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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!

The oil price handed over the baton to the gold price this week, with oil retreating steadily [ahead of the Nigerian strike to come] and the $ price of gold rising steadily to break up through resistance. Gold then spent the week looking up, like a desert mongoose checking the horizon. Such unfamiliar territory had all pausing to see if it would stay there, which it has. This feeling the market has, is similar to a gear change to higher speeds.

But in reality [that is in the Euro], the gold price pushed up from a low of Euros 334 to 337, before retreating to 335.59 as New York entered the market, on Monday. For the last two days, it has risen to the Euros 336 level and held that ground solidly.

It was the London market that held the reins of the price, all week, with New York Arbitrageurs pulling it down at the open, as they smoothed the differentials in the prices in the two market, before taking the price back up. The shadowing of the $, by gold was a moment to moment sight, as the prices moved almost in tandem, all week. Clearly the Arbitrageurs have to act quickly to get their profits now - keep it up lads, you're doing a wonderful job of making gold a currency. So, the debate on the future of the $ is hotting up! We have a lot to say on this, see below.

Global market prices:
Euro: A better week for gold in the Euro, battling a dropping tendency to hold the middle $330's, before being taken up alongside a strengthening Euro to Euros 337, then retreated to Euros 335, to spend the bulk of the week, not moving, at Euros 336. It is showing strength, in the face of downward pressures and this testifies to high testosterone levels in the gold price. The Euro price the real gold price. So we say that gold held its price throughout the week, at constant levels. The fundamental factors affecting gold are globally diverse and weighty. So, even without a $ collapse, gold would, in our opinion, still be in a growing bull market!

U.S. $: This was a pure reflection of the weakening of the $, nothing more, nothing less! This price action is persistently converting those unbelievers in gold as a currency and a hedge against currency profligacy, to believers. In the sight of this we stand back in some awe, as gold re-establishes itself in the minds of increasingly worried and concerned professionals, as an asset to be included in the most professional of portfolios. I heard one reputable fund Manager advocating a 7% portion of gold in his portfolios. Compare this to the 11% held, on average, in global Central Bank foreign exchange and gold reserve totals.

Rupees: Did you note the 1% increase in the strength of the Rupee this week? In the case of India this cheapens the cost of gold to the sub-continents buyers. Diwali is on the 12th November this year. With the $8 discount on gold prices because of the financing profits on L/C's and the Rupee edging stronger, these prices are now around the equivalent of $12 lower than the price in the $. The Physical buyers have been undeterred by the increase in the $ price of gold, because of this.

With the passing of Diwali, comes the Muslim time to do their gift giving, during the Eid Al- Fittr feast which follows Ramadan. This year Ramadan started on October 15th and Eil Al-Fittr is on November 14th. So don't be surprised if the demand for physical gold persists.

Rand: Somehow the Rand managed to avoid getting stronger this week and holds the R6.18 level to $1 still. But for how long? The possibility of a cut in interest rates may well be the cause of this. And this possibility is increasing by the day, now!

Technical Analysis versus Fundamentals:
We can only add to our comments of last week and emphasise that you should listen to a combination of the Technicals WITH the fundamentals. In our publications we provide both. Our newsletter, "Gold - Authentic Money" focuses on the both with the Medium/Long term Technicals added to the global fundamental picture. Go to our website to subscribe online, or to get details of where to send your checks.

At the time of writing, gold stood at $433.95 or $2 higher then this time last week and at Euros 336.40 or 2.14 Euros higher than last week. The Euro is worth $1.2897 up $0.0030 on last week. Gold, moved up this week in Euros as well as the $, but not significantly! It continues to build a strong base on top of the now heavy support [before it was resistance].

The changing Gold Market
This market is becoming a different market to the one where speculators could pull and push the prices at will, one that we saw last year, when we had a nearly $70 move up followed by the same move down.

