Gold - The Weekly Global Perspective

By: Julian D. W. Phillips | Thu, Aug 12, 2004
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That was the week that was

We were braced for last Friday's frantic action, when, after the figures disappointed the market the gold price shot up $12 in a couple of hours. This was probably prompted by dealers and speculators having found themselves facing the wrong way. Yes, this did signify that there is still a question mark over the recovery, but this would only relate to gold if it was reflected in the Euro / $ exchange rate, which did rise 2 cents, before slipping back again, to some extent. So why no follow through, many are asking, hoping to catch a ride to $450. Well, look at the season, it's still holidays and harvests, so the natural players are not there. The impact on the $ was not so significant was it? Indeed the gold price has slipped in Euros over the period by just two Euros. This market is reading more and more into less and less, as far as gold is concerned.

But this period is coming to an end in about, one to two weeks time, when many relatively dormant fundamental factors will influence the market in far larger ways than they have been doing in these 'Doldrums'.

Yes, the Technicals are vital at any point and will always continue to be so, but don't ignore the fundamentals. How many out there thought that during this terribly quiet period for gold the price would hold up as well as it has? Most technical pictures pointed someway down and were supported by the seasonal factors, but the price has had no really significant falls, has it? And yet for those who had hoped that the U.S. economy pointed the reverse way for gold, were also disappointed by its failure to hold above $400.

So here it sits, critically poised between the up and the down. Even speculators are in 'pause' position. Whether our men are keeping an eye on the markets, while resting in Prague, or recuperating on a beach in Spain, or even sweltering in the monsoon in Mumbai, you can be sure he will have an impact on his return and he's on his way soon.

The waves that are just visible, relate mainly to the different levels of interest rates. The difference between 10 year U.S. Treasury bonds yields [Now 4.25%down from 4.40%] and German 10 year bonds yields [Now 4.07% down from 4.15%] has narrowed still further to 0.18% [Down from 0.25%], despite the raising of the Fed funds rate by 25 basis points. The Euro $ relationship seems to have steadied to the mid $1.22 as a result. So no action promised from this source, yet.

Short term prospects for the price: We had that good move in the gold price, but things are steady now. With the Dow continuing to weaken still further and so many questioning the value of the $, nothing is as certain as it was, despite Greenspan's reassurances.

But, despite the return of gold to the lower $390's again, the gold price could still easily spring up or sheer down in a moment, as it did last week. Few appear to have the stomach to influence it either way. Of itself this situation can easily become volatile, despite low volumes of dealing, so be careful!

At the time of writing gold stood at $394.55, and Euros 322.24. The Euro itself is worth $1.2244.

Large Scale Speculators.
The total speculative net long positions as of the 3rd of August were down to 198.13 tonnes from 206.84 tonnes on the 27th July. On balance it seems that since these figures were published, there has been a tendency to short cover and to increase long positions, due to the arresting disappointment of the jobless figures last week. These helped the market to burst up on Friday by $12. Their activity was not thought to be that large at all, but we will know for certain on Monday.

The currency play between the Euro and the $ still dominates their action, which has not been that dramatic. So, until there is a significant movement on the speculative positions [who are moved on strong market stories that whip up the surf] the market should remain relatively tranquil and thin, like the sea on a windless day.

DeHedging picks up the pace!
G.F.M.S. reports that dehedging intensified in the second quarter of this year with an estimated 106 tonne cut in the deltaadjusted position. The figure represented a 25% increase from the level measured in the previous quarter and left the adjusted book at 1,997 tonnes. They report that the decline was, once again, a combination of buybacks, book restructuring and producers delivering into committed positions without doing any fresh hedging. In detail, Barrick aggressively reduced its forward position by 26.44 tonnes, whilst the combined position of the newly formed AngloGold Ashanti was cut by an estimated 17 tonnes of the 70 tonnes we expect to see from them. Harmony, meanwhile, closed out the Target mine gold hedge book, which the company had inherited through its acquisition of Avgold.

