Gold - The Weekly Global Perspective

By: Julian D. W. Phillips | Thu, Nov 18, 2004
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We provide an overview, only, of the week's activities in the gold market. Our main service, which can help you to profit and where we offer our full insight and perspective on the fundamentals and Technicals, can be found in our main newsletter, "Gold - Authentic Money" - www.authenticmoney.com. Details below.

That was the week that was!

And quite a week it was too! No doubt about it, gold broke out! The week started with hopes of the dealing in the Exchange Traded Fund, StreetTRACKS - Gold Trust, but we are still waiting for that day. Many analysts were braced for a fall in the gold price, a good cautionary measure, because so many feel these waters are uncharted, but this was not to be, for then the $ suddenly broke down through the $1.30 against the Euro level, despite the recent interest rate hike and despite some good news on the U.S economy. Gold, with as strong a pair of legs as we have seen in this 'bull' market, strode up to $440, then past it, headed determinedly towards $450. Can you believe it, we've been so mesmerised by doubts about it staying above $400, that we didn't expect it to stride away like this. The funds have increased their positions, but this is continuing arbitrage in the main, and not the capricious speculators. London, at the Fixes, has been calling the shots, all the way. So is it continuing Indian demand? No, Diwali is over, Eid has gone and the Indian market volumes are down to a mere shadow of its former self.

Could it be that something out of sight, on the supply side is driving the gold price? We think so!

Never have we seen so many confused commentaries. Most analysts are groping in this market now, blinking in the golden glare of a strutting gold price. Isn't it wonderful! After struggling through those long dry doldrums, the trade winds are blowing strongly. But, as it turns out, not quite as we have been emphasising for the last while. The physical demand that has looked so powerful is not as a result of record breaking Indian demand [see lower down], It is breaking out, not only from the $ shining in the Euro as well. Many are saying simply that it is reflecting the fall of the $, but then why is it rising in Euros? Is it the oil price? No, the oil price has fallen back. Is it the doubts about the U.S. economy? The latest jobs figures suggest not. Is it the uptick in inflation? This is not so dramatic as to cause a 'breakout'.

Perhaps it is something not obvious to those eyes that simply see the surface. The tides and undercurrents that don't break the surface in an obvious way have to be moving this price. A market doesn't do this over one small piece of news, after spending so long in around the $400 level. From the days of yesteryear, before the present investment managers sat at their brand new desks, the unfolding picture we see now slowly maturing and ripening steadily, was seeded. This gold price move is structural and far bigger than 'gold the commodity'. The individual factors showing themselves in the market are symptomatic of this underlying picture.

With so many now navigating this market with their charts we have to say that the Technical picture only tells the immediate and superficial part of the story and leaves one hopping on one foot. The other foot that allows one a full control over one's movement, is the fundamental side. Together, one can walk and even run, through this gold market. And not just the facts, but how they integrate to define the price of gold. Without those how can you lead and not follow? One has to look into the monetary aspect of gold, into its historic relationship with both deflation and inflation, into the instability and uncertainty these create, then one has to extrapolate the potential moves by governments on the situation. From this one can begin to understand this market. That's what we do. On the other hand, look too closely, no matter how expertly, and you risk losing insight and discernment. And you need both to follow and ton profit from this market.

Global market prices:
Euro: (Euro 1 : $1.2957) A very good week for gold in the Euro, wrestling over the Euro 336 level to climb over Euros 440, hitting 441+ before retreating to Euros 339+. Still a few Euros to go before it is 'up and away' in this currency, but seemingly, headed there. If it succeeds in getting through the Euro 440's, the way is open to new heights. We repeat our statement of last week, that the fundamentals in gold are weighty, so even without a $ collapse gold is in a growing bull market.

U.S. $: More is happening than meets the eye here. Snow tells us that $ strength would be in the interests of the U.S., then tells the market that they will not intervene in the foreign exchanges feeling that these markets should determine the rate of exchange of the $. Clearly, what is in the interests of the country is not in the interests of the markets as there looks to be no support to the $ from official quarters.

Rupees: ($1: Rupees 45.03) The Rupee is still being held down by the Indian authorities, despite the strengthening by 0.5% in the exchange rate in the last week. Like Japan and China, they have no desire to lose their trade competitiveness partially given to them by a weakening currency. The Indian authorities are expected to continue this policy. As a result, the gold price strength is having a full impact on the Rupee price of gold. It is too strong for the market and sales are heavily down. Gold demand in Madras was hardly 10 to 20 kg a day, compared with an annual daily average of about 200 kg. Traders estimated 75 to 100 kg of scrap gold were being sold to dealers in Bombay every day, against average sales of about 10 kg, by dealers. Until the gold price steadies down to a well supported level, the Indian market may well remain at these low levels of demand. We do see a slight appreciation of the Rupee, but will this be permitted for long? Once the Indian market has accepted higher prices they do return, but they may have to wait a while?

