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Commodities & Precious Metal Markets Weekly AnalysisMark O'Byrne Precious Metals Precious metals traded in a range bound fashion ahead of the G7 meeting. Gold is stuck in $421-$430 zone and a break of either of these levels will provide direction. Silver is trading in $665 - $695 range and will continue to do so. A break over $695 will result in $707. Commodities Commodities, represented by the Reuters CRB Index (basic components include hard tangible assets such as Metals, Textiles and Fibers, Livestock and Products, Fats and Oils, Raw Industrials, Foodstuffs) was unchanged for the week at 284.20 points and still hovering at multi year highs. Energy Prices February unleaded gasoline closed at $1.3082 a gallon, down 4.37 cents for the day, but up 0.7 from last Friday. Natural gas prices inched closer to two-week low with some traders starting to expect there will be adequate supplies of the fuel for the remainder of the winter season. March natural gas fell to a Friday low of $6.15 per million British thermal units, a level last seen Jan. 18. The contract closed at $6.259, down 9.3 cents, or 1.5 percent. For the week, it lost less than 0.1 percent. The US$, Currency, Stock
and Bond Markets The Dow Jones industrial average eked out its first weekly gain for the year, closing up 0.33 percent to end at 10,427.20. The broader Standard & Poor's 500 Index also squeaked out a 0.3 percent gain to end at 1,171.36, while the Nasdaq Composite Index is nearly unchanged, up just 0.08 percent to 2,035.83. However, the indexes look like they'll end in negative territory for the month of January. The Dow is down 3.3 percent since the beginning of the year, the S&P 500 is off 3.35 percent and the tech-heavy Nasdaq is 6.4 percent lower. Investors were unnerved by a Commerce Department report that estimated that the gross domestic product, the measure of overall U.S. economic activity, grew at a rate of 3.1 percent, below economists' expectations. And if that wasn't enough, the Federal Reserve is widely expected to raise the nation's benchmark interest rate from 2.25 percent to 2.5 percent when it meets Wednesday. But the week's small gains were, at least, gains and broke the New Year's three-week losing streak. For 2005, the Dow Industrials are down 355.81 points or some 3.3%. Interestingly the Dow Jones Industrial Average is currently below its level at the start of 2004. This would seem to suggest that we are still in a bear market since 2000 and we have just experienced a lengthy multi month bear market rally. The author of the best selling 'Bull's Eye Investing,' John Mauldin in his respected weekly newsletter entitled 'Insiders Send a Signal' pointed out two important bearish indicators for the stock market. These are the mutual fund inflow/outflow statistics and the insider selling statistics. Both are flashing warning signals. Mauldin says that "Current insider trading patterns suggest that overall market risk remains high. We will monitor short-term rallies carefully to see if insiders sell into them." He continues, "typically, mutual fund inflows are positive in January. Last year we saw $28 billion flowing into mutual funds. So far this month, we have seen a net estimated outflow of $9 billion. Since the markets are well off the last two days, it is likely that number is worse. Mauldin writes how the Leuthold Group note that "in recent years, it has become relatively rare to use the term 'net redemptions' and 'January' in the same sentence. Net outflow did occur in January 2003, but was a relatively small -$1.3 billion. But this year, January is not only shaping up to be a month of net redemptions, but record net redemptions. Unless the final three days show very strong positive cash flow (we'll have a better idea if this is the case in next week's report) it is likely that we'll be reporting a new cash flow record for January. But just not the kind of 'record' we have come to expect." In the U.S. Treasury bond market, the interest-rate sensitive two-year Treasury note rose 4/32 in price to 99-25/32, lowering its yield to 3.25 percent. On Thursday, it had closed at a 2-1/2 year high of 3.30 percent. The benchmark 10-year note climbed 21/32 to 100-28/32, taking its yield down to 4.14 percent from 4.22 percent late Thursday. The 30-year bond leaped 1-10/32 to 111-17/32, driving its yield down to 4.61 percent from 4.68 percent, as investors seemed to take cheer from the inflation outlook. Change Weekly Market Commentary Next week the ECB and the Federal Reserve will be meeting to discuss changes to monetary policy. Additionally, the finance ministers and central bankers of the G7 nations will meet to discuss the world economy on February 4th and 5th. The markets and particularly the currency markets will focus on what wisdom the G7 declare in their communiqué after the meeting. Market watchers will be nervous of an announcement of some sort of joint currency 'actions' in order to ensure an orderly decline of the dollar. Regarding economic data, the most important release next week will be the U.S. employment report for January. Some market analysts have claimed tenuously that were the Fed to announce a speeding up of interest rate increases this would be bullish for the dollar and thus bearish for gold. This is highly dubious as it fails to take into account the massive debt and leverage in the US and a significant dependency on extraordinarily low interest rates. It also shows ignorance of gold and interest rates history and the positive