Gold - The Weekly Global Perspective

By: Julian D. W. Phillips | Thu, Jul 22, 2004
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That was the week that was.

And what a week that was for gold!. The gold price held well over $400, amazingly so, in the face of some heavy fund selling! Gold is still in the seasonal "Doldrums", approaching the European holidays, when inventories are run down, so little buying takes place. Indians are wrestling their monsoons and what looked to be drought, until the rains came a couple of weeks ago, so the market should be tumbling to lows. Then after Greenspan's speech was absorbed, the funds took to hammering the gold price again, taking it down to $394, before Europe and physical buying pulled it up off its lows to the current level. We still have 'frantic Friday' to go and a month end on the way, with its position squaring. Physical buyers are still there at below $400, treating these levels as sustainable and buying on the dips. When we saw the funds come in, in the last fortnight, taking their positions up as high as half their previous highpoint, we were worried, knowing they were hoping in vain that the mood of pessimism would be consolidated by Greenspan, but not a bit of it. Just before he was due to speak, they lost their nerve, or took short positions, taking the gold price down $7 as he wandered over to the Senate. He spoke clearly and strongly about his confidence, giving the impression he has a firm grip of the reins on an economy set to gallop, once past this "soft patch". His speech, a $ supportive one, should have sent shock waves through the foreign exchanges and gold market. Initially, we did see a drop of one cent on the Euro, but gold held at $400 still. There was intense selling pressure from the speculators who had lifted their long positions to 331 tonnes by the end of last week up from 197 tonnes the previous week. Then, the next day, they came back again and dropped the Euro another cent and took gold down alongside it.

Despite this and the potential for further speculative attacks on the gold price to the downside, it is becoming more and more difficult to believe that this market is what it appears to be. Fund dumping of capricious positions took the gold price down $60 last year. Twice this year such dumping has caused small drops in the gold price, from which it recovered and fairly quickly.

It would appear that the big buying by the Producers [DeHedgers] and possibly large investment buyers are stepping in to pick up whatever the speculators drop onto the market, seeing this as, a rare opportunity to buy 'in volume'. This means a positive change for the market in that the appearance of large scale speculators may not be a danger to the price, but a positive influence as it attracts large scale Investors to the market! The next week will be telling on this story! We would guess that the funds must have dropped more vast amounts onto a market that should not be able to handle it, but there we are, at the time of writing with gold nudging $398 again!

Short term prospects for the price: No doubt about it, the Gold price is poised in a critical position. It is still in its low season, waiting for what we expect to be a strong final quarter to this year in terms of demand. The big question then will be, is there sufficient supply to satisfy the new demand? But now, is there enough strength to pull this gold price back up? Or will it nearly make it before falling away again? Can it break up over $400?

The $/Euro play still holds centre stage and doing well there. Technicals are tightening, narrowing trading ranges. The dip below $400 is ominous with the U.S. believing that because of the stronger economy, the $ will get stronger. If so, it is because they have persuaded the international community that the $ is a better investment than before. The carry trade [borrowing to invest in interest bearing instruments at higher rates than costs] will be convinced if U.S. rates overtake Euro rates, but fundamentally the twin deficits are making all, more and more nervous. Higher interest rates can drive up yields on U.S. Treasuries, attracting foreign investors. Twoyear Treasury yields rose about 0.11% points today to 2.62%, leaving them about 0.05 point above the yields on German government twoyear debt. German twoyear debt have yielded more than the U.S. twoyear notes since last month.

However, remember that a strong economy sucks in imports, as the figures have shown time and time again! We have never seen a point in the market place, not only for gold but the Dow, the $, etc, where the Technical picture has moved so critically to centre stage. If you do not have the solid support of a Technical Analyst such as ourselves, who make it a virtue never to be partisan, you should get one now! Our short term Technical services, "Changing Tack" and "Changing Tack - Gold & Precious Metal Shares" have forecast amazingly accurately to the present position. We have not put investors into the risky tiny moves, but rather focus on the expected larger potential runs, so as make larger amounts out of fewer trades with less risks We strongly advise you to Subscribe! [see details below].

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At the time of writing gold stood at $397.50, and Euros 324.01. The Euro itself is worth $1.2268.

The Tragedy of South Africa.
It appears that not only the South African government but there media seem to have got their heads stuck in the sand. The unfolding tragedy of the South African Mining industry, the largest export earner in the country, is staggering under heavy wounds inflicted by the stronger Rand and over taxation amongst other woes. But not one move has been made to assist or lessen these wounds. The Finance Minister has recognised the damage being inflicted by the Rand, saying the Rand's strength should be discussed, but promising no short term solution.

South Africa's inflation rate is in the low 3 - 6% area with prime rate at 11.50%. Great for the banks, but the death of industries who keep the economy producing. The rand looks as though it is headed to another 10% stronger level, on top of this picture R6.00 to the $.

Goldfields have confirmed that dropping South African gold production is a certainty, as where mines can do so, they switch from the lower grade ores to the higher grade ores. This solves immediate cost and production problems, at the expense of the length of the life of the mine. Hence one can reduce the overall quantity of gold South Africa will produce over the longer term. An already tightening gold bullion supply to the market is also confirmed.