South African Rand ($1 : R6.0305)
The Rand strengthened another 3% on the $ this last week, and sat just above the R6.00 level at R5.99 to $1. 3% on the gold price is $12, which wipes out any gain prompted by the gold price in the $. A no lesser mortal than the President himself made it clear that they were not going to weaken the Rand. As a result we expect the stronger Rand to steadily cause devastation to the entire export sector, including the mining industry. Inflation is dropping through the 3% level now and U.S. interest rates are rising. Consequently, next month, the prospect of another drop in interest rates is moving to a certainty. How much they will drop rates by has to be seen, but we hope it is a large one, so it will allow the gold mines to totter on breakeven point longer?

At the time of writing, gold stood at $442.05 33.95 or $8.10 higher then this time last week and at Euros 341.24 36.40 or 4.85 Euros higher than last week. The Euro is worth $1.2957 up $0.0050 on last week. Gold, moved up this week in Euros to attack overhead resistance in the mid Euros 440's.

The $ collapse - how to protect yourself.
This subject has become one of the most aired subjects in global financial circles ever. In the last week it has riveted the markets attention and is expected to continue to do so. So how do you protect yourself against such a fall? Please note we did not only address our U.S readers, who live with the $, we address all markets on the globe, because the $ is used in around 86% of global trade transactions.

Before we answer the question how, perhaps we should ask the question, do we need to protect ourselves? We are informed that of the over 260 million U.S. citizens, only 10 million of them have passports. The average U.S. portfolio has around 4% invested outside the U.S.

This points to a conclusion most have drawn that, if we are all falling with the $ who cares about the fall in the $. All we will see is rising costs of imports, giving the U.S back that competitive edge in global trade. So isn't the $ fall a good thing? Well, you can look at many situations from many different angles and feel good, but the bottom line is, you can protect yourself against a falling $ by making $ profits on the fall. Or you can remove the danger of the $'s dropping value, by holding assets that will not be affected by the dropping value of the $, but may well benefit from the fall.

But the first step is to look at the markets from a global viewpoint, not as just a U.S. or a European citizen. We're talking about protecting and increasing your and your families wealth. Leave the government to guard the nation's wealth. That's not unpatriotic, just as it is not unpatriotic for the Chinese to hold U.S.$.

e.g. If you bought gold in Euros, a year ago you would probably have paid Euros 330 per ounce. Today, that gold would be worth Euros 338. Not much profit you may think, but what about looking at the same performance in $. The figure looks a lot closer to a 15%20% gain in $ profits. So gold has been a protection against a weakening $. It is expected that there is much more weakening of the $ to go, because it looks like 'Bull' market in gold, has barely begun.

If the $ is the problem, what are you doing in it? Reflect on the Lemming, if you will. He has a wonderful life through nearly all of it. It is just those last few moments as he falls over the cliff that are difficult. To illustrate the problem more graphically, a look at South Africa paints a clearer picture.

Our South African readers have bewailed the rise of the Rand, now moving through R6.00 to the $, destroying any benefit of the rising $ gold price because the currency is strong, by 3% in the last week, wiping out the 2.5% gain in the gold price. How do they manage the situation? They have to be able to determine the point at which the Rand has peaked. Until then, they should protect against its rise, through an option, or futures contract on the Rand, so as to take it out of the equation and then enjoy the rise in the $ gold price? If they had done so that 3% drop in the Rand gold price would have been a profit on the currency hedge. We help them to do that.

We have to think globally. We have to plan our investments to profit from global changes. We have to move to a point where several times the present international content of our local portfolios are purchased. Global Strategies are vital to future profits. Gold has to be a key component of such a portfolio, as it not a national but a global asset and one we can reach within our own borders!

The Indian / Rupee market in gold
With many thanks to Daman Prakash, we now have a very clear picture of the Indian market and need to correct some figures put forward in these columns previously. The figure that we were led to believe were imports of gold into India, of just below 900 tonnes, is in fact the consumption of gold within India, which includes scrap. Imports were much, much lower, and may well be around the 600 tonne level only!

The agricultural season has not been as good as was thought, with cash flow being lower than last year. As a result the brides are not receiving dowries of newly purchased gold, but many brides, in the lower income groups receiving their mothers gold, which has been melted down and redesigned for the daughters wedding. So the parents security is given to their daughters. I have no doubt that these mothersinlaw are appreciated and wellloved, this year, more than most years.

