Gold - The Weekly Global Perspective

By: Julian D. W. Phillips | Thu, May 13, 2004
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That was the week that was!

With the froth surrounding the speculation of when and by how much interest rates will rise in the near term, the large scale speculators continued to unwind their positions, weighing the cost of holding gold against their expectations of price rises, dropping their long positions down a further 15% or 38 tonnes to 278.07 tonnes and taking the gold price down to $372 at its worst, alongside falling equity and bond markets. This figure excludes the continued selling seen last Friday, after these figures were announced. When speculators have the fear of dropping prices in their nostrils, dropping prices spur them on. We watch to see them complete the liquidation of their positions. This will show the real level of Investors left in that market.

The canny physical buyers came into buy, yes, but with no intention of holding prices up. They bought and sometimes robustly, but only on weakness. With the doldrums of the northern hemisphere expected from the end of May, they have plenty of time, so they feel. As the week closed the gold prices alongside other markets recovered to some extent, taking the gold price over $380 again, but without conviction, leading us to believe the present anaemia has not past. The week saw the gold price driven primarily by the Euro $ moves and a heightened awareness of technical levels of support and resistance in the gold price.

With the speculators out of the market will the gold price fall further, stabilise or gently rise as a result of the regular market forces? With physical demand having digested the speculators sell-off, we do feel that the more regular market forces will show an unexpected capacity some time in the future, once digestion is complete and seasonal features impose themselves again.

At the time of writing gold stood at $373.25, and Euros 316.832 with the Euro itself worth $1.1787.

"Changing Tack" gets it right!

We repeat the item on our short term technical service, because the need for Technical guidance has grown even stronger since last week. 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 and went short! 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 closed our position at $6.00, but told Traders that there could be more in the fall. We were short of gold as well.

We suggest you subscribe to this service, to find out where we are and what we are doing now in the continuing volatile market!

Weddings in India.

As May slides toward its end, we will see the Indian demand for gold, replaced by the contented glee of the newly weds. As those brides present themselves to their grooms, bedecked in gold jewellery as their dowry, so father-in-laws put back their pocket books, until next year, and their next daughters wedding. Smile you may, but in the West fathers do something worse, they pay for the wedding, and the money bubbles away in champagne, gone forever! As a father of three daughters, I often look longingly at the African custom where the groom has to buy the bride with Lobola. In Africa, if I play my cards right, I could get 18 cows a daughter!

We expect the Indian physical buyers to stand back from now on and through the summer until autumn, when they return to prepare for Diwali. But beware the wholesalers, who last year held a sure line and picked up stock ahead of this and the rising prices, so evening out the demand into this dull period. A strengthening Rupee, or a surge in the supply of bars of gold, could bring them back in support of a falling gold price!

The Oil Price.

With O.P.E.C. already producing more than 1.5 million barrels a day over the agreed quota, the announcement that quotas would be increased by 1.5 million barrels a day, underwhelmed the market. It seems the ability of the market to supply enough, is in question. With rapidly rising demand from China a structural growth factor in the demand factor, it is unlikely that summer will see dropping oil prices, nor will subsequent seasons either. With the O.P.E.C. 's Arab member's oil pipelines in the cross hairs of the terrorists / insurgent /rebel weapons, the predictability of these supplies is causing the markets to take prices up still more. Developments in other countries supplies, hoped at one time to replace some of O.P.E.C. 's oil, will now be needed to augment these. The oil price will, therefore not only add to inflation levels in the world economy, but heighten the emotional instability, growing in the world at present.


We have stated on several occasions how individual acts of terror, from bombs in Bali to massacres in Madrid do not drive the gold price up. We now have to say that this is changing! Now, the surge in the number of terror movements in Islamic states together with the growing middle eastern dislike of the U.S. has grown to a significant level. The horror of acts taking place now, whether the execution of Americans or the assassination of the President of Chechnya, is contributing on a broad front to the destabilising ability of such acts on markets. It is shameful that such wickedness has such a victory, like this, but people are buying and selling in reaction to terror now. The attacks on pipelines in Iraq are keeping 400,000 barrels of oil a day off the market leading us to expect a "Terror" premium of $4 to $8 per barrel.

Should the assassination of the President of Chechnya have been a figure in authority in the States, most markets would have been shaken badly. The gold price, could, as a symbol of value, attract buying on the revelation of future acts of horror, such as these. The strength of the reaction within not only the States, but globally, against the supporters and propagators of such terror is matching the fervour of the Terrorists themselves and will spill over into the markets, to some extent. Economic sanctions on Syria, although of no large financial consequence, demonstrates how the move towards anti-Americanism and terror is burgeoning, but receiving a reaction from the West.