  • Now physical and investment demand has taken the reins of the price, with funds not so quick to 'whip up the surf', having burnt their fingers a couple of times, of late. We suspect that the number of very real, institutional Investors, in the so-called long 'speculative' positions on Comex is growing steadily. The link to the oil price is being dismissed and the Investment nature of the market is in the ascendancy. [Don't misunderstand this, the oil price has not stopped rising, simply responded to a supply increase, with demand steadily rising and set to overtake the increased supplies again in the near to medium term.] Physical gold demand has shown itself solid, whilst not being influenced by the price leaps, only catching up when convinced those prices would hold, which they consistently have. The overhang of weak holders has fallen away.
  • The supply of gold to the market, as we pointed out in our series on "What drives the gold price" in the first half of this year, has dropped significantly, with both the lowering of scrap supplies to the market and the drying up of Central Bank supplies.
  • The number of commentators who refer to gold as only a "commodity" or a barbarous relic, has virtually disappeared. Indeed the very nature of the basis upon which the gold price is moving is changing structurally. The instability factor is well entrenched, the compensating factor to the falling $, also well established, now.
  • This is why it has been so difficult for the Technicals to be so sure of late. The history of the gold market dictates the Technicals, so when new drivers arrive, not seen before, the picture changes from the historic one.
  • We published a statement that the fundamentals would overtake the Technicals some weeks ago, in these columns, which, had you bought then, would have left you sitting pretty, with gold. We hope you did. We try not to give a defined opinion in this letter as that is the job of our subscription publications [- Got Yours?] From our inception we have been pointing to what is happening in the gold market and, as hindsight now confirms, extremely accurately! Our record to date has been good, very good.
  • This market is set to change still further. Indeed, it will bear little resemblance next year to last year, as the global economy, led by the U.S.A., begins to decay on many fronts. One of the greatest dangers to all you out there, is that you will look at the gold market, or any other market you are involved in, in a parochial or myopic way, so distorting realities in front of you. Put simply, if you look out from the nation you belong to and not in the context of your nation in a global economy, you will lose true focus and be caught by surprise by moves and changes the markets will show. In our publications, we will place gold, oil and all national economies within this global picture, to keep a clear perspective and true focus. When learning about foreign currencies and foreign markets it is not enough to see them in isolation, you must slot them into the global scene.
  • In essence, what has happened is that the 'mind set' of the observers of the gold market has changed. When we started to publish this perspective we asked the question, "What is the price of gold", then we asked, "What is the price of the $?". Ask yourselves the same question now. The answer we gave then, makes so much more sense, in this current market. Answer: The price of the $ is 1/432 of an ounce of gold.

The $ collapse.
What an important subject. As we see it grow in importance, as the $ weakens and breaks down through support, the spectre of a failing $ is focussing the minds of more than just the States. Every nation on earth is looking in its direction. We want to incite such thinking, so we say just this:-

Foreign holders of the U.S. $ will not bring on the collapse of the U.S.$!

Need to know more? The space we have here is not sufficient to look at this subject, but we have [We have an article on this in the current issue], do and will cover this subject, continuously, in the pages of our publications, [details below].

We will be covering how to profit from this collapse, particularly from the U.S. perspective, and describe just how to hold gold, without the fear of government confiscation. Please note, that whilst we respect the fact that in the thirties, the U.S. government did not confiscate gold coins, not considered money [rare coins, etc.] this was purely because the government decided not to do so. They could have, had they so wished! Our suggested route ensures that that cannot happen. We are covering that in the next issue of "Gold - Authentic Money".

Just a note on what happens when trust falls away in a currency; Myanmar, the old Burma, under its military rulers issued new smaller banknotes recently. Myanmar's military regime is now trying to quell fears over the state of its currency amid a surge in gold buying and rumours of widespread counterfeiting. The price of gold there has gone up 25% since October 19th 2004, when the decay in trust accelerated.

