The week that was, last week, saw the week build a foundation on a higher platform, and this week sees a week where the price was weak. [That felt good]. The gold price did take a breather and consolidated. New, long speculators jumped in after jumping out, just before the rise, and were hoping to catch a ride to higher levels. Well, the physical boys said, 'oh no you don't'. When the physical buyers saw the Speculators jump back in, it was a sure sign that their buying would turn to selling, if the price was not carried up further by physical buying. The physical buyers were in a seasonal position to hold off. They were buying at good prices, not prepared to pay more to the market to give the Speculators profits. So, of course, they stood back, knowing that if the price did not continue up, the Speculators would jump out, which they are doing. This precipitated a nice pullback in the price, leaving it ready for the physical boys to get on with the business of buying gold at good prices, again, once the fall stops. And how long can they keep playing this game at these prices, you may well ask?
Perhaps more pertinently, one has to ask, why are they buying at these levels and not taking the much price lower. Demand / Supply kicks in. The needed supplies are at these present levels, but not at lower levels. I made a point of saying that supplies are here, at these levels, because we believe that the demand is not that great, currently. The problems lie on the supply side! Why, see below.
The Absence of Central Bank Selling
Under the Washington Agreement Gold Sales by the signatory banks was restricted to 400 tonnes per year. Apart from some small sales by Switzerland, there is hardly any "Official" gold being sold, nor will there be until close to the end of September! This absence is probably the dominant factor which will help the gold price face upwards like a rutting bull. With the same impact as strong demand, shortages can only induce supply through higher prices! "Gold-Authentic Money" is producing an article discussing present and future Central Bank activity in "Official" gold in the next issue. This will be sent to those who subscribe now!
Gold as a Currency
All eyes are still watching the $ : Euro relationship. The focus on gold has moved from Gold the commodity, to Gold, the money. As market commentators are now saying, gold is behaving like a currency. We cannot stress this change enough. It has always been one, despite the attacks on it for twenty years, but this became obscured for twenty years. And that wheel does, indeed, turn.
Gold is now being put forward as a currency and an alternative to the $ just as the Euro is.
Gold's tracking the Euro is one way of putting it, but could it be that neither is 'following' the other? There is absolutely no reason why gold should 'follow' the Euro. It would be more accurate to say that the $ is falling against both the Gold and the Euro, with neither in a 'senior' position?
• The Gold Dinar - Malaysia's first Gold Dinar, will be available to the public next month in the ¼ and 1 Dinar types, priced at RM51 and RM181. It has a gold purity composition of 91.7%, [22-carat]. The ¼ Dinar weighs 1.06gm and has a diameter of 15mm and thickness of 0.35mm, while the 1 Dinar coin weighs 4.25gm with a 23mm diameter and 0.6mm thickness. [The public can place their orders by calling 03-5519 1611 or check www.theroyalmint.net] The commercial use on an individual level, is now being put forward for use in Dowries and Pilgrimage payments. The use of the Dinar is being aimed at savings in banks or to purchase property or land. The absence of premium on the price [which can be as high as RM10 for each bullion based coin regardless of its value] makes it attractive both as money and as savings.
• But how much is a RM, and what is it? You know the price of gold in $, so you can value the currency in terms of gold, just as you can value the $ in terms of gold. Each has $43.25 worth of gold in it, so RM 4.186 equals $1 Gold has come back as a currency!
The Marketing of Gold
We have no doubt that the marketers of gold should aim at minimising the cost of buying and selling gold and providing it in sizes that the general public can afford and in a form that it can be dealt in easily. Just a computers were reduced from rare corporate mainframes to P.C.'s, so gold should target the same accessibility.
Taxes costs and shipping acts as an impediment to the popularisation of gold. Their removal will increase it. Moves to reduce trading costs to 1% and below are a wonderful start in the global economy and certainly more accessible than coins for exchange in local economies, but nevertheless, both avenues will popularise and familiarise the world-wide public with gorgeous gold in a currency / savings / investment role.
Of very special interest is the fact that the European Central Bank showed that there was some seven billion Euros of inward portfolio investment flows into the Euro zone during May [while direct investment produced a 0.3 billion euro outflow]. It seems this headed into bond purchases. Could this be acceptance of the Euro as a Reserve currency? If so it would have taken these investments from the $. Doesn't this highlight that the $ control over the Global Monetary scene is not a foregone conclusion?
