Gold - The Weekly Global Perspective

By: Julian D. W. Phillips | Fri, Sep 3, 2004
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"Gold - The Weekly Global Perspective" is not written so as to give you guidance on the Gold, Silver or Platinum prices. It is an informed commentary on the events that reached the market since the last issue. For price guidance and the FULL picture of the markets, with perspectives and insights, see our publications below for details.

That was the week that was!
The last week saw some dramatic fund action, taking the gold price back into the teens over $400, before the present retreat to the strongly supported area around $400. Some thought the net long position of Speculators increased 60% over the previous a possible rise of 160 tonnes, despite the figures released last Friday of a rise of 100 tonnes. What triggered this vigour just prior to the return of the gold industry to work after their holidays? We are led to believe that the liquidation of the "Sons of Gwalia" and their oversized hedge book was the cause. The company's Bankers, set to take a huge knock on this book probably forced the closing of these positions, to eliminate ongoing risk positions, just prior to the announcements. The volumes we are taking about would certainly have been enough in what was a very thin market at the time, to shift the price upwards. But everyone is aware that left to itself the gold price likes the $400 area, so even these deals would have been done in a manner that would contain the price rises to just above the $400 area. The currency markets gave little inspiration to gold, and the oil prices after retreating a little before a little rise. So all in all the markets appear to be waiting for direction.

Whenever, markets narrow their trading ranges like this, you can be sure that they are being sensitised in the process, so that when significant news strikes the market, the prices take off with a dash of speed. But then again that piece of news may take a little time to arrive. But the final quarter of the year and the gold season began as we crossed the start line of September. But a word of caution, we live in a world where communication has reached remarkable levels, levels which when combined with the experience and wisdom of the markets, seeks to remove any need to act precipitously. So the seasons commencement has been factored in to a great extent.

We are of the belief that there are some major factors that are not very easily identifiable, about to exert a very strong influence on this market. The power of these, we believe, could prove overwhelming. With the market makers so attuned to individual pieces of news, creating short sharp changes in prices, tidal changes are noticed only after they have done their work. We further believe they have been exerting their influence, slowly but surely, over the last couple of months and will increase their pressure over the next couple. If we are right, the final quarter of 2004 will prove to be an exciting one that surprises even the most experienced of market players. For sure it will take more than a knowledge of the Technicals to feel this market. Those with this knowledge could " make it happen", whereas those without this knowledge will find it "will happen to them".

Short term prospects for the price:
Seems the gold market professional came straight off the beach and onto a 'fast plane' to China, to the London Bullion Market conference in Shanghai, perhaps the most impressive city on earth at the moment, with everything brand spanking new. With the U.S. Labour Day on Monday and the conference on at the same time, the markets could well prove quiet. At least that's what they hope. With all markets waiting for the Payroll figures tomorrow, there could be a shattering of this calm. The markets are reported to expect an increase in employment figures of 160,000. Below that will be gold positive, above that gold could sag. What makes one nervous about the market at the moment is the narrowing of the trading range, not only in gold, but in the forex markets, where the Euro/$ tussle is also narrowing, failing to drop through 1.19 but failing to break $1.22.

Gold broke away from its Euro relationship, a couple of weeks ago, to rise from its Euro 316 - 326 range to reach Euro 339, before the current retreat to Euro 333. A strong set of Payroll figures on Friday may just rattle gold, but with the recent numbers on the U.S. economy proving disappointing of late the market has postured itself to see a poor set of numbers.

We give the definitive short term Technical picture with price guidance in "Changing Tack" and "Changing Tack Gold & Precious Metal Shares" We give the medium and long term Technical picture in "Gold -Authentic Money".

At the time of writing gold stood at $406.30 and Euros 334.16. The Euro itself is worth $1.2159.

Large Scale Speculators.
A fairly strong build up in the total net long speculative position took the position to 373 tonnes a leap from the previous 270 tonnes, but again last Friday saw a spurt in this figure of another 30 to 60 tonnes more. Market talk has it that this could have been dehedging from the "Sons of Gwalia", by the company trying to close its risk position. We are not certain at all that this is so, and do not rule out the possibility that this unwinding has still to come to the market, or is still in the process of happening.

But let's be clear on one aspect of this unwinding. If this is a dehedging move we are seeing, these positions will not be closed in the future, they are themselves a closing of a "short" position at a loss, which Citigroup, et al, will have to bear. So we do not expect to see these additions to the net position, return to the market at a later stage. This gold will have to be returned to a Bullion Bank or maybe a Central Bank who loaned the gold previously to "Sons of Gwalia".

"Sons of Gwalia".
The Australian "Sons of Gwalia" Ltd., gold mine is in voluntary liquidation. Its hedge book of 80 tonnes would most likely have been unwound before the announcement was made, removing the companies vulnerability to more speculative losses through further gold price rises. Yes, it is possible that this process was not completed. After all desperate times do not produce the best reactions always. The company's Bankers [including Citicorp, one of its largest], who acted as counter parties, in these hedges will bear the brunt of these losses, which according to Australian sources could be in the region of U.S.$243 million on its gold hedges and another $52 million loss on its currency hedges, covering the rate at which the mine would receive its income in Australian $. Last week, market reports said that there were frequent spurts of gold buying through several investment banks, may well have been intermediaries of "Sons of Gwalia" unwinding the company's hedge exposure. Whilst a comforting thought, one would hope to hear an announcement to that effect, not simply more speculation about it.

