Gold - The Weekly Global Perspective

By: Julian D. W. Phillips | Wed, Feb 2, 2005
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HIGHLIGHTS of "Global Watch - The Gold Forecaster"
Page1. Short-term forecasts across the Board!
2 - 3. The U.S. $: Interest rates to follow Growth! - The Oil Market -
The Iraqi Elections - the future - De Hedging to continue! -
Capital Controls in the U.S.?
4. Summary: The present Gold Price Drivers.
5. Technical Analysis of the Gold Price: Short term.
5 - 8. International gold markets: - Investment Strategies.
8. Silver / Platinum
10-16. STOCK OF THE WEEK - Harmony [HMY] / Shares: HUI Index /NEM

That was the week that was - Gold Market action.

On the surface the gold price is consolidating between $420 and $428. In Euros the gold price held between Euros 325 and 327, barely moving during the week, until Tuesday, when it began to weaken, dropping to Euros 323. So the $ was fluctuating against the Euro a consequence of short-term views on the next moves. These look at one moment positively on U.S. data as it came out, the next negatively, but not to the extent of being decisive. Rather, dealer's interpretations caused them to brace themselves for potential moves. This was a week of waiting and watching. What will give direction to the market? All are waiting for news from the G7 meeting and the Fed's meeting to decide how much to raise interest rates in the States. With the present GDP growth levels beginning to wane, the Fed's moves, may well decide the markets' direction.

O.P.E.C. decided not to cut production, officially, so no direction given from that quarter. Please note that this does not mean that individually they won't cut production. The Iraqi elections are passed, but the results won't be out until next week. Don't be fooled, the orderliness of the elections [60% voter turnout] is not the issue. The result is! [see below the piece on Iraq]

Last week we pointed back to this time last year, when the gold price hit its peak, before spending the bulk of the year falling back less than 10% before moving to a new decade peak of $456. Here we are at $427, having seen a massive Speculative long position unwinding around 300 tonnes of gold and it has only fallen 7%. The speculators are pressing hard to make the gold price fall! The ability to cope with such tonnages with such alacrity leads us to believe this market is more likely to rise than to fall, but Wednesday will tell!

Comex Speculative Position.

Whilst the net long speculative position on Comex has fallen to a recent low of 186.63 tonnes, the last two days has seen around 37 more tonnes of gold dropped onto the market leading to an intriguing situation on Comex. The Long position actually rose by 15.55 tonnes, which disguised the situation a little. Not since 1999, has there been such a large "Short" position in the CFTC figures. The present 'short' position rose 27.99 tonnes to total 339.04 tonnes on the 25th January. However, the last time this figure was so high was just before the signing of the "Washington Agreement", after which the gold price bolted upwards.

Gold the "Big" Global currency picture:

The state of the monetary world sets the climate for gold. As a Long term Thermometer, what happens to global confidence and ability of the major structures of the monetary world to measure true financial values, affects Gold. This overview will focus on the climate being set currently.

Interest rates to follow Growth.

The market is constantly looking for relationships. For instance higher growth means higher interest rates; lower growth means lower interest rates. Simple and logical! But changes are taking place with these patterns. We showed you the chart of inflation and interest rates last week, where we see the new phenomenon of inflation leading interest rates for the first time in recent history. This was because of the fragility of growth in the States and the potentially devastating impact on Consumer spending. In themselves, nothing new is happening, but the order in which they are happening is different. The influence on each other, which we have taken for granted for so many years, is changing. Interest rates are following inflation now. Interest rates must catch up, so that they can be effective as a management tool again. In their present state, they are ineffective as an inflation manager, or as a manager of growth.

The Bush Administration is firmly concentrated on promoting growth nothing will stop that. The Fed realises that growth is dependant on continued spending by the consumer, who has no interest in saving, because it's not worth it in the light of very low level of interest rates. They know that both growth and inflation greater than interest rates will weaken the $, which in turn will exacerbate the Trade deficit. This Catch-22 situation won't change soon.

