Gold - The Weekly Global Perspective

By: Julian D. W. Phillips | Sun, Jul 17, 2005
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HIGHLIGHTS in "Global Watch - The Gold Forecaster"
Silver - Gold : Silver Ratio EDR.V, SSRI, PAAS, SIL, HL, CDE/ Platinum

Features Below: -
- Market Action / Short-term forecasts across the Board!
- Comex positions.
- Commercial Shorts Help to Indicate Price Movements.
- Liberalising the Indian Gold Market.
- The Oil price and China.
- Prospects for the U.S. $ and Prospects for the Euro.
- Prospects for the US $ / DJIA / 10-Year Bond / CRB / Gold : Oil Record Lows!
- Tech. Analysis of the Gold Price: Long/Short term in U.S. $
- Summary: The present Gold Price Drivers.
- International Gold Markets / Focus on Euro, Euro Gold Price

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Excepts from the "Global Watch - The Gold Forecaster": -

The Oil Price and China.
After growing 11% in 2003 and 15.4% last year, China's overall oil use declined 1% in the second quarter of this year from the comparable quarter a year earlier. Please note that it is not growing as fast, but remains at 1% below last year's level this year. The International Energy Agency's thinks the decline is temporary and that they expected Chinese demand to rebound in the second half of the year.

Control in China emanates from government. This control covers prices of oil too. China had not been allowing the domestic price of electricity and many refined products, like gasoline and diesel fuel, to rise nearly as quickly as world prices. This has caused power-generating concerns and service stations to sell less electricity, and less gasoline and diesel fuel, so as to limit their losses. Many Chinese power stations have stopped burning fuel oil to produce electricity because the prices they are allowed to charge per kilowatt don't cover the cost of importing fuel. Indeed, Chinese refiners have been selling part of their output overseas at higher prices than they can get in the controlled domestic market, where gas now sells for $1.63 a gallon. China's consumption of fuel, a portion of overall oil consumption, plunged 19% in the second quarter from a year earlier, while growth in refined fuel consumption slowed right down. Therefore, its seems likely that these artificial energy shortages caused by the distorted prices were the most likely basis for the curtailed availability of fuel, especially diesel. Partial confirmation that the government has lifted these controls is now evident. While diesel-fuel shortages and lines of trucks at empty service stations were a visible problem in China in April, the queues appeared to have disappeared over the last three weeks through southern China and to Beijing and there has been little talk of continuing shortages in the media either on the mainland, or in Hong Kong.

Many seek to try to turn the restraint presently being shown in China towards higher oil prices as a long-term phenomenon, but we have difficulty with this. China will not let its growth be deterred. It is the will of the Chinese Central government and, as we have seen in the recent path, this control is remarkable. It is so strong that they have the power to press potential 'spikes' in demand from becoming solid trends. We have seen China prevent inflation from getting out of control in the recent past, we have seen them do this without even a 'soft' landing, so it does not surprise us to see them holding roaring prices back and re-directing this pressure to alternative sources of energy, but not in the long term as this would damage growth. So demand in the second half, as forecast by the I.E.A. should pick up again sharply.

Please note that the record oil prices we have seen are in the face of this lower demand out of China, so, once this restraint on Chinese consumption is lifted, it seems likely we will see heavy pressure to make oil prices rise? Lest we become myopic, it is a good reminder to note that if the hurricanes can have such a large impact on the price of oil, the balance of demand and supply must be critical. Now it is Emily, a week ago it was 'Dennis'?

Liberalising the Indian Gold Market
The Ministry of Finance has decided to expand the number of authorized importers of gold beyond the current 17 designated agencies, which include government para-statals, star trading houses and banks. At present the criteria for those to be authorized to import gold are in the process of being established.

The broadening of the Importer base is intended to ensure the adequate supply of gold so as to minimize costs and margins charged to the consumers. This is part of the programme, announced early last year by the then Finance Minister, Mr Jaswant Singh, to make gold imports free, subject to guidelines to be issued by the Reserve Bank of India. But over the last year and a half, the RBI has issued no guidelines and imports continue to be routed through the designated 17 agencies. So far the Finance Ministry is still in the process of getting feedback from the bullion associations on how they see the proposed criteria.

