Gold - The Weekly Global Perspective

By: Julian D. W. Phillips | Fri, Oct 29, 2004
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That was the week that was!

Didn't you feel the pace pick up quite a bit this week on the $ front. When it broke down, it did so quickly. Since then it has been moving fast both ways. This tells us that it is not going to slow down to the previous pace for a while. The move upwards was a gear shift upwards. Beware of thinking it will become stuck again soon. Yes, it is due to consolidate, but the hormone level has increased alongside the pace of price moves.

Global market prices:

Euro: Gold did not perform well in Euros this week. Having broken all the way up to Euros 340 previously, it pulled back to Euros 334 early in the week to stay there for three days, before falling back to 332 then recover to Euros 334, at the time of writing. The price driver here was the oil price which came off its top as stockpiles grew. Gold waned, but not to the extent of oil's fall. But then, it never rose to that extent on oil's rise.

U.S. $: Gold attacked $430 this week in a bust of vigour that was inversely proportional to the fall of the $, then fell back in a drop slightly larger than the fall of the $ itself, in line with the pullback of the Euro.

Rupees: The Rupee has been relatively stable against the $, so reflected the fall. Previously at higher levels, buyers were deterred from picking up gold at the higher prices, believing they would pull back. This expectation led to an increase in scrap sales of gold in India, lowering the size of physical purchases in London. The present drop in the gold price could well reverse this scene, soon.

Rand: With the strengthening of the Rand lowering profits on the mines, yet again, the gold price dropped in Rands more than the Euro gold price. With inflation in South Africa also falling, the potential for more Rand strength and lower Rand gold prices, is very real. There appears little reason to believe that Rand gold prices will enjoy the benefits of a rising $ gold price for a while yet still. A further drop in interest rates may sweeten this picture, but there is no apparent willingness on the part of the S.A. Reserve Bank to do this, yet.

The market players.

• The Physical buying waned strongly this week but this was, we believe, a function of price only. They may well be back in strength shortly.
• Speculators restricted their activity to arbitraging, not speculating. We would be surprised if the long speculative positions changed this side of the Presidential election.
• Investors continue to feel more convinced of their long position and are now to be joined by South African direct gold Investors, a new feature of the global demand for gold.

• Technical Analysis versus Fundamentals:
This week we have received e-mails from readers who are confused at the Technical picture now being presented by it. This is understandable, because we are in an area where the scene has become complicated and seemingly in conflict? We told you that many Technical Analysts warned that an interim top was being made, before a gold price pullback, last week. We have Analysts telling us that this is simply a consolidation phase, before another successful attack on $430. As you can see from the above, the picture is different in different currencies. Now add to this not the simple arithmetic of the factors involved in the picture, but how these factors often have a 'multiplier' effect on each other to add weight to the combination, beyond the sum total of their individual parts.

Look how the price rise in Rupees, led to scrap sales, a sort of doubling up effect. The knowledge of a major drop in Central Bank sales, is not the simple reduction of supply to the market, but encourages Investors, who seeing this change of attitude of the Central Banks, are then encouraged, as new, individual and institutional investors into gold. We have read how pensions funds are moving into this sector from the States, right round the globe, to Japan, into gold investments.

With the broadening of the fundamental base of the gold market, significant factors, over the last two decades, are moving into the shadow of new stronger fundamentals taking up their positions in this market.

Whilst we will always say the Technicals give clear guidelines as to where short term and usually longer term price peaks and troughs will be found, no professional approach to the markets would discard fundamentals. Put the two together and the professional is sufficiently armed to enter these markets. In answer to these e-mails, we have strongly suggested that they subscribe, not only to a Technical Analysis service, but to our fundamental service found in "Gold - Authentic Money". This provides perspective and insight, into the interaction, as well as the detail of all these factors.

