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That was the week that was
The gold price is holding above $400, much to the surprise of many gold market veterans. This is gold's flat season, the time when the physical and Jewellery trade are away from the market, but there it is, a price full of hormones holding its ground. Physical buyers are holding their ground not dealing above $400 and why should they? It was the funds rushing in last week, on the worries about the U.S. economy and the oil price, that took the price above $400. Now, with their indelible reputation for capricious dealings, all know that they could as easily dump the around 83 tonnes they picked up in the last three days of last week. But the physical market has found that the demand from their own clients can be grater, forcing them into the market to buy and accept the new price levels. That's how the physical market got to accept just below $400 as a sustainable price level.
So how long is enough, to wait for the market to accept an above $400 gold price? Will the funds hold their positions long enough to retreat without loss, or will they cut and run, taking the gold price back down into the high $390s again. The dubious attitude on the U.S. economy is holding them in at the moment.
This is a repeat story of last year, which remarkably ended with the funds dumping over 400 tonnes of gold on the market in six weeks. There again the battle was played to its finish, when Investment buyers [possibly using the futures market as a convenient low cost way of holding gold] took all the funds dropped onto the market[+435 tonnes], leaving the gold price losing only 10% in the process.
Short term prospects for the price:
But where now? The fundamentals are certainly, on several fronts, not just the $ front, pointing to vigorous demand, later, but what of the short term Technicals, do they support this? Certainly if there is one time in the year when minor influences can lead the way, it is now!
On the surface demand seems sufficient to support the gold price at just above, or just below $400, but in this season, small amounts could knock the price down or hold it up. The $/Euro play remains the most dominant influence, with the Technical picture exerting the strongest influence on the market.
What we see on the interest rate front indicates a narrowing of the differential between short term $ rates and Euro rates, which could see the market favouring the $, despite the general market view that the $ should decline!
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At the time of writing gold stood at $405.55, and Euros 327.81. The Euro itself is worth $1.2371.
The I.M.F.'s Gold - The issues involved!
Chancellor Brown did not suggest the actual sale of gold by the I.M.F. just the revaluation of their gold. With the valuation of Gold at around $40 an ounce, by the I.M.F. he highlighted an archaic issue at the I.M.F. that has lain dormant for decades and should be addressed, namely the price they value gold at in their books.
The U.K. relinquishes its part in European gold sales when the "Washington Agreement" expires in September They were absent from the "2004 Central Bank Gold Agreement", which commences in September of this year. Was that because the Eurozone Bankers hold a different view to his on gold's role as a reserve asset?
The outcome of these discussions is significant and will determine just what sales will, actually, take place under the 2004 Central Bank Gold Agreement, irrespective of the ceiling of 500 tonnes per annum set within this agreement.
Why should gold be valued at $40 an ounce? Is this a victory for small minded bureaucrats trying to impose their perceptions of the real world, on the rest of us? We think not. Most likely it is the unwieldy nature of the policy making structure of the I.M.F. which requires 85% of the total voting power of the I.M.F. to make policy decisions. That the U.S. holds 17.3% of these votes, gives it a veto over such decisions, anyway. The cessation of U.S. sales of gold decades ago and their retention of gold reserves speaks volumes on their "Gold Policy". So, what is the view of the International Monetary Fund on its gold holdings? Here is their published opinion: -
"It is an undervalued asset held by the IMF, and provides a fundamental strength to its balance sheet. Gold holdings provide the IMF with operational manoeuvrability both as regards the use of its resources and through adding credibility to its precautionary balances. In these respects, the benefits of the IMF's gold holdings are passed on to the membership at large, to both creditors and debtors. The IMF should continue to hold a relatively large amount of gold among its assets, not only for prudential reasons, but also to meet unforeseen contingencies."
Chancellor Brown's remarks no doubt irritated Central Banker in Europe. We believe that significant announcements from certain Central Banks are in the offing, in the near future. We are giving details and insight on this subject in the next issue of "Gold - Authentic Money" discussing this further and detailing where this story is going!
Our view and earlier comments:
Gold - Authentic Money has become an authority on this subject and recognised as having such. Indeed, it has long succeeded in presenting the most insight and perspective on the "Official Gold" market and has kept its finger on this pulse for some time. We believe these issues are moving to a crescendo and will, in time, provide the trigger for large scale, long term Investors to turn firmly to gold as a part of their portfolios, on an ongoing basis. This could still happen this year!
The Dow.
