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Index:
- That was the week that was/ Short-term forecasts across the Board!
- Comex positions / Commercial Shorts Reducing Shorts
- Last week's gold sales under the CBGA/ Indian Demand this week/ Another angle on Gold versus Gold Shares / Takeover time - why? / Exchange Traded Funds - The difference / More on 1970 and today The Oil Crisis / $ Index/ Prospects for the U.S. $ / Shares we follow/ Gold : Oil Ratio/ Dow Jones /Technical Analysis of the Gold Price: Long / Gold price drivers /Short term in the U.S. $ / Treasury Notes/ CRB Index / Natural Gas / Copper
- International Gold Markets / New Records Across the Board! / Silver / Platinum/ Silver & Gold Shares

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Technical Commentary:

€ Gold price is challenging €450 now, what a week! Record highs with strong buying continuing along with the US Dollar gold price. We see €400 as a great support level with €450 then €500 as the next targets. Momentum remains very bullish here as well with higher levels set to come before a correction.

Fundamental Commentary:

Now the € has risen half a cent to the present level of €1.1765. The rate between the $ and the € has barely changed over the last two weeks. As regards its effect on gold, the direct relationship between the € and gold versus the $ has virtually disappeared now, as gold rises against both. There is a structural change taking place between currencies and gold which cannot be dismissed simply as a gold market force.

Our piece above on 1970 and today touches on this. This change of thinking about the gold market and the future is a vital feature to be understood to see where gold is going. History has shown that when currencies don't reflect underlying values, then other items such as oil and gold will. Currencies will then catch up, but through a series of crises. These may still take a while to arrive.

One startling point that has to be made on the difference between 1970 and today is on where the gold price came from and went to. You have heard how gold reached $850 an ounce eventually in the early 1980's. But from its start point in 1968 of $35 an ounce to $850 was an increase of over 2,400%. The start point of this rise can be taken back to around $270 [Let's call it Brown's floor]. You can do the sum!

Bear in mind too, that it was accompanied by a turmoil on the currency markets based on the decaying Pound Sterling and the U.S.$. These were the days when it was a drama when a currency moved 0.3% but we now see a couple of % move as normal! But we have been trained to focus on the moves between the € and the $ and we have been missing the decline of both. What else measures value then, you may well ask?

In the 1970's, oil became a counter to the $ as a measure of value alongside gold. Currencies had failed to measure value properly for years [fixed as they had been by the British and American governments] and the market forced a devaluation of the leading currencies, valuing properly managed currencies over undisciplined currencies. Gold and oil took that devaluation of currencies further! The relationship between the two [oil and gold] did not form a distinct pattern, but over time they rose against the $.

What did Greenspan define a currency as? Here is an excerpt from his famous essay, "Gold & Economic Freedom":

"What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term "luxury good" implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron."

Today we see a commodity of value [not a luxury but a globally needed one, upon which the global economy depends] to all worldwide, in oil, again measuring the value of currencies, all of them. Can we foresee a day when the question changes from, "How much is a barrel of oil?" to, "How much is a $", [1/60 th of a barrel of oil?]? And the price of a $? Is today the answer 1/512 th of an ounce of gold?

We appear to be at a point where currencies are overpriced relative to these and other commodities and the market is bringing this home to us all now.

The point we have to consider is if the leading global currencies fail to relate properly to global values like oil, adequately, is it not appropriate that they drop in value against these key commodities?

Last week's Gold Sales - [under the Central Bank Gold Agreement.]
And the tonnage sold is dropping. Now back down to 8 tonnes sold by two banks, no doubt France being one of them. We do suspect that the decision to lower the amount sold was a dealing decision not structural. When Technical resistance levels were broken, the prospect of gold falling back having peaked dissipated and much higher levels came onto the screen. After all, if you hurry to sell at below $500 and the price until next year averages well above that, you look like Britain's Brown does now. When you are the custodian of the nation's savings, a well-qualified Central Banker, it's a bit embarrassing to report that you sold your nations reserves of gold under the present market price?

With 109 tonnes of the total of 500 tonnes already sold to date and another 9 months of the year to go, it is wise to hold back.

We believe that France sold as much as 6-7 tonnes of this amount and will keep up this steady pace for the next 9 months. Then at least they can plead that their task was to sell and they sold evenly, they didn't play the price. That's playing it safe!

And the effect on the market has not been lost. With few sellers in the market still if you remove 8 tonnes supply from this market, the gold price has to take off doesn't it?

What is very important is to realise the fine balance in the market place that this action showed. As the gold price has continued to roar, we guess that the amount sold next week will be around the same level and from France.

The reports we receive on other Central Bank activities are not sufficiently frequent to see whether the Central Banks of Argentina, South Africa, or Russia are buying. They will simply take local production into stock and report later in their usual reporting schedule. We will have to wait and see on that front!

Today's Gold Price - Drivers
In the "climate" created by the global macro-economic view, we see strong reactions from the direct influences on gold. In this section we will cover both the Technical Analysis of the Gold Price and bring perspective to the fundamental events that define these reactions.

• Physical demand - Japan continues to buy gold as the Yen slips and the gold price rises. Physical demand is the buying feature at present, out of Asia [not India still] and to some extent Europe. These volumes are greater than fund selling and are expected to continue so, but these volumes are not that large! Within India scrap sales are sufficient to supply the Indian market, halting imports of gold for the last three months! But be careful, the absolute amounts of physical buying are small! It continues to be the lack of selling that is the main driver of the gold price!

• Fund Selling/Buying - Now their net long positions are dropping and it seems they are reducing their exposure. This is surprising the market so long used to the Funds being the top influence in the market. Short covering continues to be a feature of the market. Fund buying is present, but seems to be matched by fund selling too. We are of the opinion that fund buying is also driven by the closing of short positions! With higher margins being charged, pure speculation is being capped.

• De-hedging - Still low and delivering into the market. As the price is moving well into the $500 area and targeting $600+, we may well see the Producers adding to the demand side of the equation now. The potential losses on these hedges, is rising dramatically now!

• Investment demand - Continues to grow strongly in physical form too, spurred on even faster by rising prices. European Investment Banks continue to show interest in gold. Individual demand is moving in a rising wave into the market through the Exchange Traded Funds as well. But note please an important point. A holder of gold becomes an Investor by extending the term of his position. Investment demand is therefore growing through the lack of selling.

• Central Bank sales - Their supply has halved in the last week of selling. It now seems the French are the main sellers under the C.B.G.A. this week. The price has risen too fast and so now they may well hold off until this rise has peaked?

• Scrap gold - Sufficient to supply the entire Indian market. We expect these to fall only when the gold price stabilises. We estimate 50 tonnes supply a month from this source at the moment.

• Supplies from the gold Producers [repeat]- The Rand continues to drag down the price the mines receive on their gold sales. Sales from other parts of the globe remain steady but not rising with higher prices and dropping from South Africa still!

• Selling/buying - The lack of desire to sell gold in the market place is driving the gold price up. It is a relatively one-sided market in that there is insufficient supply to the market, because the present holders feel that they should continue to hold. So few sellers and sufficient buyers to take the price up well, appears to be the climate needed to take the gold price higher! This week saw even fewer sellers!

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