Gold - The Weekly Perspective

By: Julian D. W. Phillips | Thu, Aug 28, 2003
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That was the week that was!

The buyers won the hand to hand combat yesterday, after a tough slog with gold holding around $363 right at the end of the triangle, or pennant. Then in minutes, as the time for Options to expire arrived, the Funds forced the price to leapt up to $370 as though nothing were in the way, despite warnings of resistance between $365 and $370. Having broken out, it has now taken a breather, to build up strength before the next move.

Dealing in the week was focussed on chipping away at the upper resistance, with physical buying forced to wait in the wings at below $360. The Speculators' had the day, with them picking up stock at every point, building an historically high long position [see below], just above the physical buyers in the low $360's, until resistance crumbled before them. This morning the fix was short, indicating acceptance of yesterday's action. A look at the long term chart patterns clearly point to a new, positive, gear for gold.

On the market floor, the thin conditions should persist, certainly until the end of September when the Central Banks return to the market in the final year of the current "Washington Agreement". Thereafter we will only know about the sales after the event, a clear indication of their desire not disrupt the Gold Bullion market.

The gold Price at the time of writing was $371.20.

The Euro $ axis.

Could there be any clearer evidence of what we said last week? The link between the $ and the Euro is not the same as the link between the $ and gold. The Euro crumbled to the mid-$1.08, but was referred to as the "$ strengthening". It remains to be seen whether a strengthening of the Euro or weakening of the $ will precipitate further gold price rises.

The moves between the two currencies seem to be driven by short term interest rates and not fundamental considerations. Whilst the U.S. economy showed a solidness against that of Europe, the clear weakness of Europe now goes far beyond retaining export competitiveness. It is weakness, clear and simple. The I.M.F. report [see below] now confirms the growth forecast for the States, giving additional reason for the 'rise' in the $ against the Euro, but if we are to believe the evidence before us, not against gold.

The competitiveness of the Euro will garner some U.S. orders but still nowhere near enough to head off Chinese imports to the States. It is becoming clearer by the day, that China is impacting heavily on both Europe and the States. And there is nothing that they can do about getting the Chinese Renmimbi stronger in the market place. China is happily gaining enormous ground internally, as well as massive $ and Euro surpluses, from their artificially lower currency.

The Chinese have in the past, set the precedence of entering the market to buy gold bullion, will they do it again? It makes sense for them to do so and in line with their current favouring of gold.

Jewellery dis-hoarding?

Last week we spoke of scrap jewellery sellers waiting in the wings. The news of the week is that the Jewellery market has accepted the higher price levels and returned to the market. The stronger the Rupee gets, the lower the price of gold to Indian buyers, so scrap dealers are holding back somewhat realising they could get far more by waiting. The contribution Scrap dealers have made to the supply of the gold market, this year has dropped dramatically to around 25% from over 40% of India's gold demand since last year. Remember, a 20% rise in the gold price less the strength of the Rupee, is not a huge price rise, or sufficient incentive to sell your gold?

India

The terrible Bomb blast which killed 50 people in Mumbai horrified us all and our condolences go out to those caught in the tragedy. That mindless, utterly selfish terrorism should so indiscriminately take lives, 'for effect' is a sign of the sickness of our age. Bravely the Mumbai gold dealers are trying to get back to normal after the blast and we wish them well! Any effect will be short lived on the gold market and once the smoke clears the successful farmers should be there to invest their profits in gold, turning the horror into a meaningless, cruel incident.

The Greek Gold Sales

Having collected gold coins and the like over some time the Greek Central Bank, not a signatory of the "Washington Agreement", has just sold 20 tonnes of such gold. Citing an adjustment in their reserves, prior to entry into the EU, as the reason for the sale, we are able to glean, at least, some sort of pattern. Why did they sell before entry into the EU, could it be that they felt they would not have been able to do so after entry?

What is of great significance is that the market did not blink, as it was sold. This shows the volume the market wants is large, and we know of no amount of that size that will arrive again, until near the end of September.

Speculative Net Long Positions.

But a definite change in nature has occurred in the temperament of the Speculators on Comex. Their capricious, superficial nature has become more resilient, more determined and more focussed on the depth and fundamentals of the market. Not easily shaken from their resolve, they absorbed the news of the Greek Central Banks sales, realising the announcement was not negative, with the market having easily absorbed their sales and so they wanted more. This weight of buying appears to have absorbed the suppliers stock, leaving the market searching for quantity at higher levels. With the victory won, the spoils of a higher Gold price stands before them and us.

The change in nature of the Large scale Speculators is decidedly clear in the table below.

Small scale speculators added only 2 tonnes to their long positions against an addition of 61 tonnes on the long side and a reduction of 12 tonnes in the short positions. They could not be more certain. We have repeated HSBC's excellent work below, because it shows that the additional 62 tonnes is in line with the diagram indicating the large scale speculative position at $371 - 5 should be around 12.5 million ounces [+390 tonnes] below, so not an extraordinary or capricious addition, but one in line with the professional approach followed since January of this year.

So, again we ask the question, are these speculators becoming medium term Investors? Is this the path the long term Investors will follow into Gold?

Tonnes Large-scale Speculators Small-scale Speculators Combined Position
New Old Change New Old Change New Old Change
Long 324 263 61 155 153 2 479 416 63
Short 44 56 -12 44 43 1 88 99 -11
Net 280 207 73 111 110 2 391 317 75

The I.M.F. report.

The International Monetary Fund have been reported as saying it sees further potential for a depreciation of the U.S. dollar due to the high U.S. current account deficit. It sees the U.S. budget deficit reaching 6.1 percent of gross domestic product in 2003, with a structural deficit of 5.2 percent of GDP, and expects only a slight decline in 2004, according to a draft World Economic Outlook due to be submitted at the annual meetings of the IMF and World Bank in Dubai in September. Further, the IMF sees U.S. GDP growth accelerating to 3.6 percent in 2004 due to "unprecedented" monetary and fiscal policy stimulus, adding that growth may be even stronger than predicted.

The market is speculating that the Central Bank Gold Agreement review will be initiated at next month's International Monetary Fund meeting in Dubai. We await the meeting with interest!

Short Term Prospects for Gold

Gold Fix 28th August a.m. $370.90 E 341.214

Gold Fix 28th August p.m. $369.80 E 339.734

The break from the Euro is defined now. Europeans as well as those countering the weakening and strengthening $ are buying gold because of other reasons.


 

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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