LONDON -

Gold has been going through a weaker spell, prompted by a U.S. sell-off last week as investors, hit by the sharp downturn in the stock market needed to sell tradeable assets to cover commitments. While there was a minor recovery over the U.S. holiday weekend in very thin trading, the gold price remained weak Tuesday and was then hit with a couple of pieces of seemingly adverse news which caused it to stutter yet again.

So what were these two items of adverse news. The first was that a London analyst, Matthew Turner of Virtual Metals, noticed that the Bank for International Settlements (BIS) - the bankers banker - had 346 tonnes of gold on its books which it had acquired through gold swaps with Central Banks. As London's thebulliondesk.com reported "In its 2010 annual report, the BIS said that "gold, which the bank held in connection with gold swap operations, under which the bank exchanges currencies for physical gold," stands at 8,160.1 million in special drawing rights, equivalent to 346 tonnes this year, up from nil in 2009.

Why this particular piece of news caused concern in the markets has to be uncertain. The BIS was reporting transactions which occurred in 2009 and early 2010 which, if anything, should be positive for gold given the yellow metal's price performance over the period. (It is reported that April data show that an additional 32 tonnes of gold may have been added to the BIS total) But, as Jim Sinclair quickly pointed out on JSmineset.com "Gold Swaps are usually undertaken by monetary authorities. The gold is exchanged for foreign exchange deposits with an agreement that the transaction be unwound at a future time at an agreed upon price."

While some commentators surmised that swapped gold may, in the interim, find its way onto the open market, this is pure speculation - and if it did and gold continued to manage to rise during the year, as happened with a peak in December, then surely this actually has to be highly positive for gold?

The second piece of news to knock the market was a note by China's foreign exchange regulator that gold will not be a key investment for China's foreign exchange reserves. This can be taken several ways, but a nervous market feared the worst taking it as a sign that China is not building its gold reserves, surreptitiously or otherwise. But if one analyses the comment, given that the gold component of China's massive reserves is so tiny, it is likely to remain a relatively insignificant part of its reserves taken as a whole almost regardless of how much gold it takes into them!

China is an expert at playing the markets in any way which suits it. At the moment the Middle Kingdom is unlikely to disrupt the global foreign exchange status quo. It is not in its financial interests to talk down the dollar given its huge dollar denominated holdings, but it probably is in its interest to appear disinterested in gold even if, in reality, it is not. A top Chinese official has already noted that China has been buying gold on the dips, but as long as this is all it is doing it should not impact the gold price too positively (and de facto diminish the value against gold of the U.S. dollar), but does provide a stabilising influence which will suit its gold-oriented, and rapidly growing, investment public.

Given that Chinese gold production - it is the world's largest gold miner - does not appear to leave the country and that it is suspected of buying gold surreptitiously on market dips - it is significant that this gold is not appearing in its official reserves. It waited six years last time to uprate its official gold reserves by over 450 tonnes. It is probably in no hurry now to do the same for another five or six years and may only do so when it is deemed propitious either economically or politically to do so.

Thus neither of these pieces of seemingly adverse news for gold should in reality have much adverse impact on the market. The former should be positive for gold and the latter taken with a pinch of salt. It is only the fickle nature of the gold investor on the fringes of the gold market - and perhaps those banks which can see gains in pushing prices downwards in the short term - which really account for the recent downwards pressure on the price.

There is also a perception that the prospect of double dip recession has receded, reducing, perhaps, safe haven reasons for investing in gold. On the face of things though little seems to have changed. Indeed the outlook for the U.S. economy appears to have weakened further, while in Europe political hype, as politicians try to talk the economy up, has had a few victories. These may well be shortlived as in many economists' views the Eurozone countries still have many more hurdles to get over before it can be said the recession/depression is behind us.