The concept of expanding the number of importers to ensure a constant available gold supply to the market, is according to the dealers, misplaced as only twice a year and entirely due to the shortage of refining capacity do shortages appear for up to 10 days each. It does not require the expansion of the number of Importers to resolve this problem! Indeed, many previously designated agents who obtained licenses from the R.B.I. have not renewed. Top gold banks such as H.S.B.C., ABN-AMRO and Standard Chartered are already out of business, because they could not compete profitably. Banks who started well, such as Canara Bank, Indian Overseas Bank, Corporation Bank, Allahabad Bank, have faded from the scene.

So why expand the number of Importers in the face of this past? The whilst licenses were issued to 20 banks only two or three banks such as such as Scotia Bank, ICICI and three Indian Government undertakings, such as S.T.C., M.M.T.C., P.E.C. are still active.

Dealers input to the Government
The Chennai Bullion Dealers Forum, through its Convenor, Mr Daman Prakash, believes the existing system through which imports of Bullion into India is already a liberal and satisfactory system, that does the job well, which whilst regulated is free and efficient whilst curtailing giving no room for no-authorised Importers to function. Overall, the Chennai Forum objected to the expansion of the present system as it will expand the risks attendant on the import of bullion and possibly permit a criminal use of the system. All in this industry are keen to keep the industry comparable to the standards in existence in London and New York. They made two dramatic recommendations, which would improve the efficiency of the market to the benefit of, plus the internationalisation of, the Indian gold market.

Gold 'carry trade'
They felt the existing system could be improved by permitting importing agencies to import, as they did until August last year under 360 day Letters of Credit. Presently, 91 day L/C' only are allowed to be opened by Nominated agencies such as STC, MMTC, PEC and HHEC. The system could be expanded, by allowing all Commercial Banks to open L/Cs on their own behalf. This would permit an arbitrage market to reduce the cost of gold in India, a kind of Indian "carry trade" for gold, based on interest rate differentials between local and foreign borrowings.

Linking the Indian gold market to Comex!
They suggested the Government and the R.B.I. should permit the Banks to make forward back-to-back deals in both Gold and Silver on behalf of customers with the COMEX in New York. There is a huge existing parallel market equating to COMEX in India, which has spawned illegal practices and poor market conditions for the consumer, which would be eliminated by such an innovation.

Through such a change, smuggling, as well as dubious and illegal practices, so long a feature of the Indian market would be removed and the consumer benefited by a cost-efficient internationalised gold dealing system.

Cost efficient already!
The intention of saving costs by increasing competition is also put forward by some to justify increasing the number of Importers. Again this argument lacks substance!

The current Importers charge 20 cents per ounce to cover the costs of bank remittance charges, the paper work involved in importing and custom clearance. On top of that, because Importers are either Government entities, or Bullion Banks, the low level corruption requiring "special levies" to be paid to Customs Officials (Kickbacks! - which assist in expediting imports) is not even mentioned.

Import premiums, charged by International suppliers of 15 cent per ounce are dropped because the volumes imported by these institutions are so large. These are passed onto the dealers, so set these off against the 20-cent per ounce Administration charges and the dealers end up paying 5 cents per troy ounce of gold only. So under the principle of "if it ain't broke don't fix it" the dealers are advising the government to leave all, as it is now.

Besides that the registration costs of becoming a direct Importer are huge and would of themselves whittle away the number of applicants, thus defeating the exercise before it even started.

Money Laundering opened up?
Of course one of the constant dangers in this world facing monetary authorities is money laundering. By opening up the number of importers beyond the present solid institutions, paths will certainly be opened to this type of abuse, inviting more crime into a society already beset by Terrorism [India has lost two Prime Ministers to killers - one to a suicide Bomber, as well as suffered hundreds of Terrorist killings at ground level in recent years].

Regional Taxation equality among the Indian States
It is expected that from the 1st of August 2005 the government will ensure that the sales tax levied by all the provincial Govts will be uniform. At present, Jaipur and Ahmedabad are playing havoc with the Gold trade there. Traders there are illegally sending gold to other regions and selling it at discount, as they pay less tax in their home state.

The Government has already initiated steps to convince 2 errant State Governments, who levy just 0.25% sales tax [compared to 1% levied by rest of 28 States. May be from 1 st Aug, we will have orderly market as these abberations will be removed and every region will be importing as per their real strength.

The effects of these changes:
These recommendations are being perused by government at the moment so may well be implemented. These changes would integrate the Indian gold market into global markets far more than at present. If the Chennai recommendations are accepted, the Indian gold market would become a far more keenly felt presence in the global Gold Market, encouraging less price volatility and reducing the influence of individual facets of the global gold market.

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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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