Gold - The Weekly Global Perspective

By: Julian D. W. Phillips | Fri, Oct 22, 2004
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That was the week that was!

Gold retreated this week from Euros 340 to Euros 333, before recovering to 337.2 on Thursday. The prospects for further recovery were good as the oil price, after retreating a little climbed back above $55 a barrel.

Sounds different to the $ story doesn't it? In $, the story went like this, gold pulled back slightly to $415 before following the Euro up to attack, not just the $420 level, but took out the $426 number before retreating back to $422, which is now a support figure. So which is real? The price, again, was dominated by the London market and particularly the fixing, where earlier this week, the gold price retreated on the back of declining oil prices, until the news that inflation was not as subdued, as seemed previously, registering a 0.3% gain in September, against an expected 0.2%.

Then on Thursday the oil price began to climb again alongside further weakening of the $ giving foreign exchange markets the signal to dump the $, which dropped from below resistance at the $1.23 - $1.24 level to break down to $1.26 and worse on Wednesday. This fall held on Thursday, being reflected in the gold price, which rose strongly through resistance in the mid $420's. On top of this the uncertainty factor in the global economy caused Investors to buy gold in Euro terms starting the recovery of the gold price in that currency.

It has been an interesting week, with London taking the price down at first, which shook out some short positions, and then later in the week, took the price back up, ahead of the Comex opening. The first time the funds ran for cover, when London dropped the price and the funds dumped positions, but they do not seem so keen to go back in, in a hurry. The bruises received from the fall were still being licked, as the rise started.

Global market prices:
• Meantime the rising Rand price of gold removed the benefits of the gold price rise from the South African Producers, who are paid in Rands for their gold.
• However, with the Rupee strength, the price rise was negated, to the continuing enthusiasm of the Indian buyers, who look like buying even more than we forecast this year [900 tonnes+?], to prove the strength of the physical buying in determining the price of gold. With the gold price stable to weakening in Rupees price, expect physical buying to accept the higher gold prices quickly and move up the price, at which they continue to buy.
• The U.S. Producers of gold will be the main beneficiaries of the rising $ gold price, as the $ drops and they receive more $ for their ounce.
• This helps us to understand the attraction of Goldfields, and we think subsequently, if they succeed in buying Goldfields, Harmony, to a U.S. listing. Apart from the increased value placed on the shares in the U.S., the main, growing, $ income [due to the $'s fall] will make their bottom line look so much better, even if only through in translation, in the Financials.

The market players.
• The Physical buyers continued their strong presence in the market place and should continue to do so as the festival season warms up.
• Speculators covered their short positions as gold broke up through the $419 level and sprinted higher. This was precipitated both by the $'s drop and the gold price recovery in Euros. The short position was huge, as was the covering, leaving the speculative longs feeling a lot better with their positions this week. Their dominance over the price this week reduced still further.
• Investors to felt more convinced of their position, aided somewhat by their uncertainty over, not only the $'s prospects, but who will be the next President of the U.S.A. Looking in from outside, the way the two choices for President are attacking each other, makes one wonder why they are the only two choices. If we are to believe what is said, the future of the U.S. does not look so good? Apart from that a look at the global picture, shows confidence in the growth prospect, foreign exchange stability, both inflation and deflation warrants taking a sizeable position in gold. We expect to see this sector of the gold market to grow in this last quarter of the year.

Short term prospects for the price:
The oil prices retreated, pulling back gold in the first part of the week, before the Euro / $ play took over the very short term price action again. Many Technical Analysts are warning the an interim top is being made, before a gold price pullback. Others are confident that the gold price will break well above $430.

Most of the Speculative funds are programme driven, we are told by the Bullion dealers Scotia Mocatta, who buy more and more, so increasing their total positions, as the price rises. This has been the pattern for the last year and more, for sure. With them being in a position to increase volatility to this extent we combine this feature to the gold price and have to ask if you feel reliance on Technical Analysis is all that is required? Think about it! When you have action that we have seen since the gold price was around $405, both systems have combined to increase volatility, whilst saying if the gold price does this, this will happen.... Doesn't that make you nervous, doesn't that make you worry about the place in the crowd you hold, when it starts to move? So how can you be more certain than the crowd, how can you be sure you can take the guess work out of the Technical pointers? Had you been able for certain to do this, your policy during these ups and downs would have been more certain, more confident and more profitable, would it not? We believe a good knowledge of the fundamentals would have given you that ability, which is why we have laid a great deal of emphasis on the fundamental picture, alongside our Technical Analysis. Would you like this knowledge at your side? If so subscribe now to Gold - Authentic Money or one of the three smaller publications that stem from it [see below].

