Gold - The Weekly Global Perspective

By: Julian D. W. Phillips | Thu, Sep 30, 2004
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That was the week that was!
The gold price was slugging it out this last week, gaining a little, losing a little, plodding on throughout the week, until the funds decided a dollar more was not too much to pay to follow the Euro up. Not changing much in Euros [a Euro more than this time last week] it followed the Euro itself up as it broke through $1.24. It was London that was making the prices and mainly at the fixes, with other trades following its lead, until today [Thursday], when New York came in to make it a currency play again. Until the latest rise to $415 the physical and perhaps the investment / dehedging players were dominant. Is this 'consolidation' or a 'topping' of the gold price? Well, it is holding onto its gains, despite a volatile $ and Euro. The funds cautiously added around 50 tonnes to their positions, last week, not pushing the price but taking a slightly larger position than before, but looking more like Investors than speculators until today, when the real speculators came in again.

Physical buyers are in strength at $405 and lower, but are venturing into the prices just above this now as demand overtakes supply somewhat. This is not, 'too many sellers against demand', as would normally be the case, but rather the physical buyers are prepared to pay up to a certain price and no more - yet. Sellers are scarce. But give the physical buyers time to see the gold price hold the new levels and they will be back. They won't follow a volatile price but will follow an established price.

But be careful, this is not simply a share, or a commodity, where the moves are dictated by the perception of shareholders or predictable demand / supply patterns. This is a complex, multifaceted metal that acts as a currency to some, a counter to the $ to others, an enhancement of beauty to others and, to a growing number, a measure of protection against a world of unstable values. Like it or not, this is the world of gold. To add to the difficulty in forecasting its moves, each of the fundamental factors can act at different times on the price, together or independently, in synthesis, or in conflict. As complex as a beautiful woman, gorgeous gold is mesmerising. This complexity makes the Technical picture particularly hard to get right. It looks as if the gold price is teetering on the edge of a large move and within a couple of $ of the breakout level, but not yet making it. So anyone who wants to be professional in this market, should know the separate fundamentals well, alongside the Technicals and know how to weigh one with the other. To try to follow just one of the faces of gold and not include other facets, is to gamble on the price. A prudent professional makes sure he knows all sides of this market, as it can even be driven by macroeconomic news, seemingly unrelated to gold. There are no short cuts to know gold, no instant relationships to make it easy to follow or forecast.

To highlight this the gold price has been moving in a narrow band of under 10% for months now. Why? Is the market quiet? Far from it. A major sea change is taking place, pointing to a change in direction of the price and more importantly to the extent it is likely to go after this phase is complete. THIS MARKET WILL NOT STAY SO CALM FOR MUCH LONGER!

Whilst there is no direct link between oil and gold, the oil market is symptomatic of the stresses the globe will experience on a broad front, in the future. The price of oil broke through $50 a barrel this week, reaching new all time highs. It took Hurricane Ivan to drop production in the States and a threat of action against a Shell pumping station in the Niger river delta, to tip the balance of the market. With inventories at 29 year lows, more of the same is to be expected, despite the immediate respite the oil market is experiencing. With Chinese demand rising as it grows, there are signs of competition for the supplies that there are. This is yet another factor putting upward pressure on the gold price. Next week should be interesting!

Short term prospects for the price:
The trading pattern has been narrowing with the lows rising and the highs holding, so far. The oil price is encouraging purchases of gold, alongside a rising Euro today. When the oil price sank back a little the Euro took over. As we said last week, the fundamental strength under gold is strong. But there are Technical Analysts who say it is going to fall to $350, there are those who say it is going to $500. You can take each of them and you are still left with the decision to make, which way?! This is not a 'crusade', it is about protecting and increasing the value of ones investments, over time. Whichever way the gold price is going to go, it will do so with vigour, as you can see from the point and figure chart next to this. If you understand this market you will do very well indeed. We aim, in our publications below, to give you what you need to have to get the best from these markets. Have you subscribed to our services, if not why not?

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At the time of writing gold stood at $416.45 and Euros 335.30 . The Euro itself is worth $1.2420.

Large Scale Speculators.
The large scale speculative long position rose by 28 tonnes last week to reach 320 tonnes. Some say the rise was greater at 47 tonnes. Either way, this is not a large position for Speculators. We suspect that many "Speculators" have an intention to hold onto this gold as an investment position and possibly to roll it over into a longer term position. It could even be that when the World Gold Council's Exchange traded fund comes into being in New York, that many futures and physical Investors, switch to the cheaper and more flexible ownership of shares representing 1/10th of an ounce of gold. This is why several hundred tonnes of gold could be bought through this route in the first few days and weeks of the listing of the share. For the shares name, if you are interested, contact us. More on this concept below.