With respect to the eminent Alan Greenspan, who warned of a drop in commodity prices, as a result of the cooling of the Chinese economy, imposed by the government, we are informed that there will be no rupture in the growth roaring ahead, at the moment. It appears that two factors have come into play to alter the picture. The first is that the intention of the cooling of credit through rate rises, is to stabilise growth, so will certainly be managed to permit the continuation of growing exports and a growing economy, so as not to de-rail it but to stabilise it. Reckless investment in expansion and development will be reined in, as we saw when Premier Wen Jiabao fired the Mayor and seven senior officials in Changhon, a city near Shanghai, for reckless investment in steel production.

The second is the stark difference in the impact of rising interest rates in the U.S. and in China. Economists in the States tell us that such hikes will increase savings and cut spending, hence Greenspan's delicate hand on the rates. In China where consumers in China have more than 11 Trillion RMB in savings in the bank and debt of only 1.4 Trillion RMB in total debt. There, a rate hike increases income and could lead to a growth in consumption. We have no doubt that the managers of the Chinese economy will keep that economy at a controlled gallop or canter, but not at a trot.

Gold as a currency.

Some observers have commented on gold as an alternative is not performing. They cite as examples the failure of South American Investors to invest in gold as their currencies collapsed and the link to the U.S. $ failed to do it intended job. We would like to correct that perception and say that gold did do its job, but the South American Investors did not have the market mechanisms to switch to gold or simply failed to avail themselves of this quality.

It would be a mistake by commentators to suggest that gold is seen, even by its supporters as a stable alternative to currencies. This it is not. It, as Alan Greenspan once pointed out, has its greatest value "in extremis". This is when the management of currencies has degenerated to the point where they fail to provide the reliability, or the integrity, needed to fulfil such a role, leaves gold a feasible alternative. As the climate for currencies degenerates through inflation and international exchange rate instability, so there will be a growing osmotic pressure taking Investors into gold, initially quietly, then in larger quantities, accompanied by the volatility spawned by differing opinions, until the realisation that it is a refuge, sends a steady tide of investment into the metal, as we have seen graphically in the past. In this process we are at the early stages, with some years left of the process still to unfold.

The task of defining these forces goes beyond the straightforward process of measurement of facts. It requires insight and perspective, which is what we do our best to provide in the pages of "Gold - Authentic Money". In our present issue, we are examined whether we are in a "structural" or "cyclical" gold "Bull" market.

Interest Rate prospects and the Gold Price.

The Dow is falling and fell below the 10,000 level of late, alongside rising bond rates. The mercurial nature of Investor sentiment adds to the fragility of the consumers spending. The mere prospect of rate hikes of up to a 2% Fed Funds rate by year end, after the first expected rise in June, has led to a quick discounting of the rises. The sea of money that has taken markets to the elevated heights seen in the recent past, will run for cover for sure. The consequences of easy money have to borne and this is where the Fed's job get to be a nightmare.

Greenspan needs to see the recovery so solid, that the consumer is secure with the extra costs of higher rates. There is no doubt in our minds that the structural weaknesses that have appeared in the picture, require inflation to prompt our consumer to get pay rises to the level that can absorb higher interest charges [and oil prices]. To raise rates before this would be to cause an inordinate fall in the markets and consumer spending.

Right now the gold price has digested a full and sustainable recovery in the global economy, but not resurgent inflation. And if the economy shows itself to be not so robust as is discounted?........

Inflation has shown signs it is back and could take off. The Fed is faced with a task so delicate that it requires the deftness of a surgeon wielding a scalpel to manage them. Unfortunately, interest rates as a tool for this job, looks more like a sledgehammer. Will these problems overwhelm the efforts of these remarkably competent men. If so it would not detract from the astonishing accomplishments of Greenspan and his colleagues.

The next vital question will be, will the interest rate rises be used solely as an inflation controlling mechanism, or a tool to control growth? The answer to that is to point the direction of the global economy.

One benefit we are looking at in "Gold - Authentic Money", of the rise in interest rates is the ripple effect on producer country currencies, which will, in some cases, benefit as 'hot money' leaves those countries to return home allowing for a drop in the value of the producer country currencies. This will boost the amount of income the mines earn and improve their profitability, proportionate to the change in the currency's value against the U.S. $.


Silver continues to be the victim of the long liquidation of the speculators, falling to $5.52 and still looking anaemic. With a speculative long position sales of another 7% or 24 million ounces, the price remains vulnerable.

At the time of writing Silver was trading at $5.53.


Sad to say the Platinum price succumbed to the speculative sell-off, falling to $750. With speculative long positions dropping 16% or 14,000 ounces more, to 71,000 oz.

At the time of writing Platinum was trading at $793.

The London Gold Fix

Gold Fix 13th May a.m. $375.50   E 316.691
             13 th May p.m. $375.15   E 317.225


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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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