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Julian  D. W. Phillips

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…

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Gold - The Weekly Global Perspective

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That was the week that was

Friday the 13th didn't bring bad news after all, did it. The big change, since last week, is that the confidence in the U.S. recovery, despite the words of the august Chairman of the Fed that all is well, is visibly waning. One number after another confounds those in control.

Have you ever seen the market split so evenly on which way the gold price is going to go? It appears that the link between the gold price and the Euro is being broken with a rise in the Euro price of gold to almost Euros 330. The drama in the oil market seems to be in the process of replacing the currency play, with oil hitting $47 a barrel, well above the O.P.E.C. hopes for a average oil price below $30. Not only is confidence on the wane, in the States, but global uncertainty is rising as the oil price ramifications are feeding onto the gold price. Demand for oil will keep on rising, so the comforting platitudes from the oil producers are just not being believed, by the markets.

The mood of the market is tensioning before our eyes as the August quiet draws to a close. The room for simple punters is narrowing. Now's the time to know this market well. If you don't, get learning and fast. The next quarter could be full of surprises from factors least expected!

The last week the gold price, though poised for a fall, was hoisted by a massive, unexpected $55 billion budget deficit, which many thought preceded a dive in the $. Yes, we got a 2% fall but then it steadied around present levels. Dealers took defensive positions, speculative hedge funds increased their positions, but most significant of all is the clear acceptance of the $400 level and midEuro 326 gold price, by all players. Physical buyers are happy with this price now.

Short term prospects for the price:

The time the price has spent at these levels can, of course be seen in one of two ways.
1. The gold price cannot break up through the $410 level so looks insufficiently strong, or
2. It has built a base from which to spring.

Which way now? These last days of August are decision making days, days when you should be looking at gold from all sides, ready for its busy season. Are you ready?

Market players have been searching for something to cling onto to guide them on the gold price. The Euro / $ play is closely followed, but is not so significant a play as the gold price moved around 7 Euros against it in the last week.

The oil price has not directly related to the day to day price of gold, while it has been driven by Terrorists in Iraq and Russian courts on Yukos. But the oil price is definitely weaning the gold price from the Euro. Interest rate differentials have narrowed between the Euro and the $, down into single digit basis points to low teens basis points, hardly tempting to Traders, so this is not a major driving force in the short term. It looks like we are going to need some startling news to set the market off now, one way or the other! That is while we wait for the seasonal trade to come to life!

So, no change on last weeks view that, "the gold price could still easily spring up or sheer down in a moment, as it did last week. Few appear to have the stomach to influence it either way, yet! Of itself, this situation can easily become volatile, despite low volumes of dealing, so be careful!"

We will be stating our positioning on the gold and Silver prices in tomorrow's issue of "Changing Tack" and "Changing Tack Gold & Precious Metal Shares" You need to understand the changing fundamentals more than ever now, so also subscribe to "Gold -Authentic Money" for this understanding! - These are exciting times for Gold and Silver, so Subscribe [details below].

At the time of writing gold stood at $407.10, and Euros 329.80. The Euro itself is worth $1.2344.

Large Scale Speculators.

the total net long speculative position amounted to 242.60 tonnes, up around 46.66 tonnes on the week. The activity last Friday is excluded from these figures which likely added marginally to last Tuesdays closing figures. The activity of the Speculators [Funds] is still restrained compared to their activity at its peak last year and this. We do not regard them as a significant price factor at the moment. Indeed, we hope that they stay quiet, for any rush by them to push the price up, as in the past, will likely be followed by a fall on their exit. They are like a wind on the water, which can disappear as quickly as it came, leaving the underlying tides and currents untouched. But we do expect to see a heavier position being taken by real Investors, either in the futures market or more likely through the Bullion Banks.

World Gold Council report on the first half of 2004.

