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Politics flexes its muscle in Commerce and Oil.
Two degrees rise in temperature in the Caribbean, seems to be so small a move, how can it have such an effect on the hurricane season? Likewise, the purchase of oil & commodity reserves by China in the "Free Market" surely is consistent with "Capitalistic" principles and should be lauded? Oh, no!
The concept of 'vital interests', an opaque concept, enters the fray. Do political interests override commerce, the "Free market" and "Capitalism"? Is "Nationalism" an overriding principle in these matters? Answers to these questions are shaping policy and redefining priorities. Where each stands in the pecking order of principles shapes the future of international markets.
As the oil market sits at a critical level, with total global oil supply at around 84.5 million barrels a day and demand at around 84 million barrels a day the surplus of 500,000 barrels a day is so small that global tensions are rising, as the fight for a piece of the global pie is underway: -
The Kazakhstan government has just passed a bill giving it the power to change mineral rights in any company in the country. The law amendments announced on the weekend give the Kazakh government the right to limit the transfer of property rights to strategic resources or assets and are aimed at pre-empting changes of ownership that occur through the sale and purchase of shares listed on exchanges. The government has the right to cancel unilaterally all contracts with companies that conclude deals with third parties in violation of the new amendments. In the case of Petrokazakhstan, such contracts would involve the licenses to operate its largest oil fields at Kumkol. Energy Minister Vladimir Shkolnik had said last week the government was seeking "strategic control" of the Kumkol fields.
The Chinese company, CNPC has already signed a binding agreement to sell a 33% stake in Petrokazakhstan to state oil and gas company KazMunaiGaz for around $1.3 billion.
Watch this space! Oil is too important an item to leave to 'Capitalism' and 'Free Trade' and could burst into flame easily. Political interests sit on the throne!
China - Momentum grows alongside impact!
China 's planning agency announced that G.D.P. had grown at an annual rate of 9.4% in the first nine months of 2005, causing it to raise its forecast for the full year to 9.2%, from 8.8%. The agency also predicted a record trade surplus of $79 billion for this year, more than twice last year's. The Chinese Communist party leaders reiterated their commitment to rapid growth by restating a goal of raising China's GDP to double its 2000 level by 2010.
The strains of such dynamic growth are highlighted by the more than 70,000 demonstrations, attended by some 3million protesters. The Chinese government is riding a tiger with the most enormous industrial revolution the world has ever known. To keep it orderly and ensure the entire Chinese society benefits is an overwhelming task, but one they have to achieve. Internal pressures have to dictate policies they feel, so to accommodate U.S. interests by revaluing the Yuan dramatically is just not on the list of to do's. China 's finance minister, Jin Renqing, rebuffed U.S. Treasury Secretary's demands: "Using revaluation of the renminbi [yuan] to resolve global imbalances, particularly the imbalances of certain countries, is impossible and also unnecessary".
China needs the export sector to continue booming, in order to absorb surplus labour from the countryside and state-owned companies. Failure to keep the growth of the nation at this fast pace will cause potentially disruptive social strains, which would fracture if growth slowed. So the economic situation inside China continues to override U.S. interests. We do not expect to see a significant revaluation of the Yuan in the future. Without it, global pressures stemming from the transfer of wealth from West to East will continue to create huge global pressures, favouring gold as an investment.
Prospects for the U.S. economy & the $.
The economy.
The U.S. economy right now looks just as Fed Governor Poole says it does, " The economy is about as nicely poised and balanced for further growth as imaginable," Poole also said. "I don't think the expansion is fragile." But with inflation coming in hard, spurred by the ripple from the oil prices, what lies ahead?
This is perhaps the most important question ahead of the Fed. If the economy is sound, it can take higher interest rates. But if 'confidence' is lowering in this healthy economy, the impact of rising interest rates will have a disproportionatly negative effect on the consumer and subsequently the economy. With a roaring housing market billowing bigger than ever, fears are that 'confidence' will subside quickly. Just how hard should it hit to calm inflation and at what point will the blow shatter?
The hammer of interst rates, hits harder the higher they go. The constitution of the consumer in the face of such treatment grows more fragile by the blow. The skill lies in knowing at what point inflation is tamed and at what point does the consumer buckle. We fear the consumer has a more delicate constitution than inflation?
We have long stated that growth and confidence have to be maintained as a more important priority than inflation control. It will soon be apparent if we are right or not.
The $.
As the $ interest rates differentials [against other currencies] lower as $ rates rise, the 'carry' trade may find the margin difference with countries with higher rates, narrows to the extent that interest arbitrage positions have to be closed, so sending the $ back home to strengthen even further. Alongside sustained high oil prices [breeding greater demand for the $] and we have more upward pressure on the $.
These additional dollars, a ccording to estimates by the International Monetary Fund, oil export revenues of Middle Eastern countries will reach nearly $400 billion this year. On an inflation-adjusted basis, that is double the amount of those revenues in 1980 and more than three times the figure of 1974, when the price of crude spiked after the Arab oil embargo. The 19 main energy exporters will harvest $781 billion this year, compared with $549 billion in 2004 and $324 billion in 2002.
Russia 's current account surplus - the broadest measure of its balance of trade - will swell to $102 billion from $60 billion last year, the monetary fund says. The surplus in Middle Eastern countries will rise to $218 billion this year from $57 billion in 2003, according to the I.M.F., almost double China's surplus.
Eventually, as disenchantment in the $'s value and its management actually pressures other nations to diversify away from the $, it's role as a reserve currency will diminishe [which will take some considerable time]. Then because of this lowering international profile, the $ will fall in value even if the internal, U.S. value, becomes strong.
But this is not 'confidence' in the $. This is a mechanical strengthening, which causes investors to doubt the $ still further, whilst being confused. The value of the $ inside the U.S. becomes very different from the value it has as a global reserve currency, under these conditions. Stagflation can and we expect will, hit inside the States. But the $ will look strong. As the stagflation hits, it is almost certain the the Fed will have to reduce interest rates to protect the health of the economy. But that is unlikely to weaken the $, because of its reserve currency role, at least in the short-term.
Expect the $ market moves to defy reasonable forecasts. We do expect it to continue strong, because of both rising global demand for the $, as it cheapens, and prices, rise.
As the structure of the global economy continues to evolve and weaken, the brewing storm for the $ gets closer and closer. Gold becomes a defensive investment in this climate.
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