Gold - The Weekly Global Perspective

By: Julian D. W. Phillips | Sat, May 7, 2005
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HIGHLIGHTS of "Global Watch - The Gold Forecaster"
- Is a revaluation of the Yuan imminent.
- Short-term forecasts across the Board!
- A reason why gold shares underperform the gold price.
- De-Hedging Prospects.
- Is the Revaluation of the Yuan Imminent?
- Prospects for the U.S. $ & $ Technical picture.
- Is a Dow sell-off near?
- Summary: The present Gold Price Drivers.
- Technical Analysis of the Gold Price.
- International Gold Markets.
• Silver / Platinum.

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Is the Revaluation of the Yuan imminent?

Last week we said "The government itself keep indicating that when and only when they are ready will they revalue the Yuan. This could be a long time still. So, much as we would like to see the revaluation, it won't come because the developed world wants it but because China wants it!"

Since then there has been mush talk in the media about the immanency of the revaluation of the Yuan perhaps more should be said.

China is fully aware of the fact that its banking system is somewhat archaic, which can be an advantage in this situation. On top of that China has a degree of control, because of its political control of both the people and the economy, which is considerably greater than the developed world is capable of. Hence, they have the capacity and capability to ameliorate the pressures the massive surplus of U.S. $ in their reserves. Just as the capital account input from surplus countries into U.S. Treasuries balances the books for the U.S. $, so the reverse is true in China's case. Internally, like the U.S., the issue of bonds sucks out the excess liquidity from the economy.

The clincher in this scene is the fact that such a position fuels growth in China, so why should they change policy now? The underlying process that is going on is the massive transfer of wealth to China.

Now consider the latest moves in China with reference to Taiwan. The opposition party has agreed to rejoin China, if it is elected into power. The prospect of this happening is probable, having moved on from possible. The Chinese have now said that they want the President of Taiwan to stop 'independence rhetoric' before further progress can be made. This is quite remarkable, because the U.S. is the power behind the throne of Taiwan. Would they be willing to let Taiwan go back to China? For the Taiwanese the prospect must be attractive, particularly if the same line is followed as was followed in Hong Kong. For the U.S. the prospect cannot be good, as they will have to relinquish power in that area.

What happens there may provide sufficient advantage for China to revalue? If not, then it is difficult to see why they should revalue. We note that the Chinese Finance Minister is saying the Chinese are working hard on the issue of the Yuan. No clear picture is yet forthcoming. When they are ready they will act.

Prospects for the U.S. $

The Fed has reassured us that short-term or long-term inflation is not a worry. This is comforting. But the $ responded to the Fed's comments badly. Clearly the market wants higher rates to compensate for the loss of confidence in the $. A 1% differential between the Euro and the $ key rates is not sufficient to restore confidence in the $, and that is a worry. Clearly the market sees a problem with the $ with rates pointing to a 'pause'. It is important for gold 'as a currency' and gold as an investment. Perhaps this is the most significant event of the year for gold?

The Eurozone, as expected, held their rates at 2%. The Eurozone is suffering internationally on the trade front more than the States, with the Euro price of European goods dropping in line with the drop in the $, and alongside that from the drop in the price of Chinese goods as it drops with the $ too. The 'peg' ensures this will continue to be the case.

Before publishing this report the U.S. Jobs numbers came in well above expectations, which prompted a resurgence in the $ this p.m. We have not changed our views, simply riding out these churnings. We reiterate what our view is of the U.S. economy. A strong U.S. economy is good for gold as it draws in imports weakens confidence in the $ and encourages investment demand for gold.

The transfer of wealth to the East is an issue of greater significance than the Euro's relationship to the $ in the longer run. The next quarter could well see some major surprises unfurl in front of us.

Funds unwinding longs
This week ended with the funds attempting to trounce the gold price, dumping 50 tonnes of gold onto the market as we completed this issue. We are under the impression that the funds have unloaded around 100 - 150 tonnes of the 420 tonnes long position they held earlier.

Please note that when this happened the year before the gold price fell $30.

The year before that the gold price dropped nearly $70 when the funds unloaded. We are encouraged and surprised at gold's resilience.

It is easy to get emotional at these events, but one always has to step back to see clearly.

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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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