Trepidation Ahead of a Rate Cut: Anaemia Afterwards

By: Julian D. W. Phillips | Thu, Jun 26, 2003
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Since our last weekly perspective, Gold dropped to $347 ahead of the quarter point drop in the U.S. Federal Funds rate. The week saw the gold move from its whippy contentious moves to a mood of trepidation ahead of the Fed's decision. In so doing it lost its vigour over the last few day dropping out of the fifties to current levels. However, net speculative positions remained large, perhaps more certain than before Iraq at 293 tonnes, up from 290 tonnes the week before. It will be interesting to see just how tenacious these positions are now, with the price well below $350 an ounce? Some heavy buying has been seen in the market place, but not sufficient to convince us the there is an impending run up in the market. It is significant that what are clearly Investment buyers are becoming visible at last. They have to gain more visibility by an increase in numbers before they could even hope to control the market.

After the rate cut, those who had expected a larger 50 basis point cut saw the $ stronger at just above $1.15 to it, and others saw that as negative for gold. The gold price today reflected that with gold trading at $346 in the middle. Last night after the rate cut saw good physical demand emanating from Honk Kong, Singapore and particularly Tokyo. The presence of physical demand has to be tempered against a backdrop of gold being out of season for the Jewellery and Indian markets, but below $350 it is considerably happier than above it. The funds were sellers yesterday in the wake of the rate cut, this was met by bargain hunting interest. But this has not been enough to halt the gentle slide down to $345 at the time of writing this "perspective".

Central Bank Buying!

But behind gold doors, we heard tales of Central Banks buying gold in the Far East spread, to date over the last two weeks, to date.. Just in case the words were automatically digested, let's repeat them again, 'Central Bank buying was seen over the last two weeks, in the Far East. Do not think for one moment that this means Asian Central Banks were doing the buying. A good dealing ploy is to buy in markets furthest away from yourself, so, who did the buying? The talk for the last twenty years has been of Central Bank SELLING. Now buying? [We can only recommend that you reads the articles from Gold-Authentic Money on the Washington Agreement and Central Bank intentions regarding gold]. Many Central Banks buy for their reserves, when they do, from local production first, its much more manageable and low profile. Another way is to tap larger quantities of gold in a falling market, one picks up volume, without impacting on the price. We have to say that the market in London has not confirmed this, but why should it?

We heard ourselves from the heart of the market, that a very big buyer was seen picking up very heavy quantities, last week, but this was followed by several sales, which when added together met the size of the buyer. But this is the clever way to buy quantity. The de-hedgers were seen picking up big volumes from the overhang of Speculators when the gold price dropped after the Iraq War.

Understand please that the volume traded in the average fixing is in the order of 150,000 to 500,000, so we are led to believe. A purchase of one million or just over 31 tonnes, will have a hefty impact on the price, unless, usually in a falling market, there are cumulative sales totalling that sort of quantity.

Short Term Prospects for Gold

The net speculative long gold positions on Comex, last week 290 tonnes, this week 293, these positions showed a tighter grip on gold than they usually show ahead of the Fed rate cut. But now will they unload or keep hold? A short term change of behaviour is not a change of character, so perhaps we will see the start to an unwinding of to these positions. To be sure the market seems anaemic as well. But after these weak holders of gold have departed, then we could see a large dose of Viagra injected into the market. Let's see!

Since our last issue, gold has dropped well down into the $340 confirming the positions we have recommended to our Subscribers. We still have not re-entered the market and have been short since the $360's. Through our "Changing Tack" service we have been sending out Market Alerts and clarifications to our subscribers, readying them for action. We have placed them in what we believe to be the ideal position for action, and ready to capitalise on the position on a moments notice. We still believe this is a "Bull" market, but want our Subscribers to make the most of the market waves.

In view of the unstable currency markets where exchange rates are acting in seemingly unpredictable patterns, we give "Currency Guidance" to those who have to deal in these instruments. Contact us to subscribe to this service, particularly if you are an importer, exporter or generally deal in cross border transactions.

