Gold - The Weekly Global Perspective

By: Julian D. W. Phillips | Fri, Dec 24, 2004
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That was the week that was

The gold market sat in a mild state of shock last week after the bruising and brutal falls of the week before. Many forecasters and observers said that's it! Its over, you've seen the best of it. But look at the market now.

The gold price has, so far, shown a vitality, not expected by them. It has held above the $440 level almost stubbornly. The recent falls were the result of heavy, heavy selling and saw the completion of the massive liquidation of speculative positions, as well as selling from Central Banks [which has been going for the last few weeks in relatively small amounts]. The new recent seller has been Portugal.

Not only did the price suffer in the U.S.$, but in Euros. And in Euros, it reflected the action in the physical market. It still sits just two Euros up from the low at Euros 329/330, but reflected the resumption of the weakness of the $, early in the week. The funds cut back their positions by over 144 tonnes [this was in addition to the 15 tonnes dropped onto the market by streetTRACKS - Gold Trust, last week]. What is most significant about this is that gold having fallen $23 from its recent peak, has recovered to only +$13 below its peak. For the next few days the holiday spirit will keep the market thin and sensitive. Have you noticed how the London Gold Fix acts as an anchor for the gold prices throughout the London day?

The London Gold Fix

We must know where the market in gold is really, before we can understand the influences on the gold price.

A careful look over the last few weeks shows that the real price of gold is being made at the London Fixing. Yes, the other markets may well influence the price, but not dominate it. From where we stand it looks as though the structure of the market will show the London Fixing will be dominant for the foreseeable future. Their site is www.goldfixing.com

Should the demand for the E.T.F.'s grow, then the physical purchases through the fixing banks and particularly H.S.B.C. will grow, keeping the London price makers in charge. More than that, that is where Central Banks buy and sell their gold, where the Producers sell their gold, because they know that at the gold price fixing, all deals are done at the one price, that of the gold fixing price. This is agreed by the Bullion Banks with open telephone links to their main clients, who adjust their prices, as the fixing prices are weighed and set by these few men. No longer though, will their Union Jack flags on the front of their desks be lowered, if their dealing position changes, so they can adjust their prices and amounts, then restart the price discussion, as the fixing, like all things today, takes place on computers. Nevertheless, the procedure is essentially the same as it used to be, to ensure that no one dealer is prejudiced by a moving price. Fair isn't it. The deals that are done in the fixing are therefore closest to the main gold prices of the day. This is where you would expect the biggest volumes of gold to trade that day. This is why the structure of the Exchange Traded Funds of both "London Bullion Securities" and streetTRACKS - Gold Trust, are important. Both use H.S.B.C., who are the main Bullion Bank in the London Bullion market. That is why the prices dealt to their clients [shareholders] are based on this Fix. [See below]

Global market prices:

Euro: (Euro 1: $1.3452)
IN THE FULL VERSION - EURO CHART OF THE GOLD PRICE

This week the price in Euros has continued to be a solid but unimpressive performer. With the Euro rebounding, gold has moved, once again into its slipstream. New factors on the global front must rise to the surface as symptoms of the structural decay slowly, but steadily develop. We watch this price very carefully. Do not misunderstand what we are saying here, even at the fixes the main currency quoted is the $, but in its role of the global currency. In itself this is a translation from other currencies driven by factors other than the $. This is normal market action. Arbitrageurs will intercede to even out the prices. We are talking here of the structure of the gold market, not about manipulation. Last week saw good investment bank buying, as well as the selling mentioned earlier. The Euro price has now returned to its historic level of Euros 330. It has maintained this level for the last couple of years, on average. This confirms that to date and at the moment the gold price is simply a reflection of the U.S. $ moves.

U.S. $:
IN THE FULL VERSION - U.S.$ CHART OF THE GOLD PRICE

A recovery to just below $440 was the feature of the early part of the week, as the $ recovery petered out, leaving it to resume its downward path. We are of the belief that the volatility of the markets has increased tremendously. If this volatility is here to stay, then many forecasters are going to be driven to the back foot, as consolidations and rallies prove speedier than expected. In the 1970's the time frame for the rising market was relatively slow, because technologically the market was far closer to the Stone Age than it is now. Today the markets have a degree of speed that was unimaginable 35 years ago. This has to translate into the speed of market reaction moving to the pace that market players take to assimilate market factors and deal. Now it can happen in a heartbeat. As we have emphasised many, many times before, this should awaken us to the importance of understanding the fundamentals and not just following the Technical picture. If you are not quick enough and are a follower of the Technicals, you may well find yourself closer to the back of the queue than profits will allow?

