That was the week that was!
As we started to write we saw the gold price was looking a little tired. It has been remarkable of late with it hitting over $412 before retreating. Despite it bold efforts to rise, the gold price meets more than adequate sales to keep the price in a consolidation phase, having now retreated back to the current $406 level. The week has seen many hand to hand price battles, this week. Such intensity should continue for a while. As these battles are fought to a standstill, keep an eye on those 'Technicals' for direction, as demand and supply reach equilibrium.
On the 9th December, "London Bullion Securities" began trading recording an impressive start as shareholders bought over 25tonnes of gold! This entirely new source of demand will give a great boost to the gold market.
What must please the bullion market particularly, is that a lot of this trade emanates from funds, pension funds, investment funds, et al. We were surprised to see that although the buying was, indeed, across a broad spectrum of types, the funds took the lions share.
Gold, at the time of writing was trading at $406.50.
Exchange Traded Funds - coming to the market.
What a start! 25 tonnes on the first day! The attraction of "Gold Bullion Securities" to investors is its low transaction costs of less than 0.5 per cent per trade against costs of up to 7% for buying physical gold. And what an eye opener! We are told the quantity bought so far, is up to almost 40 tonnes as of now. This is larger than we thought and seems to be just the start of a huge potential demand for this type of investment.
Not only is the attraction of "GBS" in the very form it takes, but the fact that it is within the 'area of competence' of those who usually deal in shares, which makes it so much more palatable. Before, the logistical problems of holding the physical metal kept them away, but now gold in this form is easily manageable, tradable and portfolio compatible.
We know that a Merrill Lynch fund with $35 million in cash, intended buying a good chunk and we do expect that many fund managers across the globe, will be considerably more comfortable entering the gold market this way, rather than with the real thing. But more than that, those who held gold shares, as a means of holding gold, now find this avenue a more prudent way of doing so, divorcing themselves from the additional company risks of holding gold shares! A trend to apportion at least part of the percentage of their funds dedicated to gold, may well begin.
[The full story of the benefits of holding gold in this form will be explored in coming issues of G-AM - subscribe.]
The U.S. Recovery
The concept of an "unwelcome fall in inflation" appears to be receding, as growth is thought to be strengthening. However, the superficial impression of the Fed's statements is that although they are not so fearful of deflation, their confidence in the state of the economy has not grown so much, that they foresee a rise in interest rates. Why not, you may ask - because even a slight raising of interest rates could inflict a powerful blow to the inclination of consumers to keep on spending. Its that 'confidence' factor again. Damage that and the recovery would lose momentum, very quickly. It appears that if in order to protect that delicate commodity, the Fed will even allow inflation to accelerate. Their objective remains to ensure a recovery of the U.S. economy on a sustainable basis, irrespective of external collateral damage to the $ overseas.
Continuing to weaken against most other currencies, except the Yen, where we had a stark reminder of the continuing banking crisis last week, when the government nationalised a regional bank, to prevent its liquidation. The Central Bank continued to sell Yen to keep its exports competitive, despite U.S. protests. At 107 yen to the $, it is moving right into danger zones.
The $ dropped to a low of $1.2240 against the Euro, where it stands at the time of writing. The October U.S. international trade deficit rose to $41.77 billion from September's $41.34 billion, giving good cause to the $ weakness.
It appears that the U.S. $ policy is now being made in Brussels and Beijing.
In Europe the stoic European Central Bank did not raise interest rates but seems set to do so by Spring of next year. Still holding a course that presents the Euro as the most attractive currency, it continues to attract capital and $ based reserves. Certainly, its performance is consistent with the world's most respected currency at the moment.
The erosion of the $'s reserve currency status is steady, persistent and looks irreversible.
[G-AM presented an article which describes Greenspan's 'gradual displacement theory' describing just why the $/Euro situation is so dangerous, which is free to those who have subscribed to it - subscribe now to get your copy!]
The conflicts in international trade which boost the demand for gold!
History tells us that the U.S. government, being the dominant world power can 'stand astride the world like a colossus' and the events of the last week appear to confirm that. In what can only be described as punishment, for not supporting the U.S. in Iraq, the Pentagon has barred French, German and Russian companies from competing for $18.6 billion in contracts for the reconstruction of that country. Conversely, as a reward to U.S. contractors, the government is paying Halliburton more than twice what others are paying to truck in Kuwaiti fuel - It seems that this has caused a sense of humour failure in Europe.
The impact on gold of these events, is seen in its shadowing of the Euro and its standing as an alternative 'currency', as the global scene gently destabilises.
As to China, after last weeks confrontation over textile import limitations, the U.S. made a gesture of reconciliation over Taiwan, when President Bush welcomed the Chinese Premier and said he opposed Taiwan's attempts to change its relationship with Beijing. For sure the inroads China is making into the States, is heavy, perhaps even more dramatic that Japan's was a few decades ago. Clearly the Administration sees as high importance, the revaluation of the Yuan. But it will take a great deal more than that to precipitate a higher priced Yuan and a strangulation of Chinese exports.
Meanwhile, the boom in China goes on at 9% GDP growth per annum against 3% average, in the West. As a result of its own and export high consumption rates, China has now become the world's leading manufacturer of these types of consumer goods: 20% of refrigerators, 25% of washing machines, 30% of televisions, 30% of air conditioners, and 50% of cameras. Its motor industry is growing fast as well, with manufacturing doubling in the first half of this year.
With so many Chinese saying they will take their new found wealth and save it in the form of gold, as well as those with wealth saying they will switch at least 20% of it to gold, the market is braced for a steady swell of individual Chinese investment into gold, the traditional method of saving.
The London Gold Fix
Gold Fix 12th December a.m. $406.60 E332.108
Gold Fix 12th December p.m. $407.10 E332.191
Gold, again has dropped slightly in price in Euros, on the a.m. fix, since last week's level!
Other Precious metals.
A terrific performance still, reaching new 23 year highs at $825. With the South African Reserve Bank showing an introverted attitude to their economy and only cutting interest rates 50 basis points, yesterday, the Rand could well remain strong and continue to decimate expansion and development plans in the precious metal mining industry to the present and future detriment of the South African economy. The Platinum sector is taking it right on the chin, so ensuring these price rises on a strong demand platform, are here for at least the medium term.
Showing a pent-up strength, Silver is putting in a sterling pace, reaching highs of $5.59 and set to outperform its peers?
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