At the time of writing gold stood at $423.80, six $ 60cents above last week's figure and Euros 335.48 one Euro down from last week's figure . The Euro itself is worth $1.26022 two cents stronger than last week.

Large Scale Speculators.
The Long term Speculative position in gold dropped back to 358.1 tonnes, down from 479 tonnes last week, leaving what looks an increasingly solid longer term [Investor] position holding on. With the speculative shorts covering their positions vigorously, as the price moved through $419 level perhaps the next move by the capricious speculators will be on the long side.

Every day it is getting more important to understand not just what the fundamentals are, but how they synthesize together to make the gold price move. Just how high is the gold price going now, soon and in the future? - See the banner at the bottom of this page and click on it to find out.

Harmony / Goldfields what are they really trying to achieve now and in the future?
With the news of the "hostile" Goldfields had a major sense of humour failure. The fight then began for Shareholder support. Perhaps of more relevance to shareholders and those interested, is not simply the immediate deal, but the motives behind the deal and the path forward, thereafter. Why do Goldfields want to reverse into Iamgold in the first place? [We covered that, last issue]. So then, why did Harmony and perhaps more importantly Norlisk, mount a bid for Goldfields [Norlisk immediately gave its support to Harmony]? Don't think for one moment that it was a patriotic attempt to keep Goldfields in South Africa and increase Harmony's South African content. Initially that may happen, if Harmony is successful, but it looks like a stepping stone to bigger things, to us. No, initially, Norlisk thought that the 20% ownership of Goldfields gave them a greater degree of control than it actually did. To get control of the company's policy, much more is needed. But what prompted them to buy this 20% stake of Goldfields in the first place. It is part of an overall policy of theirs to diversify their interests out of Russia. This is their intent and should continue to be so. Another acquisition by Norlisk to confirm that policy, was the $300million in Stillwater Mining, with its New York listing [SWC], another mining company. They would, logically want to continue this diversification as far as they are able. With limited cash resources, certainly not sufficient to take and extra 30% in Goldfields, the partnership with Harmony in the bid 'kills two birds with one stone'. With the objective [in common with the bulk of S.A. mining companies] of rapidly increasing non-South African mines in their portfolios, Goldfields reverse into Iamgold provides a good path, which, whilst put on hold by a successful takeover, could well be resurrected later, by Harmony. In addition the statement by Bernard Swanepoel, that the bid could well go on for four months, despite acceptances/rejections of the bid being set for the end of this month. This seems to imply their could be an increase in the offer, or new elements being thrown in. With Norlisk already giving the support of its 20% shareholding in Goldfields, it is in a position to give, possibly, more support through leveraging, or other avenues, via its Stillwater holdings, at some stage. Whilst these are guesses at present, it would further the aims of the Goldfield Shareholders, the Harmony Shareholders as well as the Norlisk Shareholders to structure this and subsequent transactions to ensure the deal be structured to follow the path of international diversification. The shareholders should be aware that this could be step one, in quite a walk. There is no doubt that either way these deals go, the shareholders of the three companies are going to see a great deal of International diversification and a predominantly $ price to the shares, which will benefit from the $'s weakness, after these preliminary moves.

Goldcorp is doing it again
Goldcorp said it withheld 1.586 tonnes of gold, or 31% of its production, in the last quarter. It retains this gold in anticipation of higher gold prices later on. The company now holds 5.2 tonnes of bullion. The last time they did this was last year, ending up with far more than this. With perspicacity, they then sold this amount into the market at around the higher $420's when it was last there. Here we are at the same price level. Will they sell now? Will they continue to acquire more. If they acquired this stock over the last quarter the price certainly has not risen sufficiently to jettison a bullion holding like this, so how high do they expect the gold price to go?