The principle Investment driver of the Gold price

It's a knee jerk reaction to want to find something that relates to the gold price. Recently the Euro was chosen as the mirror of gold, and presently the market looks to that for very short term guidance. However, Gold in the longer term will reflect uncertainty, distrust, instability far more than one particular currency. We have spoken of competitive devaluations at length, so have to point out that for the sake of trade competitiveness, it will pay governments to interfere in the markets to retain this trade position. In other words currencies will cheapen together. At some stage this will reflect in the gold price as very distinct from the interrelationship between currencies.

Gold Fix 26th June a.m. $345.85

Gold Fix 25th June p.m. $348.25

Growth or Yield - the Fed Funds Rate cut

A full half percentage point was expected by most economists. But what is most interesting is that the speculators were reading a greater interest rate fall would boost the $, in the hope that the drop signified more growth. But lower interest rates make the $ less attractive to foreign investors seeking yield, but if economic growth were to result,[so longed for by the Fed] then investment in the U.S. economy would be stimulated. If rates were not dropped sufficiently, then growth would not be the beneficiary, as has been the worry to date, voiced most succinctly by Alan Greenspan himself. These were the key points made by the Fed, "the Fed said it expects economic growth to strengthen in the near future but it was worried about a dangerous "substantial fall" in already-low inflation...and "The economy ... has yet to exhibit sustainable growth," the statement said. "With inflationary expectations subdued, [policy-makers] judged that a slightly more expansive monetary policy would add further support for an economy which it expects to improve over time." If observers agree with the Fed's own comments then few will be convinced at the growth prospects for the economy even after all these rate falls? Bear in mind that one can call for as many opinions as one wants, but until demand picks up to the extent that excess capacity is utilised, the problem is not solved.

To understand the dilemma of the Fed, they seem to be rather like captain of a massive petrol Tanker trying t steer it round in and out of a port, without having effective controls with which to do it. Having to weigh the decisions very carefully, wary of a heavy fall in inflation [deflation in our language] bringing on a loss of momentum they want to stimulate the economy but again not too much. We at G-AM feel that the stimuli might prove to be too little and leave the economy still too anaemic. Perhaps they were hoping that they could add the extra stimuli later? We are reminded of the tale of a man who fired a worker, resulting in the other staff losing confidence in their own prospects. The employer was only able to restore confidence to the same level as before by hiring two employees. From what we are seeing it seems premature to say that the economy is recovering sufficiently, to be sure the slack will be taken up. Bear in mind that the drops to date have not produced the results expected! Now, the interest rate gap between U.S. and Eurozone rates is wider again, so the Euro should benefit at the expense of the $.

On the 24th June we went public with these views from Tony Henfrey of Gold-Authentic Money.

GLOBAL EQUITIES INDEX 24th JUNE: It appears that global equities have peaked and are going lower over the next 6 weeks or don't want to be long. Perhaps the XAU and Nasdaq could be the best shorts.

DAILY (closed 1229 from 1249 previous day): The 34-day indicator only reached 51.5 and then turned down and is now falling at 46.1 (in not getting up above 90, this indicator has recorded a major divergence in turning down now). The daily Mesa shows a top in place with the low for the move due on the 4th of August The attached daily chart shows a completed (A)-(B)-(C) expanded flat correction and now the upward trend has been violated. The approximate 52-day cycleis expected to make a low between the 30th of July and the 8th of August with the ideal date according to the computer being the 4th of August.

HOURLY(1225 ): The 34-hour indicator is now oversold at 0. The hourly Mesa shows a low at 1200GMT/0800ET today, a high at 1100GMT/0700ET tomorrow, a low at 1100GMT/0700ET on the 26th of June and a high at 1100GMT/0700ET on the 27th of June. One or the other of these highs is likely to be the top of the ultra short term correction, which should soon be under way. The attached hourly chart shows that the index has fallen to the 200 hour MA where it may find a measure of support.

It does seem as if the technical picture is complete for the correction. If the index has indeed peaked, it looks as if weakness should continue until the 4th of August.


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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