Can the G-20 Halt the Gold Bull Run?

By: Julian D. W. Phillips | Fri, Oct 9, 2009
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This is a snippet from a recent issue of the Gold Forecaster with Subscriber-only parts excluded.

The G-20 meeting last week was hoped to be a watershed for the global economy. It was hoped that accepted that there has to be a global solution to the financial crisis that triggered the credit crunch and the worldwide recession. Those solutions had to include the full cooperation of other key governments, including China, before we could hope for a sound recovery of the global economy. If we have more superficial statements with no real action, expect yet another crisis as confidence is lost, not only in currencies, but in global money systems. You all know the old adage, "Cheat me once, shame on you cheat me twice, shame on me." Just how much 'spin' can the globe take, before losing heart?

So where are we now?

The gold price has shattered overhead resistance, which is now support at $1,032, reaching $1,065 and due to consolidate now [Subscribers will be told at what levels].

Investment demand [Europe and Asia for bullion itself] is growing. Physical demand is coming in from India as the wedding season takes off, but at lower levels than seen in past years. Speculative demand rose taking the net speculative long position to new record highs in line with the gold price. So there is no wavering in the confidence in gold, even after the G-20 meeting. As the G-20 meeting progressed and the statements came from the conference, the inclination of the gold price was to struggle to hold ground and we saw it slip from $1,017 to $992. The $ itself appeared to hold ground in the $1.46: €1 zone, which ground it has since lost. What did this mean? A look at the results of the G-20 should point the way forward.

As only politicians can do, the 'spin' to come from the conference, pointed to a solution and an air of renewed confidence. But did this bear examination?

  1. After Mr. Geithner, the Fed Chairman's massive issuance of new money through Quantitative Easing a major fear has and is that any withdrawal of this money will renew deflation at a more destructive rate. "We will avoid any premature withdrawal of the stimulus," said the G20 communiqué assuring us that worldwide this money will stay in place. With the Fed having stated that interest rates are not going to be lifted for some time to come the U.S. $ is now the "Carry Trade" [borrowing in a currency with low interest rates and lending into a country with high interest rates] of choice. Previously it was the Yen, but the Yen kept on rising and taking away profits from the transactions. With the $ likely to fall, the $ now allows borrowers a currency that is going to be cheaper to repay leaving interest rate profits intact. So, while the attempt to resuscitate economic growth through the stimuli, the key global reserve currency is weakening against the bulk of the world's other currencies. This is gold positive.

  2. While the 'carry trade' will enjoy the weakness of the U.S. $, the $ will be protected by its very size and only be allowed to fall gradually [no brutal drops], other $ dependent currencies will not fare so well. It appears more than likely that Britain's Pound Sterling is headed for a "brutal collapse". We have talked about Capital and Exchange Controls for some time now, so brace up for these in the U.K. This will bring U.K. investors streaming into gold.

  3. Another part of the communiqué stated, "We will adopt policies needed to lay the foundation for strong, sustained, and balanced global growth." Perhaps we misunderstood something here. We thought that this planning had been going on for some large number of months and that this conference was going to reveal these policies? There is little to rely on here. What we do know is that China is not going to allow itself to pay for past U.S. mistakes in any reformations, so we foresee at least some conflict of interest to prevent such an objective. Nothing solid here, again gold positive!

  4. The communiqué called for "global architecture that meets the needs of the 21st century." Sounds inspiring but with the International Monetary Fund being put forward as the body that will monitor nation's progress and possibly provide the new global reserve currency in the form of Special Drawing Rights [this failed before] nothing was done to re-distribute voting shares within the body. China will certainly not go along with a body where the U.S. has the final say on resolutions the I.M.F. makes [85% of members votes are needed to pass any resolution, the U.S. has 16.83% of the body's votes] . With the economic power of the East rising rapidly and the developed world facing a potential lurch back down into a deeper recession [depression?] this matter has to be addressed before a start is made on a 'global architecture to meet the needs of the 21st century.' Until this issue is properly addressed, no progress will be made on a reformed global monetary system. At the moment the issue is not expected to be addressed until early 2011 by the Fund's 186 member countries.

  5. The reassurance that "economic stimulus measures" would remain in place "for some time" is reassuring, but as we see disturbing signs that far more is needed than we have seen to date. While German car sales were up 28% in August, the Center for Automotive Research says sales will fall by a million next year: This will be the largest downturn ever suffered by the German car industry. Fiat's Sergio Marchionne warns of "disaster" for Italy unless Rome renews its car 'cash for clunkers' subsidies. Chrysler too will see some "harsh reality" following the expiry of America's scheme this month. Some expect U.S. car sales to have slumped 40% in September and worse in October, unless these policies are made more permanent.

  6. More than that, where are we in terms of the "recovery"? We were led to believe it was taking off rapidly and that 2010 would prove to be a return to prosperity. The figures are now painting another picture, China's exports were down 23% in August, Japan's were down 36% with industrial production dropping by 23% in Japan, 18% in Italy, 17% in Germany, 13% in France and Russia, and 11% in the US. What can we expect by way of a response? It has to be more stimulation and more currency issuance. Of course if all do this in concert then all will fall in value at the same rate, giving the appearance of stability. Gold Investors won't buy this and gold will reflect that fall in buying power.

  7. With all the repairs being made to the global banking system, surely the banks are fuelling growth now? The reality is that U.S. bank loans have been falling at an annual pace of almost 14% since early summer. M3 money has been falling at a 5% rate, M2 fell by 12% in August, the commercial paper market has shrunk from $1.6 trillion to $1.2 trillion since late May, and the Monetary Multiplier at the St Louis Fed is below zero (0.925). In Europe, M3 money has been contracting at a 1% rate since April. Private loans have fallen by €111 billion since January. Europe is headed for a new credit crunch now. And what of all those Eastern European bad loans? What happened to gold when this happened last time round was a rise in its value? Now that we're going round for a second time, the road to gold will be shorter, as uncertainty and fear reach new heights!

So with this bad turn in the global economy, after the powers that be tried to make us believe that all is going to be well, we seem to have come to a major turn and a bad one. So why should we abandon gold? When we look at the G-20 meeting yet again we ask, was there anything said there that changes the global economic and currency picture except more good intentions in the face of a decaying system? So where will gold go now investors are wising up. How high and just how far will the gold price move? Could this be the start of the real 'bull' market in gold?

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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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