The U.S. recovery
The reports of less than hoped for performances on the profits front, the inflation front, the jobs front, et al, is having its impact now on the equity markets and the $. The pattern is indicative of a mounting deflationary environment, despite the latest indications of inflation rising [0.3% against 0.2% expected]. Global, but specifically U.S. growth, is clearly waning with surveys showing expectations of growth for next year dropping, somewhat. There is no doubt in our mind that the Fed will do all in its power to prevent growth from stalling, even at the cost of allowing inflation to grow to fend off deflation. "Stagflation" will be different this time, as it will be in the context of a global economy, one considerable more mature than before. Companies, involved with China will continue to do well, as the Chinese economy will continue to grow despite the U.S. situation.

The U.S. authorities are hoping to see a much weaker $ in the hope of an improvement of their international competitive trade position, but be ready for other nations 'counter measures' to a falling $. Yes, the $ has broken down this week, but think of the consequences. What are they? How far will the collapse go, if it comes? What will this be symptomatic of? What reactions will it precipitate? You can be absolutely certain that the answers to these questions will surprise you. Wouldn't you like to remove that surprise and be in a position to protect and or profit from the developing situations?

In our impending issue of Gold - Authentic Money goes into these questions, so you will be at the front of the crowd and see ahead of the others. We will also be looking at the future of the oil price and the scene in which it will find itself.

India's gold smugglers - revisited. [Thanks Pierre]
The smuggling of gold into India goes back to the days when the Indian government imposed currency restrictions. This gold came into the country in the 1980s & 1990s at the time of these impositions. Indians were allowed to exchange only a certain amount of Indian rupees while traveling outside India. And this was written into their passports as the allowable amount which could remain outside the country for up to 5 years. Of course, this lead to a 'black market' for the currency, the Rupee. There were very elaborate systems for going around the currency controls, even employing personal checks!. The black market rate of the Rupee was around 15-20% higher than the official rate. At the time Gold was regulated too and suffered import taxes. This currency system has been abolished.

Isn't it fascinating that when restrictions were imposed, the gold trade grew, as they fell away, imports of gold increased still further. Now the opposite situation persists with India's exports of gold growing at a massive rate. How so? Indian gold Jewellery, unlike that sold in the developed nations is usually sold by weight, so removing much of the premium from the price placed there as a charge for workmanship. Hence, it is valued at a price close to market price. This is so much better than buying gold at a price you can rarely recover from its gold content alone. Methinks this trade will grow and grow and grow! Those of us in the "developed" world have rarely thought of the gold on our wives as a source of capital.

A gold publication, tailor-made for you!
We are continuing with our survey of what you want from a publication on Gold, Silver & Platinum, with the emphasis on gold. Would you be so kind as to spare us a moment of your valuable time to let us have your views? We will send you set of questions if you send us an e-mail asking for them. Wouldn't it be nice to have your very own, tailor-made publication on these markets? For a set of questions please contact us at: gold-authenticmoney@iafrica.com.

Silver $7.21
Alongside all the precious metals the price of Silver was primarily driven by the funds, dumping positions in the face of a declining oil price before recovering on the back of a falling $ and rising oil prices. The fundamentals for Silver are nowhere near as solid as they are for gold, but the volatility of the Silver price makes it suitable for the aggressive Trader, still. With the Funds holding sway over the price still, you have to make sure you are not a fellow traveler. We are told that China's Silver exports rose by 56% in the year ended April. This steady stream of silver onto the market weakens the fundamentals, but not to the extent that has put off the Funds. With them dominating the price there is no reason why the Silver price cannot rise further. But should it be made to fall the fall could be, precipitous at times?

Platinum $847
It seems that the Chinese are appreciating the virtues of white gold, a metal with many of the Jewellery qualities of Platinum, at half the price. Jewellery demand for Platinum is around 20% of annual demand but now dropping steadily. This should be more than compensated for by the increase in demand for its Industrial uses, so keeping the price steady to rising.

The Platinum price, this week has moved with the prices of the other precious metals, but in a narrower band than the Silver price. We expect it to continue to have a low level of volatility.

It seems that the strikes did little damage to the market and little damage to the companies, who are now in a race to make up the lost production, after the settlement. Greater damage was done to the prospects of Platinum, due to the holding of South African interest rates at the current levels. The Rand, alongside the Euro, strengthened against the $, so reducing the Platinum and gold Producers income by nearly 4% as the Rand fell from R6.50 to the $ to R6.25 and looks like heading lower still.

The London Gold Fix
21st October a.m. $425.50   E 337.083
21st October p.m. $423.60   E 336.297

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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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