"Sons of Gwalia" was Australia's second largest independent Gold miner, who found the problem was, that they just didn't have enough gold in the ground, to cover their hedging commitments.

Gold, another currency?
The Gold price held its higher levels and went better in its departure from the Euro lately. With the market having set a standard in moving the gold price up and down almost exactly the same as the Euro moves against the $, this move up in Euros is significant. If it is able to keep this up and go higher, gold will have broken the tight relationship. But it will still be treated like a currency, but in moves against both the Euro and the $.

World Gold Council "StreetTRACKS Gold Trust."
A statement posted on the Securities and Exchange Commission's web site, a gold backed security known as street TRACKS, could soon begin trading on the New York Stock Exchange. Share prices, which will trade under the ticker symbol GLD, will be determined by the spot price of gold at the time they are sold to the market.

This long awaited announcement of an equity trust, sponsored by the World Gold Council, is expected to mirror the "Gold Bullion Securities Ltd" shape, of each share representing 1/10th of an ounce of gold. The U.S. version has registered 60,400,000 shares, according to the prospectus.

Institutional and retail investors will be able to trade in gold in the way they have been trading in shares without the security/ physical / storage problems at a fraction of the cost of holding physical bullion. With the zero learning curve involved in these shares, new institutional and individual Investors in gold should enter the gold market. Additionally, Institutions already trading physical gold and those using the gold futures markets, should find these shares a more flexible, cheaper and attractive means of effectively dealing in gold itself and switch to this avenue, from the physical market. To give you a feel of the practical problem of owning gold, here is a picture of gold worth about $90bn is held, representing roughly onequarter of the world's official reserves, weighing in at 7,000 tonnes. This gold is held on behalf of foreign governments, amongst others at the Federal Reserve Bank of New York.

This share will allow traditional equity markets to extend their range of gold investments beyond the company/currency/geological/political risks of holding gold mining equities, that has been the sole avenue for goldrelated dealings of the equity markets, to date.

On top of those new features, Exchange traded funds offer the small investor the ability to play in gold, cheaply and efficiently.

The NYSE and the World Gold Council are forbidden by the S.E.C. from commenting during the listing process so the timing of the listing is still unknown. As with Gold Bullion Securities, the actual gold will be warehoused by the custodian, H.S.B.C. Bank, U.S.A. What impact will this have on the gold market? With the demand supply balance as it is we need to know! We discuss this in the next issue of "Gold - Authentic Money", along with the full prospective gold demand / supply scene for the rest of this year.

The U.S. Recovery.
With the Commerce department informing us that wages grew by 0.1% and spending jumped 0.8%, it is clear that this recovery is based on the "live now, pay later" principle. If this trend continues there will be a slowdown in consumer spending. With the consumer being the foundation of this recovery, such a relatively small change in the balance of consumer patterns will have its impact. It won't take much of this for the recovery to stall? Whilst we are led to believe that the recovery is "sustainable", the atmosphere of uncertainty hanging over it is pervasive. Each set of numbers is awaited with slightly more anxiety than the last. With nonfarm payroll figure due out after we publish, the tension is high.

Elections will, by their very hype, help us to keep a positive view of the economy, but when the fog disperses the reality must be faced. Who will be in the White house then? With a full term ahead of him will we 'bite the bullet' or have more of the same?

With the vigour absent from the recovery and inflation slowing, it is growing more and more unlikely that we will see an interest rate hike until after the election, if then? Some forecasters are talking now of a $72 oil price on a Technical view. This would certainly trigger a stalling of the economy. Such numbers do the work of interest rate hikes and so deter them. News of new interruptions in oil supplies from Iraq are starting to counter assurances from Russia that the oil supplies from Yukos will not be interrupted.

Silver $6.76
Still a fund play in this market, with forceful bulls looking for an upward breakout, but the bears expecting a dramatic drop. The total speculative long position in Silver rose to 347 million ounces, a 5% rise. Despite this, the price remains close to the top of its trading range.

Platinum $870
South Africa's Implats, the world's secondlargest platinum producer, forecast on Friday a small global platinum surplus in 2004 after five years of deficit, as high prices crimp Chinese jewellery demand. A sharp drop in jewellery demand will be partly balanced by continued strong consumption from the auto sector. They said that since 2002 high prices had caused the loss of nearly threequarters of a million ounces in jewellery demand leaving the market in balance. They forecast an overall surplus of 125 000 oz this year, compared with a deficit of 175 000 oz in 2003. They added that Jewellery demand in China was expected to fall below a million ounces.

This forecast is in sharp contrast to the view of rival Anglo American Platinum, the world's biggest platinum producer, which has said demand in China could match last year's level. China accounts for around 18% of platinum demand. Implats said global demand from the auto sector, which uses platinum for catalysts to clean pollution from exhaust fumes, was expected to rise 2,4%, to 2,8million ounces this year, while jewellery demand was forecast to slip by 13%, to 2,17million ounces. They believe that a price of below $800 was needed to reinvigorate the Chinese Platinum jewellery market, which they did not expect to see this year. With white gold serving just as well in a jewellery role, the move towards gold will continue. The Platinum market will favour the upside as the sheer number of cars requiring Platinum catalytic exhausts will continue to burgeon, in China. Indeed, they saw the auto industry doing more forward buying of platinum. The total speculative long position in Platinum fell to 161,000 last week. The metal is looking more attractive than the shares at the moment for sure, for short term Traders?

The London Gold Fix
2nd September a.m. $407.80   E 334.784
26th August p.m. $406.10   E 3346.129

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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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