[We have had difficulties on our website, which has been down for a while, but which should be up and running from Sunday onwards. To subscribe online, please go to]

We want you to get this last week into perspective too, so have a look at these figures recorded at the time of writing and juxtaposed with last week's figures: -

1. Last week, at this time 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.
2. At the time of writing gold stood at $426.15 two and a half $ higher than last week and Euros 334.28, one Euro down from last week. The Euro itself is worth $1.2748, one cent stronger than last week.

Large Scale Speculators.
Long term Speculators were not active this last week, dealers doing arbitrage business held the floor, matching and smoothing out the prices between the States and the rest of the world, until yesterday, when New York, dropped the gold price down, in the face of dropping oil prices after gold was fixed at $428+. Now the fix of today was adjusted down to that level, clearly in agreement with the move.

Chinese interest rates up.
The Chinese have raised interest rates, a step that has caught most commentators, off guard. Its initial impact is that it has improved the value of the Euro in $s and helped the gold price to recover to the $426 level and to Euros 334 level.

Another point of confusion is that Chinese savings in banks are primarily in huge levels of deposits with very little borrowings. The banking system there is unsophisticated, so not the place from where most growth is financed. Hence, a raising of rates is likely to increase the sizes of these deposits, encouraging consumer spending there, not discouraging it. This story will intrigue the west no end, we are sure! - More comment next week!

Oil - Off the boil - for how long?
Perhaps the main reason gold prices fell later this week was the drop in oil prices by 5% on the back of rising inventories, rising more than four times expected levels. For the average Investor, this requires checking to see if this is a medium term + break in the price or just a temporary fall. The U.S. government's Energy Information Administration said crude stocks rose 4 million barrels to 283.4 million barrels, narrowing a deficit against last year to 9 million barrels. These figures show us that in the short term the U.S. deficit will be narrowed in a short time, so this stimulus to the gold price, et al, should cool off.

An indication of where the future is taking us is shown in how the main market suppliers are behaving? Clearly O.P.E.C. is still reacting as though high prices are a medium term feature, for the head of O.P.E.C. approached Washington to urge them to tap their strategic reserves, supply the market and so, bring down the oil price.

The U.S. was not convinced and said that only a severe supply disruption would warrant such a release of oil.

Will that happen in due time? The big problem lies in the underlying problem that supplies of light, low-sulphur crude have been having trouble keeping up with on-going, surging demand from countries such as India and China, where officials believe that the growth in demand may continue at the double figure level next year. And will supply rise to meet this demand? The ceiling appears to be relatively close already. Russia's output, the world's second-biggest producer, will rise only 6-8 % next year, down from 11% in 2003. O.P.E.C is not able to expand supply to meet the burgeoning needs of these two developing countries. Demand for cars is rising at the rate of 50% per annum, alongside a similar figure in oil demand, and growth there is set for a couple of decades at least.

We have looked more closely at the future of oil in the latest issue of "Gold - Authentic Money". This gives one the 'big picture' in rough strokes, but puts it beautifully in perspective for us.

South African Mineral Royalties
Inflation figures are dropping and internal economic growth is rising, so encouraging the hope that another rate cut is on its way. If this does not happen expect a R in the region of R5 + in the near future. We cover South African Gold and gold equity indices in all our publications [see below].

South Africa repeated that mineral royalties should be based on sales, rather than profits and said it would publish legislation next year. Finance Minister Trevor Manuel said that the Treasury would soon release recommendations on the tax formula for gold mining companies. "It remains government's view that the royalty should be imposed on a gross ad valorem basis, but a number of critical issues have still to be addressed". The revised Mineral and Petroleum Royalty Bill would be published in 2005. "It will address outstanding issues, such as the differentiation of royalty rates, marginal mine treatment, the elimination of the double royalty risk and transitional matters," he said. The implementation of the tax would be delayed by two years to 2009. The rates as originally proposed run from 1.0% for oil drilled in deep offshore waters, to 3.0% for gold, 4.0% for platinum to 8.0% for diamonds. Mining firms have said the tax will have a heavy impact during a mine's start-up phase.

