factor, with prices reluctant to rise beyond the $350/ounce level, although the chart above suggests that a break one-way or the other is imminent.

Trading last week was quiet. As far as external factors were concerned, when there was an undue influence from outside it appeared to be the currencies rather than the equity markets that drove the price. Thus as the dollar strengthened (and bonds were hit hard) on Tuesday in the wake of Dr. Greenspan's Congressional testimony, so gold slipped sharply under liquidation and dropped to test the low end of the range. Physical interest stemmed the decline and latterly prompted short covering. Ironically, the longer-term implications of Greenspan's testimony ­ a sustained accommodative stance and the hint of possible reflation - are seen as negatives for the dollar and potentially bullish for gold. The market was not in that frame of mind on Tuesday, however, and the dollar's spurt took precedence over longer-term considerations. For the rest of the week the market was quieter and regained ground despite the fact that the dollar strengthened again towards the week-end. News of an exchange of machine gun fire between North and South Korea in the demilitarised zone towards the end of the week had no discernible impact on sentiment.

Market factors
Dr. Greenspan's testimony was seen as an attempt to reassure financial markets, endorsing the Fed's policy of maintaining "a highly accommodative stance of policy for as long as needed to promote satisfactory economic performance". While intimating that the Fed may again cut short-term rates, he also suggested that financial conditions should now be good enough to promote stronger, and extended, growth. The FOMC has reduced its US growth forecast for 2003 to 2.5-2.75% and it is looking for 3.75-4.75% in 2004, although some economists have suggested that this may be a little bullish.

Bonds dropped heavily in reaction to Dr. Greenspan's testimony, partly because of his view that deflation is only a remote possibility, and the associated strong implication that the Fed would not be a buyer of long-term instruments.

Bundesbank President Ernst Welteke has said in a press interview that in his view there is little likelihood of any more rate cuts from the ECB in the foreseeable future, as they are at an historic low level, liquidity is sufficient and more cuts would probably not have any appreciable positive impact on the economy.

China's second quarter GDP growth was +6.7% year-on-year, with progress impeded by the SARS virus. The first half GDP, however was up by 8.2%. Full year growth in 2002 was 8%. Meanwhile a Reuters poll of economists has forecast an average 6.1% growth rate in India for this financial year. Last year's growth was constrained to 4.3% as a result of the poor monsoon season, which severely reduced the harvest. Over the past five years India and China between them have accounted for just less than 28% of world gold demand.

Background News
The Shanghai Gold Exchange will launch platinum trading in October. The Exchange began accepting membership applications last week for platinum trading. Those 108 members already registered for gold trading may automatically acquire platinum-trading memberships, while other applicants must be institutional investors or jewellers with at least five million Yuan (just over US$604,000) in registered capital.

The latest CFTC Commitment of Traders reports, for the week to July 15th, when the price hovered between $340 and $350/ounce, shows a substantial drop in the net long position on the part of the large-scale traders, but a much smaller drop in the positions held by the small-scale operators. The net long position on the Exchange was last Tuesday at the lowest level since the end of April, when it stood at 77t and the spot price was fixed that afternoon at $331.40/ounce.

The NUM is threatening strike action in South Africa on July 27th at Harmony, Gold Fields and South Deep as well as at four coal-mining companies. A decision about AngloGold, whose offer is slightly higher than that from the other three gold mining companies, will be considered on Tuesday.

In a Merrill Lynch survey of 293 fund managers running combined assets of US$742Bn, 41% expect the euro to appreciate further against other currencies over the next 12 months. The yen was favoured by 14% and 22% expect the dollar to fall the most (this is down from 24% in the June survey). Dollar exposure has been hedged to one extent or another by 37%.

The latest LBMA clearing figures show that the number of ounces transferred in June decreased marginally on a daily average basis to 15.8M ounces per day. This suggests overall transfers of approximately 10,320 tonnes during the month as a whole.

The figures contain the following:
--Loco London book transfers from one party in a clearing member's books to another party in the same member's books or in the books of another clearing member;
--Physical transfers and shipments by clearing members;
--Transfers over clearing members' accounts at the Bank of England.

