Gold - The Weekly Global Perspective

By: Julian D. W. Phillips | Thu, Oct 14, 2004
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That was the week that was!

The "Trade winds" blew away all memories of the summer "Doldrums" we had become so used to. Gold looked so strong, before falling back on the day when Japan and the States, 'were closed', last Monday. This was after the market saw only 94,000 jobs added last week in the States, as against an expected 150,000. The resulting break through in the $ price of gold, as we predicted, sent it up to the $422.50 high. But was that truly a gold price rise, or was the $ in play? In Euros the gold price was as steady as a rock at around Euros 340, nearly all week, until the funds jumped ship. It was the $ / Euro prices that caused all the volatility. When gold rose to its high above $422, it faltered and did not follow the oil price rise that continued after gold fell. Then, when the States wasn't looking [before its opening] London dropped the gold price in Euros and in $'s. When New York opened Funds and "Stop-Loss" liquidation took a dive to a low of $409.35, before bouncing. The heart-in-mouth plummet, rattled all and sundry, but was an excellent test of just what the market was made up of. What was seen then? A look at the features of the action gives us the balance we need, to understand this market.

• The price "smoothing" between markets was assisted by some smart 'arbitraging'. [An Arbitrageur is a person who simultaneously buys and sells the same asset in different markets in order to profit from a variation in price between the markets. With the $ / Euro jumping 1% quickly and sometimes more, a dealer can make that as the moves take place and it's good business too. In markets like these, the arbitrage department can be the most profitable, and exciting, of all the broking departments.] This is why it is important to know where the price is being made. This week it was London and the Fixing price held the high ground and dominated other market prices. This accounted for why the Euro price of gold held at its, initially, unwavering level. That's why we closely follow the Euro gold price, as well as the $ price.

• The hedge funds took the price up well above its $410+ level, the level at which the physical market was seen buying and then over $420. London made its downward move when U.S. markets were closed and the funds absent. Initially, it fell back to $415 for a few minutes before returning to the $418 level. But this was still $4+ off the highs where many funds had bought. The speculative long position in gold had risen to 21.5% off its peak [see below]. The speculative position may well include capricious Speculators, real Investors and Arbitrageurs [playing other books alongside their gold book]. Remember when the funds took gold from $320 to $390, then took it back down there again? The position the funds had then was as hefty as it is now. So when New York opened, the tumble could have seen the price decay well into the mid-$350, eventually, IF THE FUNDS HAD THE SAME SWAY OVER THE PRICE AS THEN! But they seem to have lost that power in the face of Physical buying, which came in, in sufficient amounts to take all the gold on offer from the dumping funds. That was a huge move by both sides. We believe that the amounts shed by the funds were a significant portion of their holdings. If this is not the case then, for sure, the Investors using the futures market are exposed to view, by their continued holding of their positions! The continuing underlying strength in the fundamentals, is overwhelming the Technicals, again. Like the tides ruling the waves, so we say look below the surface if you want to get it right! Just who are these powerful physical buyers? We follow this at "G - AM" so, subscribe and see below the waves. For sure, the funds are not ruling this roost.

• Investors out of the London market ensured that the Euro price of gold dropped back to Euro 335, before starting to climb again. The pattern it has held has been steady with a rising trend, reflecting the worries inspired by the oil price, not the oil price itself. The rise in Euros is significant. This, to us, reflects a tendency of Investors to see the gold price as a thermometer of the global economy, an economy with no government and no cohesive regulation, headed into a series of crises, with no tools at present to extricate itself from them. National interests will prevent the synthesis of policies needed to cope with the future.

The question on all our minds is where to from here. How high will the gold price rise or how far will it fall? There is such a need to know and to know now!

Short term prospects for the price:

The Euro $ play is dominant, until the large players decide to interfere, as they did from London this week. Shaking the weak holders out of their positions is healthy for the market, and we have had a shakeout. Likely the market will continue to be mesmerised by the Euro / $ play, until the fundamental forces step into secure their needs in a market seeing a constant lowering of supply, gently but firmly.

It is unlikely that the U.S. voter is so myopic as to change his vote because Bush releases oil from the strategic stockpile to lower the price of oil. If we are wrong and Bush does so, he will pay a hefty price, whether he wins or loses the election. Is the U.S voter sufficiently far sighted to see how that will send the oil price to new highs when the U.S. tries to replenish the stockpile? All eyes are fixed on the oil price right now and we are led to believe that there is no top in sight? The gold price is presently recovering steadily, looking to an assault on the $420 again.

At the time of writing gold stood at $417.20, one $ off last week's figure and Euros 336.45 four Euros off last week's figure . The Euro itself is worth $1.2400, almost the same as last week.

Large Scale Speculators.

Long term speculators stayed in gold and increased their positions after the disappointing jobs figures of last week. It was a good Technical positioning, which has been shaken by the small recovery in the $ this week to $1.23 Euro! They are not too comfortable at the moment with their position at 479 tonnes long, a mere 21.5% off the high seen earlier this year. Many expect to see this figure dropped heavily onto the market. But take note of what we said above. Are these positions genuinely one way speculations, or are they investment positions, or the one side of a closed arbitrage position [closed by a sell in U.K. / Europe]? For sure there are sufficient pure speculative positions to rattle the market. But with the physical buyers at not far below these prices, will a sell-off drop the price that far? This is why you have got to know the fundamentals as well as the Technicals. The answer lies there.

When will the $ collapse? Will surplus nations switch to the Euro?