The ongoing restructuring of the global hedge book, with producers tending to simplify hedge positions, made a significant impact of the makeup of the global hedge book in the second quarter of this year. In particular, Newcrest, holders of the world's fourth biggest hedge book, eliminated their options positions and the book now consists of simple forward sales. G.F.M.S. noted "forwards now account for close to 70% of the global hedge book in nominal terms, compared to roughly 60% in the corresponding period last year". The entire dehedging process is gold positive to us.

The Italian Gold?
Following in the pattern of Germany and France the Italian government went on a public reaction, fishing trip at the weekend, with the economic adviser to Prime Minister Silvio Berlusconi's office, when asked about the assets that could be used to pay down Italy's debt, Renato Brunetta said, "There are idle national gold reserves, in surplus compared with the reserves forecast by the European Central Bank because each country had reserves related to its own currency before the entrance of the euro." He also named a number of other ways that the government could tackle the debt issue, including privatisation of local utilities and nonstrategic assets. The suggestion, from this nonkey official, awaits a reaction still. The chairman of Italy's parliamentary industry commission, Bruno Tabacci, first proposed breaking into Italy's gold reserves to ease its debt load in 2002, but the head of parliament knocked it down. It seems that this suggestion to sell gold was not a serious one in view of the size of the debt to be repaid by Italy and the insignificant contribution these sales would have at these market prices.

Please bear in mind, that they were fishing for any reaction. If the reaction was positive, then gold sales could be explored. But if the reaction is negative, as in the past then the idea could be dropped again. This was neither gold positive nor negative, at this stage.

The U.S. Recovery
The recent recovery has produced fewer jobs than any recovery in the past 50 years. The economy as a whole grew by only 3% in the second quarter, compared with 4.5% in the first. But, American companies are producing terrific profits (which, after tax, are their highest in 50 years). Whilst higher profits mean companies tend to hire more workers, high productivity implies, through efficiencies, less workers are required than before, to do the same work.

Consumption fell by 0.7% in June indicating that household incomes are also rising more slowly than they have in previous recoveries. Our beleaguered, leveraged, U.S. consumer is the backbone of this recovery and he has had to cough up a quarter more on his gas bills, his temporary tax incentives are being withdrawn and interest rates are on the rise. The stretching of his income to the limit, apparently the norm amongst too many consumers was based on an environment of dropping and stable interest rates, so how much of the leveraging of the consumer was based on floating rate debt. With either the banks or the consumer having to take it on the chin when rates rise, you can be sure that the bulk of the burden of rising rates will be carried by the consumer.

When Mr Macawber informed the readers of "David Copperfield" that happiness was earning twenty pounds a year and spending nineteen pounds and sixpence, whereas misery was earning twenty pounds a year and spending twenty pounds and sixpence, he was not familiar with rising interest rates, petrol prices, loss of tax incentives, et al. Whether the American consumer is to be taught this lesson or not [by cutting back on expenditure], the certain victim of this is sure to be the U.S. economy, sooner or later.

With the Fed The Fed's statement on Tuesday declaring confidently that the economy "appears poised to resume a stronger pace of expansion going forward", it would appear that we should dismiss such doubts. If they are wrong uncertainty will favour gold over equities for sure, not only in the States, but elsewhere on the globe.

Interest rates
In the light of the above and the Presidential election just ahead, we probably have heard the last of interest rate rises until after the election, after all, any more moves could be perceived as threatening, particularly by that consumer, who's just about to vote? This is gold neutral.

The Oil price.
The International Energy Agency, the oil adviser to 26 industrialized nations, raised its projections for oil demand this year and next. "The market is tight, production and infrastructure capacity is less than desired and uncertainties continue to weigh on the market." Crude oil in New York was over $45 this week, reflecting not a short term spike in demand for oil, but the growing overall worldwide demand for oil. The potential disruptions, whether they be in Russia or Iraq, have been sufficient to push up prices. The available capacity with which to supply this rising demand is limited, if it exists at all in the minds of those owning the oil fields. Famous for bartering the best price, the Middle East wants to have the highest price that continuous high demand will allow. However, as demand continues to grow the oil supplying nations will see their customers between East and West competing for these limited supplies. Oil demand this year will average 82.2 million barrels a day, 700,000 more than a July estimate, the I.E.A. said. Next year, oil use will average 84 million barrels a day, also 700,000 more than earlier forecast. The I.E.A. said it has underestimated oil use for years and is recognizing that demand now in an annual review. The change comes from higherthanestimated use in nations outside the Organization for Economic Cooperation and Development [No doubt, primarily, China].