It appears that the S.A. government is somewhat impervious to the cries from the mining Industry that this will discourage overseas investment and raise the risks of investing in current South African mining companies. As it is the profitability of the mines is being damaged by a strengthening Rand which climbed to R6.18 and better, against the U.S.$ this week, inflicting further wounds on profitability.

South African Foreign Exchange Controls
S. A. Finance Minister Trevor Manuel eased foreign exchange controls by removing limits on the amount companies can invest abroad. Before, South African companies were allowed to invest a maximum of 2 billion rand ($325 million) in Africa, and 1 billion rand outside the continent in any one transaction. Dropping these limits will help companies such as AngloGold Ashanti Ltd. and Gold Fields Ltd., and Harmony, the country's biggest gold producers, to buy more mines in other parts of the world. Alongside the introduction of Royalties, this measure will speed up the mining industry's diversification away from South Africa to less, prospectively onerous, tax climates.

Manuel also said that South African companies will be allowed to retain foreign dividends offshore. Repatriated dividends may be taken offshore again at any time, the Treasury said. Limits on investment by South Africans in foreign companies listed on the Johannesburg stock exchange have also been lifted. South Africa in February announced plans to allow foreign companies to list in Johannesburg. Other controls on the amount of money pension funds and other fund managers are allowed to invest outside South Africa are being examined. On individuals, the R750,000 limit on the amount individuals can take out of the S.A. will be looked at fairly soon and then increased?

We fully expect Exchange Control, a feature of South African life for nearly forty years, to fade away in the near future? But beware, they can return in a heartbeat! A look at the trends in the South African government attitudes to the wealthy, will encourage an osmotic process of capital flight over time, the very reason Exchange Controls were imposed in the first place.

NEW GOLD - Paper gold spreads further across the globe.
The World Council continues its efforts to market gold funds. In South Africa, together with a main, local bank ABSA, they are launching "New Gold" - Gold Bullion Debentures.

Each of these securities represents 1/100th of an ounce of gold and price in South African Rands. [Not the 1/10th of an ounce in the London listed "Gold Bullion Securities"]. Its code on the Johannesburg Stock Exchange is to be "GLD". Its purpose is to track the gold price [less admin fees]. With the volatility of gold shares, particularly gold shares priced in Rands, this Debenture, is the first time South Africans have been able to 'invest in pure gold' without the problems usually associated with physical bullion and coins. These problems also included the speed with which one could deal.

The gold that is backing the Debentures, is to be held at the Rand Refinery, [Where South African Gold is refined, prior to export to the global gold markets].

With the volatility of the Rand gold price at 18.98% compared to 46.2% on the Johannesburg Stock Exchange Index in the year to September 2004, this form of gold investment will be preferred by many individuals and Institutions, over gold shares.

With many believing that the Rand is within 10% of its ceiling, against the $, this form of gold investment will probably act as a counter to the Rand, in investment portfolios as well as an investment in itself.

It will be interesting to see the market reaction to this investment.

A gold publication, tailor - made for you!
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Silver $7.20
The Silver price, as in the case of gold and Platinum, was steady in Euros and weaker in $. Now it has recovered to one cent lower than last week. Little change from the position of last week was registered. It would appear that this will be the case next week too. Methinks there is hidden strength in this price despite its vulnerability. One Silver enthusiast Subscriber, is extremely positive on this metal, even against gold, which position we now support, particularly on a ratio basis!

Platinum $823
Yes, the Rand down to R6.10 to the U.S. $, this week. With the $/Euro moves the price maker of these metals, expect more of the same next week. Platinum dropped 2.5% on last week's rice a poorer performance than the Silver price!

The London Gold Fix
21st October a.m. $423.85   E 333.189
20th October p.m. $428.25   E 335.015

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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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