We presented to you in the last two issues a chart of the gold price and forecasts of where it was going and when? You can see for yourselves, just how accurate these have been. The tone of the financial markets in the U.S. has changed dramatically, from the thrusting confidence of strong growth under the threat of being reined in by rising interest rates a month or so ago, to the worry at the ‘sustainability' of growth. Our being alert to this change benefited our Subscribers, put this way by one of them, "I find your technical analysis of the Dow very useful to me and since the markets seem correlated anyways...... As always, continue the great work."
To a purist, the relationship between Gold and the Dow is not direct. The link comes with the confidence, or lack of confidence Wall Street has, in the U.S. economy. This promotes instability and doubt, which can be self-fulfilling. After the disappointment on the jobless front, came the retail figures, confirming that this may not have been an attitude problem, now disappointment over the extent of earnings from the I.T. industry, amongst others. Unfortunately, whilst there is a real recovery, the prospects now developing for a disappointing one. Our forecasts look like being completely correct.
Even if you do not follow gold but want to keep your finger on the pulse of the Dow why not subscribe to our Technical services below, because we got it right!
The $ and the Gold price.
But how should this affect the $ and the Gold price? The $ exchange rate hinges on the value international foreign exchanges put on the currency. This weighs up the Trade picture, currently a horrendous deficit, offsets it against the capital inflows to the U.S., which has compensated for the deficit and interest rate differentials, then sets the price. Currently the interest rate differences between the Euro and the $ have narrowed to 51 basis points on the 3 months rates, with the Euro rates higher, but the gap dropping to 7 basis points on the 12 months L.I.B.O.R. [London Interbank rate]. So the dealers and speculators have little arbitrage to play with. But emotions also kick in and the speculators bet on the perception that the $ should be weak, because the economy is not looking so good and the rate is moved accordingly. But in reality, it is a strong U.S economy that sucks in imports, to the detriment of the U.S. Balance of Payments, so should weaken the $. But it is perception that sets the market price. We also got the $ right in our Technical services, as well as the $/ gold relationship -
The Euro, the deficits and its real value.
Here is some comfort for the readers in the U.S. - The Euro is facing some structural pressures. The European Commission is responsible for the interests of the entire Eurozone. The European Central Bank, responsible for European monetary health. It took the European Court of Justice to rule that Member States, France and Germany could not simply suspend the "stability and growth pact", the fiscal rules that govern members of the euro area. The pact prohibits budget deficits greater than 3% of GDP and threatens persistent offenders with punitive fines. Two big member states, France and Germany, have repeatedly breached the 3% limit. But last November, France and Germany conspired with six other countries to suspend the pact altogether, putting its punishment proceedings "in abeyance for the time being". Portugal had to conform, but the Council of Ministers today have to enforce it, if they and the Euro are to retain the credibility they have laid claim to. If a qualified majority of Ministers do not back the commission's proposals, the proposals have no force. The reality of Politics of Nationalism and money printed by these, may have to acknowledge that its rules can only be enforced by peer pressure, not judicial rulings and financial punishments. If financial discipline is not maintained in the Eurozone, the Euro will go the way of all currencies before them. Gold cannot be manhandled in such a way, which is why it is difficult to employ as direct money. But its ability to counter such diminishing confidence can be harnessed to support currencies. We are led to believe that this will assist the discussion amongst Eurozone Central Bankers on their discussions covering gold as part of their reserves and confirm its value there!
Expected Impact on the gold price. Any factor that detracts from the value of a currency, will undermine confidence in that currency. Should a sign be given that gold will shore up those currencies, then Central Banks and Investors will demonstrate a new respect for gold, by acquiring it as a long term holding.
Oil prices and Gold.
This Oil price just won't go down! Now the next O.P.E.C. meeting is to discuss increasing supplies still further. They may, but they most of all are aware of how finite these reserves are and have already indicated they are not unhappy will oil prices around $35. So you and I pay more. Not a concern, after all demand is on the up and up. But beware, more than that, O.P.E.C. is keenly aware of the dropping values of currencies and have made it crystal clear that they will raise prices to compensate for inflation or the dropping value of the $. So currencies can play in the market to stem rises and falls in their currencies, but the oil price will keep its value. And gold WILL follow.
Expected impact on the gold price and timing: -
Now we say unequivocally that higher oil prices are here to stay. So, we believe is inflation. The Fed has as its top priority the sustainability of growth. With rising inflation they will have to accept it and factor it in if they are to keep the U.S. economy, and its fellow travellers, healthy.
