Gold - The Weekly Global Perspective

By: Julian D. W. Phillips | Fri, Jul 2, 2004
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That was the week that was!

The market price of gold broke through resistance at $398 and ran through to $405, pushed up by Investment Banks and speculators in the States. But the same gold price performance was seen this time in the Euro gold price too, making a significant break up and away, from the usual shadowing of the Euro. It has risen in Euros from a low of Euros 316 to the recent high of Euros 331 a performance we had been expecting for some time. It then retreated in both Euros and $, back to the lower $390's and to the mid Euro 320s, ahead of the Fed statement on interest rates, where it remains with a slightly positive bias ahead of the E.C.B. interest rate announcement. With many believing the U.S. economic recovery is now sustainable, consumer confidence jumped from a level on the confidence index to 101 from 93 against an expected 95. However, even in the absence of an announcement from the E.C.B. on interest rates the Euro is showing a small bias to the upside. In the present quiet season for gold, the metal is holding up remarkably well, with Institutional and physical demand present. Physical demand becomes shy above $400. But why, suddenly, is it moving in both currencies you may well ask? It is clear that the performance of the Euro and the $, is economy and interest rate driven. Whilst Europe has a less vigorous economy at present it too is on an upward path.

Like a seashore on a balmy tranquil day the only movement seen is on the surface, with small waves in control, and tides and currents not making a ripple, the market ultra short term Traders and dealers making prices now. But the tides and currents are there and still aim to "buy on weakness".

At the time of writing gold stood at $395.35, and Euros 324.963. The Euro itself is worth $1.2166.

The Fed and this weeks announcement.
And so the entire financial world was braced for the words of Alan Greenspan, when he announced the 25 basis points rise in the Fed Funds rate, using words to prepare the way for a policy of measured rises in interest rates through to the point where they are "neutral", [they equal the level of inflation giving neither a real nor negative return] from the present level of + now [3% inflation - 1.25% interest earned =] 1.75% negative return on the U.S.$ in real terms. The market had discounted this after such an intense media campaign had had its effect. The $ immediately began to fall and gold to rise thereafter.

We were forcefully struck by the power of Greenspan over the entire financial world, supported as never before in history by an all pervasive media. Whilst we wish the Chairman many more years of life, it would appear that his very mortality could threaten the stability of the $, particularly as there is no equal successor appointed to date. His colleagues may have the equal competence, but until proven, will not replace him fully. In the gap until then, uncertainty will also be worldwide and emphasise the attractiveness of gold's glitter.

Gold as part of foreign exchange reserves.
At last, at last! Central Banks have for twenty years given the impression that they consider gold an unperforming relic in their reserves, reinforced by Germany's previous Bundesbank President. The new Bundesbank President has confirmed that he fully understands the relevance and effective role of gold in their reserves. In saying that gold is a, "natural hedge against strong swings in the $" he has shown that he values the role gold plays. The fact that this is being discussed by other Euro users, hopefully will convince all of them to appreciate this. To put it simply, his understanding appears to be this; if you have gold in your reserves alongside U.S.$, when the $ performs gold will not, but when the $ weakens, gold will strengthen.

The result is a balance in the performance of your portfolio of Foreign exchange and gold reserves, in all seasons. Should Germany confirm it has learned this and other European Central Banks state their agreement, we expect the rest of the world's Central Banks to sit up and take notice and perhaps follow suit. This includes all Central Banks who find themselves holding U.S. $, from Japan to China, though to Russia, Holland, Canada, et al.

But please take note, gold is not fused at the hip to the Euro, as its performance demonstrated this last week, as it moved up and down against the Euro. We believe that in time, it will move in the same way against the Euro, as it presently does against the $, if and when the Euro under performs, so the same lesson holds true for Central Banks holding Euros in their reserves. Gold is al last being recognised as a vital reserve asset. We sincerely hope that the Worlds Central Banks in total, will recognise this quality, for the sake of the health of their national reserves.

We present the full story on this subject encompassing the Chinese situation, as well, in an article on the "2004 Central Bank Gold Agreement" series we are featuring in our bimonthly newsletter, Gold - Authentic Money, currently [subscription details below]

South Africa, Peru and royalties.
With Mbeki turning left and emphasising State over the individual and the corporate entity and Peru imposing a 1 -3% Royalty on turnover [same as South Africa], the mining industry continues to be assaulted by Government. In South Africa, the labour laws were changed to ensure that employees get the same protection as is the case in a place like Canada or the U.K. Unfortunately, the majority of employers are individuals who can pay only a little and cannot carry the burden of these laws. So they let the employees go, sad to say. South Africa, needless to say has one of the highest unemployment rates in the world? What's that got to do with gold? The S.A. government withdrew the subsidy on pumping water from E.R.P.M. gold mine, which left the owners unable to afford the costs, so they closed the mine. This closure is final and more unemployed walk the streets of Johannesburg. The same future now threatens the South African mining industry.

In Peru, Anglos has just pulled out of next month's auction for the Las Bambas copper project, because of the Royalty tax.

