Gold - The Weekly Global Perspective

By: Julian D. W. Phillips | Thu, Apr 29, 2004
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That was the week that was!

The helter-skelter days are back. That drop took our breath away. Then a $10 bounce and a settling at the mid-$380's had us all jumping. Who said the markets were boring? With the threatening overhang of gold in the short term hands of the speculators, the market was trepidacious at the start of the week. Many were looking over the cliff edge called the 200-day moving average and saying that's the end of the "Bull" market, whilst others were saying the cleanout of 'weak' holders of gold, sets the market looking up again.

Then, in came a flood of demand for physical gold. Having patiently stood to one side, as the large scale speculators held sway, strutting around at prices above $400, these patient buyers, saw them turn and the weakest of them run with a total liquidation of at a guesstimate, 50 to 150 tonnes being off-loaded. At prices they clearly believed were right for the market, physical demand flooded in from China, from Japan but mainly India, where the arbitrageurs had their day too, buying cheaply, to import to India where premiums over the international price, guaranteed them a sound profit. Demand was so great that we heard reports of a shortage of 100-Kilo bars in the market.

In Japan, buyers are keenly aware of the departure of the Bank of Japan from the market and believe a lower Yen is here to stay as imports to Japan, swing the balance of payments to a deficit, a far better weapon for a weaker Yen than interference by the Central Bank. The government of China is being blamed for the fall in precious metals, because they stated they wanted a cooling of the economy, to ensure stable, balanced, growth. This was enough for the panic signals to be given, as the thought that China would reduce its demand for commodities would break the bull's back. Seems like the market needed any excuse, even bad ones to tumble. Technically, the market was due for a correction. But we have to say, the inscrutable Asian market is still comfortable in gold!

The question in the market place remains, is there enough support for the gold price and will the gold price rise, if the Euro sees further falls? With the gold price falling in both Euros and $, from above 334 after dipping to Euros 323.45, where it currently stands, is it going to rise back to the heights of Euros 347 and $430 or fall further?

"Changing Tack" gets it right!

This is the short term technical service of "Gold - Authentic Money". At a time when the bulk of the market was looking upwards, we were going short. We will go where the market tells us to go, not where our emotions tell us to go. That is why we got it right. We told our readers last week in these columns that we were short of Silver and hope you followed us, to your benefit. Our Subscribers followed us all the way from our start point at $8.00 . We were short of gold as well. We suggest you subscribe to this service, in what is definitely going to continue to be a volatile market!

De-Hedging in the Market.

Alongside the patient physical dealers we are seeing the Gold Producers, waiting for their opportunity to pick up the stock falling from the Speculators hands, so as to remove the constraints of hedging from their exposure to the rising gold price, so they and their Shareholders believe.

• Place Dome having de-hedged 12.44 tonnes in the first quarter, aims to buyback another 34.22 tonnes by the year end.

• With the Anglo Gold / Ashanti now complete we see another 70 tonnes of de-hedging in the near term.

• This reinforces the expectation by GFMS of a total of between 340 & 400 tonnes of de-hedging this year.

In the next issue of "Gold - Authentic Money" we are incorporating our perspective and insight on the G.F.M.S. report, with whether we are looking at a "structural" or "cyclical" gold "Bull" market. With the emotions pressing and different views being thrown into the arena, we felt it important to have a factually based assessment, of where the market is really going in the short, medium and long term.

At the time of writing gold stood at $386.00, and Euros 323.229 with the Euro itself worth $1.1942.

The European recovery.

Until now the market reads Europe, as lagging the U.S. on the recovery front. Recent statistics indicate that Europe is now, also on the road to recovery. Whilst this is an indication of no further rate increase this year and Euro positive, its main point is that the Global economy is now healthy. Contrary to the expectations of most people that interest rates In both the U.S. and Europe must rise, we do not believe they should, yet, because the reasons for increasing rates are not sufficiently substantive, yet. GDP growth is not meeting expectations and inflation has not grown to the point where it warrants compensatory action.