correlation between gold and interest rates. Throughout the inflationary 1970's interest rates rose in concert with inflation and the explosive gold bull market of the time. The converse happened in the 1980's and 1990's as interest rates declined so did the price of gold. There is a very high correlation between gold and commodities and interest rates. When price levels of commodities and gold are high, generally inflation is a concern and creditors demand a higher return on their money causing interest rates to rise. Conversely when returns on bonds and cash are high, capital flows into these asset classes seeking yield and thus the gold price drops. Claiming that the Fed raising interest rates this early in the interest rate tightening cycle is dollar bullish and gold bearish is silly and nonsensical. Traders said both the bulls and bears were unwinding their positions since early January when gold started range bound within $420 ~ $428. They expect spot gold to stay in the tight range until the market gets further cues regarding the direction of the dollar. "The tone this week has been indecisive, with gold traders struggling to find a compass heading of their liking," said Erik Gebhard, president of Altavest Worldwide Trading. The market has been "drifting" amid a lack of compelling reasons for bulls or bears to "stick their necks out and take a firm stand." The gold open interest is extremely intriguing. It fell another 4607 contracts to 257,904. The specs and major shorts can't exit this market fast enough. The end result is you have a washed out spec market along with extraordinarily bullish gold fundamentals. The Commitment of Traders data would seem to indicate that gold's recent weakness may be coming to a close and its long term bull market trend ready to reassert itself. The total open interest of traders in gold as dropped by a massive 100,000 contracts from 370,786 contracts on the 22nd of November '04 when gold hit its recent high of $451.40. Today there only 257,904 contracts outstanding and yet gold is only some $25 off of its recent highs. Thus there has been a massive liquidation and yet the underlying cash market and demand for physical is creating firm support under the gold market. It also looks like that a lot of the liquidation was by nervous shorts who felt it prudent to unwind their short positions in anticipation of higher prices. The strength of physical demand is underpinning the gold price. This demand is global in nature and coming from Central Banks, investors and consumers all over the world but especially in Asia including the Middle East, the Far East, China and India. The John Brimelow Report featured in Bill Murphy's Le Metropole Café showed that on last Friday Indian ex-duty premiums for the import of gold into India were AM $7.00, PM $7.87, with world gold at $426.70 and $425.95. India is very much the largest importer of gold in the world and it is estimated that they will import some 880 tonnes of gold bullion this year alone. To put 880 tonnes of demand into perspective one must realise that total mine production, the largest element of supply, is only some 3 times larger so that India alone will import a third of all the gold mined this year. Indian ex-duty premiums are a good way of assessing the demand for gold in the world's largest importer India as they show how much Indians are willing to pay for gold. John Brimelow: "... it possible to settle quantitatively the question of whether India is or is not an importer at any point. Indian demand is price sensitive (in rupees). High premiums have been a fairly good indicator of lows in the world gold price. Sometimes, world gold rises high enough that imports are not possible. Very rarely, world prices get so high that the gap between domestic Indian and world prices is not enough to cover the import duty, which creates a negative "ex duty premium." (http://vdare.com/jb/041130_indian.htm) This increasing global demand in the physical gold market is coming at a time of decreasing production due to the very expensive nature of the mining business and the fact that precious metal prices have been in decline since 1980 and thus it became uneconomical to mine and put into production many gold mines. There was a somewhat interesting but nevertheless nonsensical gold bearish theory posited during the week. The Virtual Metal's analysts, Jessica Cross and Matthew Turner were the source for the story which featured in a Reuters article 'Is Gold Losing the Midas Touch' which was subsequently picked up in other media. The dubious theory posited was the notion that because working class urban youth culture in the Western world had embraced tacky 9 carat gold rings, bracelets, earrings, necklaces and chains somehow this was going to affect the price of investment grade gold bullion as it would make it less attractive to the rich of the world. Presumably because these rich people are such snobs that the sight of rappers dripping in gold would put them off gold, it was claimed that this attraction of hip hoppers for cheap gold was tarnishing gold's image. How this was the case and how this was manifesting itself was not elaborated upon. No proof or examples were given for the notion that BA Baracus', Snoop Doggy Dog's or Eminems choice of jewellery or sartorial elegance might be affecting how rich western men and women view their more 'refined and artistic' rings, bracelets and necklaces. Also the notion that this may affect how Central Banks might view gold as a monetary reserve to protect against