They exclude:
--Allocated and unallocated balance transfers where the sole purpose is for overnight credit;
--Physical movements arranged by clearing members in locations other than London.

They are not total turnover, but a fraction thereof, because the figures reported for transfer are the residual movements once all possible trades have been netted off at each bullion house. Dealers have estimated that actual turnover could be up to three times the clearing figures, which would imply that in the first six months of this year, loco London turnover alone was of the approximate order of 66,000 tonnes, or just over 50 times mine production for the period.

Gold thus found itself trapped towards the end of last week between physical purchases and professional sales, which were augmented by professionals selling the gold:silver ratio on technical considerations after silver's recent strength had taken the trend out of its previous channel. Generally speaking, there are only two places in the world where the gold:silver ratio actually matters; in India and on the COMEX floor. In both places, gold or silver will be bought and the other one sold if the ratio is seen to have gone out of line. In other words, if silver is expensive by comparison with its normal relationship to gold, then silver will be sold and gold will be bought with the proceeds. This may well be part of what's happening in India at the moment. On the COMEX floor, however, technical considerations have taken over and the recent strength in silver (which could well be a typical speculative drive at the metal - they tend to happen every couple of years or so) has pushed the ratio lower (see chart). So much lower so quickly, in fact, that the ratio has been sold down further as technically-driven trades have kicked in. This has helped to put some pressure on gold in the speculative arena. As suggested, it may well be working the other way in the physical market.

Dealer comments about the unseasonable strength in physical demand for gold at these lower price levels is backed up by reports that daily import volumes at major importing centres in India last week were running at roughly twice the levels of the week before. Mumbai is reporting 200-250kg per day (compared with approximately 100 kg daily the previous week) and Ahmedabad is reporting roughly 80kg a day against 40kg per day the week before. These figures are understandably still well below the daily average for the year as a whole and they do reflect bargain hunting by stockists following the drop in dollar prices and the improvement in the rupee, so this would tend to suggest that when the consumer returns in force in August, the change in volumes will not be as marked as usual. Overall offtake is expected to improve on last year, when a poor monsoon curtailed purchases by roughly 23% against the previous year and 24% against the five-year average of 729t.

Market factors
As well as a generally bullish mood in the equity markets at the start of last week, market participants also appeared to be worrying less about deflation than previously. Interestingly a number of European economists have been arguing recently that the US is fundamentally less likely to encounter deflation than virtually any other major economy, despite the fact that this is where the fears have been most volubly expressed.

Fed Chairman Alan Greenspan addresses the House tomorrow and the Senate on Wednesday on the economic outlook.

Bundesbank Vice-President Juergen Stark, meanwhile, said that selling Bundesbank gold, a move that has been proposed by some German politicians in order to finance tax cuts, "would lead to a monetary financing situation which is forbidden by the Maastricht Treaty" and effectively ruled it out.

While ECB left its rates on hold, Asian governments are pressing ahead with stimulation efforts. South Korea has cut its interest rates by 25 basis points to a record low of 3.75%, following a drop in second-quarter GDP of 0.7% (quarter-on-quarter). The first quarter GDP also contracted, by 0.4%, thus putting South Korea technically into a recession for the first time since the crisis of 1997/98. The Bank of Korea governor Mr. Park Seung said that the bank believes that the economy bottomed out in this past quarter and will grow steadily from now on. The Bank is looking for 3.1% growth this year. The Singaporean Government has said that the economy contracted by an annualised 11.8% in the second quarter with tourism battered by the SARS outbreak. The Monetary Authority of Singapore also eased monetary policy last week, through adjusting its target rate-band for the Singapore dollar (these targets are not published); the government expects that Singapore too will recover and is forecasting growth for the full year of 2.5%. Meanwhile back in Europe, new Bank of England Governor Mervyn King presided over his first MPC meting and UK rates were cut by 25 basis points.

