Gold - The Weekly Global Perspective

By: Julian D. W. Phillips | Thu, Sep 9, 2004
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That was the week that was!

This week the $ / Euro play continues to allow the hedge funds to hold sway over the market, as gold hovered round support levels and then fell below them, only to challenge these, now resistance levels, immediately after the very different words from Greenspan. His words of warning certainly lowered expectations of a rate rise in the near future, sending the $ down through its support levels.

The market was thin, through the week, so the hedge funds, with small activities dictated the moves and dealers positioned themselves, by pricing in expected moves, quickly. Like a sea with changing tides, the waves sent mixed signals to the players. With the Technical picture still on a knife's edge, the market was skittish and the funds saw an opportunity. They saw the break in support and went short with some vigour, only to turn round and cover the shorts as Greenspan's words turned them around. Normally they would have had a great price impact, but a market that wants to hold its level and rise, because of fundamentals factors, cannot be pushed down for long. Greenspan's comments did just that. If tomorrow is another "Frantic Friday". It will be a churning one seeking direction. The question will be then, will it find it?

Short term prospects for the price:
The tone has changed, without doubt. Greenspan's confidence in the recovery is nowhere near the levels it was last time he spoke and the time before, even with his positive remark, "the expansion has regained some traction". The market will have to absorb his comments carefully and adjust to the nuances he gave. No wonder the long term [10yr] Tbond rates have been dropping whilst the market talked itself into rising rates. Should you question this perspective, have a look at one of his earlier in the year speeches. We expect to see this adjustment in perceptions continue not just in the short term but the medium and long term too.

But first there may be hesitation in the market's actions as it reevaluates the big picture, before acting. The funds will do their best to 'whip up the surf', as they tried to do in the last week [unsuccessfully] in gold. Our advice to make sure you are ready for the Autumn [not the fall], is sound and those who do understand the market are ready and are taking positions. Are you? [Look at our services below, to see where you can get ready]

The Euro broke upwards through resistance, this week after the chairman's speech to close to $1.22. Most expected $ strength, which did not come allowing the gold price in Euros to stay above Euros 326, still. With the physical market buying on dips, as all professionals do, they will not be pushed into a position where they have to pay more. They will pick the time to buy, using the futures and options markets to smooth their supply requirements, so do not expect a flood of buying from them to dominate. That flood will steadily take from the markets as tides affect the sea, but they will leave the wave making hedge funds et al, to define the very short term prices.

We give the definitive short term Technical picture with price guidance in our new "Changing Tack - The Metals", Changing Tack - The Indices" and "Changing Tack - The Ratios". We have other publications, which may suit you better, so please contact us directly for details. See below for our medium and long term Technical picture services.

At the time of writing gold stood at $399.10 and Euros 327.32. The Euro itself is worth $1.2193.

Large Scale Speculators.
With momentum players going short, then changing direction later in mid week, the tendency for the large scale speculators was to reduce their exposure overall. The market saw some long positions liquidated in a move that was interpreted as 'looking for direction'. The net position pulled back, if we add in the moves after the numbers were taken, last week Friday, of around 342 tonnes, down from 367 tonnes the previous week.

This indicates to us that the "Sons of Gwalia" position has now been squared with the banks. Clearly they are not going to venture out again until they hear the Trade deficit tomorrow and the retail figures next week. They will watch the impact on the $ of these numbers before their next play.

China - The Central Bank Governor speaks on Gold!
Considering that China and its approaching 2 billion people are growing in wealth at a dynamic rate perhaps one of the most important statements made about gold was made this week. In no uncertain terms, the Governor of the Bank of China has shown that the government of China, is determined to increase the levels of gold held in China, by Chinese citizens. It is a lot easier to encourage this than for the Central Bank to go into the open market to acquire gold for its reserves.

In his speech to the London Bullion Market Conference in Shanghai, the Chinese Central Bank Governor, Zhou Xiaochuan, made it absolutely clear that the Chinese government wanted its citizens to own gold! Trading in gold will provide another choice for individual investors who keep their money in bank accounts due to a lack of desirable investment options, the official Xinhua News Agency quoted the central bank governor, Zhou Xiaochuan, as saying. Trading by individual investors [in gold] would unlock some of the 1.2 trillion yuan (U.S.$145 billion; Euro 119 billion) now kept idle in bank savings accounts, he confirmed the governments position with these remarks in particular, taken from his speech this week. "China will speed up the opening of its gold market to bring gold exchanges more in line with international practice," ................"China's gold market will eventually become one inseparable part of the international gold market." ............. He then gave motive for the citizens of China for turning to gold, saying, "Futures gold trading will provide gold consumers and buyers a channel to protect against price shifts," ......."It may also give those who want to take profit on betting on price trends another investment channel."........."trading of the physical commodity would allow individuals to hedge their investments against swings in inflation". Earlier this year, he had indicated that by further developing the gold market, creating safety and a highly efficient gold trading system and exploring new trading products with investment and hedging functions, the Chinese gold market would fulfil a transition from the present spot market to a comprehensive financial market.

The moves have been taking place steadily over the last year, but for the inscrutable government, through the key official in this matter, the Chinese government has become unequivocal on gold. For the solidly determined nature of the Chinese government, this could not be a stronger progold statement than it is! The ramifications go far further than the simple projection of a tripling of gold purchases in China to 600 tonnes within a decade. 600 tonnes would cost a mere $7.716 billion of the $145 billion Zhou referred to, a paltry 5% of this amount. If the Chinese hear his words and act, it will not be a 'slow boat' that takes it there, but 600 tonnes of gold will reach China in a lot quicker time than a decade!