Friction between European Central Bankers and their Finance Ministers continues, with a, reportedly fierce, confrontation between The French Minister of Finance, Sarkozy, aided by Hans Eichel of Germany and the French Central Bank Governor, Trichet, over interest rates, at the G7 meeting this last weekend, seemingly an extension of the confrontation between Welteke and his Finance Ministry, over interest rates.

The independence of Central Banks from their governments is under severe test, right now. The governments involved, bound by myopic objectives seem unaware, or unwilling to understand that the very integrity of the Euro is at stake. Will we see the French Ministry of Finance carry this over to the sales of gold? Remember that Trichet, of the Banque de France, has not yet announced the sales, only spoken of the willingness of the bank to sell. We believe there is still tension on that front too! ["G - AM" has the full story!]

Producer countries NEW taxes on mining!

It was with angst, that the mining world viewed the South African government's proposal to impose a "Royalty" on the income received by the South African gold mines, on top of the heavy taxes they now pay. It is with horror that this world now views Chile contemplating the same move.

The attitude of these governments to their mining industry is beginning to resemble the owner of the 'goose that lays the golden eggs', who decided not to simply accept the eggs, but now wants the carcass of the bird itself. The result has been that new mining ventures in S.A. are on hold and old mines looking like they should be closed.

In Chile there is a difference to S.A. and that is they say they will recognise that the mine needs to make a profit, in order to pay these taxes. They propose linking this tax to the profit margins of the mines.

Placer Dome, mining in Chile has voiced its concern, following Harmony gold mine in South Africa proposing the layoff of several thousand workers!

Mining shares must have this political [taxation] risk factored into their value now, with an allowance for an increase in taxes in subsequent years, after all, once the foot is in the door, opening it wide is the next step? Memories of the debacle in Papua New Guinea and its old Bougainville mine spring to mind, where it eventually closed down too. Bear in mind, one buys gold mines for the projected net profit due to Shareholders.

The consequence for the gold price is clear. Future new supplies of gold will be handicapped by greedy governments, reinforcing the prospect of dropping supplies. In South Africa the current gold price, [against a strong Rand] is insufficient to make many mines profitable, so new mining ventures will not take place until higher prices are seen. Further, It is insufficient for a mine to expect higher gold prices in the future and then develop. A profitable average, gold price must be visible in the market for new mines to be financed and developed.

Gold a Safe Haven or a good investment?

Many opposers of gold, talk of it as giving a poor return on capital employed. On bullion this is a fact of life. Many Central Bankers talk of needing a return on investments. So why do any Central Banks hold any gold and why do Investors buy gold shares and bullion?

A fundamental reason why gold is bought and held by both Investors and Central Banks is that gold has value, in times when the investments fail to provide adequate returns when there is a rupture in the credibility of investments that yield returns. Today we hear of reports of Investors moving out of falling equities into gold. We see that Central Banks continue to hold the vast majority of the world's gold. Both these types of Investors show, by their actions, that they do not believe that the days are gone when paper assets can suffer a loss of credibility. Indeed, aren't we all painfully aware of the structural problems that continue to face the world economies, upon which the global monetary system is built. Unlike the man who fell off the fifty story building was heard to say, as he passed the twelfth floor, "so far, so good", the gold holding Central Banks and Investors have what they believe is a 'parachute', in their gold holdings.

Please note that if one does not understand the issues involved you will not understand the long term gold price. Subscribe!

Silver

Silver was badly mauled, again, far more than was gold this week, falling to $5.85 yesterday, before the small bounce to the current $5.93. Again, as we expected the hedge funds were responsible, driving the price down as far as they could. With such a large scale speculative overhang, it had to happen sometime!

At the time of writing Silver was trading at $5.89.

Platinum

We gave you our view on Platinum last week, in which we said Platinum was overbought and the decline we see was headed to $810 and $733. It seems the long term speculators were aware of this too and hit the market ,as well as the other precious metals and knocked it down to $785, already. We will be examining the Platinum price in a future issue. At the time of writing Platinum was trading at $792.

The London Gold Fix

Gold Fix 29th April a.m. $382.75   E 323.405
          29th April p.m. $386.00   E 323.446

Gold fell $10 and Euros 10 since last week! A fall in both shows a separation from currencies again!

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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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