That was the week that was!

If this were a military battle, wed be at the stage where it has come to hand to hand combat between the buyers and the sellers. The physical marker is very visible in the high $350's. The Funds and dealers tending long in the low $360's, while low cost Jewellery selling by dealers is waiting above $365. When COMEX opened, yesterday, early trading saw gold come under aggressive US investment bank selling with the price falling to a low of $356.40 on the day. Then in came the physical sector and helped to stabilise the market. By the p.m. fixing gold rallied to $360.40. Funds then piled in again and pushed the price up and up, for the rest of the session leaving a high in gold futures of $368.20 an ounce [December] with 'spot' closing at $362.30.

The long speculative position remains huge and committed to higher prices. Many remain worried at the speculative overhang, will it panic and dump gold onto the market? Will gold break up and out having defeated the suppliers?

The market supply shortage still there, with around a month to go before new Central Bank supplies are permitted to be sold, in the final year of the Washington Agreement. The Gold Price at the time of writing was $363, less than a $ down on last weeks price, at the time of writing.The trading band could not be tighter. The seeming pennant formation has moved to the tip, bringing the level of risk right up to its peak. So, you would rightly say, are the potential rewards now at a peak, if you are facing the right way! Not the place for widows and orphans!

The gold price could spring either way, it seems. Those who looked to the Euro for guidance are aghast at its low level against the U.S. $ standing at the time of writing at $1.09835 with a sharp drop to $1.0960 possible. But a bounce back will trigger those Euro followers into gold to test the higher $360s.

Those who thought the market had to fall because of the absence of physical buying, are standing mouths wide open as the physical buying stubbornly refuses to go away. And the reports that jewellery demand has recovered strongly in the second quarter have nonplussed all, so where are we going from here. You pays your money and you takes your choice!.

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We made little mention of the bomb blast in Iraq, simply because the market on hearing the news did not rush to gold. Some traders have taken positions on the back of the news, but no serious Investors. Such events have been a convenient way of explaining the gold price movements, and in some instances traders have taken positions on such news hoping that others will follow, but such news, whilst horrible, is no reason to invest in gold, unless one seriously believes that such incidents cause an overall destabilisation of the world economy, of which there seems little evidence.

The Euro $ axis.

Since the beginning of the year the Euro and the Gold Price have stood together against the $, but now we have seen a departure: -

We have said before that the close relationship would not last. The Euro and Gold have little in common, except they are alternatives to the $. We would say that the Euro has to try to be more attractive than the $, hence the higher interest rate, but it has to stay close to it for trade reasons. Europe would dearly love to have capital invested in the Euro, whilst it fell so improving its trade competitiveness. But short term investments rates in the States will cause short term money to chase the best short term investment rates on either the $ or the Euro and cause exchange rates to be volatile.

But gold is being driven by entirely different forces to the Euro. Gold is showing a reaction to the general decay in global instability, it is reacting to a long term diminishing in the supply picture. Gold is sought after in new markets, whether it be China or in the hands of the small man able to buy gold in share form, or the wealthier Indian farmers translating profits into the one item that they trust [and relatively cheap, in India, whilst the Rupee continues strong], gold.

The Euro does not react to these factors.

The weak $ is measured against the Euro, but as with Europe itself showing strong signs of recession country by country, the currency is bound to suffer to some extent. The battle of the J-curve then comes to the fore, with Europe increasing its competitiveness with every cent fall and the $ trying to do the same. The investment figures into the Euro will show see the real attractiveness of the Euro. As each shows weakness in turn, gold grows in attractiveness, because of its reliability.

India

We await the arrival of the farming community in the gold market, hopefully smiles from ear to ear, with a bumper profit on a bumper harvest?

The Recovery in the States?

History thrusts itself back into the picture. In particular the "boom-bust" picture of the Sixties and Seventies. The typical cycle followed this route, back then: -

"Cash - Bonds - Equities - Housing - Commodities - Cash......."

What are we seeing now, is it the past revisited, now we are in the Noughties? Then one used to use the relationship between fixed interest yield and Dividend yield to guide one on value. Is the same happening as Commodities on a broad front are climbing strongly, or is this a prelude to a more structural decay? Certainly the turn down in refinancing of mortgage bonds, points to the drop in housing starts, despite the recent record figures. The Dow is still pushing forward, but with the Fed's repeated fears of an "undesirably low level of inflation" appearing on an ongoing basis, will this last or will a serious fall in the Dow's value start? The market is talking to us and telling us that it is tired. Despite the optimistic tone of so many, the vibrancy is gone, yes the figures do show some growth, but not sufficient to spark a solid rise in the index. With Bond rates rising and commodities rising, the strategy of holding commodities, or cash as history suggests is attractive, if the move precedes a bear market in equities. Certainly the pattern of the past suggests that. For sure, this cyclical pattern is one of the influences supporting the Gold price at the moment.

Swiss Sales.

The argument over what to do with the money raised from the sale of 1300 tonnes of gold by the Swiss is suppurating again. But this time it has been suggested that the regional authorities, the Cantons, take two-thirds of the income and the Federal government one third, for thirty years. The decision is subject to a referendum. It was a Referendum that threw the previous two suggestions out. Let's see what happens to this suggestion. Swiss sales of gold proceed steadily as prescribed some years ago.

Speculative Net Long Positions.

Last week's net long of 317 tonnes and a gold price of USD358/oz ere consistent with the relationship that has held between the price and the volume of speculative long positions, since the beginning of the year. This has caused a re-think of the nature of these Speculative holdings. Their nature seems to have changed since the Iraqi war, to less capricious and stronger holders of their positions. Are these becoming medium term Investors? Is this the path the long term Investors will follow into Gold? The indications seem to be pointing that way.

Short Term Prospects for Gold

• The tightening trading range is even tighter than last week. It seems that the point of breakout is close. The Gold price seemed to have broken down at one point, but it has forced its way back up to current levels again. We are holding our breath and ready to act. The tension is high, but so it is on many fronts, including the path forward of equities.
• The Euro stands at 1.10 down from 1.1238 to the U.S. $ last week.
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Gold Fix 21^st August a.m. $364.00 E 330.518

Gold Fix 21^st August p.m. $363.30 E 330.724