Gold - The Weekly Global Perspective

By: Julian D. W. Phillips | Thu, Feb 12, 2004
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That was the week that was!

On the surface a week of no dramatic action in the gold price. But dramatic action there was, just below the surface. The G-7 meeting, so eagerly expected, was a none event [see below]. The gold price responded to that, by jumping up over $405, then it slipped back ahead of the speech by Alan Greenspan, head of the Federal Reserve. Why there, you may well ask? Because physical buying is strong below $400, fund buying dominates above $400. Important to recognise that because it helps us to appreciates other underlying facets of the gold market. Then, in the speech in front of the House Banking Committee, he uttered the magic words: "Prospects are good for sustained expansion of the U.S. economy....employment will begin to grow more quickly before long as output continues to expand." - We were delighted to hear this news. The gold price responded, not as those who think a growing economy is bad for gold, with a fall, but rose up to meet resistance at $412.

Strange you may say? Not so, our position has been that a healthy recovery will lead to a dropping $!

Funds control the market still. The funds, appear to have terminated their long position liquidations and are present on the buying side. They're in no hurry content to pick up tonnage, but buy as it suits them. The important feature is that a huge amount of gold has been sold into this market and the price is holding up. How much? - From an average monthly sale from usual sellers around 333 tonnes. From Central Banks, around 49+ to 55 tonnes [on the higher than the usual 32 tonnes] plus the 164 tonnes from long position liquidations, a total of 546 to 556 tonnes last month or almost 200 tonnes more than in a usual month! Seems like the sellers must be pretty worn out? If buying enters now......?

Why is this important? The change of direction required as much momentum as a massive acceleration. Now that it is looking up, where will it go to? Unfortunately, this is not the place to say how far or fast it will travel [That's the job of our short term services, called appropriately, "Changing Tack" & Changing Tack - Gold & Precious Metal Shares" - so we invite you to subscribe through our website - just below the title above]. To us, the remaining core of the "Large Scale Speculators" look the spitting image of Investors.

In Euros, as well as $, gold staged a recovery to the current Euro 321 up from Euro 313, showing this was a gold price play, not a Euro play. We watch the Euro gold price very carefully to isolate what gold id doing without the fog of the currencies around them. Today, gold looks very healthy in both currencies.

At the time of writing gold stood at $412.50, or Euros 321 with the Euro itself worth $1.2815.

G7 meeting in beautiful Florida. - "The Mouth of a Mouse"

Oh, what delicious irony! We were curious as to why the town of Boca Raton was chosen for such an important meeting - now we know. In Spanish the name means "Mouth of a Mouse" How appropriate!

Those who wanted to hear statements halting the Euro's rise and a recovery of the $ certainly thought so. The statement was :

"We reaffirm that exchange rates should reflect economic fundamentals. Excess volatility and disorderly movements in exchange rates are undesirable for economic growth. We continue to monitor exchange markets closely and cooperate as appropriate. In this context, we emphasize that more flexibility in exchange rates is desirable for major countries or economic areas that lack such flexibility to promote smooth and widespread adjustments in the international financial system, based on market mechanisms."

To the gold market as well as the currency markets the message "no change in the markets" - we don't like currency volatility, and will not do anything about it until we are in crisis, if then. Accept a dropping $ - it will happen. Copy U.S. forex and interest rate policies and undermine your currency, or take it on the chin.

Oh, this was a joint statement form all the G7 Members and included Europeans, not just Americans, surprisingly. The huge question now being debated is, "Will the E.C.B. have the strength to hold onto the Euro's integrity?"

Instability in currency markets is expected to become a relatively permanent feature after this. It has to be "gold positive"!

Greenspan's speech.

Greenspan himself confirmed that the U.S. $ drop was welcome and by using the word "eventually" as much as confirmed this, when he said, "The currency depreciation that we have experienced of late should eventually help to contain our current account deficit as foreign producers export less to the United States..." The mechanics of this are the simply that the J-Curve [We explain that and give you a clear insight into this picture, in the next issue of G-AM] will cure the deficit. Yes, if you have a happily cooperative rest of the world, letting the U.S. devalue its currency to get market share. And this is where the trouble begins, because the rest of the world has now had a gauntlet thrown in its face. That is except for those countries who say, if the $ goes down, so does our currency! Make no mistake about it this is a power play. The U.S. is the global economy's driver. Greenspan and the Administration are saying "like it or lump it". They have to, their job is to look after the U.S.A., just as the rest of the world has to look after itself. This is a test of, who needs who?

If the global economy is self sufficient, the E.C.B. will hold tight to the Euro, letting it rise as far as it goes, hoping to contain the damage. With the $ falling, gold will rise in $. If the integrity of the Euro is breached, or perceived to have been breached, not only will its price drop relative to the $, making Alan Greenspan unhappy, but confidence in monetary stability will suffer a body blow. Don't think that gold will then shadow the Euro, not a bit of it! Either of these two scenes is good for gold.

It seems as though the speculators are beginning to gather, like vulture watching a fight to the kill. Will George Soros and his offspring come out to play? It could be the play of the century? Better than the billion made by George overnight against the Pound in London last decade. [Contact us for currency guidance - above]

- Will there be a switch to Euros from the $, on the capital account?

Greenspan is aware of foreign reactions and that they could hurt, from his remark on oil, when he said, "Still, a "sharp spike"' in oil or natural gas prices is a risk to the economy". We have already heard that O.P.E.C. announced a cut in production quotas of 10%, this week, which even with summer coming will keep oil prices high or rising. Is this the first strong reaction to the lowering of the cost of such items by being quoted in $. In the 1970, oil hit $35 a barrel as the inflationary crisis hit, as the oil world reacted to the devaluing $. Are we close to that? Will there be similar reactions to other items priced in $. Seems reasonable to expect them to, particularly if they do not rely on the States for their business.

To say the least, this is being seen outside the States as national opportunism, at the expense of the rest of the world! There has to be a strong reaction and destabilisation. - Again this is 'gold positive'!

Large Scale Speculative position

Large Scale Speculators long position liquidations, seems to have stopped, and small buying taking place. The current net position as reported last Friday, stands at 351 tonnes down 44 tonnes on the week before. As we said above the present holders have weathered the storm of selling and have to now be classed as Investors.

Whilst the physical buyers stepped in whenever the price fell below $400, it stayed above it most of the time, so who took it. Clearly, the take-off was centred on the London market with the fix dominating the price. This could well have been major institutional buying for investment! So, from weak holders to strong.

Central Bank Gold Agreement 2004

Please bear in mind that the "Washington Agreement" signatories selling programme is lessening by the day and will continue to do so from now on until September. The pressure for them to come to the media to state their future agreement is on and heavy, as the market begins to realise that this is happening. The longer they postpone the statements on their agreement, the greater the upward pressure on the price.

Herr Welteke's media exercises, do not appear to have had any lasting results. Or perhaps, in itself, it was an exercise in seeing just how effective media statements, by monetary authorities Officials, are. If so, all that has been learned is that they have only a temporary effect and can only serve to cool volatility in the markets for short periods.

If the G7 statement is applied to the gold market, clearly, the gold market is to be allowed to rise without any but this cooling mechanism. Think on Governors! [See G-AM for clarity on this statement - subscribe]

The London Gold Fix

Gold Fix 12th February a.m. $411.40   E 320.980

4th February p.m. $411.60   E 321.186

- Gold higher in both currencies!

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Julian  D. W. Phillips

Author: Julian D. W. Phillips

Julian D. W. Phillips
Gold Forecaster

Julian D. W. Phillips

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price.

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