Gold - The Weekly Global Perspective

By: Julian D. W. Phillips | Thu, Jun 10, 2004
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That was the week that was!

The market looked like it was going to have a run in gold, but it couldn't quite make it, pulled down by the market perception that the $ would be strong. The Euro dominated the field taking precious metals down with it. Gold showing a very steady hand in Euros, alongside Silver and Platinum, overall. Funds showed themselves on the quick in and out, favouring the downside, but selling has been across the board after Mr Greenspan made the comments that the Federal Open Market Committee "is prepared to do what is required to fulfil it's obligations to achieve the maintenance of price stability, so as to ensure maximum sustainable economic growth." Put so neatly, it was the source of many interpretations from an imminent aggressive driving up of interest rates, to some that said he would be cautious and wait for inflation to appear first. The gold market interpretation was to stay steady, to slightly stronger in Euros, shadowing the Euro in $ terms.

The announcement of a public holiday for the U.S. in to mourn President Reagen's death, has caused the market to close short positions and a flurry of trade ahead of the holiday, but of no real price consequence. Right now with the large and impressive players in the wings of this market, for sometime, the present actors are capricious and emotional, so expect volatility to continue as the market is distracted by the news of the moment, swamping yesterday's news of the moment.

But have no doubt that when the big players return, they will take the reins!

Ask yourself why is the gold price so steady in Euros, and so reflective of the Euro's performance? The price of gold that dominates the market is the $ price, making this question so important. The focussing of all players on this facet highlights that this is a currently a reflection of the $'s performance alone. Why? And wither the $? Look at our comments on interest rates below.

At the time of writing gold stood at $386.25, and Euros 319.55 steady for the last few days in Euros. The Euro itself is worth $1.2081 down 2 on the week.

French Gold Sales confirmed, but with a twist!.

Bank of France governor Christian Noyer said the central bank plans to sell part of its gold reserves to the market, possibly up to 500-600 tonnes, confirming earlier statements of the French Finance Minister. The announced purpose is that the French government is hoping to raise funds from gold sales to help reduce its budget deficit. Few are convinced. Most believe it is a politicians show for the French gallery. The Bank of France head Noyer, added a twist that intrigued us and links to our comments in the series of articles we have been running on the Central Bank Sales: -

Noyer said the central bank will wait until gold prices are "appropriate" before agreeing the sale, adding that a decision will be made either by the end of this year or the beginning of 2005. In addition, he added "The bank will certainly take into account the price. If we feel the timing is not appropriate, then we will wait".

We find ourselves smiling and will be writing our conclusions in one of our main articles that appear in Gold – Authentic Money" each issue. In the latest issue we have in our main article the penultimate in a three part series, on "What drives the Gold price", a facet of the gold market that will catch the market by surprise, we believe, in the near future. It could overwhelm the dominant currency features of the market, pushing the price at the moment. Subscribe to find out what this facet is and how it works in making the gold price!

It's all very well having the parts, but they must be put together to see how they work!

Interest Rate fears.

As interest rates took over from the oil price, as the centre of attention this week, we thought it pertinent to say something on this. The U.S. $ market has factored in an aggressive rate hike at the end of this month, more like 50 basis points rather than 25 basis points. The bond prices tell us that. Why? Productivity has been impressive and wages have started to rise. Most observers are happy with the rises in employment. A likely level of the Fed Funds rate is 2% by years end, we are told. The election year, the daily desire for a dramatic tale to tell on the part of the media and the driving hope that all is well and the future is good support this view. But before we jump on this bandwagon we look around and see: -

• The Fed has to get any rate hikes out of the way in time for them to be a thing of the past, at election time. This puts them into June / July / August at the latest.

But: -

• The U.K. perhaps in a better position to raise rates took a 'cautious' line and raised their rates by 1/4 % only, following a similar move by the Australian government previously. The effect was to 'pop' property prices in Australia. We suspect the same will happen in the U.K., despite a shortage of houses. Could the U.S. consumer react the same way, after all re-financing of mortgages is dropping to a trickle even now, before the hike.

• With the burden at the pump of gas prices set to return, after the dip of this week, in the form of rising prices inflation is certain to take off. The money pump will have to begin flowing again to counteract the drain of money to the middle east and other oil producers.

Mr Greenspan's statement made a major point in a minor way, when he said, "....the maintenance of price stability, so as to ensure maximum sustainable economic growth." In other words his prime objective is "sustainable economic growth" "price stability" is a path to that objective. He will not act in a way so as to damage growth! Inflation will have to be a feature before he attacks it. Yes, he has warned of rate hikes, but we expect them, if they occur at the end of June, to be 25 basis points only. The PPI figures will tell us more tomorrow.

How will the gold price react? The Dollar's performance is dependant on real interest rates relative to other currencies. As it reacts to the Euro, so currently it reacts to gold. But inflation reduces the value of these interest rates. If rates rise following inflation it will be a catch-up situation, which over the longer term, will favour gold. For more of this clarity subscribe to our services below.

Norlisk, the Russian base metals miner, buys Gold mines.

Norlisk the giant Russian metals producer has invested $1.57 billion in gold producing assets. Asked why, the comment from the company was, "The outlook for gold looks great and it's a natural hedge against a global downturn."

South African Gold Mining in difficult straits

With two out of every three South African gold mines, owned by the large producers operating at a loss and a further third are making margins of less than 10%.

A further 3.5% increase in wages is set to damage even these figures. A distressing sight for these producers indeed. The problem? The South African Rand continues around R6.6 to the U.S.$, when to make the mines buoyant again requires a R8.40 Rand price to the $. It seems little hope of that, when the South African economy is growing well and the Reserve Bank seem oblivious to these cries of distress. The 'golden goose' seems to be under attack. With the proposed Royalty to be imposed on turnover, not profits, the knife that could deliver the mortal wound is being put at the ready.

Silver

This metal is shadowing the Euro, alongside gold, so its potential run to $6.60 looks unlikely, if we look at this week's performance. The market in the summer season is looking for direction?

Platinum

Even Platinum took a beating to a small extent alongside currency plays. It remains sound, despite the news that the Chinese are turning to white gold jewellery from Platinum jewellery. The demand for this metal from its industrial uses seems sufficient to keep it looking strong. With the Strongly pernicious effect of the strong Rand continuing, there appears little likelihood of an increase in production for some time.

The London Gold Fix

Gold Fix 3rd June a.m. $384.25   E 318.562
           3rd June p.m. $384.95   E 319.249

All moves this week a $ play and steady in Euros!

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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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