The World Gold Council said consumer demand for gold rose in the second quarter from the yearearlier period. It reported that: -

  • Increased consumption of jewellery and retail investment rising 11% in tonnage terms to 743 tonnes, and by 25% in U.S.$ terms. The rise in demand was fuelled by strong economic growth, relative absence of price volatility, and continuing concerns over the longterm economic and political outlook.

  • Demand for gold jewellery rose 8% on the year earlier figure, to 664 tonnes even as gold prices increased 13%.

  • Net retail investment demand in key markets jumped by a third to 79 tonnes, the highest secondquarter figure since 1999.

  • Industrial demand climbed 7% to 87 tonnes, the eighth consecutive quarterly gain, boosted by increasing demand for gold for electronic components.

  • Net central bank selling was half of that of a year earlier with planned central bank sales partly offset by purchases by Argentina, which bought 42 tonnes in the first six months of the year.

  • Jewellery and retail investment consumption in India were buoyant, helped by the country's economic growth.

  • Consumer demand jumped by a third in Greater China, and by almost as much in China itself. The main cause of the increase was the effect SARS had on demand in the yearearlier quarter with jewellery buying 14% higher.

  • Jewellery demand in Japan rose 10%, helped by the unexpected strength in the economy, while consumption in Vietnam surged more than 50%.

  • In the US, jewellery sales climbed 4% but trends in Europe remained generally negative, although the decline was less strong than in the past.

  • Total gold supply fell 10% to 820 tonnes from the yearearlier quarter on lower Central bank supplies and a dip in mine production.

This is as we expected and forms a solid base for the market. While the U.S. recovery may well disappoint, it is sufficient to help gold demand and should continue to do so. We will be analysing these figures and highlighting their impact on the future gold price in a price focussed way in the next "Gold - Authentic Money".

The U.S. Balance of Payments, including the Capital Account.

Last week the much larger than expected monthly U.S. trade deficit of U.S.$55.8Bn against an expected level of USD46.9Bn shocked the market, giving the gold price a good boost. Some said it would cause greater $ weakness. We however, feel it caused greater economic global instability and will not necessarily, of itself lead to $ weakness to a large degree. Why?

The Balance of Payments, as you know comprises of all outgoing and incoming money flows, on the commercial, trade front and on the Capital front. It is the balance between the two that dictates the 'shortfall' or 'surplus'.

The Treasury International Capital data for June, which gives us the capital inflow to the States recorded net foreign inflows amounting to U.S.$85.5Billion, well ahead of May's figure of U.S.$65.2Billionn. These inflows have more than offset the June trade deficit of U.S.$55.8Billion. Even this surplus, does not dominate the exchange rate on the $ on a daytoday basis, but certainly explains why the $ has not been tumbling! Until a lack of confidence in the $ is shown by a switch into Euros, away from the $, reflected in the overall Balance of Payments, we do not expect a real $ crisis. The Euro $ link currently is not critical to the future of Gold, in our opinion.

A great deal of market reaction at present is due to emotions affecting market players and dealer positioning on limited volumes. Media reports elevate reactions and news above their proper importance, leaving the average observer with a distorted view of what is really happening as well as what is really important. In the coming months, as the breadth of the gold market expands, this picture is likely to be distorted still further. It is extremely important that all involved in the gold market be able to cut through the emotion and understand the shape of this market, if he wants to get the best out of it. - In the pages of "Gold - Authentic Money" we try to keep you focussed on the whole clear picture so subscribe - details below.

The U.S. Economy - The Consumer Price Index and the Long Bond Yield at the 18th August - Tony Henfrey
The latest U.S. inflation figures have been taken as a positive sign by the bond market, with the U.S. 30year yield now at 4.985% it as nipped through support at +5.0%. This break opens up the way for a test of the previous low at 4.60%. Declining interest rates and slowing a inflation rate is telling us that the economy is not doing all that well!

