Gold - The Weekly Global Perspective

By: Julian D. W. Phillips | Fri, Aug 6, 2004
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That was the week that was!

The market is quiet, with low volumes being dealt, making it vulnerable to high volatility. Europe is on holiday, e India is battling a difficult Monsoon, and the market sit controlled by New York, who are blown by the waves of opinion on whether the recovery is strong or weak. The rest of the world has supported the price with a strong and physical undertone, waiting for the forceful U.S. market to call the shots. So far it still holds above $390, with most observers, even many of the longer term "Bulls" saying it should have fallen by now. But it hasn't! Every time it is ready to dip, it pulls itself up again to sit below resistance on top of support. Month end squaring didn't knock it down, will the 'expected' positive news about the U.S. jobs, on Friday do it?

Is the recovery strong? Yes it is, no it isn't continues to harass us all, so what's happening.

What we do know is that: -

· The large scale speculator has completed the liquidation of his long positions.

· He is most probably short, so will accelerate any rise through resistance as he covers his exposed shorts and will no doubt increase his short position if support is violated.

· Physical buying has been strong enough to prevent the falls from holding the lows and perspicacious enough not to chase the price up.

· De-Hedging is continuing.

· Dealers and speculator pricing is dominated by economic, terror and oil price news, adjusting their prices to accommodate the prevailing views on these scenes, which change from day to day.

· A major influence on the Euro / $ exchange rate is still the interest rate differential. The difference between 10 year U.S. Treasury bonds yields [Now 4.40%down from 4.58%] and German 10 year bonds yields [Now 4.15% down from 4.27%] is barely changed at 0.25% [Down from 0.31%]. As we see this has eased the Euro lower, and this trend should continue.

· The Euro / $ relationship is still dominant, BUT... gold is beginning to refuse to follow at will. Did you notice the Euro price of gold? It rose as the Euro fell this week up to the Euros 326 before settling to the present level of 324.72! Will this continue?

One has to emphasise that the forces at work in the gold market are not representative of the entire gold market, so small volumes from the dominant players will distort the true gold market picture. You have to ask yourself whether this represents an opportunity for you or not? For sure, you would be well advised not to let the emotions of the gold market influence your decisions, at present, but rather use them to benefit you!

Short term prospects for the price:

With trading being confined to the low $390 for a few weeks now, there is a raising of pressures on this range and the break out from this range will be surprising and convincing either way. No place for the widows and orphans. Its more like 'no man's land' waiting to be claimed by the most aggressive. Get ready for a good move in the gold price!

At the time of writing gold stood at $391.35, and Euros 324.72. The Euro itself is worth $1.2052.

Large Scale Speculators.

According to the numbers recorded a week before last Friday, the large speculative net long position has dropped to 206.84 tonnes, but with an estimated further liquidation of 30 to 47 tones on Wednesday and Thursday of last week, the net position could well be as low as 152.41 tonnes now. Essentially this removes the threat to the gold price from residual and easily panicked positions held by the funds. Should the funds return to enter the fray again, they will be fresh new and easily reversed positions, bringing back high volatility to the market. With low volumes being dealt in the market at present, this is set to add to the volatility. With the gold price range-bound in the low $390s, the move subsequent to the disclosure of the payroll figures, could well prove substantial

The U.S. economic scene.

Doubts about the robust nature of the U.S. recovery remain. With disappointing retail figures the whole market awaits U.S. economic data to see if Mr Greenspan was right in his description of the economy as being set to experience growth. The "is it, isn't it" tug of war is still going on, with more than a touch of electioneering trying to persuade all observers that all is well at home. But the figures are still not fully supporting this. And the equity markets, whilst seemingly determined to believe this and act upon it, only manages anaemic performances. We do expect U.S. interest rates to add another 25 basis points next week, which may put U.S. interest rates above that of Europe, and send the $ higher. Thereafter, the Fed will probably hold off any further increases until after the elections, if the same President is present.

But Friday's July employment data, is set to provide the trigger to movements in many markets including Gold and the $. With the $ and Euro rate performance tending to favour the $, Market estimates for non-farm payroll data have risen to 242K in the latter half of last week. Anything better than this will boost confidence and faith in Alan Greenspan. Below that and doubts will break out again and send the gold price higher.

The Oil price.