The Austrian Central Bank to sell 90 tonnes of gold in the next five years.
The Austrian Central Banker announcing this news, let it be known that whilst gold had performed well, recently, gold did not earn a return, so was not deemed a vital component of reserves. It is staggering that he should say this, particularly after the falls in the global currency, the U.S. $, and its negative overall return.

Still, if you cut away the facts:
- that the $ is falling [3% this week] and where interest rate returns are at the approximate inflation rate.
- Where some believe the prospects for a further 20 to 50% decline are possible.
- Gold having climbed 5% in the last few weeks, but with a miniscule interest rate return possibility.

Gold could be construed as a poor investment? Did this sound like the views of a qualified Central Banker? The amount Austria is to sell, not necessarily this year or next, but during the next five years is not a significant addition to the total to be sold by the signatories to the Central Bank Gold Agreement. The announcement is significant in that it removes the Austrian Central Bank as a major seller of gold for the next five years. We all await an announcement from France, probably in two months time?

Producer De-Hedging continues.
According to Virtual Metals, Producer de-hedging continued briskly in the last quarter, at 134 tonnes. But what is significant in this report are the de-hedgers themselves. No longer do we see only the largest companies de-hedging, but a mixture of companies. Five companies with the largest hedge positions, accounted for only 16% of the de-hedging that took place. Over the previous four quarters these companies contributed to 62% of the dehedging. Three companies - Sons of Gwalia [no longer with us], Thistle Mining and Oceana - completely closed out their hedge positions. Forward sales still represent the largest portion of 83% total hedges.

The reasons why the urgency to de-hedge remains is clear with the 'mark-to-market' [The revaluation of outstanding contracts or positions at current market price levels] valuation to negative US$5.1Billion. Under current considerations the hedge book breaks even at US$322/oz, a $110 loss per ounce.

For many who had hoped that the gold price would retreat to allow the closure of these positions without a loss, the feeling of panic, must have entered the door. As a consequence, we expect to see de-hedging persist, and at a lively pace, until such potential losses are eliminated. We expect the largest companies too, to reduce their levels of adequate hedging, to cover only financing requirements, over time. The leaves an awful lot of de-hedging still to go. Imagine a company reporting horrendous hedging losses in the future after all the shareholder objections we have heard over the last couple of years!

NEW GOLD - Paper gold spreads further across the globe.
We are covering Exchange Traded Funds in the next issue of "Gold - Authentic Money" and how to practically deal in them, explaining the beneficial features they have.

We saw that over 2.8 tonnes of gold were bought since the listing of this debenture, just over a week ago. Remember please, that this is in a country where the currency is strong, linked more to Euro trade patterns than to $ trade [irrespective of the mining industry receiving $ for their products]. This volume is fairly good as a start up figure. These instruments are new so first the 'knowledge gap' has to be filled. The issuing company Absa, is going on a road show to market the product throughout the country. No doubt like that tiny snowball at the top of the hill, momentum and size will pick up as the days go by.

Mare rumours of the imminent listing of the U.S. version abound. We hear that it will happen before the end of the year, but it could be much sooner. It is time to get to know this animal, now.

Silver $7.43
As the currency aspect of gold rises again and the potential for a future monetary enhancement to gold comes across the horizon, it is clear that Silver may well find itself in the slipstream of gold eventually. Presently the metal is more vulnerable to speculative fund flows as it sits in resistance right now. We ourselves are increasing our Silver knowledge input on this front, as that horizon is getting closer.

Platinum $852.50
Unlikely to become a monetary instrument it will remain a reflector of monetary decay and a reflection of industrial demand, as the global car population rises, particularly in China. It has become a fixed component of the car so not price sensitive on this front. Chinese demand has dropped off and this accounts for around 20% of the demand for the metal. This fall in jewellery demand looks to be made up by industrial demand.

The London Gold Fix
11th November a.m. $433.35   E 336.400
11th November p.m. $433.80   E 336.149

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