Gold May Rise on Speculation Central Banks Will Reduce Sales

June 20 (Bloomberg) -- Gold may rise for a fifth straight week, the longest rally this year, on speculation European central banks will begin to slow annual bullion sales just as investor demand is growing, a Bloomberg survey showed.

Thirty-nine, or 78 percent, of 50 traders and investors surveyed from Sydney to New York on June 16 and June 17 forecast a rise in gold, which gained $10.70 to $440 an ounce last week in New York. It was the most bullish consensus since the survey began April 2004. Nine respondents forecast a decline and two expect little change.

European central banks, which agreed to limit gold sales to 500 tons a year through September, shed 346 tons as of April 1, or about 13 tons a week, London-based researcher GFMS Ltd. estimates. If that rate was maintained, central banks that accounted for most of a 23 percent rise in gold supply in the first quarter will reach their sales target this week.

``They cannot keep selling at this rate,'' said Ian MacDonald, managing director of precious metals trading in New York for International Assets Holding Corp. ``We should really be asking where the gold is going to come from to meet growing investor demand.''

Gold for August delivery rose 2.5 percent last week, surprising the majority of analysts surveyed on June 9 and June 10, who predicted a decline. Bloomberg's survey has correctly forecast the direction of prices in 34 of 60 weeks, or 57 percent of the time.

`Selling Less'

``The central bank issue is an important one for the next six months,'' said William O'Neill, a partner at Logic Advisors LLC, a commodity consulting company in New Jersey. Even if the sales target isn't met this week, the central banks ``will be selling less in coming weeks,'' he said.

Olivier Radelet, a spokesman for the European Central Bank in Frankfurt,

Central banks are the biggest holders of gold, with 31,822 tons, or 1 billion ounces, in their vaults at the end of 2003, according to the International Monetary Fund. Without restrictions, central bank selling helped to send gold prices to a 20-year low of $253.20 in July 1999.

In September that year, 15 central banks in Europe pledged to restrict their sales and lending of bullion for five years. Last year in September, the limit was raised to 500 tons from 400 tons.

Gold's rally has been part of renewed gains in commodities last week including crude oil, which reached a record; copper, which jumped to a 16-year high; and corn, which had its biggest weekly gain in 17 years.

Commodity Rally

The Reuters-CRB index of 17 commodities, which includes gold, climbed every day last week, gaining 2.8 percent to 310.98 and approaching the 24-year high of 323.33 reached on March 16. The index, up 15 percent from a year ago, will expand to include unleaded gasoline, aluminum and nickel, dropping platinum, starting today.

Gold has climbed 5.3 percent in the past four weeks as investors bought the precious metal as an alternative to currencies.

Gold last week touched 47,773 yen an ounce, the highest since October 1991, and 358.131 euros, a record. In dollar terms, gold is up 13 percent from a year ago, and reached a 16-year high of $458.70 on Dec. 2 as the dollar headed to a record low against the euro.

If the August futures contract in New York goes above $441.50 an ounce, ``look for prices to go up $20 in the next four to six weeks,'' said Carlos Perez-Santalla, president of Hudson River Futures in New York. He changed his opinion from hold to sell for gold this week after prices on June 17 surged to $441.30, the highest since March 17.

Gold's Dollar Link

In the 12 months ending June 1, gold moved almost in lockstep with the euro's performance against the dollar at a correlation coefficient of 0.894. The maximum reading is 1. The coefficient measures the degree to which the two variables move in unison.

Gold mostly stopped moving in the opposite direction of the dollar three weeks ago, after voters in France and the Netherlands rejected referendums for a European Union constitution. The vote has eroded confidence in the euro and helped add about $30 to the price of gold, Merrill Lynch & Co. in New York said in a June 14 report.

``The real bull market begins in gold when it rises against every fiat currency,'' said Dennis Eich, a trader at Chicago- based brokerage Peregrine Financial Group Inc.

Inflation Concern

Prices may touch $445 ``in the near future,'' buoyed by higher oil prices, said Prithviraj Kothari, director at Mumbai- based Riddhi Siddhi Bullion Ltd. Rising energy costs may accelerate the pace of inflation and slow the economy.

Crude oil, which reached a record $58.60 a barrel on June 17, is expected to rise this week as producers face growing demand from refiners, a separate Bloomberg survey showed.

Higher oil prices may reduce consumer spending and ``seriously hurt the U.S. economy, the dollar and be yet another catalyst to buy gold,'' said John Licata, an independent analyst in New York.

Hedge-fund managers and other large speculators increased their net-long position in Comex gold futures in in the week ended June 14, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 56,861 contracts, up from 39,107 a week earlier, the government's Commitments of Traders Report on June 17 said. The net-long position was the highest since May 10.
 

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