Gold - The Weekly Global Perspective

By: Julian D. W. Phillips | Wed, Jan 26, 2005
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1. Short-term forecasts across the Board!
2 - 3. The $; - The darkening clouds of instability & inflation/ Fed Funds
Emasculated /the Trade surplus & Capital surplus/Investment
/Will foreigners 'dump' the $/Fixed exchange rates -
Capital Controls -Protectionism - Dual Currencies to come?
4 - 5. Summary: - The present Gold Price Drivers.
4 - 5. China: - Demand potential much more than thought!
5. Technical Analysis of the Gold Price Short term.
6 - 8. International gold markets: - Investment Strategies.
8. Silver
9. Platinum
10. STOCKS OF THE WEEK / Gold/Silver Shares - Technical Analysis

That was the week that was - Gold Market action.

The gold price was consolidating, not licking its wounds at all. Yes, it did struggle to break up, but this price isn't interested in going down, it seems. In Euros it is actually rising, from the low just below Euros319 to the present level of Euros 327.05. Looking around it seems as if the Funds exited stage left leaving the net long position at just under 200 tonnes. Why you may well ask did they wait for the quiet holidays to start the games? Certainly the Technical picture would stand more chance of dominating when only the professionals, not on holiday, were around. Even in the currency markets, where the $ was strong, putting the Euro well onto the back foot, taking it down to 1.299 at one point, the action was lively. But now the holidays are rapidly becoming a distant memory as the pace of life and the markets get back to business.

Take a look back to this time last year. The gold price was hitting a new peak at around $429, before it started to wilt and kept on so until September, before advancing to new heights at the end of last year. With the possibility of that happening and the market needing a breather, it looked a good move. But this year has a completely different flavour now than last year already. The price, for such a huge tonnage of gold to be dumped on it, did well, falling in $'s to the $420 level from the peak of $456. And it is still holding up well.

On the physical side, we note that the E.T.F. streetTRACKS bought an additional 47 tonnes of gold since the beginning of this year, setting it off to a good start. We are keeping our eyes on the gold price in Euros carefully, but expect the $ price to continue to move, riveted to the Euro, except for this developing independence suddenly appearing [?]. Time will tell if this is structural or momentary.

Cross around to the other side of the globe and we find our Indian friends in the Gold market happy with these prices, but not so happy with the policy of keeping the Rupee alongside the $. Still this has to be, as the $ rules international trade prices for all goods. With their wedding season under way [14,000 weddings to start the season] and the harvests more than adequate, there are a huge number of dowries to pay for.

The U.S. Dollar ($) - The darkening clouds of instability & inflation

The rally is still here, with the Euro sitting just on the $1.30 level, having dipped below it briefly to the high @1.29 level. Now talk of a more aggressive rising of rates is the 'feel' of the moment. Somehow this doesn't ring true to us. Whilst there is plenty of time before the Fed meeting in February, it is possible that the published inflation levels will be lower than forecast. A rising concern at the Fed about the nation's imbalances: the federal deficit, which hit $413 billion in 2004; a low and declining national savings rate; evidence of speculative behavior among investors and consumers; and the country's enormous trade and financial deficit with the rest of the world.

There is a need for rates to rise if the Fed is to have a tool to cope with inflation, even if it is a blunt one at best. But it is clear from our understanding of Fed official's statements that the raising of rates will be on a 'catch-up' basis to inflation and will not even attempt to lead the way. This is a dramatic turn of events, because growth is too fragile to be able to have the Fed raise rates to the level at which they can dominate inflation, is the reason why they must follow. This is putting pressure on the Fed and putting distance between themselves and the Bush Administration. At present levels the Fed Funds rate is emasculated.

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China: - Demand potential, much more than thought!

Some time ago we pointed to the poor state of the gold distribution system in China holding back demand for gold there. The evidence that this is so is mounting. This has now been confirmed by the rapid speed that offerings of gold to the public are being taken up almost instantly. Evidence of the demand for gold was particularly clear when the Caishikou department store sold all its gold bars in just a matter of hours last month. When a second set of gold bars was released, the top gold retailer in Beijing asked people to register by phone and nearly 3,000 people did. The Chinese government is never in a hurry to do anything, but it has made its policy clear through Zhou Xiaochuan, governor of the People's Bank of China, the country's central bank, who said previously that China will encourage more banks to provide individual gold trading services to boost the metal's role as an investment vehicle. China deregulated its gold market in late 2002, when the Shanghai Gold Exchange began operations for institutional investors. Last year 235.35 tonnes of gold were traded on the exchange and the figure had already reached 170.04 tonnes of gold in the first half of 2004 alone.

The Bank of China, one of the four biggest lenders in the country, received approval to conduct individual gold trading on December 17. It has now announced it is expanding its programme to the whole of China, rather than just Shanghai.The Agricultural Bank of China, another of the 'big four' has become the second mainland lender to offer trading in gold certificates to its retail customers. The Beijing-based lender said yesterday that it received permission from the China Banking Regulatory Commission to offer financial instruments whose returns are based on gold prices. Gold trading services will be launched nationwide before the Spring Festival next month, Yang Kun, a bank vice president, said in a statement. Individuals will be able to trade gold bullion through special accounts without physically acquiring the precious metal - transactions that are referred to as "paper gold." In addition, the bank also has plans to offer trading in actual bullion.