The press is reporting hints from the head of the Chinese central bank the People's Bank of China (Mr. Zhou Xiaochuan) that it is considering looking at a degree of reform on its policy over the yuan, (or renminbi as it is known locally). The currency is closely allied to the US dollar at present and Mr. Zhou has commented in a working report that the country aims to "perfect" the exchange rate mechanism. He set this in the context of a "stable" exchange rate and maintaining a balance in international payments. Observers are construing this as an intention to widen the band within which the currency trades on the international markets, rather than a move to a free float.

Background news
The latest CFTC figures for the week to July 8th (prices oscillated for much of that week around $350/ounce then dropped to $345/ounce) show a small degree of long liquation, fresh shorts among the larger players, but short covering among the smaller speculators.

Market factors
The US bond market rallied on the back of the unemployment figure, but was then hit by a sell-off from Japanese banks who took advantage of the strength to make some sales, given the welter of Japanese bonds currently being issued. The 10- year Treasury note finished the shortened week in the US on a yield of 3.64%, the highest in almost two months. The German 10-year bund is yielding in excess of 3.8% and some technical analysts are now suggesting that the three-year bull run in bonds around the world is drawing to a close.

ECB President Wim Duisenberg poured cold water last week on the prospect of more imminent interest rate cuts from the ECB, saying the Bank had played its part in stimulating growth and that the onus now rests with governments to implement urgently needed structural reforms. He said that the Governing Council sees current policy, with rates at 2%, as appropriate given the outlook for the medium term.

Background news
Gold Fields Ltd. has sold a 15% stake in its South African mining operations to Black-owned company Mvelaphanda Resources Ltd. for R4.1 ($515 million). Tokyo Sexwale, the founder of Mvelaphanda Resources Ltd. in 1998, joined the Gold Fields board in 2001.

Newmont Mining Corporation has put Newmont Yandal Operations into voluntary administration. Newmont is now making an offer to bring Yandal out of this voluntary administration by valuing its assets at US$200 million, which could leave Yandal's third-party note holders and hedge counterparties with no more than 40 cents on the dollar. Newmont has received acceptances from hedge counterparties representing 76% of Yandal's negative mark-to-market liability as of May 22, 2003, and Note holders representing 83% of the 8 7/8% Senior Notes due April 2008 not already owned by a Newmont subsidiary.

If Newmont's offer is accepted, Yandal would be returned to the control of its directors and employees would continue their employment as usual. In addition, Newmont will honor any prior unpaid obligations to Yandal's employees and offer trade creditors payment in full. The Newmont offer will require Yandal to enter into a Deed of Company Arrangement at a meeting of creditors to be held within one month. Yandal Bond Company Limited (YBCL), has extended the consent payment deadline and the expiration of the offer to acquire the Notes to 5:00 p.m., New York City time, on Friday, July 11, 2003, with respect to Notes not previously tendered.

Newmont has appointed voluntary administrators for Yandal and they are now looking at the available options to try and ensure the long-term viability of the Jundee, Wiluna and Bronzewing mines that form the Yandal portfolio. The first meeting of creditors will be held this Thursday July 10th.

The Canadian central bank sold 114,064 ounces (3.5t) of gold in June, leaving holdings at about 300,000 ounces on June 30.

The Commitment of Traders report will not be published until later today, Monday, due to the public holiday in the US last Friday.

2003 (Jan. - June) Archive for The Week in Gold

2002 (Jan. - June) Archive for The Week in Gold

2002 (July - Dec.) Archive for The Week in Gold

2001 Archive for The Week in Gold

2000 Archive for The Week in Gold

1999 Archive for The Week in Gold

Editor's Note: Reprinted with the permission of the World Gold Council/New York. Market Commentary is a review of the major events shaping opinion in the gold market during the past week. It is compiled by Council staff in London and New York based on contacts in the market and a network of WGC offices around the world.

If you have any questions or comments on this input, please address them to Rhona O'Connell in the London office, Tel. +44 207 930 571, Fax. +44 7839 6561, E-mail: rhona.oconnell@wgclon.gold.org

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