What Will Drive the Gold Price in the Days Ahead?

By: Julian D. W. Phillips | Fri, Nov 20, 2009
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This is a snippet from a recent issue of the Gold Forecaster with Subscriber-only parts excluded. Non-Subscribers will not be given our price forecasts, sorry!

Gold is higher than ever before and is still climbing. Many investors are waiting for a fall in the gold price, because they are looking at the past market shape, that has not factored in the major sea-change in the shape of demand. Even many institutional analysts have not realized just what has happened to the market and turn only to their charts to decipher the next moves. You our subscribers, we hope, have realized from our writing and forecasts that a great deal more is still to come in this gold market in the years to come.

The impact of I.M.F. Sales of Gold on the gold price
Essentially there has been a leap in the evolution of the gold market, due to the I.M.F. sales of gold. For a couple of years the pending sale of 403.3 tonnes was seen as an overhang on the market and one that pointed to the days when gold's price would peak. But the reverse has occurred once the first portion of the 403.3 tonnes sale was announced. We are waiting for further announcements on the third tranche of 201.3 tonnes. Please note that India indicated it would be an ongoing buyer of gold from the I.M.F. Mauritius is happy with its 2 tonnes.

However, if this is another central bank and not Russia or China the market will again be surprised and take the gold price even higher. China will have the same impact, with all eyes on the quantity it buys. This is because of the tide of central bank's changing attitude to gold expressed in the action of buying gold, has not yet been fully accepted by the market place and monetary analysts. To do so would also herald as well as define dropping confidence in the U.S. $ and other paper currencies. Monetary authorities will fight this all the way, even in the face of gold buying by central banks.

A look back in history to the time when the I.M.F. first sold gold shows us that their motive was to support the S.D.R., but this failed. This time their motive is entirely different. They simply want to sell gold for as much as they can. But not small amounts of gold, as this is the first time since the U.S. and the I.M.F. sold gold in large amounts [500 tonnes at a time - at auction] last century that the market has been able to buy gold in large tonnages. It may well be the last time too!

The sea-change attitude to gold has now been shown by these sales. It is central banks who want to hold and buy gold. This is not a temporary phenomenon, it is a change in an attitude that has dominated for the last 38 years, since Nixon closed the 'gold window' on selling the U.S. $ for gold. One cannot underscore this fact sufficiently. It will hold sway for at least a decade if not longer [the clouds on the horizon make it difficult to see more than a couple of years now].

Political and economic changes in the world.
Stand back in your mind's eye and look at the last five years changes in the global economic and political world. Unbelievably the Western Financial system saw a breakdown that startled and disappointed even its staunchest supporters. The system was saved by the skin of its teeth. Today, the banking system, standing as the arteries and veins of this system, seems disconnected from the needs of the world riveted by their own greed. As the tentacles of the banking system followed the economic development in all countries, so the ripple effect of these crises spread globally into all countries except China and India. In China the government has a tight grip over every part of economic life and can effectively dominate the banking world. That's why China keeps growing so much. In India, a cash-driven Society, banks, like government are viewed with suspicion and find making headway extremely difficult.

With the currency system and foreign exchange markets stemming from the banking system [banks remain the major players when it comes to exchange rates] the crises flowed into all nations to some extent. So far the root causes of these crises have not been attended to so stand a real chance of re-occurring.

The crises are now seen in the global economy, as a U.S. $ crisis. After so long a decline in the exchange rate of the U.S. $ the U.S. monetary authorities are ding nothing about it, except to keep repeating that they favor a strong $. This is now bordering on the ridiculous as all see that the U.S. stands to gain so much from a falling $.

Now extend that and we are facing a growing situation where political tensions start to grow. President Obama went to China where he faced confident leaders. What did he get? He wanted China to let its currency rise [this won't happen] He wants friendly cooperation between the nations [he will get this as far as it suits them both. But very much to the point [regarding currencies] he then said that, "if we don't solve some of these problems, then I think both economically and politically it will put enormous strains on the relationship." A look at the two very different national interests shows that there cannot be cooperation on currency issues. Political pressure therefore has to rise in the days ahead. Bear in mind that the battlefields are not on land but in the banking and currency worlds, where all economic exchanges happen. So here is where the influences on the gold price will be most keenly felt.

Already the U.S. has seen a decimation of its manufacturing base, a feature that President Obama realizes. In recognizing this he has said, "It is particularly important for us when it comes to Asia as a whole to recognize that in the absence of a more robust export strategy it is going to be hard for us to rebuild our manufacturing base and employment base in this country,"

Take this to a global view, where last year the G-20 expressed a desire to find global cooperation of monetary and economic issues and what do we now see? Central banks and government intentions are now subsiding, and coordinated activity among member states is being replaced by more unilateral, nationalistic decision making by individual countries. As gold is now a 'tacit' currency, gold is benefitting as the prospects for collective action on currencies is included. Now, as we have expressed before, the overriding objective of nearly all members is to maintain some level of currency competitiveness all of which makes a weaker U.S. $ likely and benefits gold. With national interests becoming more selfish as the pressures grow, political tension between East and West must grow. In this way we are moving towards 'extreme times'. This is when gold becomes money and its owner calls the shots.

Central bank gold buying is telling us that.

Where will this take the gold price to and how can we best profit from the gold markets?
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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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