This policy will continue to stifle the development of new sources of mined commodities and Gold, in these two countries and exacerbate the supplies dilemma building up steadily, on a broad front, globally. Once South Africa produced just under 800 tonnes of gold, now they around 338 tonnes per annum.

Hopefully for South Africa, interest rates rises in the U.S.A. will encourage "hot money' to go back home and weaken the strong Rand, currently assisting in the strangulation of the mining industry there, giving some much needed encouragement to the South African mining industry.

DeHedging going well.
We continue to see dehedging marching on a pace, happy to buy back at these levels. The latest announced moves came from Durban Deep, who have now closed their hedge book to give them full exposure to the "Spot" price of gold. They borrowed $60 million to do so, so they could extricate themselves from the hedge that was linked to the price of Electricity. Thought a good idea at the time, they paid more for Electricity the more the gold price went up. Has it gone up for them? No, indeed, it has fallen significantly, not in $ but in Rands the currency they get paid the proceeds of the gold sales they make. The Rand in the last few weeks has fallen from around R6.9 to the U.S.$ to the current level of around R6.15 to the U.S. $, a drop of over 10%, equating to a drop of around $42 on the gold price. What better time to buy back a hedge than that, making the hedge book perform far better than had it been in $.

The Nature of Gold.
Paper money demands full trust in the man issuing it. Gold inspires trust in itself, not in the producer or the possessor, nor in his politics, his ethics, principals, his actions or in his mortality.

Large Scale Speculation.
With the high and the low of the last 12 months large speculative position in gold, seen on the 6th April 2004 at 610.58 tonnes and on the 25th May at 153.03 tonnes, the present position of 219.60 tonnes is fairly close to the lows, showing the response to the speculators of the rising costs of financing position in the futures market, so it is thought.

German Central Bank Sales - On or Off?
Alex Weber, the new Bundesbank President said last week, that gold forms a "natural hedge against strong swings in the $ and is being given an important role in the management of Germany's funds." On top of this he revealed an important development saying, "the decision on how much gold the German central bank would sell depended on the outcome of discussions with 12 other central bankers representing nations using the Euro, on currency reserves".

Subject to this report from Die Zeit, being accurate, this is perhaps the most important statement on gold since the one made by E.C.B. President Wim Duisenberg after the announcement of the 1999 "Washington Agreement". We await an announcement from the Eurozone Central Bankers within two months! In our series of articles on the " 2004 Central Bank Gold Agreement", we go into detail on the possibilities of this agreement, still to be announced to the market. You can have this series by subscribing to our publication "Gold - Authentic Money", details below.

The return of Indian demand to the gold market!
The first five months of 2004 have shown a larger demand for gold to date, with this trend expected to continue this year, as the economy burgeons, growing at 8% per annum, up to March 2004, up from 4% the previous year. Rural incomes have risen after good harvests, as well. With rural Indians accounting for 60% of the gold market demand in India, this bodes well for the overall demand for gold, which has been as high as 855 tonnes per annum, at its peak. Gold demand in India grew 25% to 149 tonne in the first quarter of 2004 from the same period of last year. In 2003, gold demand rose by 3% to 588 tonnes from 570 tonnes in 2002. In value terms, it jumped by 16% to Rupees 318.8 billion ($6.95 billion). Despite Indian demand being deterred by rising prices in the market last year, 2003 was a good year for Indian demand. Had prices not risen, driven by the speculative / investment demand, the way they did, purchases would have been much greater. Please note that it was not the higher levels of the prices that put buyers off, but the lack of steadiness in the price. The sagacious Indian market doesn't like having prices chased up by Speculators and normally stands back until the dust has settled.

Special Offer: As a special offer to new subscribers, or subscribers taking one more of our [annual subscription] services, we will send you the entire three part series on "What drives the Gold price" FREE.

Silver - $5.89
A quiet week, shadowing the Euro. More of the same expected!

Platinum - $780
A quiet week, shadowing the Euro. More of the same expected!

The London Gold Fix
Gold Fix 24th June a.m. $394.50   E 324.424
           24th June p.m. $395.80   E 328.932

This week Gold has been moving well in both currencies!

The near future of the Dow Jones Industrial Index!

Tony Henfrey, in Global Markets of the 8th of June gave the following M.E.S.A. forecast: "the daily M.E.S.A. forecasts a top today, a low on the 14th June and a high on the 23rd June" Subsequently, the M.E.S.A. showed another high on the 29th June, to be followed by a sharp drop, into a low, due on the 14th of July. In the event M.E.S.A. turned out to be amazingly accurate. Now we wait to see if its forecast of a decline into a low on the 14th of July is going to be just as good. A Dow close below 10357 or an intra day decline through 10307 would signal that it is on its way lower which would signal weaker global equity markets. On the other hand, a daily close above 10480 or an intra day break above 10488 would signal that the upward trend remains intact.

The attached daily chart shows that the index has been moving sideways over the past 3 weeks with a high at 10488 and low 10307. The Mesa forecast highs have been highlighted. The global equity performance model shows that the S&P should be the weakest global equity index in the event of a decline with the Dow second weakest.


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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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