But of deep significance is the now disclosed attitude of the Central Chinese Bank towards gold. There positive attitude is not merely accommodating gold keen citizens, but seen in the context of the changing attitude of Central Banks towards gold, no doubt it should positively influence many other Central Bankers globally, on their thoughts towards gold, as a reserve asset and an alternative to the $!

Transactions on the Shanghai Gold Exchange totalled 235.35 tons valued at 22.96 billion yuan (US$2.7 billion; euro 2.3 billion) last year. In the first seven months of this year, trading volume jumped to 363.76 tons valued at 36.9 billion yuan (US$4.5 billion; euro 3.6 billion).

Hedgers beware - Aussie Gold shares after "Sons of Gwalia"
The aftermath of the fall of the "Sons of Gwalia", has been similar to the fortunes of Barrick, prior to turning against Hedging. The stark reality of the risk taken on by hedgers when they went too far in their hedging was a down rating of the performance of the share. The same seems to be happening to Aussie shares. Do not be surprised to see a further lowering of hedging levels even amongst those who have and still are lowering their hedging levels! Pierre Lassonde, the president of the world's biggest gold company Newmont Mining, fuelled the fire. "Gold hedge books are real liabilities that will continue to grow and likely sink more gold companies."

The U.S. Recovery.
It seemed a week ago so 'cut and dried'. The near certainty that a 25 basis point interest rate rise and the sustainability of the recovery was apparently established! We all expected Mr Greenspan to give us words of confidence in the future. The whole year we have been told the recovery has taken off, that it is sustainable and the future looks good. Then came the speech from the Chairman of the Federal Reserve. He gave us small items of comfort, but occasionally cloaking them with a warning that it was not going to last into the medium and the long term. He told us, "Consumer spending and housing starts bounced back in July after weak performances in June, although early readings on retail sales in August have been mixed"...... "In the manufacturing sector, output has continued to move up in recent months, though part of that rise likely reflected an increase in inventory investment. In the labour market, though job gains were smaller than those of last spring, nonfarm payroll employment growth picked back up in August"....... "Nevertheless, the outlook for oil prices remains uncertain. Higher prices have damped the consumption of oilfor example, U.S. gasoline consumption, seasonally adjusted, fell about 200,000 barrels a day between April and July. But the growing concerns about longterm supply, along with large prospective increases in demand from the rapidly growing economies of China and India, both of which are expanding in ways that are relatively energy intensive, have propelled prices of distant futures to levels well above their ranges of recent years"........... "Nonetheless, the prospects for the federal budget over the longer term remain troubling. As yet, concerns about the budget do not appear to have left a noticeable imprint on the financial markets.".......... "These developments, however, do not warrant complacency about the fiscal outlook. With the baby boomers starting to retire in a few years and health spending continuing to soar, our budget position will almost surely deteriorate substantially in coming years if current policies remain in place.".......

This has been entirely consistent with our expressed views for the bulk of this year, sad to say. This speech in our opinion has certainly removed the doubts about Mr Greenspan's integrity, with the elections approaching, for it is unreserved in its castigation of governments and their failure to prepare for the future. His picture of the future pulled no punches, whilst pointing out the positive, stating that effective controls should be in place to ward off the potential disasters of the 'baby boomer' retirement bomb. We recommend you read his words directly to get the sense of the dangers the future poses.

It reminded us of the story of the man who fell off the 50 floor building, who was heard to say as he passed the 12th floor, "So far, so good". We will be pointing out the ramifications of his speech for gold, in the next issue of "Gold - Authentic Money" & "Gold - Authentic Money - Gold's Macro Economic scene" . [subscribe]

Beware of the dressing up of this picture, or the elimination of key parts of what was said and the dangers of Mr Greenspan's own opinions being wrong. Let's face it, while consumption was strong in July, it was boosted by large and unsustainable auto incentives, and the evidence suggests August was a disappointing month for retailers.

Indeed, even the numbers from the chain stores were extremely poor, with one economist expressing scepticism about the August Payroll figures, saying the increases came form the 'seasonals'. The International Council of Shopping Centers said samestore sales rose just 1.1% last month, below an already reduced forecast of 1.5%. In addition, more than 80% of the nonfarm payroll gain in August came from government estimates of new business startups. In addition with Ford laying off 800 workers and more expected, and Delta Airlines cutting 7,000 jobs and implying bankruptcy was possible, it is getting difficult to believe we have the strong recovery all were punting in the first half of this year. As we said earlier, we doubt we will see another rate hike before the election, even tough the bulk of the market is still talking Fed rates up. This sent the $ through its support levels!

Silver $6.14
The price broke down this week, heading quickly for $6.00 as we thought it would. This after a thin week where total speculative positions only dropped 9 million ounces down from a total of 347 million ounces. There are many silver bulls out there who may well be right in the longer term, but right now the bears are in charge.

Platinum $827
Barely any change in the total speculative position with a 1,000 ounce increase in total speculative positions. With the metal moving slightly better than, but still in tandem with, the Euro, the picture will continue to reflect the overall precious metals picture.

The London Gold Fix
9th September a.m. $399.25   E 327.791
9th September p.m. $398.70   E 327.528

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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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