Structural, Sound Reasons why this is a good time for gold Investors and Traders

By: Julian D. W. Phillips | Sat, Jul 31, 2004
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Conclusions : - This is no time for waning morale. Now is the time of opportunity! Do you recognise this?

Gold Investors, Traders and long time gold supporters are watching the Gold price fall below $390, looking as though it is heading, even lower. Morale for this sector is low among many of the Bulls. The media hype has the U.S. economy in the ascendancy, implying that confidence is solid and the $ on a roll. Many feel the gold market has had its day and the $ is set to ride high. Do you believe that? Do the facts tell that story? Or is that another dramatic daily picture set to change to an equally dramatic different view tomorrow? We think that this is nowhere near the end. Quite the contrary, we are close to the time when perhaps, we are seeing the bottom of the decline. If this is true, it presents solid opportunities that may well become a happy memory for those who act soon and a point of deep regret for those who sit on their hands and mope!

There are a whole spectrum of reasons why we take this view, some of which we mention below. These are solid, structural reasons why the opportunities being presented in this gold market are to be taken now. We will send the full story to those who subscribe to our approximately twice monthly newsletter, "Gold - Authentic Money" now [visit our website]. Today, the competent Investor or Trader, should stand back from the market to refocus on what really is happening, standing away from the immediate picture, so full of emotions and pressure, and reassess.

In the gold market, the driving factors are not only independent of each other, but impact at different times of the year, allowing one factor or another to dominate for a while before the next one pushes its way in. As we highlight below, the price of gold itself, produces a change in the fundamentals, leading us to a picture that is volatile and sometimes confusing. In addition, gold is the only metal that is driven primarily by factors outside its commodity aspects. Here is a taste of what we mean: -

The Season.

The present gold market is in the Doldrums, but the Trade winds are set to blow in a couple of weeks time. So this market currently presents an opportunity that the gold market will remember as one of the best opportunities for buyers, since gold hit its bottom at around $270 per ounce, in 1999. We say this, because there is a build up of forces in the market, which will swamp the current, dominant, price makers like a seachange, gradually but overwhelmingly. Factors that are unrelated to the current, $/Euro play. Factors that are simple, but weighty, as ethereal as confidence itself. On top of this there is a confluence of major factors, almost ready to burst on the market, long overdue, to show their full force in the next eighteen months and more.

- The Attitude.

Contrary to the mood of the moment, a positive attitude is needed to see the opportunities in the market today. The present mood of the market gives you the advantage over others and allows you to do what we all dream of doing, that is buying at the bottom. Now ones policy should be, in our view, a time to 'Buy on weakness' for long and medium term holders, whilst Traders must be very nimble of foot on short positions and ready to hold longer, on long positions.

Broad spectrum of influence that affect the market over time:

- Jewellery: - The jewellery trade worldwide is either on holiday or waiting for the harvests to come in - they're absent from the market, until midlate August!

- Investor Demand: - Investor demand for gold is low profile, as always, but is picking up high volume sales on price falls, discreetly, attempting to simply cushion falls with their dealings and so remain unobtrusive. We read them as having acquired close to 400 tonnes this year, so far. Gold positive news will see them accumulate more. Investor presence will continue, following the market, not leading it.

- The danger of 'averages' and 'overall': - One has to deeply respect the institutional work on gold by highly competent Institutional Analysts, but they do have to present a picture that is conservative, measured and free from dramatic news, to suit the very large institutional clients they have, with their huge portfolios. But the fact of the matter is that the gold market is not conservative measured and free from dramatic news, it is volatile. Significant news can send it skyrocketing or tumbling, in an instant. Significant news can change the perceptions of the market players, reversing their positions. A good monsoon can tip the balance of demand / supply and act in a different direction to Western opinions. The gold market defies conservative 'overall' assessment, forecasting 'averages' making such an approach, inadequate and as unreliable as defining all women by the 'average', for anything but a long term view. As though to defy the conservative analyst, the diligent measurement of a speculative traders motives, is inappropriate, as he is driven by Technical considerations and changeable criteria, such as the concept that the Iraqi war could affect global stability, a factor which was good for a $70 rise and a $60 fall after it was conceded that they were wrong.

In addition, the gold price, by itself can alter demand and supply factors, not the other way around, as is the case in other markets. A good knowledge of the market and its driving forces is imperative, to get the best from the market. When these factors interact, is also a key to benefiting from the market. [That's what we help you to achieve, as well as to keep a firm grip on the Technicals through our services - see below]

- The state of the U.S. recovery and the advent of uncertainty, again : - The markets across a broad front are indecisive and tending lower, giving no convincing reasons why they should rise. According to a Merrill Lynch survey, for the first time since 2001, more company financial managers expect the global economy to weaken rather than strengthen, while expectations are for a significant reduction in the outlook for corporate profits. Only 2% of the 275 managers surveyed believed corporate profits would improve - the lowest percentage in three years. U.S. equity markets are considered to be the most overvalued in the world.

- Inflation : - Inflation remains a concern for fund managers, with 78% of those polled expecting core inflation to be higher in a year's time, without mentioning energy prices set to remain high and even rise. The oil picture and its record prices, is telling us that inflation and high prices are here to stay. Oil Producers locked into $ payments for their oil, ensure that the oil price rose and will continue to compensate for decay of the $'s value irrespective of its relationship with other currencies. Now that demand is so strong, and increasingly diverse, Oil Producers grip on the oil price is bound to harden.

- Central Bank Sales and Purchases of Gold : - Let's face it The signatories to the Central Bank Gold Agreement have not finalised how much gold, if any they are going to sell in the next five years. France has given an indication, but told us that price is important and they will not be held to a time scale. All we know for certain is that they have set a ceiling of 500 tonnes per annum, for those sales. If confirmations of the discussed sales are not made soon, the gold market will read the banks as not being sellers in the future. As it is the amounts publicly discussed for possible sale, come nowhere near 500 tonnes a year.

Meanwhile, Eurozone Bankers are deep in heavy discussions on reserves [including gold] behind closed doors, even though the new Central Bank Gold agreement comes into being towards the end of September. We believe they Europe is on the brink of structurally confirming the need for gold to be a key part of currency reserves, not just an important element of them. Germany's Bundesbank President confirmed this was being discussed and mentioned how gold was an effective counter to the 'swings' in the $. This is not simply an academic stance on gold, but the first move to counter the near total dependence on the $ as a global reserve currency in thirty years. We await the conclusion to these discussion via an announcement from them, soon!

Of course they will do their best to make it one that will not unduly disturb the market in the very short term, but the golden writing will be on the wall!

It has escaped few people's attention in the gold market that the Central Bank of Argentina bought 42 tonnes of gold recently. This is significant because we have had two decades of only Central Bank selling, which was thought to continue until the gold was gone from Central Bank vaults, entirely. 'Official' buying of gold represents a major change which will affect the attitudes of Investors and market participants towards gold confirming it as a sound long term investment!

- DeHedging : - De hedging is set to continue for the next year and more, although the hedge books of the major companies are moving into line with what Producers now consider prudent hedging policies. The fact that they are unwinding such hedges confirms their desire to be exposed to the 'spot' price of gold, a position only those who expect higher prices would want to be in! They always 'buy on weakness', and stay low profile in the market, following not leading the price.

- The Euro : - The Euro is forecast by the bulk of institutional Analysts to rise over 10% by the year's end, which takes it to $400 +. Currency instability is set to continue before that and thereafter. We do expect the gold price to remain a shadow to the Euro, until the other major market forces kick in.

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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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