Rupees: ($1: Rupees 43.78)
IN THE FULL VERSION - RUPEE CHART OF THE GOLD PRICE

Half a Rupee stronger means over 1% stronger. A 1% stronger Rupee, means $4 [in Rupees] cheaper in real terms to the Indian market. The Indian Authorities appear determined to rein in the Rupee to ensure its strength does not endanger the international trading advantages of India. But for how long can and will they do this.

South African Rand: ($1: R5.6325)
IN THE FULL VERSION - SOUTH AFRICAN RAND PRICE OF THE GOLD CHART

And the Rand went stronger again, by another 29 cents! Oblivious to the plight of the exporter and opening the country up to floods of imports, destroying home-grown industries, the Rand powers on. Probably hoping that the steady rise in U.S. rates will discourage Rand investors as the interest arbitrage number narrow, the Reserve Bank focuses on the dropping internal inflation and the booming economy. With the impact of the BEE [Black Empowerment] broadening the base of the economy, many in South Africa believe all is very well, but can they afford to savage the industries the economy has depended on for so long. Perhaps they feel that the growth they are achieving is good enough for the Political scene, but it has to be said that once the Blacks are empowered, or 'hot' money decides that the strength of the Rand and interest rates has peaked; South Africa could feel the chill of unsustainable growth and to a depressing future for the country. They, at that stage may well look around and find the industries on which they depended, for past Balance of Payments soundness, in a very damaged condition, one from which it will take many years to recover from.

Latest

At the time of writing, gold stood at $441.80 or $7.00 higher than in the last issue and in Euros 330.34. The Euro is worth $1.3374.

Central Bank Sales

At "Gold - Authentic Money" we have been forecasting the decline, to cessation, of gold sales by the Central European Banks for the last two years. We have written article after article on the ascendancy of the U.S. $ and the decline of gold in "Official "eyes during all this time. We highlighted the developing division between Europe and the U.S. on gold and the $ fronts. This week's announcement from Germany and the earlier one from Italy, have confirmed that we are one of the only publications that fully understand this aspect of gold. As it is one from which huge implications for the whole gold market and the price of gold will stem, it is important that you see our work. This aspect could well prove to be the most influential facet of gold next year and the entire decade starting from now.

After the "Washington Agreement" was signed, the return to gold in the global monetary system, as a significant, not just important, reserve asset, began. This last week in particular, heralded a further step down this road. Germany announced it was not going to sell a portion of the 600 tonnes of gold it had "the Option" to sell within the Central Bank Gold Agreement of 2004. This followed Italy's announcement a while back, that "It had no plans to sell gold". What is the true significance of this announcement? Is this a major trend likely to add to the resurgence of the gold price?

We have been forecasting the reduction of and future cessation of gold sales from the vaults of the European Central Banks as a lone voice, even in the face of the bulk of the London Bullion Market Association's views. We did this because the underlying value of gold in reserves is inestimable in the face of growing structural instabilities, which look set to cause a major rupture in the Monetary system as early as next year onwards. By integrating monetary considerations into our views the long-term future of gold pointed away from the sales continuing for much longer. The U.S. terminated their gold selling programme in the 1980's, leaving the I.M.F. to sell other nations gold, before it too retreated from such sales, never to repeat them. That Europe would follow the same road, for the same reasons, was entirely predictable to us.

In view of the task Central Bankers have of protecting the value of a nation's reserves, it was incumbent upon them to retain an asset that was set to and did outperform the largest component of global Central Bank reserves, the U.S. $. We are writing an Article, for "Gold - Authentic Money on the true significance of the announcements and what it means for the future of "Official" gold, following the ripple effects thereafter. We are of the opinion that the understanding of "Official gold" is the foundation to the full knowledge of where the gold price is going to and why. We believe that if one is armed with the knowledge of the fundamentals and combines that with the Technical Analysis information, one is properly equipped to profit from these markets. To that end we are commencing with a new publication, "Global Watch - The Gold Forecaster", whose task will be to:

