Gold Surges to Record Multi Year Highs in All Currencies

By: Mark O'Byrne | Tue, Sep 20, 2005
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Weekly Markets
Precious Metals
- Gold reaches multi year High, Silver moving higher.
Oil - Branson and Virgin Oil! - never one to miss an opportunity!

Weekly Commentary
Pump panic, gold glee- Time to roll out the safe havens?

Performance ( % Change)

Weekly Markets
Precious metals were all up for the week.
Commodities and oil sold off from their record highs.
Stock markets were down for the week, with the exception of the Footsie.

Precious Metals
After suffering from a huge supply deficit for more than a decade, silver may be primed for a big rally.

The financial market has simply put too small a price on the much sought-after white metal that's often seen as a sidekick to gold. Silver, which is used in a wide variety of applications in several industries, including the electronic, jewelry and photographic sectors, currently trades around $7 an ounce on the New York Mercantile Exchange.

That's a far cry from the peak level around $50 in the 1980s, but that may change soon enough.

"No other commodity exists in such short supply as silver," said Ned Schmidt, editor of the Value View Gold Report, and "silver demand has exceeded production for 15 years now." Indeed, the physical silver market operated in a deficit for the fifteenth-consecutive year in 2004, according to the CPM Group, a commodity research and consulting-services provider based in New York.

In its Silver Survey report released in late August, the group estimated that newly refined supplies of 750 million ounces fell short of industrial demand by 44.5 million in 2004. And the deficit, though not quite as high, will likely reach 31.4 million this year, with total supply estimated at 774.3 million. The supply deficit could spell more gains for silver on the futures market, which posted a climb of around 40%, or $2 an ounce, over the past two years. "As you analyze silver's potential, the fundamentals become powerfully bullish," said Paul Mladjenovic, a New Jersey-based certified financial planner at PM Financial Services. The "chronic silver shortage ... is becoming more acute," he said.

Demand factor Overall demand is growing as silver is used in cell phones, military technology and a range of new applications in the healthcare sector and alternative energy technology, said Mladjenovic.

But John Person, president of National Futures Advisory Service argued that while production costs are rising, demand is actually flat.

The market saw total demand in 2004 at 794.5 million ounces, according to the CPM Group. For 2005, it's estimated to be 805.7 million. Person doesn't believe the lows are in for the year, but December silver prices should find their support level close to $7 to $6.95 and that "should be the next buying opportunity investors can take advantage of," he said. December silver closed at near $7.08 an ounce on Thursday. Taking gold's lead Silver has been riding off the back of gold futures, which recently traded at their highest level since March. And with gold expected to climb, don't expect silver to stay behind.

Peter Grandich, editor of the Grandich Letter, believes that the poor man's gold will continue to "play second fiddle to its namesake and while it can have its own moments in the sun, it will continue to need a higher gold price to help lift it up." Gold's move into the $450s will be an "important signal to investors that the metals are still alive and ready to march upward," said Schmidt.

Indeed, Philip Klapwijk, executive chairman at precious metals consultancy GFMS Ltd., expects gold to climb toward the $480 mark before the year is over because of rising investor demand for the metal.

"A similar phenomenon is likely in silver, a metal that historically tends to follow gold," he said. It's true that silver is an industrial metal and is affected by economic demand, but even during the depression of the 1970s, "silver tracked gold because the Fed was creating 'money' -- actually, banking system credit -- out of thin air," said John Stafford, editor of Stafford's Investment Strategy Letter. "More 'money' and credit was created 'out of thin air' by the Fed and world central banks in the single decade of the 1970s than the entire cumulative total in all the world's previous history," he said, citing an academic study done in the early 1980s.

So it's no wonder that silver went to $50 from $1.29 an ounce, and gold to $850 from $35 in early 1980.

And in the framework of a rising gold price, silver is actually the "coiled spring," Schmidt said. Traders "will move to silver for the unrealized opportunity it represents," he said, noting that the silver market simply "cannot take incremental demand without its price being moved materially higher." "The developments with gold's price will spill over into this market," he said.

Remember also that "silver is a much smaller market than gold, and speculators can usually get a bigger bang for their buck in more volatile silver than in the larger and deeper gold market," said Klapwijk.

Price outlook Against this backdrop, there's no denying that silver will end the year -- in the very least -- above the $7 mark.

The key levels for silver to watch are $7.25 and $7.50, Schmidt said. "As they are taken out, silver will move on to $9 this fall." Klapwijk would only go as far to say that "another spike above the $7.50 mark is very likely before year-end." Stafford sees prices reaching $8 or more this year and maybe even trading in the $12 to $15 range in five years.