We expect that the government's permission will be extended to all the four governments banks soon, as they see the business is soundly based. It is the government's intention to have gold fully liberalised and freely traded within its borders. The Chinese government is slow in moving forward. It would rather that a sound path be walked before taking any risks, but the pace at which it is giving permission for national gold trading encourages us to believe demand will grow far quicker from now on than expected! The introduction of gold sales is part of a larger effort to expand investment options. China's citizens set aside 1.59 trillion Yuan (US$191.5 billion) in savings by the end of last year. The potential demand is so large, when one realises that gold is a popular means of savings in a nation where the banking system is relatively simple still and there are few alternatives sound avenues of investment, for a nation that still loves to save, that demand could go into 4 figures of tonnes of gold and still sound conservative. The demand for gold from China is a matter of the number of outlets available. It is not dependent on a gradual growth of demand. The demand is already there, it just needs to be tapped!

South Africa - S.A. Rand $1: R5.9500

The U.S.$ rally weakened the Rand to over R6.00: $1. It is still holding this level, but as we said last week, this could prove short term. The length of the rally in the U.S. $ will dictate the time the Rand will stay above R6.00: $1.

We have been expecting an interest rate cut in South Africa. It has become clear that the Reserve Bank, still introverted, are now unlikely to lower rates, because the country is enjoying a structural boom at present. The fear, that if rates are cut, it will inspire over-spending and excessive stimulation is now being borne out by the new 'financially' empowered black middle classes spending every penny they get. The growth of this sector is strongly underway and will continue for the medium term at least. We continue to believe that the present prudence of the South African Reserve Bank is misplaced, as it ignores the long-term ramifications of a suffering export side to this very globally related economy.

[The South African Rand is the price paid to the Gold Mines. With South Africa producing 11% of the world's new gold, and some leading Mines operating there, the balance of future gold supplies is directly affected by the strength or weakness of the Rand, so the Gold Price in Rands is a key one to the gold market.]

Last week the gold price, per ounce was R2,555.86, today it is R2,5430.0

Canada / Australia: - Gold Producers Currencies.

Canada and Australia are two of the leading gold producing countries in the world. As important, they are home to a very large number of gold shares and gold investors. We will be tracking the $ and relating the gold price to those countries as well in the FULL Version.

Japan: - Japanese Yen: - Yen 102.78: U.S.$1

Certainly there is a tremendous fundamental strength in the Yen, not from the Japanese economy, but from the weakening $. They key to this direction is whether the Bank of Japan will intervene to prevent such strengthening as they did last year. We believe they will, as they have to protect the value of their reserves as well as the trade advantages arising from a lowered Yen $ value.

Silver $6.86 [Euros 5.262] [Current "Silver Price"]

The future for Silver in 2005 is still favouring a similar market to the one it saw in 2004.

Silver as a monetary metal has been discussed of late with Mexican provinces pushing for its re-instatement in their monetary system. We do not believe that it will have a global role in the monetary system until some time; well after gold has made a return to a favored position in the monetary system.

Until then it will continue to show far greater volatility than gold and provide an excellent trading vehicle. Closing our 'shorts' and opening our 'long' positions, is proving successful of late. We hope you made good profits!

Platinum $8.75 [Euros 671]

The announcement was made this week of the discovery of Platinum 'reef' formation at Thunder Bay in Canada, the site of the only Platinum mine in Canada. This formation is similar to the one found in South Africa in the Rustenburg area. It certainly expands the supply horizons for the metal. Eventually after the 5+ years it takes to develop a mine, it greatly add to the supplies available to the market. Whilst the Chinese jewellery industry favours this metal, the present price is closer to it trading range top than to its bottom.

With the supply moving gently into surplus this year the price is expected to remain high, despite the forecasts of some analysts seeing it down to the low $700. Others see it rising to well over $900. We see the formation in the chart as favouring the latter opinion.

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Policy Statement.

In "Global Watch - The Gold Forecaster", we will present the global picture, as it relates to gold and its price whilst synthesising these factors to forecast the gold price.

The gold price is an amalgam of diverse and changing influences, from Currencies to Jewellery, from Investors to Speculators. From Asia, to India, to Australia, to Canada, to South Africa, to the U.S.A. and to Asia, the gold price is of interest to all. It cannot be seen in isolation as a metal, but must be understood as a Global Thermometer measuring monetary, political, economic, stability as well as the raw demand / supply features of the metal itself. These factors do not merely add up to the price but interact in sometimes, strange ways, to produce the gold price. For example, rising prices often lead consequently to rising demand, as the appetite for the metal grows. Its price may rise in one currency and fall in another, at the same time. Overall, it reacts sensitively to the overall level of global stability, which, in turn, gives us the gold price.

It is our task in this letter to track these different features, giving you both the Technical Analysis and the fundamental features impacting on the gold price each week. It is our goal to help you to understand and profit from this market, wherever you are on this globe, in a professional manner. We welcome any input or observations you may have, which contribute to the enhancement of this service.

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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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