In this publication we will provide both the important fundamental factors, with Technical Analysis [Charts] on all these features. However, we will not be a repeat of other services already available, we will aim to bring all these global features together in an integrated way, so as to synthesise these factors into the gold price. We then hope you will be able to understand what effect the South African Rand's strength will have on gold production and the gold price, or how a strong Rupee affects the gold price in $, as well as to what extent these individual factors will have in the short medium and long term. Likewise, what importance is Governor Noyer's standing with the French Finance Ministry, to the gold price? These may seem obtuse to you, but the have a direct impact on the gold price. This publication aims to give you a focussed view of the gold price! [See below for subscription details]

What really is the price of Gold - What really is the price of a currency?

It continues to amaze us how so many people in different parts of the world continue to look at the same thing [the gold price] and see different things. We always include the performance of gold in different currencies, as you can see below and those from the parts of the world where these currencies are the local ones go to that picture and relate to it. We have described the value of the $ as 1/440th part of an ounce of gold, but the same applies to other currencies too:

The point we are making is not simply that all currencies can be measured in gold, but that in each of these parts of the world gold is thought of and reported in these currencies.
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Why Chinese demand has still to be tapped.
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The overwhelming value of E.T.F.'s!

The last piece we wrote on the E.T.F. streetTRACKS - Gold Trust, stirred some strong emotions on this subject. The discussion aired on the web focused on the absence or otherwise of gold from the Trust, as well as the suspect administration of the trust. We do not want to address these points as they have received sufficient coverage from other writers. Should you wish to explore their concerns and opinions, please do so. We personally accept the very high reputation of those involved in the Trust and handling the gold for them. The shareholders of the Trust, which holds around 91 tonnes of gold seems to have satisfied themselves on these issues too. We are sure that if the World Gold Council were permitted to state its case, it would have pointed this out too. In addition if there are any weaknesses such as those pointed out by the web commentators we are sure that the Trustees, et al will have rectified matters by now. They cannot afford to allow any truth to persist on this front. But the furore has clouded the enormous benefits of these new instruments, which we feel we must point out now:

This now prompts us to add more comments, as well, as follows:
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The E.T.F.'s and Manipulation!
Full Story for subscribers

Royalty tax - why so destructive in S.A. and not in Chile.

Chile has announced a Royalty Tax of 5% on profits of the mines. Whilst the mines are complaining, they are in a much happier position than the South African Miners, who in a few years time are being warned that they may have to pay a 3% Royalty Tax ON TURNOVER. What does this mean in effect?

Assume a mine makes profits of 5% in both countries:

Assume a mine makes losses of 5% in both countries:

Now apply these sums to the real situations in both countries, factoring in the exchange rates to the gold prices received and you can see the trepidation it is causing.

Dropping gold prices in South Africa - How do the mines stay in business and not go bust!
Full Story for subscribers

$55 Billion Trade Deficit and the $ Why hasn't it fallen further, or will it? What a deficit! Everybody, including, Alan Greenspan is telling us that this is too much and the $ will go down as the appetite for $ investment falls. If this is correct, why didn't the $ fall further and faster? Some have spoken of a further 50% depreciation of the $, before it is at levels acceptable to Investors. But the $ doesn't act as though this is likely, despite the recent fall, recovery and now another small fall. Foreign Investment into the $ capital account was down at $40+ billion last month, against $67.4 billion the previous month, against the $55 billion Trade deficit. Of course the $ had to rally, after this. But why isn't the $ dropping further and faster?
Full Story for subscribers

On an ongoing basis, we will be covering this subject in our main newsletter "Gold - Authentic Money" and not here as it is too large a topic to be covered briefly. Ant which way it goes, you can be sure this topic and its future developments will be gold positive!

Silver $6.84 - Euros 5.0840
Full Version Includes Chart

We are now around $1 profits on our 'short' position. Our Subscribers are very happy. Wouldn't you like to be in line for these potential benefits? We are finalising the format of our new services right now and will be letting any who wish have a sample of these, prior to being asked to subscribe to them. Please contact us for these samples, if you haven't already received one?
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Platinum $845 -Euros 628.07
Full Version Includes Chart

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The London Gold Fix:
22nd December a.m. $442.70   E 330.447
22nd December p.m. $441.00   E 329.596


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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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