To add insult to injury, the Indian Authorities removed the local Indian price advantages over international prices. Now the price has broken above international prices, which together with the depreciation of the Rupee this summer, took gold prices up $24, a 5% jump, which discouraged buying, rapidly. So now they are paying premium of 3% over London prices. [This is explained fully in the next issue of "G - AM"]

As a result the physical demand for gold from India has dried up to about 100 kg a day from an average of 250 to 300 kg. Bullion traders in Bombay, the country's financial capital, said demand was hardly 20% of the 450500 kg generally seen during the festival season. Rising prices will continue to encourage scrap sales and discourage gold imports for the rest of this year we expect.

Producer DeHedging continues.
Producer dehedging continued briskly in the last quarter according to GFMS at 144 tonnes of gold, but according to Virtual Metals, this was 134 tonnes. Not a lot to fight about and the two reports highlight how Dehedging has changed. The changes highlight simply that hedges in a rising market are a deep embarrassment to the mines. As the gold price rises the losses on these hedges grow.

The mining companies can pull in their hedges, by taking an opposite position on them [by buying in the same amount of gold to close the position], but at a loss, usually. This is what they are doing now and have been doing for the last couple of years. They had been hoping that the gold price would pull back to allow them to do this at only a small and hopefully, insignificant loss, but this is not to be so. With a policy of hedging, what they consider a small portion of their production [which varies from company to company], the danger of losing out on a rising gold price seemed small. Now that there appears to be some vigour in the price rise, the potential losses on these hedges is moving to the dramatic. Mining companies must be considering dropping their hedges way down from current levels, to levels where such hedges yield an upfront income to cover mine development. This way uses future production to finance itself. But the hedging that we talk about when we mention dehedging, is that which sought to secure prices in a market where prices were thought to be falling on a long term basis. In a market where prices are rising on a long term basis there is no room for such hedging, as it amounts to speculation that prices have reached their ceiling. Mining companies are in the business of digging for gold and selling it, certainly not in taking an openended risk on future prices. As a result, we do expect to see all companies that hedge continue to close such risk positions, well beyond the current high levels of hedging in the industry at present. So do not be surprised if vigorous dehedging continues for longer than expected. Bear in mind that they would not be doing this if they really thought that the gold price had hit its ceiling?

StreetTracks Gold Trust
Dealing began on Thursday the 18th of November. Pretty soon wholesalers has taken up 8.40 tonnes of gold. To put this in context this is more than Switzerland, thought to be the only Central Bank to be selling gold presently, sells each week.

If we take the demand that Australia and the U.K. have taken since the inception of similar funds there, and accepts the thought that the U.S demand will be at least 10 times that of the U.K and Australia combined, then an amount of 10 x 54 tonnes is a possible offtake in the U.S., over time. Comparably fewer U.S. citizens and Institutions take a global view, but, as this is an internal, hedge against the $, certainly we can expect half or more of that tonnage to be bought in the U.S over the next six months, through this E.T.F.?

As it is such a new animal in the U.S. it seems appropriate that we should outline some strategies useful in dealing in these shares that highlight what place these shares should have in a local U.S portfolio and in an international/global portfolio, in the next issue of "Gold - Authentic Money". We will be also add concepts of how to bring in a global perspective to your portfolio.

As an afterthought, if the expectations on this fund come even slightly close to market beliefs, we wonder where they will get the gold from at these prices?

Silver $7.55
Still tracking gold, but not yet through its overhead resistance. A more volatile price than gold and one with the potential to be very exciting both ways [We managed to take a $2.00 profit from the last fall from $8.00 to $6.00, last time round]. The funds have considerably more influence over the Silver price than we believe they have over the gold price. So stay on your toes both ways!

Platinum $860
Johnson Mathey forecast that the Platinum market would move from an expected shortage this year and next to a balnce of supply and demand in 2004 and an oversupply in 2005. They expected price range of $760 - $880 in 2005. If they are correct then this price is at its ceiling.

But it does seem that the expansion plans of Anglo Platinum will be shelved and for a considerable time period. With the Rand strengthening still further, management will have no desire to add to an oversupply situation. With the demand for Platinum in the diesel car industry in Europe, set to continue growing, the industry can expect to see no substitution by other materials in the catalytic exhaust, so giving the Platinum mines and the price a stability they want. Global demand for platinum is expected to rise just under 1% in 2004 to 6.47 million ounces, due to an expected rise in purchases of vehicle catalysts, to a record 3.43 million ounces. This increased vehicle and industrial demand is expected to be offset by a fall from the jewellery industry by 240,000 ounces to 2.20 million, as purchases by manufacturers in China fall for the second year running. There is no doubt that if prices do fall back substantially, Chinese jewellery demand will recover and adjust these conclusions. With this report, if indeed it proves to be accurate, the likelihood of price spikes diminishes.

The London Gold Fix
18th November a.m. $444.30    E 340.590
18th November p.m. $442.00    E 339.791

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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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