The funds following the Euro / $ play came back into the market in the last day or so, to take gold up alongside the Euro. This pattern should continue, with them unloading loading alongside the currency. But the Investor type, driven by longer term motives is present.

Whilst Central Bankers are notorious for how little they say and when they do say it say it in such a way as to reflect both a majority opinion and one that causes the least disturbance to the markets, we alert you to the statements coming out of the G7 conference starting tomorrow. These could have a dramatic impact on the price of gold, if not in the short term, in the long term.

Central Bank Gold Buying - Argentina buys more gold!
Argentina's central bank bought more gold in July and August, taking its gold reserves up to 55 tonnes, as of the end of August, according to data on the bank's website. The bank's website showed that gold reserves were at 53.5 tonnes at the end of July and 42.6 tonnes at the end of June.

The Central Bank of Argentina has experienced the most trying times on the currency front, of perhaps any country in the last 10 years. The Peso of Argentina had a disastrous ride on the back of the $, when it was pegged at U.S.$1 against 1 Peso. With this experience in hand, Argentina is balancing its reserves through diversification into gold, as a prudent measure.

We believe that the prospects for the $ and the global economy for the next 10 years at least, is encouraging Central Banks to consider holding gold as a counter to swings in the U.S.$. The prospects of a burgeoning global economy and limited resources available for such growth is likely to bring substantial currency instability in the future. With this in mind the conference starting tomorrow [I.M.F. / G7], will have some interesting revelations, we are sure!

Switzerland - What to do with the cash from gold?
They felt it prudent to lower the gold content of their reserves by 1300 tonnes. Then came the question, what to do with the cash. The debate started in 1997, seven years ago. Parliamentarians voted this week, in favour of giving the Cantons twothirds of the funds raised, with the remaining third for the Federal government. Earlier this year Switzerland's other parliamentary chamber, the House of Representatives, came out in favour of the proposal to invest most of the money in the oldage pension scheme. Education, Pensions, humanitarian causes have been proposed as beneficiaries of the proceeds during this time. Few stopped to think of why the gold had been bought in the first place. It was to protect against the potential weakening of the $ and in the light of the currency disasters Switzerland, France Germany et al, had suffered several times last century. Did they think this century would be better?

Real retailing of gold begins in China! - The People's Bank of China has promised that "in time" individuals would be allowed to trade gold. Commercial banks jumped the gun, and have opened their doors to the public. Banks in Guangzhou and several other mainland cities began retailing gold bars to investors on the 22ns September. Mainland Chinese retail investors, rushed to the banks in such large numbers that one of them had to keep its doors open after office hours. China Merchants Bank set up counters to sell gold bars to individuals a week ago, at its branches. The move followed similar decisions by banks in five other cities. At one branch, the queue of buyers was so long that the bank kept its doors open after hours. If the Bank of China turns a blind eye to this [bearing in mind the Central Bank wants individuals to buy gold], it will have served as a good sample of the future reactions of the Chinese, when the government gives the nationwide OK. As we said earlier this year, once they allowed and have developed a good distribution system for a gold market, we will see the emergence of the real Chinese demand for gold. This confirms it. An important note to add is that these buyers are unlikely to be sellers for some time to come, for there is no easy way to sell this gold, yet. We guess that the Central Bank are happy with this development, using it as a gauge for their next liberalisation moves.

Alongside the liberalisation of China's gold market and with China aiming to buy Canada's Noranda [a supplier of base metals] the Chinese government's policy to ensure value from its $ surpluses is in action now. One important Chinese academic writing in China's newspapers, gave this as part of the protective action that should be taken to protect China against a $ fall, "China could also encourage its enterprises to "go global" to weaken its dependence on US treasury bonds......Using U.S. assets to increase the strategic resource reserves, such as oil reserves, could be another alternative". So expect more of such diversification of China's surpluses out of the $. A revaluation of the Yuan, would work directly against this policy, so remains a very remote possibility!