Large Scale Speculation.
The drop of 28 tonnes was recorded, taking the total speculative position on Comex down to 196.58 tonnes. This was before the demand from the funds towards the end of last week. Guess estimates are that the real total speculative position on Comex at the end of last week was around 280 tonnes.
Hedge Fund behaviour and the Gold price.
Well the hedge funds picked up around 83 tones of gold last week when the price jumped up into the +$400 area to nearly touch $410. Why, because they believed that others would follow, so they could make a profit from a higher price than they paid. They still do. But the physical market won't follow them, nor it seems will others. So the gold price holds a level just above $400. Should these funds change their mind, then out they go, leaving the gold price to fall back to the high $390's or so. What sent them into gold - dropping confidence in the U.S economy and the subsequent weakening of the $. So, of themselves, they are not long term benefits to the gold price, in general. They bring volatility to the gold price, one that is driven solely by perceptions of matters outside the gold market. It could be a good report that encourages equity market investors on the economy that has them selling gold. But they can strongly dominate the price and for some time should they wish, then disappear as quickly as they came. Gold's fundamentals do not really concern them. Our Technical services really do help you to keep a control of your positions, see below.
De-Hedging going well.
With Newcrest confirming its market activity informing us that it had adjusted its 224 tonne hedge book to a forward, fixed price sales one. In other words a position where gold had been sold by them for delivery at a future date at a fixed price [called "Vanilla"], with no complications in the terms whatsoever. This simplifies life allowing them to know precisely how much revenue to expect from these gold sales. Newcrest has a policy where it prudently sells gold forward but only to pay the costs of a mines set-up with these sales, so development cost repayment is never in question. Profits are made from the full exposure to the gold price on the balance of production on the rest of the gold mined. For example, the Telfer mine production is 500,000 ounces so it will take two years of production to pay off the companies loans. Of course, the hedges on this liability are spread over a longer period in agreement with the companies financiers, ensuring the shareholders reap benefits in the early days of production too.
The future of hedging:
It would seem that this is a break with the past, where the simpler meaning of hedging [removing cost risks], becomes policy, leaving production above that fully exposed to the vagaries of the market. Many of the big Producers who remain hedged have a level of 30% of the next 5 years production as their hedge position. The present de-hedging comes from these Producers reducing their book to reach that level. It seems likely, if the present mood persists that even those levels could face future reduction, particularly with the gold price remaining at of even above levels the best of their hedges have achieved. Should the price rise still further, their position will look like a bad policy decision, leaving C.E.O.s positions tenuous. To illustrate, the South African Producer, who hedged his production forward from years ago, would if he is receiving the income from these futures sales now, have seen his $ profits decimated by the strong Rand, having risen from R12.5 to the $ to the present R6.05 to the $, a drop of half his income. For futures sales extending out into the future next few years, he must take a risk on the future level of the Rand, or buy back the hedge now, while the Rand is strong and his hedge position cheap. Th same applies to both the Australian Producers sitting with a stronger A$ than a few years ago and the Canadians with their stronger "looney".
Our view and earlier comments:
Gold - Authentic Money forecast that during this quiet period for gold that de-hedging would provide a strong, support for the gold price. And that Producer would "buy on weakness", discreetly, during this period. The strength of the gold price can be attributed to these buyers, in part. We carefully monitor de-hedging as part of our Gold - Authentic Money service.
Expected Impact on the gold price. We expect this influence to continue throughout the summer.
Silver $6.64.
Though nowhere near its year beginning level of 410 million ounces level, the total speculative position in Silver stands at 241 million ounces, again recorded before the recovery in the Silver price. We were right that the Silver price continues to shadow the Euro's performance alongside Gold and Silver. It will continue to do so.
Platinum $817
The Fundamentals for Platinum could not look better! With market analysts fearful of massive spikes in the price and calling for capital expenditure on new Platinum production, a four figure Platinum is on its way, sooner or later.
We do believe that Production will be expanded, but not until Anglos is happy that its can pay the increased costs of mining in South Africa, including the demands of a rapacious government. Once the price level can sustain these costs and accommodate the root cause of business, profit, then the developments will commence.
This position s reinforced by the present total speculative position on Comex which last reported stood at MINUS 26,000 ounces.
The London Gold Fix
Gold Fix 15th July a.m. $403.90 E 327.045
8th July p.m. $403.15 E325.857
The drop in the Euro price was greater than that in the $
The Nature of Gold.
No one owns gold. They may possess it, but not own it, completely!
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