A trading week full of surprises, with gold looking toppy, but bouncing back each time a decay began, leaves the week looking resilient. Physical trade constantly make its presence felt whenever the gold price fell into the $350's. The speculative funds together with aggressive Investment bank buying, kept the price above physical buyers reach, so they could take what little stock that came onto the market in this week of thin volumes. We warned of long liquidation in our last report, as the total position of long speculation stands near it recent high. However, less than expected liquidation came onto the market. They seem to have much more fortitude than before. It seems that something far more substantial than a war in Iraq is keeping them in the market. Perhaps they are sensing the structural pressure of lowering supplies and economic failure? The funds could well be positioning themselves to take greater control of the price when the time physical buyers pick and choose their buying time runs out and they have to go into the market to supply retail demand. The month of August is passing the half way mark and moving rapidly to the point of return of many market participants, whether from harvest gathering or from holidays.
Resilience was confirmed by the break between the gold price and the Euro price. Gold will not be tied to the Euro except for relatively short periods, as it reflects the total macroeconomic scene, not just the relationship between Europe and the States. The Gold Price at the time of writing was $363.25.
Spare a thought for those unfortunate young people in India, with stars in their eyes as they look towards the ripe fruits of a new marriage, with all its delightful gusto. Hindu priests, who pronounce Hindu matrimonial dates have placed a 'celestial bar' on Hindu weddings this year [so long!]. Under threat from Jupiter and its wrath, couples have been warned that their marriages will be wrecked if they marry in this year. September to November is the period most affected by this in the gold market. We wanted to factor in an estimate for the amount of gold not bought for this reason, but we are struggling with determining the average Hindu couple's ability to keep mind over matter on both the physical and the financial front. We have no statistics to refer to on this matter, being torn as we are between assessing their religious fervour against their ability to hold off gold buying at good prices, now, as well as the huge battle to prevent their resolve dropping that all important three feet, for one year? A testing time indeed!
The Indian economy continues to be vibrant.
The first Chinese gold mine to go public, Zhongjin Gold, last month issued 100 million A shares, or 35.7% of total equity, at 4.05 yuan ($1=CNY8.28) a share, about 20 times its earnings per share. Its IPO was 824 times subscribed. Now Shandong Gold-Mining announced it is launching an IPO. Shandong Gold-Mining said it would offer 60 million A shares at CNY4.78 a share, 17.84 times its 2002 earnings per share. The offering would represent 37.5% of its total equity. Shandong has about 60 tons of gold resources, he said, while Zhongjin has only about half that. Shandong's subsidiaries and mines also are concentrated in eastern Shandong province, while Zhongjin's are spread out across the country making managing them difficult. We mention these developments because we see China's entry on an individual basis as a key new demand factor for gold and one we do well to keep an eye on.
To give you perspective on the potential of Chin's demand for gold, China's per capita GDP is more than double that of Pakistan, India, and Vietnam, but per capita gold consumption is less than half of these countries. However, the same attitude to gold persists in China as it does in India, to a large extent.
The Recovery in the States?
With strong July retail figures [up 1.4%] and the Fed pronouncements helped the $ but only for a short time. The markets are at a level that discounts a tremendous future and need to maintain high confidence levels to keep at these height. The sobering future now being envisioned, does not warrant the high levels seen in the indices at the moment. The FOMC announced that interest rates would be held at current levels, this week.