Which SHARES to hold if you want to enjoy the gold price itself, without other risks?
So, you want in on the gold price. Holding the metal itself is not an option open to you, you feel. You have always traded in Investment and Units Trusts and in the Funds. They always play it safe with a spread of god shares across the board. But many times the gold price and gold shares have gone in different directions. Let's face it, it's been frustrating in the equity markets of late, including the gold shares. So how can you strip out the company risks, the portfolio risks, the currency, labour and cost price risks, inherent in gold shares? How can you strip out the second layer of fund management risks and their average performance and get back to gold itself. We believe you have to follow the route opened up to you with shares each representing a small portion of actual gold held in vaults, against your shares. These shares can be bought and sold as quickly as any other shares and carry none of the risks of holding actual bullion. They represent a pure gold price play, simple and straightforward.

Reputable industry research companies, such as the Australian, van Eyk Research, are advising a diversification into gold as the key to more stable financial returns. a strategic asset allocation to the gold sector is attractive because during periods of financial stress - either inflation or deflation - the performance of gold has a particularly low correlation to traditional asset classes like equities and bonds. Investing in listed gold shares is probably the easiest way but it also carries equitytype risks such as higher volatility and reduced diversification benefits. This is why the shares representing one tenth of an ounce of gold will be attractive to many, many Institutions and not only Individuals.

But I want to invest in the Juniors because of exceptional leverage!
The work involved in due diligence, prudent selection of quality shares is huge. Institutions employ the brightest guys to do this for them. You have little chance of doing it properly or thoroughly by yourself. Such research is a must when venturing into gold mining shares. After all, it's not just a matter of the gold reserves a mine has, one has to ask other questions such as; Is the company properly financed? Are the reserves really there [Remember "Sons of Gwalia"?], what are the local country risks [Mugabe wants to seize 50% of Zimbabwean mining shares], what are the currency risks [mines get paid for their gold in local currency, not U.S.$], what is the [break even] point at which the mine can pay dividends to you.

So how can one pick a "Junior" and get it right without this easy to get wrong research? Many say go into a gold fund that holds them. When you can find one, you again have the spread across a bulk of the Juniors, so spread, possibly a greater risk across your fund. What about buying into a Gold Mining company owning several mines? As every competent fund manager knows, if you buy into a mine, that is owned by one of the big mining companies that owns several mines, you dilute your earnings across those mines and have to pay some of the gold income not just to the mine for getting it out of the ground, but to the mining house to cover their fees. Add an investment trust or fund fees to this and you are just left with the residue after all these fees have been paid. You can do better than that, surely! Yes you can and relatively prudently too! We will be discussing the answers in the next issue of "Gold - Authentic Money".

Which of the best shares will perform the best on the market?
The conservative avoid the juniors because of the higher risks involved and go for the well established, well funded already successful mines on the HUI and the XAU, amongst others. Very wise too. But amongst these you get some leading the prices up and down, whilst the rest lag. How do you stay with the best and run with those that lead the way and move the most. Tony Henfrey has developed a system which he calls his "Comparative Performance Model". With this we track the leaders and laggards, within the high quality shares of the HUI and XAU indices, plus a couple of other shares, not all of them, but the ones we like. In this way, Traders can switch between these on a short term basis, to maximise profits, whereas longer term Investors can pick the timing and the shares, of the best they want to buy or to sell, to get the best entry and exit points. It improves profit margins, if handled correctly. This is featured in our service, "Changing Tack - Gold & Precious Metal Shares".

In addition, Tony has developed a system which gives the approximate dates of highs and lows, called Maximum Entrophy Spectoral Analysis. Together the two add to the usual system of indicators we use to be fully aware of the short term picture. Then when you follow the sound conservative Pension fund type of approach, you can perform better than most in these gold share markets coming to life at the moment [see details below].

Silver $6.78
The rally in gold got under way, taking the price up 5% again. One of the key features to the market is the position of the Speculators in the market. After trimming positions to near to the lows seen in the last couple of years, the funds, reacting to the chart's signals of a rally returned to the market. Last week's long position in Silver rose only 2million ounces to 239 million.

Platinum $855
The strike is on, the strike is off, now the strike is on. At Implats it's on, and expected to last a while. Today sees the unions reacting to the offer from Anglo Platinum, which if they don't like it, will start the strike there, too. Certainly it will pay the owners and operators to have a strike. It will keep the Platinum price up, and reserves in the ground whilst cutting labour costs and the function of mining, increasing profits. Remember the Peter Sellers film, "I'm all right Jack", well there hangs the tale. Not for too long though, or else damage may be done. So don't expect management to give in to wage demands too easily.

The Platinum price visibly reacted to the strike situation and will continue to do so. Why should oil be the only one to play the game.

The London Gold Fix
30th September a.m. $412.35   E 334.540
30th September p.m. $415.65   E 335.1210

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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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