The Trade deficit came in a t a horrendous $54 billion today, sending the $ lower. Last issue we made the statement, that "We do not believe that nations holding the bulk of their reserves in U.S.$, including China, will precipitate a collapse of the $!" So much talk of this has been seen in most gold and macro economic commentaries. So why hasn't it happened yet. Last year saw the U.S. Administration attempt to encourage a $ fall, but it did not happen. Since then the Trade deficit is reaching a staggering $600 billion annually, so why hasn't it collapsed already? Many say that it is not a good reserve asset to hold in view of this, but the $ continues to be held as much as before. How can we move beyond logical reasoning to market action now and in the future?

The subject is covered in the latest issue of our newsletter, "Gold - Authentic Money" in full. There are dramatic ramifications that stem from this. Indeed, the prospects for the global economy are not what they seem presently. They are a great deal more dramatic than expressed in the media to date. In fact, these prospects have moved to sooner, rather than later. How will these coming events play out in the future? The way they do will directly affect the manner, the timing and the impact on your investments!

We will continue to be the only set of publications to express these views and examine the coming realities in this way.

The Oil Price goes higher

Now pushing beyond $54 and still rising! Little dips are seen and welcomed as a change of direction in the price, until the rise begins again. No particularly new news, just rising demand against insufficient oil as lost production in the Gulf of Mexico is not back on-stream yet, nor will be, entirely, until next year. Hurricane Ivan hit hard! Stockpiles are too low entering winter, so, no relief in sight.

Let's face it, if you are a long term user of oil and you saw the demand rising in the future above present levels, wouldn't you be persuaded to stockpile, on any fall in the oil price against a day, when the oil price tops new highs regularly.

In the 1970's the oil price was sent higher by O.P.E.C. and with subsequent 'pressure' allowed the prices to drop. This time round O.P.E.C. is not the problem and despite efforts to maximise supplies, are not succeeding in bringing down the prices. This time round we are seeing a demand / supply problem that is not likely to go away.

In the next issue of "Gold - Authentic Money" we look at the oil market from a new perspective one which allows for the facts to combine, as they are along the lines of "he who sows the wind reaps the whirlwind". We include the consequences for the gold market, the $ and the subsequent deflation and inflation.

Goldfield moves out.

Goldfields is happily reversing its listing into Iamgold's, which is changing its name to Goldfields International, which will be based in Denver. Goldfields will own 70% of the new company. Exit South Africa in one fell swoop. Yes, it will continue to mine in South Africa and its expansion there "will be robust", provided the Rand remains stable. Or weakens to R7.00 to the $1. Nevertheless, this is part of the exodus of mining companies from South Africa. They are diversifying into other countries as quickly as they are able to, an example of which is this very move to Denver and the takeover of Iamgold. Why? These moves are about management ensuring future profitability, not political. Until mining companies can know that South African investments will stay profitable, in the face of government's view of taxing , this exodus will continue.

India's smugglers.

One of the prime qualities of gold is that it increases its value in times where there is no trust, no morality, no cooperation. It is the one item that men, who would steal from each other, cheat each other, will accept from each other. Proof of this came from a news item from India. The possessor of gold is the owner, in reality, which is why it is attractive to the criminal, as well as those who want to evade taxes. Gold smuggled into India is a thriving and rampant, parallel, gold market. The attraction is to avoid any government duties and taxes on it. But were it not for this attraction of gold, the smuggling trade in gold would not be so large. Indian Banks report that the smuggled gold market accounts for almost 20% of India's annual gold purchases. One analyst, ex-Royal Bank of India, tells us that around 3,000 tonnes of India's estimated hoard of 15,300 tonnes was smuggled into India. But there is no way to trace which particular piece of gold was smuggled and which was not smuggled.

This gold market remains outside the control of banks and the government, which they don't like and by whom they are generally not impressed by, it seems. It's only a 1200 mile journey along the coast, up the Gulf of Oman, through the Straits of Hormuz to Dubai for tax/duty free gold. Once melted into another shape it is untraceable. Why do they do it, you may well ask? So that you can get an inkling of their thinking; imagine the days of yesteryear when you could transact without a banking fee being paid on every transaction you make, or the government taxing all transactions? Look at your bank charges and purchase taxes and see what that could mean for you.

We are told that the best way to eliminate the smuggling is to remove duties and taxes on gold? Let's see what the liberalisation of the Indian gold markets does to smuggling.


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Silver $7.00

Perhaps the most dramatic moves, amongst the precious metals, were seen in Silver, a pattern that is likely to continue in the future. Having shot to above $7.25 the fall to $6.76 was also dramatic and fund driven. From the 336 million ounce position pre the sell-off, we expect the fund position to have been cut severely, as it has on most commodities and on gold. It is likely that the volatility in the Silver price will provide the best short term price movements for traders. It is now higher than it was last week!

Platinum $842

The strikes are off! The Platinum price did not react to them, by rising, locked onto the Euro price of the metal. Eventually the strikes did not have that big an impact on the prices, which were driven by currency moves initially. The funds long positions had fallen 25% before the sell-off, so did not feel the same bite as other metals. It is still only around 2% off last week's price and remains solid, but slightly below last week's price. We are waiting for news from the South African Reserve Bank of the interest rate action at the time of writing. If they continue to prime rate at 11.00% with inflation around 3% we expect the Rand to present one of the best interest arbitrage opportunities in the world. Unfortunately this is to the detriment of the nation's export industries and restrain the expansion of the nation's Platinum Industry. Platinum continues to reflect strong fundamentals in the price, which is base forming.

Bear in mind in the global economy and with the demand from China continuing, demand will continue high irrespective of any growth decay in the developed world.

The London Gold Fix
14th October a.m. $414.65   E 335.50
14th October p.m. $415.35   E 335.77

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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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