Gold Rises as ECB Cuts Sales

Contracts for August delivery add $7.30 at $674 an ounce.
Author:
Publish date:

Gold prices were moving up Friday after the European Central Bank said it would curtail its bullion sales program, a decision that should reduce downward selling pressure on the metal.

Contracts for August delivery of bullion were tacking on $7.30 at $674 an ounce in recent action on the New York futures market.

The bullion exchange-traded funds that hold inventories of the metal,

streetTracks Gold Shares

(GLD) - Get Report

and the

iShares Comex Gold Trust

(IAU) - Get Report

, were both up about 0.9% recently.

The ECB said it had completed its planned sales of 60 tons of gold and receivables already this fiscal year and wouldn't offload any more until the new period starts Sept. 27.

"I think this ends up helping the market a tremendous amount because sales will dry up," says Neal Ryan, director of economic research at New Orleans coin dealer Blanchard.

Ryan has persistently pointed to central bank sales as a reason for the failure of gold to breach the psychologically important $700-an-ounce level so far this year.

Collectively, the ECB and its country member banks are subject to the Central Bank Gold Agreement, which restricts sales to a maximum of 500 tons a year through Sept. 26, 2009.

Although a positive for prices, the announcement doesn't preclude the other country-specific member-banks of the ECB system, such as the Bank of France, from selling portions of their gold holdings during the remainder of the fiscal year. In other words, the ECB system as a whole will in all likelihood make further sales this summer, although at a reduced rate.

The gold agreement was designed to allow the central banks to rebalance their reserve holdings by reducing their bullion stores, but without disrupting the orderly operation of the metals markets.

The ECB has a target of 15% of total reserves of gold, explains Philip Klapwijk, executive chairman of London-based specialty consulting firm GFMS. That has meant as the price of gold has risen, it has found the value of its gold reserves has remained high even as it was selling bars of the metal, he adds.

On the economics front, new government data pointed to a robust U.S. economy. Such news could weigh on the gold market in the months to come, as historically the impetus for many gold investors has been the prospects of a weaker dollar and higher inflation, the exact opposite of what the new statistics suggest.

In the precious-metals patch, shares of

Barrick Gold

(ABX)

and

AngloGold Ashanti

(AU) - Get Report

were rallying 1.1% and 1.9%, respectively, buoyed by the rising metal prices.

As for base metals, benchmark copper contracts were up a penny at $3.41 a pound on the Comex division of the New York Mercantile Exchange.

Elsewhere, UBS upped its rating on shares of power and aluminum producer

Norsk Hydro

(NHY)

to buy from neutral. The move follows better-than-expected first-quarter results that were helped in part by healthy aluminum prices.

Shares of Norsk were recently ahead 1.8%.