There seems little chance according to this expert source of prices declining for long, that is if they do decline. Should this growth of demand continue, something will have to give. At $70 a barrel, in a growth scenario, such an oil price will cause a recession, all by itself. Should any other major factors combine with this, such as those mentioned above, that price will have to be lowered!

We have stated that oil and the gold price do not rise in a fixed relationship, but the overall influence of a high oil price, will at some time have a major impact on the gold price.

Here is a thought to mull over: - At what point does the developed world refuse to accept a few, small, oil producing nations drawing off so much from them by way of the oil price....

Gold will benefit short, medium and long term from a high oil price - substantially!

South African Miners and their reaction to South Africa
South Africa's Gold Fields is merging with IAMGOLD on these terms. Gold Fields will receive 351.7 million IAMGOLD shares worth $2.1 billion as part of the deal. The new firm, 70 percent owned by Gold Fields, will be renamed Gold Fields International.

This merger speaks far louder than words could possibly say. We hope the South African Government is listening to this action. We published an article on the South African Tragedy lately, in which we pointed out that whilst the South African taxation and the strong Rand is efficiently strangling the South African Mining Industry, South African Miners are perhaps right up there with the best miners in the world. This merger certainly states that as does the holding by other North American, etc, shareholders in South African Mines. What is being said here? With the established record that South African companies have in mining in the more difficult areas in the World and that they [Anglogold - Mali 2 mines, Goldfields - Ghana 2 mines] already operate IAMGOLD mines in Africa, South African miners have and are diversifying their mining across the globe [headed for China too]. From Patagonia to China, through the U.S.A. these miners have of themselves established not only a good record as miners but as profitable companies. We would have no hesitation on stating that any dip in their prices for long term holders should be seen as buying opportunities. If anyone can turn mining into a profit anywhere in the world, South African mining companies will be in amongst them. So don't discard them because of the present South African scene. You can be sure that they will turn matters to good profit, somewhere. These are not only expert miners but expert mining financiers, with a multi generation history of success.

Meanwhile, understanding how international mining goes through countries, currencies, then reaches profits and dividends before they reach you, will give you power to profitable investing in these companies for many, many years more!

Gold atomic Memories!
Scientists at IBM in Switzerland hav managed to attach an electron on a single gold atom, then remove it without destabilising it. This control could eventually lead to devices that work at the atomic scale, like a nonvolatile memory cell that stores information in a single atom. Practical atomicscale memory would increase the amount of data that can be stored in a given area by 10,000 times, according to the researchers.

The author has volunteered himself for attachment to any large amounts of gold anybody would like him to be attached to.

Silver $6.53
Silver proved volatile this week, going into the $6.7 area, then down to $6.5 area at present. The speculators seemed more confident in the price by raising the total speculative long position in Silver to 311 million ounces, by the 3rd August, up from 288 million ounces, on the 27th July. Primarily a fund play, where again they have not been forceful in their approach, the price is vulnerable!

Platinum $845
The total speculative long position in Platinum rose a modest 9,000 ounces to 65,000 on the week. The inherent strength of the fundamentals are influencing the price which is steady to strong, rising to the mid $800 this last week and looking healthy.

The South African reserve bank held interest rates at present levels, confirming the 'hot money' [short term interest rate differential] attraction of the currency. But in support of the miners, the Unions were out marching to the doors of the Reserve Bank to complain at the strong Rand and the consequential, prospective job losses. It will take a while for these objections to reach their target if common sense never made it.

The London Gold Fix
12th August a.m. $396.25   E 326.206
12th August p.m. $394.15   E 322.334

Gold slipping against a stronger 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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