C.P.I. - July 3.10% from 3.27% in June - The attached monthly chart shows a simple cycle study which was looking for a low between mid 2002 and early 2004 in the inflation rate. Remarkably, inflation made a type of double bottom into this window. The next cycle low is not due until 2008. What we want to know is when will Zeon PDF Driver TrialZeon Trialwww.zeon.com.twwww.tw the cycle crest? The monthly ME.S.A. [our own system of analysis of the timings of these events] shows the profile of a top in place, with a declining trend until May 2005, followed by a rise until September 2006 after which it goes down until the November 2008/June 2009 window. However, the 34month indicator is currently rising, which is in conflict with our M.E.S.A. forecast. The announcement yesterday of a decline in the C.P.I. was accompanied by a decline in the U.S. 30year TBond yield from 5.070% to 4.985%, now. This is not surprising when you take into consideration the second chart, below, which shows the long bond yield and inflation overlaid going back to 1977. Broadly speaking, the historical trend has been for them to move in the same direction. We will keep an eye on the long bond yield, which, in edging below +5.0% is opening up the way for a test of the 4.60% low! These lower interest rates will be gold positive as this lower than real return prospect in this unstable atmosphere, will favour gold.

The Oil price.

With the record oil prices being seen in the markets, above $47, most observers seem to be accepting that this is not a "spike" in the price now. The games of the Russian courts and the Russian government serve to show how tight the demand supply balance is in the oil market. Just what the Russian authorities think they are doing on the tax bill of Yukos is anyone's guess. Whichever way it goes, it's keeping the oil price high, and Yukos as well as the Russian government are benefiting. Somehow, it seems unlikely that Yukos will close the flow of oil, except for a couple of days or so, to keep that price higher than it should be. Control certainly lies in the hands of the suppliers and looks like staying there. The gold price seems responsive to the oil price and less responsive to economic data in the U.S. If that continues to be so, then it will favour the gold price short, medium and long term. But don't expect a joining at the hip of the gold price to the oil price. With Iraqi supplies of oil at half their usual levels, the Terrorist are pulling the strings of the global economy with their threats and the realities, of their sabotage.

Some Good news for South African Miners!

At last, some relief, at least in the headlong rush of the Rand to new highs. With a surprise cut in the South African Prime rate from 11.50% to 11.0% the "Hot Money" boys saw that the good times are being held at present levels.

Those risk averse positions reversed their stance and left, letting the Rand move away from the R6.00 level to the R6.5: $1 level. But it will take much more than that to do it. We reckon that if the rates fall another 1.50% the differentials in interest rates between the Rand and the $ will reflect the political risk fairly and put a valid price on the Rand, somewhere between R7.50 and R8.50 to the $1.

This leaves the attitude of the government towards taxation in the air, still, discouraging new investment, but we hope that the rate cut was symptomatic of a different attitude towards the outside by, not only the Reserve Bank, but the government. Maybe the "goose" will survive. But if she is to she will need a while in intensive care. Meanwhile, the conservative view is that the mid R6.50 : $1 is a rate that can be used in future projections.

Silver $6.88
Silver still filling 'gap' in the price patterns and yet, giving signs of rising. But the price vulnerability remains! The speculators seemed more confident in the price by raising the total speculative long position in Silver to 337 million ounces, by the 10th of August, up from 311 million ounces, on the 3rd of August. Still a fund play, and still vulnerable!

Platinum $865
The Speculators moved more confidently in the last week taking the total speculative long position in Platinum to 45,000 ounces to 110,000 on the week. The strength is likely to stay for quite some time, despite the announcement by Implats of an expansion into Zimbabwe and a $700 million investment in that country. I guess they are hoping that at Mugabe's age, either mortality or failing health will swing into the picture, to spare them from one exchange rate for imported supplies and another for payment of the proceeds from the sales of Platinum. No doubt about it, the increase in supplies will not bring down the price, but may prevent the industry rupturing price "spikes" that did Palladium so much damage in the past.

This price and maybe higher looks here to stay, even if the speculators get out again.

The London Gold Fix
19th August a.m. $406.30   E 328.509
19th August p.m. $406.50   E 329.097

Gold breaking up from the Euro at last?

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