currency crisis or how astute wealthy investors might view gold as a safe haven asset is dubious. If anything urban youths embrace of gold as hip can only be construed as positive for the price of gold as it creates more demand for the precious metal. It is a peculiar analysis of the market movements of a commodity and monetary reserve such as gold that fails to look at figures and facts, study basic supply/ demand fundamentals and completely ignores geopolitical realities and macroeconomic fundamentals. In the great Eminem and Snoop Doggy Dogg verses Osama and George Bush debate, somehow I think Osama, Bush and the 'War on Terror' might be more of an influence on gold's 75% increase in 4 years and its price going forward than Eminem and Snoop. Of far more significance to the gold price was the survey sponsored by Royal Bank of Scotland Group Plc which showed that Central Banks are boosting their non-US currency holdings, particularly euro holdings, at the expense of the U.S. currency. This is a trend which is likely to continue due to the large US trade and budget deficits. There has already been confirmation that the Russian Central Bank has not only diversified into Euros but has already boosted their gold reserves. This trend is likely to continue due to the increasing tensions between the U.S. and President Putin's Russia. As evidenced by Russias agreement with Germany to start pricing its huge Oil and Gas exports in euro instead of dollars as part of a strategic shift to forge closer ties with the E.U. as reported by The Daily Telegraph. There have been leaks, rumours and informed speculation that many other Central Banks including the Argentines, Venezuelans, Indonesians, Malaysians and others have been doing likewise. Indeed Ex-Prime Minister of Malaysia Mahathir Mohamad has on many occasions proposed that the Islamic world from Indonesia to Morocco create their own currency. This currency would be a multi country currency similar to the euro but importantly it would be based on and backed by gold. In January 2004, he told Saudi Arabians they should sell oil for gold, not U.S. dollars, to avoid being "short-changed" by a decline in the U.S. currency. "The price of oil is $33, but the U.S. dollar has declined by 40 percent against the euro so you're effectively getting $20," Mahathir told an economic conference in Saudi Arabia's Red Sea city of Jeddah on Sunday. "So you're being short-changed." (Source - CNN) In a similar vein the words of the Director of the National Economic Research Centre, Beijing, Mr Fan Gang are also ominous for the dollar's long term survival as the petrodollar and global reserve currency. "In our opinion the US dollar can no longer be seen as a stable currency since it constantly depreciates and therefore is a permanent source of problems. So the real issue is how to change the regime from a U.S. dollar pegging to a more manageable reference, say euros, yen, dollars -- those kind of more diversified systems." The Chinese are already scouring the world buying up companies that will help provide them with the food, raw materials, metals and energies required by the rapidly industrialising nation and its billion people. Should even a small portion of their huge currency reserves, largely consisting of depreciating US dollars, be diversified into gold and silver, it would be an important new stream of significant demand and should result in higher gold prices. The Week in Quotes "In our opinion the US
dollar can no longer be seen as a stable currency since it constantly
depreciates and therefore is a permanent source of problems.
So the real issue is how to change the regime from a U.S. dollar
pegging to a more manageable reference, say euros, yen, dollars
-- those kind of more diversified systems." "Another salvation may
be the economy. It's going to go very bad, folks. You know, if
you have not sold your stocks and bought property in Italy, you
better do it quick. And the third thing is Europe -- Europe is
not going to tolerate us much longer. The rage there is enormous.
I'm talking about our old-fashioned allies. We could see something
there, collective action against us. Certainly, nobody -- it's
going to be an awful lot of dancing on our graves as the dollar
goes bad and everybody stops buying our bonds, our credit --
our -- we're spending $2 billion a day to float the debt, and
one of these days, the Japanese and the Russians, everybody is
going to start buying oil in Euros instead of dollars. We're
going to see enormous panic here. But he could get through that.
That will be another year, and the damage he's going to do between
then and now is enormous. We're going to have some very bad months
ahead." "Countries go broke gradually,
by borrowing so much money that creditors lose confidence in
their ability to pay the debt back. Then, they go broke suddenly
as creditors stop lending. This has happened to more than a dozen
Third World nations, who had the additional misfortune of having
to borrow in dollars. As their own currency lost the confidence
of world markets, they lost value against the dollar. This only
increased their real debt burden. The optimists say, "It
can't happen here." First, we're the people who print dollars.
So if the dollar is losing value, it just means the money that
we owe the rest of the world is getting cheaper. Lucky us. Second,
we enjoy a codependency with our creditors. For instance, China,
which keeps lending us money to finance our deficits, may be
accumulating dollar credits that are losing their real worth.