The continuation of 'negative' interest rates will lead to a further loss of confidence, internationally, in the U.S. $. The States have been put on notice by the world's leading Central Banks, [39 nations of the 65 recently surveyed are raising their euro holdings, with 29 cutting back on the US dollar.] that they now favour the Euro over the $ in their Foreign Exchange Reserves. They've said it! The likelihood of a further depreciation of the $ by 15% or even 50%, though technically sufficient to even out the disparities, does not resolve the problem of the $'s behaviour. As long as the underlying and fundamental approach to the $ favours internal U.S. interests, it acts against the international value and confidence in the $. This is not Europe's problem, or Asia's. It lies in the hands of the present Administration to set matters straight. Until it does, the U.S. $ will decline in value and reputation, still further. The Euro and Gold show this by rising in value.

But with the impact on Europe's trading position of the stronger Euro, it is only a matter of time before the Europeans react defensively to this and attempt to weaken the Euro. Gold will then be enhanced as a measurer of value. If the Euro does not weaken itself against the U.S. $, it will grow in strength with gold in its slipstream. A major question will then be, do the managers of the Euro place its value and reputation above the competitive position of Europe in the States? Either way gold will benefit from the answer! For the Euro to take on the $'s mantle, it will have to keep this solidity irrespective of the $. Any weakening at the knees will lead to a measure of foreign exchange anarchy, which is against the entire globe's interests.

The Oil Market

O.P.E.C. met on Sunday and decided that 'officially' production levels would not be cut. One would think this was a neutral statement and the market should take it as such. We don't. Oil Producers have made a transition from the days they wanted the oil price to sit between $22 and $28 a barrel to the favouring of $40 a barrel. It was in 1973 that the oil price hit $35 a barrel. Saudi Arabia was earning $22,000 per capita, in the '80's. Today that is down to $4,000 and they would like it to be higher.

They saw just how easily the world coped with oil prices hitting $50 a barrel. They heard the experts say that an emergency would only occur when the oil price hit $70 - $80 a barrel. They have seen how $45+ prices are now the comfortable norm. But they remain keenly aware that their future security and that of their ruling houses, lies in the hands of the U.S., that considers that the Middle East oil countries as part of its "vital interests". [Roughly translated, this means toe the U.S. line or you're out]. Within these governing parameters, Oil Producers have no desire to lower their prices, to former levels. Put yourself in their shoes. The higher prices are here, accepted with no-one complaining, so why lower them? Keep a low profile, yes, but hold prices at these levels.

They confirmed this line of thinking when they met in December, in Cairo, as they witnessed rapidly falling market prices, from $55 a barrel in October to around $40 a barrel as the group met. O.P.E.C. then cut its output by one million barrels a day to hold prices in the $40 region. Presently at $+49 a barrel, the decision not to cut production or raise it, confirms their desire for higher and average prices.

Last year, OPEC's 11 members - Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela - received $338 billion in revenue from oil exports, a 42% increase from 2003, according to figures compiled by the Federal Energy Information Administration.

All well and good you may say, but we ask you to consider a well know fact that has not yet been fully assimilated by the markets in their pricing. Saudi Arabia is in the process of increasing its potential output from current levels. Saudi Arabia had increased its capacity to 11 million barrels a day, with the addition of two new fields, Abu Sa'fah and Qatif, and is starting 2005 with excess capacity of about 2 million barrels a day. Please note that the increase in demand from China alone could well be in excess of 2 million barrels a day, if not more, in 2005. Should this happen then control of the oil price will have been lost in the face of overwhelming demand!

O.P.E.C. is not likely to place itself in the spotlight by holding back supplies in a market where prices are moving up too rapidly, but all of us are aware that possibly this year, the surplus capacity from the world's oil Producers could well disappear not only used up by demand from China, but by speculators and nations stocking up ahead of the expected shortage

What are the implications for gold from this? As we have said many times the relationship between Gold and Oil is not a solid one. They move in the same direction and over time, they reflect similar increases and decreases. However, the world has never seen this sort of crisis before. Such a crisis, will exponentially weaken confidence and the value of the U.S. $, throwing currency stability out of the window!

The Iraqi Elections and the future!

We look at this subject only in the light of its impact on global stability, which, in turn will be reflected in the gold price.

