Gold - The Weekly Global Perspective

By: Julian D. W. Phillips | Fri, Mar 19, 2004
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That was the week that was!

The focus of the gold market remains the Euro / $ battle, but new elements have been introduced leading to a breakaway in the Euro price of gold. Having slipped back to Euros 316 it has spent the last couple of days sprinting up to Euros 333. In $ it has performed well having leapt from below $400 to the current levels, breaking through resistance around $405. But the breakout in Euros is more impressive, as this is in a currency that it has been shadowing for quite some time.

It appears reasonable to say that gold is exhibiting more stability than the Euro or the $, a feature we have been waiting to see. If this is the case then gold is steadily walking its own road, as a currency and moving away from dependence on Euro strength? Time will confirm whether this is indeed the change in pattern.

Yes, physical buyers are the main buying force and growing stronger by the day, but perhaps the main reason that prices are higher is that the selling has dropped off considerably.

The currency instability ruptured the forex markets just before we wrote this letter. At the time of writing gold stood at $411.10, or Euros 332 with the Euro itself worth $1.2377.

Speculative position on Comex

Having said that the physical off-take held the market up, speculative long positions turned the corner last week bouncing off a net position of 290 tonnes to rise to nearly 342 tonnes last week. With the price rise above $400 the funds came back to the market strongly enough to keep prices at levels at the high end of the range acceptable to the physical market.

Still, speculative levels have been up as high as 515 tonnes in January of this year. What is of note is that this 160 tonnes came on top of normal supply to the market and the price is still only 4.4% from the recent peak of $430.

The seasons are kind in India

The two thirds of India's over 1 billion agriculture dependent population are having a good year. The weather has been kind, the economy is strong and there are profits in the pocket. The Hindi marriage season is with us for the next two months and gold inventories are low. All this conspires to indicate that physical demand from India will rise strongly. Yes, they are price sensitive, but with the market having been around $400 for some time, I doubt whether the extra couple of dollars on the gold price is going to slow down those couples headed for their nuptials. The attempts to delay the marriage by the brides parents, hoping for a drop in the gold price below $400, could produce quite a sense of humour failure from the bridal couple. The gold buying will go on, even if it is spread over a longer period. It is a time to accept that parental influence is not as strong as it was when they were younger and that it now costs an extra 'bob' or two.

Indian buyers are on the way back, realising that there is no impending legislation on gold about to cost them dearly as it did last year, when duty levels were dropped. The Indian buyers are still not going through the big gold banks, as they can still buy what is effectively a few $ cheaper, through the route we described in "Gold-Authentic Money". This makes it more difficult to quantify precisely, but it is clear that there is ebullient demand there.

The 2004 Central Bank Gold Agreement

"Gold-Authentic Money" published the first article in a series of articles, on the agreement of European Central Bankers, in which it highlighted who the likely sellers would be. It appears certain, that, if one does not understand the issues involved you will not understand the long term gold price. In a continuation of the series on the "2004 Central Bank Gold Agreement", we will be examining these issues and all the other issues surrounding the future of "Official" gold sales, very closely.

The U.S. Economic recovery and the value shares offer.

The Federal Reserve continues to hold rates down to historic lows. The employment rate is not falling further but is not rising. Unless improvements are seen in employment levels, doubt will be cast on the sustainability of the recovery inside the States. Unless visible improvement is seen, confidence could begin to wane.

At the time of writing the PPI figures for January in the States showed an increase of 0.6%, warning that inflation is taking off. The gasoline prices rose 14% in January. The petrol price will keep on rising as the $ falls. As this is a necessity, higher prices will not lead to lower demand, then a fall in prices, but will feed through to the economy as higher inflation. i.e. lower $ = higher inflation! As a result, the $ has faltered in its rally against the Euro. We appear to be at a point where the medium to long term influences are overwhelming the short term moves. Are we about to see a change in direction of the markets?

We have no doubt that the Fed's eyes are locked onto the dangers of waning numbers, such as the expected faltering in manufacturing growth. We are not looking to see them raising interest rates until they are convinced that higher levels will not damage the vigour of the economy. When will that be? It is looking like next year at the earliest! Gold is responding as you see above and is likely to do so for a while. With Greenspan telling us all is well and inflation under control, such figures are likely to weaken confidence! If the tide of inflation is taking off, and the $ reflecting a lowering in its value, gold will have to raise its $ price. With the Euro doing the same gold is moving independently of both it seems.

Silver

Taking a breather this week, as though readying itself to spring, it remains driven by speculative funds. The longer it consolidates, the better for the price. However, when Speculative influences wield control, the level of risk in the markets rises to great heights. The wise determine price levels in the absence of such Speculators, for the conservative view. Those caught in the market, who have relatively low risk tolerances, have to realise they are in a high risk game with the speculators calling the shots. They must make their decisions accordingly This is the time even they should closely follow the Technicals [Will Silver prices continue to rise? - Subscribe through the above link, to "Changing Tack" for guidance on when to close positions]. The desire to stay in for the ride, can quickly give way to the panic of seeing profits ebb away!

Also remember that a Commercial goes short when he has a physical position. He sells what he has bought so as to lose the risk of price movement. This is pure hedging, because he makes his money from improving the metal, for a higher product price. He is not speculating! When he sells his stock, he buys more and continues to be short via futures or options! So weigh carefully, talk of a 'bear squeeze'. At the time of writing Silver was trading at $7.37

Platinum

Platinum still has solid fundamentals even with the continued presence of the Speculators. But the same danger exists here as for Silver. We have seen Speculators take the gold price up and down $90 or 30% in a matter of months, so ask yourself, why are you still in and when will you get out? At the time of writing Platinum was trading at $900.

Terror pays!

We confirm what we said last week, that terror incidents, "are not a mover of gold prices". However, in the long term they will have a destabilising influence that is massive and that will move gold prices. This last week showed just what we mean.

Consider what happened over the weekend, after the blasts in Madrid. The Spanish elections went ahead and removed the incumbent government, primarily because of their support of the U.S. in Iraq. The new government confirmed that they would move closer to Europe and away from the States. For the few squalid men, responsible for the explosions, this must appear as a victory beyond their expectations, on 3-11.

The ability to have such an effect on world politics will certainly promote further incidents. But it will also promote a significant distancing of Islam from Democracy, as terror seems to be broadening away from Al Quaida to other groups from the extreme Muslim quarters. Then will we see the Muslim American become an American Muslim?

This destabilisation of the world can only exacerbate the instability that seems to be growing on so many fronts now.

The effect on gold prices will be seen when this instability floods over into the financial arena.

The London Gold Fix

Gold Fix 18th March a.m. $407.15     E 331.555
           18th March p.m. $410.75     E 333.050

- The gold price looks like it has broken up in Euros, as well as in $! Is gold walking its own road now?

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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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