Most importantly, when we compare the language used by the Fed, this time, against the last time they pronounced, we see a noticeable lowering of their confidence in the economy coupled with a greater fear of deflation. The fear was expressed this way, "the risk of inflation becoming undesirably low is likely to be a predominant concern for the foreseeable future.'' In other words their posture is against deflation still. The nagging worry about prospects for the economy is on most people's minds, despite the strong faces set to the wind. Confirming this, the 10-year U.S. Treasury note fell in New York trading, closing on a yield of 4.58% with the 30-year bond closing on a yield of 5.465% after the Federal Reserve expressed optimism economic growth is accelerating. This note is more attuned to the growth prospects of the economy, confirming the markets scepticism. It is no wonder that Fed policy makers meeting in Washington left their target rate for overnight loans at 1 percent, and said they believed they could keep the rate at that level, a 45-year low, "for a considerable period'' without causing inflation to rise. In the face of declining inflation, there appears to be no danger of rising inflation. The holding of rates at a low level, for a considerable period is, to us a continuing attempt to spur the economy into action. Yes, the Fed may well believe the combination of low interest rates and rising productivity is providing important ongoing support to economic activity, but we are getting the distinct impression that it is not enough. We do expect, at some stage, the Fed will take ordinary or extraordinary action to further stimulate the economy. The major danger is that falling inflation destroys confidence, when it is so low. The rise in mortgage rates is sufficient, already to choke off a great deal of growth in that market, immediately reducing the all important confidence level. Certainly the market waits to be convinced of the growth impact of increased productivity.
Note if you will, the many efforts to instil confidence into all, attempted by the Fed. By now the economy should be roaring, but this is not happening. Yes it is growing, but not as vigorously as market levels would have us believe? Even with projected growth as given to us by all, the U.S. economy has cooled in comparison to the nineties. The $ is set to go lower or pull other currencies down with it, defeating the benefits of the J-curve. Confidence is now sagging, visibly. The conditions are uncertain in, the ideal environment for gold. This is a long process as we know with days when confidence rides up the beach, but followed by the receding waves back to the sea, with the tide slowly, but surely ebbing.
Swiss Sales continue steadily
The figures from the Swiss National Bank for the reporting period to August 8th imply that the bank sold approximately 7.5 tonnes of gold in that time. This takes the bank's sales, which fall under the auspices of the Central Bank Gold Agreement, to a cumulative total of just over 846t, from a proposed total of 1,300t over five years. They will, we believe continue to sell at around this pace until all 1300 tonnes have gone. The question remaining is will they be completed by the time the Washington Agreement completes its first five years, in September 2004. Bear in mind that it could be renewed with ceilings on sales levels, which are never reached?
Speculative Net Long Positions
Comex long positions dropped from the huge level of 343 tonnes to 290 tonnes last week, leaving it still up 77 tonnes from the week before. It is a huge position and one that is just sitting waiting for action. As we said last week, Speculators are indeed holding the reins of the market right now. And they are saying we are ready for it to rise. Their continued buying, we feel is not on short term news items. We feel as the gold price separates from the $ as it is doing right now, that it is an awareness of the negative structural problems getting out of control, and on the broad front.
Short Term Prospects for Gold
- The gold price is still like the quiet before the storm and still moving in an ever tightening band again, at a slightly higher level We wait and see! The future for non-gold investments is getting cloudy with storm conditions moving in. These conditions favour gold. But short term - be careful out there!
- The Euro stands at 1.1238 to the U.S. $
- Apart from our, sad to say, Hindu bridal couples all looks solid!
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Typical action of our trading positions: We have just closed out a position where we were long 4 contracts of USD (Sept) 96.27 for profit of $10480 and a short position of 3 contracts of T-Bond (Sept) 104-07 for profit of $45936 for total profit of $56416.
Our short term view on Brent is here shown as a sample : -
Oil Price (Brent)($29.64 nearest):
...Back in buy mode from the 5th of Aug. It did not close below $29.55 yesterday so the 34-day indicator did not turn down and today a close at $29.90 or lower will turn the indicator down. The Mesa now declines until the 29th of September. Brent and crude closed below their respective levels of $29.76 and $31.70. They are now going into sell mode.
Gold Fix 8th August a.m. $363.30 E 321.846
Gold Fix 31st July p.m. $364.50 E 323.511
Please note the p.m. fix is $10 higher than last week, a break from the Euro and a change from the previous week.