The turnout was 60% we are told, the results won't be known for one week. What should our take on the future for Iraq be? Terrorism is a virulent cancer, buried in the depth of the globe. Will the election of a Democratic government in Iraq take this scourge away? No! This Terror is likely, at the present rate, to bring "Democracy" head on with "Islam". This was the first Democratic election to be held in Iraq and it is likely to be the last. The election of a Shi'ite government to power will ensure the dominance of the government by 'the church', irrespective of who actually is in the government. A Shi'ite government will almost certainly align itself with Iran. The two nations will then control both the East and North of the Persian Gulf. Such an alliance is unlikely to continue good relations with the U.S.A. The two nations control more than 50% of the Middle East's oil reserves. Their influence over the oil price will be strong thereafter. The climate created by these developments, is negative for the future of global stability and positive for gold!

Capital Controls

In the latest issue of "Gold Authentic Money", we take a look at the history of the sort of controls that could be used to stem the outflows of capital from the U.S., if the dollar decline becomes a crisis. The writer is particularly well qualified to describe these controls, as he was present when they were used in 1970 and after. At this stage such potential action has only moved onto the screen, not as a probability but as a future possibility! You need to be aware of this possibility, so as to be forewarned for your own protection and to be in a position to increase your wealth should this happen.

Please visit the end of the report to read the legal notice and disclaimer. All work is copyrighted and may not be distributed without written permission. © 2005

The London Gold Fix
1st February a.m. $421.15   € 323.166
1st February p.m. $420.90   € 323.421
Current London Fix: Latest London Fix

At the time of writing, gold stood at $420.90 and in Euros 322.603. The Euro is worth $1.3047.

The Euro: - Euro €: $1.3047

Euro Fundamentals:

Very little change to last week's picture as all wait both the G7 meeting this week and the Fed's interest rate decision. A point for us all to note is that the Eurozone has an economy as large as the United States now. With 400 million people in this zone and 260 million in the U.S. these numbers give us a sense of proportion when assessing market moves. However, the U.S. still retains its place as Europe's main economic driving force, through the import of Europe's exports. Europe holds the crown of being the globe's largest exporter.

India - The Rupee: ($1: Rupees 43.679) Present Price [excluding duties, etc] Rs.18,380.70 per ounce [last week: Rs.18,673.11]

Indian Gold Market: The Fundamentals.

With prices stable, demand for imported physical gold is strong. With buyers happy with these prices, sellers of scrap are unhappy to sell. With this local source of supply diminished, demand for imported new gold is high. If this continues demand for the year will beat previous records. However, sudden price rises will incite scrap sales, in place of imported gold. The agility with which prices move up will dictate the level of this local supply.

South Africa - S.A. Rand $1: R6.0225

Fundamentals of the South African Market

South African gold producers are struggling to benefit from record gold prices because the Rand's rally against the U.S. $ is wiping out earnings needed to invest in new mines. CEO of Goldfields, Mr Ian Cockerill said that the challenge for South African Miners was not only to make profit at an operating level, but also to make enough to reinvest. So often investors look at "Cash Costs", but this is not sufficient, for Investors need to make a return on their money, sufficient to justify an investment in South Africa for the long term.

The value of the Rand against the dollar has more than doubled in the past three years; taxation is on the increase with the proposed new "Royalty" on turnover and Mineworkers pay is placing even more pressure on margins. Mineworkers' pay rose 7% in July after a 10% increase in 2003, ahead of South Africa's inflation rate of 4,4% a year. The companies pay over 50% of costs at local mines in Rands and get Rands for their gold, after changing their U.S. $ at the Reserve Bank of South Africa.

With mining costs hitting $349/oz in the third quarter of 2004 and receiving $435/oz in the fourth quarter, gold mining in South is the most expensive in the world at 40% higher than the global average.

Last week the gold price, per ounce was R2,5430.0, today it is R2,534.87

Silver $6.725 [Euros 5.154] [Current "Silver Price"]

The Silver Market - The Fundamentals.

The future for Silver in 2005 is still favouring a similar market to the one it saw in 2004. The selling from China, down 22% in 2004, could hold the key for the Silver price. Should this drop further the Silver price has the potential to outperform other precious metals.

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 still proving successful of late. We hope you made good profits and are taking new positions?

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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