The Euro is now showing its hand more obviously, as an alternative to the $. With its 15% backing by gold and one percent better return on investment, it is now being accepted as a viable alternative to the $. Yes, it has a political foundation, but this is growing more and more acceptable in the light of the behaviour of the $ as an investment. The competition between U.S. and European Treasury yields will play an increasing role between the currencies values.
- Russia, China, North Korea and Malaysia have begun holding €uros in their foreign exchange reserves.
- It is reported that President Hugo Chavez Frias of Venezuela, is to replace the US$ with the €uro.
- Iraq's Saddam Hussein started using the €uro for oil transactions last November, will they continue under the new regime? The answer will tell us just how liberated Iraq is now.
- CIA and other intel organizations, including Britain's MI5, now fear that the next step is that the Organization of Petroleum Exporting Countries (OPEC) is about to switch to €uros. The immediate effect would be a massive devaluation, perhaps sparking of domino-effect devaluations worldwide in US$-related foreign reserves and foreign debt calculations.
- The Kingdom of Saudi Arabia is on the brink of converting to the €uros and the opinion held by many OPEC ministers is that the conversion is an inevitability.
The conclusion is that:
- The challenge to the U.S. $ dominance is now real.
- For the $ not to suffer further, it is vital that it regain its value, not in terms only in its rate of exchange, but its relative strength, its return and reliability. A message is being sent out is that the world will not accept the undermining of the U.S. $ without a fight.
- The use of gold as a currency as well as a backing to currencies is now a present reality.
Speculative Net Long Positions
Comex long positions jumped back to life again as they saw physical buying steadily push the price up, rising from last week's level of 167 tonnes to 251, a rise of 37 tonnes even over two weeks ago. In the belief the physical buyers would keep on buying Speculative longs took 84 tonnes worth of new positions. We see the physical buying as opportunistic ahead of the return of the Indian farmers to the gold market after their harvests have been sold. On that basis, price is all important and the Speculators misread the buying. They seem to have paid a heavy price, for gold has and is dropping back since they bought. So short positions have now become medium term positions.
Whilst we ourselves were encouraged by the rise in Durable purchases figures, last week, it did not adjust our view of the future, nor did it convince Wall Street, or many other people as well. Even Japan desperate for hope showed their unhappiness in the dropping Nikkei.
What is of concern to us on the gold front, is the possibility that shares in general [S& P reflecting P.E.'s of 35] are still discounting a bright, indeed too bright, a future. This could include the view on gold shares, not the metal though.
When a market has suffered a fall from its historic high such as the Dow has, its initial rally can convince market players that all is still well. The slow process of the puncturing that confidence, changing hope into desperation, is quite a battle, but when it comes the subsequent fall can be dramatic and very emotional. Are we approaching that now?
Short Term Prospects for Gold
- The pullback in the gold price was expected and reinforced by the positioning on the long side of speculators. It was healthy then to see a fall in prices to solidify the price. How long will this go on, is the next important question?
- The Euro fell again to just above 1.12 to the U.S. $. It will probably continue to move alongside gold, both reflecting the weakness of the $.
- There is an underlying strength in gold, shown by the presence of physical buyers in an un-seasonal time. It bodes well for the future.
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Prospects for the Markets
Through our "One-on-One" service we track and guide Subscribers on the full range of Commodities, equities, Bills and Bonds. Interested? Contact us for details! Our short term views on T-Bonds, Oil and the Dow are here shown as a sample : -
T-Bond (30 year):
A Big downtrend is still intact. It looks like wave 12 is in progress, with wave 13 to come. Notice at the top how the RSI diverged with the price. So far there is no divergence at the bottom, which suggests that there may well be one more wave down to come to complete. Once the downtrend has terminated there is likely to be a very sharp rally.
Waiting to buy T-Bond (Sep) for the coming bounce.
Oil (Brent) ($28.65 nearest):
Is in the Sell mode and has been since the 23rd of June ($28.09). The 34-day indicator is falling, the Mesa was calling for a high yesterday and now it shows a downward trend until the 4th of Sept. A Brent close below $28.11 takes it lower, Crude (Sept) close below $30.11 is needed. It will be interesting to see if the Mesa, which resumes its decline from today, is going to get it right.
DJI (spot 9200)
Has been in the Sell mode since the 24th of June (9109 spot), the 34-day indicator is still declining, the Mesa low is due on the 5th of August, a close below 9113 allows it to go lower. It needs to close above 9323 to go higher.
Gold Fix 31st July a.m. $355.75 E 314.774
Gold Fix 31st July p.m. $354.75 E 313.989