What Should Investors in Gold and Silver Do Now?

By: Julian D. W. Phillips | Fri, Dec 4, 2009
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This is a snippet from a recent issue of the Gold Forecaster with Subscriber-only parts excluded. We will not disclose our forecasts on the gold price except to Subscribers.

A change of market - Understanding fundamentals

We have talked about a complete change of tone and shape in the market place in the last few weeks that has altered the future of gold. It has taken 10 years for this to happen, but it is here at last.

Conditions when gold last peaked

When gold was floated off from the $ and the U.S. refused to exchange U.S. dollars for gold, gold was considered to be money, still. The message didn't sink in to the public for some years. The gold price rose from $42.35 to $850 in a series of neat moves. But all Central Banks had subscribed to the U.S. inspired change in the monetary scene before it hit $100.. No, they didn't accept the Special Drawing Right of the I.M.F., but they did accept the $ as the sole global reserve currency when it became apparent that this was the only currency they could use to buy oil with.

First the U.S. sold gold, then the I.M.F. both sales failing to discourage investors, but the campaign was then changed to accelerated sales of gold from producers to overwhelm keen buyers, which it did successfully [through a scheme to lend producers gold ahead of new production of gold, with which they repaid the loan. Quite a time before the gold priced peaked at $850 investors became wary of buying gold shares, letting the bullion price run by itself, to the peak. Gold shares and bullion were considered very acceptable institutional investments by all ahead of this change.

Gold itself gradually went off investor's screens and into the shadows as a barbarous relic. It took years before the world accepted the fact that central bankers, including European ones, were against gold and were following policies that undermined the gold price. Even gold shares were treated with disdain. For the next 15 years gold from around 1985 gold was sidelined.

Conditions now

The negative perception and undercurrent of potential central bank sales militated against a rise in the gold price. This situation lasted right up until 1999 and the announcement of the "Washington Agreement". Oddly enough this was an Agreement to sell gold by European Bankers [they had not done this before] but turned the gold price around to the positive side. At the time the gold price was at $275. From there it slowly rose. What changed the scene?

It was the statement that gold was a valued reserve asset in the eyes of central banks and that the sales were limited to specific quantities. This immediately removed the perception that gold sales would continue until all central bank held gold would be sold into the 'open market'. Supply could then be measured accurately.

It was clear that demand could now overcome supply eventually. Producers slowly realized that the days of falling gold price were over and they were vulnerable to losses, [through the scheme that accelerated gold production] if gold prices rose above the proceeds they hoped to achieve over years from their previously hedged positions. They started buying gold to cover their exposures.

But just as the market took a very long time to realize gold prices were going to go down, again the market has taken nearly 10 years to realize that gold was coming back onto investor's screens. With the three central bank gold agreements still in front of us, the common perception still remains that central bank's are sellers. It has taken most of this year for the market to accept that central banks have stopped selling and are now net buyers.

Institutional acceptance from central banks through Sovereign Wealth funds through the many types of funds down to individuals, is now gold's path into the future. The implications of this for the gold price are enormous. These changes must form the foundation of our approach to gold from now on, with all other factors affecting gold subordinated to this. Right now Asia is leading the way in this appreciation.

Adjustments to ratios influencing the gold price.

The Oil price

Some analysts in the past took the performance of the oil price as a direct guide to coming gold prices. We have believed that at best its influence was and still is indirect. It pointed a general direction when growth and speculation, prior to August 2007 was such that the oil price rocketed to $145 a barrel. As the bubble popped the oil price fell back to $35 a barrel, but gold didn't fall. Now with Russia trying to sell as much as it can and O.P.E.C. keen to hold prices around $80 the oil price is 'under the control' of oil producers. In time, once the global economic recovery is established, growth in Asia together with the recovery maturing in the West will see demand outpace supply, taking the oil price up to new territory. But, until then its function as an indicator of future gold prices has been undermined.

The $: € Exchange rate

For most of this year and years before, the $: € exchange rate was taken particularly by short-term traders as a direction finder for the gold price with, at times the gold price cleaving to the rate. Many times the gold price decoupled from the € as it rose against both, but on a day to day basis the $ still triggers moves in the gold price. Why? Inside the U.S. speculators and traders see this rate as being a measure of the value of the $. It harps back to when currencies were complete measures of value. When the $ weakened, it was seen in isolation to other currencies, particularly the only other really major currency, the €. But now the true picture that the $ is the trunk of the tree that all currencies stem from is becoming clear. Consequently gold now has a record of moving up against all currencies. This is symptomatic of the structural faults in the monetary/currency systems. At the turn of the century the € price of gold was well below €300 and took some years to rise through this level, but now it has just broken through €800.

With China rising from insignificance to growing prominence the tensions rising from a $-pegged Yuan and greater trade tensions on the way the time for another global currency to barge into the world scene has come. This promises some ruptures and ructions to the extent that it is now prudent to retain and or buy gold for national reserves and for investment protection against currency swings. A future of uncertainty and lack of global cooperation is on the horizon. So what relevance does the $: € exchange rate, have on this scene? Why should the gold price move with the €?

The breaking away from this ratio is more significant than gold's relationship with oil. This break takes gold away from all currencies and places it as a measure of the entire system.

While we do expect the markets, particularly in the short-term, to take time to be weaned off this relationship, it has, is and will happen.

Changed Direction

This leaves gold in a new world. This was what drove the gold price up to $850 the first time. This time those central banks, which control the world of money are now turning back to gold. Where will they be happy to see gold? And in what role? We will have to wait and see.

It is incumbent on all of us who follow the gold price and its influences to re-address these changes in the gold market and to adjust to this new shape and new future.

Impact on the Gold Price Long-term & Short-term
For Subscribers only! We sent out a review of the gold market to Subscribers only, which reveals why the gold price is being held well above $1,000, where it will go next and how the gold market has changed shape due to the changes in overall central bank policies, from selling gold to buying gold. Potential Subscribers should ask for this report and it will be forwarded to them.

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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