Given silver's growing uses, Mladjenovic expects prices to see a "very strong upward movement" during 2006 to 2008, with silver having a "great" chance to top its recent April 2004 high of $8.50 by the end of 2005 or early 2006.

In fact, it should be trading in the $8 to $10 range in the fourth quarter of this year, or no later than the first quarter of 2006, he said.

And "realistically, I expect silver it to hit $50 in 2-5 years," Mladjenovic said.

by Myra P. Saefong.

This story was supplied by MarketWatch. For further information see www.marketwatch.com

Oil

Oil was down some 0.7% for the week to $63.62.
Oil in Euro terms was down 3% for the week to $52.05.
Branson seeks a piece of the oil market - Trembath, ABC.

Commentary

Pump panic, gold glee.

The influential and respected Buttonwood, the anonymous finance writer in the Economist, asserted that the price of gold would soar in the coming months as investors seek a safe haven investment. The reasons were primarily because of the soaring price of oil, gasoline and energy but also the long term macroeconomic damage that Hurricane Katrina will inflict on the US economy and the fact that with Alan Greenspan is to retire in less than 3 months and the irresponsiblity of recent US monetary and fiscal policy will become increasingly evident:

MUCH of England came to a halt on Monday, watching its cricket team win back the Ashes. It may well come to a halt later in the week for quite a different reason. With unleaded petrol now fetching over £1 ($1.82) a litre in Britain, for example, and talk of shortages rampant, truckers and farmers around Europe are ganging up on their governments to cut fuel taxes. In Britain, protests and motorway go-slows are planned from Wednesday onwards. In France, one protest has just ended.

In the face of this nascent revolt, Europe's finance ministers say they will hang tough (most have budget deficits, hence little choice) and hang together. But no one really expects them to. Five years ago, similar protests crossed borders, stopped trade and caused several governments to make concessions. This time around, Poland has already said it will cut fuel taxes, France is talking of doing so and has offered Euro 30m ($37m) in tax breaks for farmers, and Britain may yet freeze taxes at the pump.

Their preferred ploy, though, is to shift the problem to oil producers - both OPEC and private companies - urging them to expand production and refining, and even to cut prices now. That is harder than it looks. OPEC has already increased investment in oil exploration for the first time in ages: its biggest members drilled 7.5% more wells in 2004 than the year before. Opinions differ as to how much usable oil is left in OPEC and other ground, but it is clear that the cartel is operating near current capacity.

Private oil companies, it is true, have handed back to shareholders rather more of their recent windfall profits than might have been wise politically. But if they are to make the investments necessary now, threatening them with a windfall tax makes little sense. And there are signs that companies are stepping up investment anyway, in response to higher prices.

Oil prices were already feeling the strain before Hurricane Katrina wiped out 1.5m barrels a day of Gulf crude, along with more than a tenth of American refining. But they retreated from their spike of $70.85 a barrel on August 30th to just over $63 on September 13th, as some activity resumed in the hurricane zone, the release of strategic reserves flooded the place with crude, and China said that its oil imports had fallen in August compared with a year earlier. CIBC, a Canadian bank, recently joined the ranks of those who reckon oil will hit $100 within two years. Others, including many in the business, see it slipping back below $40.

Martin Barnes and Elena Gavrina at BCA Research, an independent firm in Montreal, predict that oil prices will average around $50 a barrel over the next five years, perhaps falling below that in the near term as weaker economic growth conspires with high prices to undermine consumption. The International Energy Agency says that high prices have already slowed the rise in the world's use of petroleum. And Katrina is believed likely to shave up to one percentage point off America's already slowing GDP growth in coming months. In the longer run, however, demand from Asia's fast-growing economies will make up for any anaemia on the part of rich countries.

The black and the yellow

So much for black gold. What about the real thing, which fans have been expecting to take off for months, if not years, in tandem with it? After all, the last time oil was on such a ride (in the 1970s), gold tore right along with it, ending up at $850 an ounce in 1980.

Since the second world war, gold bugs say, the prices of oil and gold have followed each other about, give or take the odd lag. An ounce of gold has fetched just over 15 barrels of oil, on average, and whenever that ratio got seriously out of whack one price or the other quickly adjusted. But gold and oil have been drifting apart for at least four years. While oil has blasted up by 60% so far this year, gold has risen only fractionally. These days an ounce of gold, at just under $450, buys a mere seven barrels of oil. In other words, the purchasing power of gold has been badly eroded.

Gold is a strange substance. It is a commodity, an investment and a means of exchange, and its price reflects all those roles. Like any commodity, it responds to the laws of supply and demand. New figures from the World Gold Council, which groups producers, show that demand for physical gold is growing strongly, up by 21% in tonnage terms during the first half of 2005 compared with the same period a year earlier. Supply, meanwhile, increased less quickly, by just 18%, thanks partly to slowing central-bank sales. Gold supplies are eminently manipulable, however, and if prices rise substantially, a lot more of the stuff will hit the market.