The real blows will be felt by Harmony and Durban Deep, two mines with very deep level mining, where, of necessity, the "long wall stoping" method of mining is used. No such grade variation can be implemented here, for safety reasons. So the full force of the strong Rand, increased taxation and cost demands has to be absorbed by the company's cash flow!

Gold Authentic Money highlighted the weakness of the South African Gold mines and the gold Index there some time ago. When it became obvious that the fall in the Index would be precipitous, we went short, to the delight of our Subscribers! Our trades are not that frequent, but usually extremely successful!

Alan Greenspan.
The power in his hands is overwhelming. Every word of his said before the House Banking Committee has been savoured, chewed, interpreted, then reported. I saw three reports initially, on his words and each came to a different conclusion. There seems to be plenty of space for 'spin' these days, but Mr Greenspan's words were clear, precise, saying the necessary and not saying the necessary too. It would be fair to say that he confirmed the recovery is sustainable and should prove selfgenerating from now on. He confirmed that inflation may rear its ugly head not just from the oil price but from strains within the economy, a worrying word. He did confirm the interest rates would rise either at a 'measured' pace or a 'gradual' one, a feature already assumed by the market. Overall, his words are set in a nationalistic context and this time, very positive, but with caution. The market chose to treat these words positively, initially. The result was that the Dow's decline was not halted, but the $ strengthened from 1.2422 to 1.2240 in two days. Mr Bush must be pleased with the way he handled the speech too, how long before the election now?

But we feel that this impact will be short lived, leaving the Euro looking stronger, shortly. His comments on the transitory nature of the oil price impact on inflation, seemed hard to swallow. You can be sure that for every point that inflation rises, the oil price will rise to compensate. It is clear that if the pay increases and job availability does not keep pace with interest rate hikes, our poor consumer will be gently squeezed until he bellows. Greenspan believes that the consumer will receive pay hikes to compensate for the increase costs of interest rates and oil costs. We are watching car sales, jobless numbers, housing starts, new mortgage figures as well as WalMart numbers, to see how he's doing. And remember that Joe citizen likes foreign goods, which is why Japan and China are doing so well. That's why the deficit rises and why it will keep on rising. Contrary to market opinion, this is not good for the $ but is good for gold!

A subsequent recovery of the Euro will take the gold price up with it.

The Dow
The Dow continues to fall as we said it would, post the Greenspan statement of Tuesday. You will remember the article we produced on, the "Dow has topped" and the followup confirmation of how it was breaking down. Despite the positive comments from Greenspan on the economy, the Dow is now threatening the 10,000 level. It was this sort of work that makes the Technical services of ours so valuable.

We see nothing in Greenspan's comments that would warrant putting new money into U.S. equities indices. Remember, all that has changed in his actual words, is that interest rate rises are now confirmed and the potential for inflation is still a worry to the Fed. The new factors are inflation fears and solid confirmation of future rate rises, both damaging to the Dow. Our being alert to this change benefited our Subscribers, put this way by one of them, "I find your technical analysis of the Dow very useful to me and since the markets seem correlated anyways ...... As always, continue the great work." - subscribe!

Indian Gold Importers and the L/Cs
Much has been made of, in the press, about the restrictions the Indian government is placing on the use of L/Cs in the gold import trade. The R.B.I. has advised banks to open L/Cs for direct import of gold for a maximum period of 90 days against the previous 360 days. Only nominated agencies, approved banks and EOUs/SEZ units can import gold. Why the fuss you may ask? By playing the interest arbitrage game, Indian importers could add a good dose of interest to their income [much in the same way that hedgers used to earn from the "Contango"] and effectively reduce the cost of their gold buy around $8 per ounce, now on a 90 day L/C this drops to $2, IF you are one of those designated by them as being an acceptable Importer. No wonder the howling. Mind you the big International Banks, like HSBC were cut out of the trade themselves, because this L/C game passed them by, causing them to cut their Indian staff and operation. Now they are back in the game and the government has regained control of this trade. With the dropping of many import restraints including duties the Indian gold trade is still ahead of the game over last year! To our Indian Gold friends, we hope your harvests are going well this year and look forward to the market bursting to life when you return.

Silver $6.43.
The total speculative position in Silver stands at 289 million ounces, up from last weeks 241 million a more modest increase than the gold position. Nevertheless, the fortunes of gold were those of Silver. Silver leapt to almost the $6.70+ levels, before pulling back to the current $645 level, still walking the road with the other precious metals. We see no reason why this will change this week.

Platinum $830
Platinum is starting to show its inherent strength, having risen $13 over the level we recorded last week. We like this market but prefer the metal to the shares. When and if the Rand rises to $5.50+, we believe the shares will be as attractive as the metal, if not more so. We cannot see even the myopic South African monetary authorities allowing the destruction of their mining industry for short term monetary objectives. Note the large scale speculative position on Comex moved from a -26,000 ounces to a + 1,000 position, leaving a terrific potential for the market to spike up.

The London Gold Fix Gold Fix
22nd July a.m. $395.00   E 322.265
22nd July p.m. $397.75   E 324.112

Gold is moving the same amount in both currencies. Walking its own road?

The Nature of Gold.
The cleanest metal there is!

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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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