Will the Gold Price Fall to $850 When Consumer Confidence Really Rises?

By: Julian D. W. Phillips | Fri, Jun 12, 2009
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This is a snippet from a recent issue of the Gold Forecaster with Subscriber-only parts excluded.

Here we are with the gold price pulling back towards $900 after threatening $1,000. It hit $985 then pulled back into the $930's. Traders did not want to be in the lead in taking it over $1,000. Now it needs time to re-group and build up the strength and the reason why it should go through $1,000. Long-term investors have been on the sidelines since gold ran through the $900 level and COMEX speculators have jumped in 'boots an' all' taking it up on a Technical basis to just below $1,000. They have now joined the fray buying nearly 225 tonnes in the last four weeks. Where now? Many Analysts see the gold price backing off to $850 or less then running up to $1,200. This, if correct, would give a healthy trading range of over 50%. This is a range that even long-term investors should contemplate taking if it is going to happen?

You can see our view in the charts below [in the newsletter] as provided by Peter. We are precise and careful in our view, giving support and resistance levels so you can make up your own mind.

But what of the fundamental picture? After all, it has been the long-term investor that has driven the gold price over the last year and he focuses on the fundamentals using the Technical picture to pinpoint his entry and exit points only. Where is he looking for, what is his perspective on such possible moves?

Fundamental picture

To determine if such a large trading move will take place based on fundamentals we have to look at the levels of uncertainty long-term investors see ahead. The signs of an economic recovery are being seen like tiny fires in a dry forest [see our € and $ sections below], some are even growing fast amid the cold wintry recession. In fact the U.S. economy shrank slightly less in the first quarter than initially estimated, while corporate profits rebounded so it seems that the recession is moderating. Everybody wants an economic recovery. Everybody needs it! The mood is certainly one responding to hopeful signs.

Deflation and Inflation & Growth

Central Banks have fuelled the money supplies with floods of newly printed money which are still filling in the holes left by deflation and general illiquidity in the banking system. But consumer confidence rose to its highest level in eight months in May and a report showing business activity in New York City expanded in May for the first time since January 2008 offering another hint that the recession was abating. Yes, lending remains difficult and long-term Treasuries are seeing a steep rise in yields against very low levels of short-term Treasuries in the U.S.A. still. It's all very well looking at the U.S. start to a recovery, but gold reflects a global economy so we have to include global interest rates, global lending restraints and the condition of the global consumer too, to get the right background for gold.

China, the second most critical factor in a global recovery is pumping up its economy and trying to switch to local growth from primarily export growth and succeeding. Manufacturing in China is climbing. As liquidity feeds the U.S. economy the first beneficiary is China as U.S. citizens seek out low price Chinese imports in shops like Wal-Mart.

The oil price certainly a common denominator of the global economy has climbed over $70. We have to temper this by highlighting that speculators are already piling into oil while looking to the longer-term oil shortage that will occur once the real recovery takes place. Takes out that speculation and what price is oil. We maintain it will reflect the state of the global recovery to a large extent.

Overall now, the global economy is showing convincing signs of growth starting up. Nevertheless, the reliance on the U.S. consumer's disposable income remains the key to global growth. This has to gain traction. But the deflationary holes are large and it seems that some of the new money out there is re-kindling inflation not simply turning deflation around. There are no instruments to accurately measure deflation and its path while measuring the detailed impact of the effect the new money is having. Much of that money is going where it shouldn't and not going where it should! So we are in a wait and see mode, where inflation is not showing but deflation is still shouting, but not as loudly as before. When the mixture all comes together, we do expect to see deflation overwhelmed, as much by rising confidence, as by new money. But inflation has to take off for the same reasons.

But is this enough to change the climate for gold? Will this stall the gold price? No, we think not, because the gold price did not rise simply because of dropping consumer confidence, but because of the fears and uncertainties coming out of systemic failures. Has the flood of new money resolved the systemic failures or instigated more?

Doubts about the $ and $ Bonds

A look at the current path of the $ hints at the answer. The fears publicly expressed about the $ by the largest holder, China, add to that answer. Timothy Geithner may be moving to a revered position in the States but when visiting China and hoping to allay concerns that Washington's bulging budget deficit and ultra-loose monetary policy will fan inflation he got a does of the realities those outside the States have to face. "Chinese assets are very safe," Geithner said in response to a question after a speech at Peking University. The ever so inscrutable Chinese students laughed loudly. So does the rest of his global audience, with far more at stake than U.S. citizens realize. The Beijing-based Global Times greeted Geithner by publishing a survey of Chinese economists who called big holdings of U.S. debt "risky." There is little doubt in foreigners minds that the present monetary policy of the U.S. is undermining both the $ and U.S. bonds. As China is the biggest foreign owner of U.S. Treasury bonds, holding $768 billion in Treasuries as of March [it could be as much as twice that level] that laughter tells us what will happen to gold and why it faces such a glowing future.

The $ remains the global reserve currency and cannot be sold freely by China or other major holders. Promises of a future strong $ have been heard for several years now, but the U.S. will benefit heavily from a weak $. Would it be prudent or wise to rely on the same policies that have been touted for several years now? No, prudence demands that a measure of portfolio diversification be adopted for the long-term. If the Politicians fail again, the cost to all $ holders could be heavy.

Systemic flaws.

What has become clear is that the global economy cannot be governed by the U.S. Solutions within the U.S. are not the solutions for the globe. We foresee U.S. solutions precipitating more systemic failure in the rest of the world to greater and smaller extents over time.

The prospect of floods of money being created to stem deflation then withdrawn to stem inflation does not take into account the ripples that will flow through the world even if [which we doubt] they will work inside the U.S. This seems to be the Treasury Department's plan, one which will clash headlong with confidence levels over time. The only way that normality [as in pre-July 2007] can be achieved is through the constant nurturing of consumer confidence uninterruptedly. Confidence has a delicate nature and is increasingly difficult to restore if damaged even once. It's more difficult if damaged twice and nigh on impossible to restore if damaged three times. As it is the stance of China is the stance of smaller economies - try to reduce reliance on U.S. Trade and on the U.S. $. Such a position favors gold tremendously. U.S. citizens though loyal to the State are fully aware of the risks to their wealth and have shown their views by buying gold even as signs of an economic recovery flicker into life.

It becomes crystal clear that an economic recovery and consumer confidence are not repairing the global monetary system. They are not restoring confidence in the $. There is little evidence that a recovery accompanied by potentially explosive inflation will encourage investors to turn from gold to $ investments. Quite the contrary, the potential for more devastating systemic failures is growing on the back of an economic recovery as trade and money flows resume in a world where half of it are up and coming and taking their portion of the globe's available resources. The present climb of world oil prices reflects that well. We have moved into a economic and monetary climate where risks have never been so high and are rising. Uncertainty and fear of the future, are at peaks never before seen since the World Wars.

So where to for Gold and Silver?

The last two years have taught so many the virtues of gold and the gold price has reinforced these. Prudence and perspicacity demand that competent investors hold at least a good portion of their wealth in gold and silver. In a worst case environment gold and silver have proved many times that they rise considerably with a real appreciation. Fundamentally, it is now time for gold and silver to take an important place in the world of real value as paper values are sincerely questioned.

We are of the belief that gold will continue on its upward path until there is substantial and convincing evidence that we have a monetary system that can withstand the potential systemic failures on the horizon now.

In the light of the above, should we be selling gold and shorting it, or waiting to get back in lower down? Will long-term Investors get in before a fall through $900? The conclusion we have come to is clear. Details of when and how are covered each week in the newsletter "Gold Forecaster - Global Watch" each week for Subscribers-only

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com



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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