It is from its role as an investment and a means of exchange, though, that gold derives its real mystique. Sentiment is important: in a small market, a few big positions affect prices more than, for example, they could do in the oil market. And that sentiment depends, more than anything, on expectations about inflation and the value of the dollar.

When people believe that paper assets are worth something approaching their face value, they buy gold to wear but not to put in a safe.

In the past, gold prices rose with oil prices because inflation did too, and gold was seen as a safe store of value. Yet investors have not really viewed inflation as a threat for a couple of years, continuing to buy shares and houses, for example, in preference to gold despite the huge run-up in crude prices. The notion that higher oil prices will tax growth rather than stoke inflation has gained, dare one say, currency.

That idea may itself be taxed by the inflation numbers coming out this week, however. Consumer prices in Britain rose by 2.4% year-on-year in August, the quickest rate of increase since the Bank of England began targeting inflation in 1997. Observers point out that the increased transport and energy costs which produced the hike are not yet being passed through to the final purchaser of goods and services - ie, business margins still have room to shrink. But with the pace of inflation likely to pick up further in September, this is presumably a short-term consolation. America's consumer-price inflation figures are likely to show something similar later this week.

Just as inflation has, until now, lain low, and gold with it, America's dollar has also been resisting arrest. Gold is after all a monetary metal, an alternative to the paper currency that replaced it at the heart of the world's trading system, when times are tough. But they haven't seemed tough so far. Despite America's famous twin deficits, everyone else's currency has been even less appealing, and big exporters such as China have had their own reasons for propping up the dollar. Now, as Katrina heaps billions on a national debt that is already close to $8 trillion, might that perception change? The time is surely not far off.

For at the end of the day, the price of gold reflects confidence, more than anything. When people are confident that their central banks will control inflation while permitting the economy to grow, when they believe that paper assets are worth something approaching their face value, they buy gold to wear but not to put in a safe. Alan Greenspan has achieved the remarkable feat of suspending disbelief in America's gerrymandered finances for the past few years. On his departure, watch the gold price soar.

The Economist, http://www.economist.com/agenda/displayStory.cfm?story_id=4398821

Week ahead - economic calendar

Monday, September 19, 2005
JPN- Respect for the Aged Holiday 09:00 GMT- EU- Jul Ind Prod
06:00 GMT- GER- Aug PPI.

Tuesday, September 20, 2005
23:30 GMT- UK- RICS House price survey
09:00 GMT- EU- Jul Foreign Trade
09:00 GMT- GER- Sep ZEW Survey
12:30 GMT- US- Aug Housing Starts vs. 2.042 mln in July
12:30 GMT- CDA- Aug Leading Indicators
12:30 GMT- CDA- July Wholesale Sales
18:15 GMT- US- FOMC decision.

Wednesday, September 21, 2005
01:30 GMT- AUS- Westpac/MI July Leading Index
09:00 GMT- EU- Jul BOP
08:30 GMT- UK- Aug MPC Minutes.

12:30 GMT- CDA- July Retail Sales
14:30 GMT- US- API and DOE Energy Inventory Surveys.

Thursday, September 22, 2005
23:50 GMT- JPN- July Tertiary Activity Index
23:50 GMT- EU- July Ind Ord
06:15 GMT- CH- Aug Trade
10:00 GMT- UK- Sep CBI Ind Trends
11:00 GMT- CDA- Aug CPI
12:30 GMT- US- Weekly Jobless Claims
14:00 GMT- US- Aug Leading Indicators: vs. +0.1% in July, see -0.3%Friday, September 23, 2005
JPN- Autumnal Equinox Holiday
06:00 GMT- GER- Sep CPI.

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Mark O'Byrne

Author: Mark O'Byrne

Mark O'Byrne
www.goldassets.co.uk

Brief Profile
Mark O'Byrne is Executive Director of Gold and Silver Investments Limited (www.goldassets.co.uk). He is regularly quoted and writes in the international financial media and was awarded Ireland's prestigious Money Mate and Investor Magazine Financial Analyst of 2006. He is a financial analyst who believes that due to the current macroeconomic and geopolitical situation, saving and investing a small portion of one's wealth in precious metals is both prudent and wise. Gold and Silver Investments Limited believe that hard tangible assets and monetary assets such as gold and silver, the world's oldest forms of money, will once again become the safe haven assets of choice in the coming years. The increasing economic and geopolitical uncertainties at the dawn of the 21st Century mean that gold, silver and platinum will become increasingly important in the new century as a means of preserving financial wealth.

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