With the Oil price sitting well over $40 a barrel still, the medium term expectations for the Oil price have become the short term realities. With the tortuous and tortured progress of the Yukos affair, we are realising that high prices are now accepted in the market place. With the confirmation from O.P.E.C. that they are at full capacity, we are expecting that prices will rise still further. Should there be any disruption in supplies, which could easily be precipitated by strikes or sabotage, etc, the market expects price spikes to appear. Some have even talked of $100 barrel oil. We are told that the last time oil was being supplied at capacity, was in 1973 and in 1980. Bear in mind that the price then was at similar levels to today's price, and inflation since then is pitched at 40%. Should this happen then prices would dramatically rise. Please bear in mind that figures have been put forward saying that $70 a barrel will be sufficient to precipitate a recession in the States. In those days the price hikes were relatively easy to contain, but then there was no growing Chinese demand. There was no awakening empire with a healthy and growing thirst for oil, that could not be diminished. It seems that inflation may well take off, lowering the value of the greenback, in the future, to counter any deflation tendencies in the U.S. economy. With supply at full capacity, the market and its price are almost certain to be vulnerable to Terrorism and so encourage it. Striking workers have never had a better opportunity to press their case, whatever it may be!

As we wrote, the first oil market rupture is set to spike the oil price still higher. The Russian government seemingly playing a new version of Russian roulette, has again frozen the bank accounts of Yukos, so reversing yesterdays decision which allowed it to continue to operate fully. Brace yourselves!

The Monsoon.

After a poor start, with the possibility of drought on the West of India and floods in the North East, the monsoon got off to a poor start. Currently estimated at 20% lower than the good monsoon of last year a big improvement has taken place now, removing the likelihood of a poor year for the crops. As 70% of India's gold is bought by the agricultural communities, we watch this feature of India closely.

What is remarkable is the strength of the physical demand for gold in the market, in this quiet period. Certainly India's reforms concerning gold have been as dramatic as those in China, allowing the markets to focus on the business of gold internationally, more easily than ever before. What is of particular note is the expected growth of India's jewellery sector as a result. As Indian jewellers expect to sell the bulk of their jewellery 'by weight', the gold content of their work is far more gold price related than western jewellery, bringing its perceived value far closer to money, than western jewellery, which has a relatively smaller relationship to its intrinsic gold value. In the long run, we believe that that will benefit the volume of gold sold as jewellery, globally.

Terror!

What a shame that terror now has an impact by rumour as well as reality. With the continued warnings from the authorities we all, wherever we are remained heightened to the possibility of a Terror attack. It has moved from its past perception of the occasional act of occasional acts by the madly fanatical to the weapon of the expected act of a growing number of groups, whose capabilities may possibly outweigh the authorities ability to stop them. It gives a contagious effect to the easily adopted perception of instability.

Silver $6.68

Poor relation of the other precious metals this may be, with digital photography threatening the industrial use of the metal. With photography still accounting for 20% of Silver's use, this threat is real. Mind you, with a shortfall of 80 million ounces a year, or 10% of total annual demand for the past thirteen years, a vast amount of the world's stockpiles of Silver have been depleted. Whilst Silver is sometimes associated with Gold as a monetary metal, most of the world's monetary authorities have ceased using Silver as a currency and Central Banks by and large do not hold large quantities of the metal. Nevertheless, with reports telling us that Bill Gates is long of a Silver mine and its strengthening price performance pattern in the long term, the metal has surprised many in the market. But the present price may well be driven by the short term factors alongside gold, shadowing the Euro and other commodities. In common with gold, the funds have been a major driver of the price, but now stand with their large scale speculative position at 288 million ounces down from this year's high of 436.5 million ounces, showing that the more capricious funds are out of the market, lessening the downside. But who would want to push it higher now? The funds, in this quiet unseasonal period may move ia, but which way?

Platinum $828

Strong and steady was the market in Platinum this week and should continue to be so even if the $ should strengthen. The Fund positions on this metal have increased but not dramatically, from 37,000 ounces to 56,000, well down on the peak for the year of 349,000 ounces. We expect little by way of fund action to increase the Platinum price's volatility in the short term.

We have not changed our views on either the metal or the shares which are available to Subscribers.

Since we last wrote the Rand has weakened from around R6.00 to the $6.25, finding support at around R6.30 : $1.

The London Gold Fix
5th August a.m. $391.80   E 324.876
5th August p.m. $391.50   E 325.951

Gold starting to move away from the Euro?

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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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