But China needs us to keep absorbing their products, so China
will go right on lending. And third, the United States remains
the anchor of the world economy. So even though other nations
may not like America's immense trade and budget deficits, nobody
is going to risk pushing the world into depression by crashing
the dollar. That, as I say, is the optimistic view. Well, dream
on. Yesterday, the bipartisan Congressional Budget Office, possibly
the last intellectually honest government agency in George Bush's
Washington, reported that our fiscal situation is even worse
than expected." "The principal problem
is the American consumer's reliance on debt to finance consumption.
U.S. consumers are borrowing too heavily by using the value of
their homes to back credit. We are in the early stages of a residential
property price bubble in the US. Consumers know this and that
is why they are turning their homes into a massive ATM machine.
Rather than using the fruits of the increased economic activity,
US consumers are funding their massive spending spree through
borrowing against the inflated values of their homes.... Because
they are spending increasingly, as asset dependent consumers
extracting value from property, which by the way is clearly entering
the stage of being a bubble, and going deeply into floating-rate
debt to do that. The self-indulgent American consumer is an accident
waiting to happen. There's nobody home on economic policy in
America right now. The twin burdens of household and public debt
in the United States are unsustainable. This is an insane way
to run the world economy. You know that, we know that, but the
Federal Reserve is in denial." Even Kenneth Rogoff, a centrist
former chief economist for the International Monetary Fund who
is now a professor of economics at Harvard, thinks there's a
greater than even chance that the dollar will fall 20 percent.
"Americans are so profligate that we're making everyone
else look good," says Rogoff. He notes that even the currencies
of perennial financial basket cases, such as Brazil and Turkey,
have been strengthening recently against the dollar." "The possibility of an
abrupt and globally damaging correction persists, since the depreciation
of the dollar alone seems unlikely to be sufficient to reduce
the global imbalances to sustainable levels in an orderly fashion.
The global imbalance is between consumption and debt in the United
States and ballooning surpluses in many US trading partners.
Currency changes by themselves, especially bilateral currency
manipulation, will not resolve the problem. Greater global economic
cooperation would be needed to avoid a hard landing." "It is a bit scary. We're
in uncharted territory when the world's reserve currency has
so much outstanding debt. The old dollar, it's gonna go down...
I'm short the dollar." February 1, 2005
Mr Mark O'Byrne is a director of Gold and Silver Investments Limited. He is a financial analyst who believes that due to the current macroeconomic and geopolitical situation, saving and investing a small portion of one's wealth in precious metals is both prudent and wise. Gold and Silver Investments Limited believe that hard tangible assets and monetary assets such as gold and silver, the world's oldest forms of money, will once again become the safe haven assets of choice in the coming years. The increasing economic and geopolitical uncertainties at the dawn of the 21st Century mean that gold, silver and platinum will become increasingly important in the new century as a means of preserving financial wealth. Gold & Silver Investments Limited is a precious metals brokerage company which sells and buys a wide variety of gold, silver and platinum numismatic and bullion products to all class of investor, companies and institutions in Ireland, the UK and internationally taking payment in all major currencies. We assist our clientele in diversifying their assets with a comprehensive range of precious metal coin and bar products and by allocated and unallocated precious metal storage facilities licensed by the Chicago Board of Trade (CBOT), Comex and Nymex and by other precious metal storage programs. Mission Statement Gold and Silver Investments Limited hope to inform our clientele of important weekly financial and economic developments and thus help our clientele and prospective clientele understand our rapidly changing global economy and the implications for their livelihoods and wealth. We focus on the medium and long term global macroeconomic trends and how they pertain to the precious metal markets and our clienteles precious metal savings and investments. We emphasise prudence, safety and security as they are of paramount importance in the preservation of wealth. Disclaimer -- Legal Notice: The information herein is based on sources which Gold & Silver Investments Limited believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold & Silver Investments Limited have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold & Silver Investments Limited make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold & Silver Investments Limited only and are subject to change without notice. Gold & Silver Investments Limited assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit which you may incur as a result of the use and existence of the information provided within this Report. Opinions expressed at www.goldinvestments.org and www.gold.ie are those of the individual authors and do not necessarily represent the opinion of www.goldinvestments.org and www.gold.ie or its management. The content of this website is the property of Gold & Silver Investments Limited or its licensors and is protected by copyright and other intellectual property laws. You agree not to reproduce, re-transmit or distribute the contents herein. Copyright ©2000-2005 www.goldinvestments.org www.gold.ie Gold & Silver Investments Limited 321gold Inc  |
