Gold Forecaster
- Global Watch
The Gold Price - A "Spike"
or something else?
Julian D.W.
Phillips
May 15, 2006
Excerpts
from "Gold Forecaster - Global Watch."
At one extreme, there are the
"Gold Bugs", supposedly constant 'bulls' of the gold
price, so not too reliable? At the other end there are those
who look at the gold price as "peaking", simply because
it has gone up a lot, so it has to come down. And with so many
one way or the other, the market is labeled as dangerous or worse.
But there is a tendency amongst professionals as well as amateurs,
to believe that if it is not measurable, of numerically definable,
it is dangerous, speculative or just plain gambling. In this
gold market, such views will exact a heavy penalty from those
who hold them!
The reasoned reality
is so different from the above, leaving the only pertinent question,
"Is this gold price rise a 'spike' or something very,
very different"
1980 'Spike'
We now believe that this market
has taken the position the gold market was headed to in the '70's
and '80's, before "Official Intervention" [Central
Bank sales, leasing, accelerated supply, etc] took the gold price
down over the next 20 years. Then gold 'spiked' to $875. We call
it a 'spike' because the price went quickly down, when new supplies
were thrown at the market and demand just was insufficient to
take this supply up. Yes, there were other macro-economic features
of note that we find similar to today, for sure, but nowhere
near as disturbing as they are today!
Reasons why
Inflation: This roared until in 1979, until
Volcker drove interest rates up to 25%+ quickly, to cap
it and cap it well, but this was seen in the developed world
and was initially triggered by oil prices that had jumped from
$8 a barrel to $35 a barrel.
Gold rose on the back of that inflation and fell on its fall
too. But today is very, very different!
Inflation is not driving prices
up as it was then. Inflation is being restrained by deflation
caused by cheap imported goods and amongst other reasons, by
the realization that wage demands may well not be met, despite
higher growth rates. Whilst there is a fear that inflation will
rise the numbers on which the inflation levels are based are
not showing any danger signals. At all!
The oil
price: - is jumping
now because the globe is heading irresistibly towards a situation
where there will simply not be enough oil to go around, irrespective
of the oil price, which is certain to go a great deal higher
as those nations caught without sufficient oil bid up the price
[which looks like heading through $100 a barrel and higher].
The drive behind oil price
rises in the seventies came from O.P.E.C. fed up with being paid
inflated $ for their oil, but a whisper from Uncle Sam in their
ear [primarily the Saudi government] about their future being
reliant on U.S. backing had them towing the line and dropping
prices.
The day when supply is just
insufficient is likely to appear in 2007 or thereabouts, but
could come considerably earlier, if Iran diverts its supply just
to China, or supplies are damaged through a sectarian war among
Muslim nations. It could come far earlier if we have another
Hurricane Rita, hits the Gulf of Mexico, say, Houston? With global
warming there could be more than one such hurricane hit.
China and India are likely
to be able to maintain growth through such difficult days too
so keeping demand for oil rising inexorably. Visions of national
"Musical Chairs" around the oil price jump into ones
mind with visions of rationing in the worst affected nations.
In the middle sit the Producers
of oil, no longer dependent on the U.S. for their demand, but
having a choice between East and West, each willing to pay the
price. They are already signing deals with China to supply oil.
In addition to the dangers to the oil price mentioned above,
lies the growing threat of a conflagration in the Middle East
between the two main branches of Islam, the Shi'ites and the
Sunnis. Oil exports will no doubt be a prime target of both sides.
Hence these prices cannot be dropped by political influence.
Rather the reverse is true!
"Official"
Supplies of Gold
 Perhaps
the prime reason the gold price appeared to 'spike' in 1980 was
the sudden threat of overwhelming Central Bank sales. The prime
Central Banks did so threaten, as well as lend, lease and sell
[for extremely low interest rates] gold until it fell to $270.
It funded the accelerated supply of gold so that it paid to hedge
future gold production earning more than the market paid [the
additional 'Contango' made this possible].
This stopped in 1999, when
the "Washington Agreement" was signed. This clarified
who would sell gold and limited it to 400 tonnes worth a year.
The second agreement took its place at the end of the 4-year
"Washington Agreement", limiting sales to 500 tonnes
a year. Interest rates were at a low, so the "contango'
shrank to unattractive levels, reducing leasing and lending.
With this threat limited to containable levels the gold price
turned around and started to rise.
Not only did this reduce the
supply to the market, it made the conservative, profitable, hedging
of future gold production unwise as the gold price rose above
the levels of the prices earned from the hedging of future gold
production. Three years ago the market began to see the 'opportunity
cost' of hedged positions against the proceeds of 'spot' [immediate]
prices make hedging look unacceptable. The proceeds of de-hedging
then appeared and slowly gained momentum. This allowed management
to close these hedged positions, once again exposing shareholders
to the higher open market prices of gold. With gold accelerating
its climb, the potential opportunity costs are now horrendous.
Mines such as Western Areas
having to deliver virtually, all available production to those
with whom they hedged future production. This means that they
are looking to earn $430 and ounce, whereas un-hedged mines are
earning $720 and ounce. So producers are selling very
little and buying back hedged positions. If they believed the
gold price was at a 'peak', they would not be closing positions,
because they would be buying at the top of the market, ahead
of a fall. But clearly they do not believe the gold price is
at a peak, so they are buying ahead of further rises!
Investment demand
In the seventies, investment was solely in the form of bullion
or coins [excluding India], difficult to ship and to store and
expensive to insure. This is still the method very wealthy individuals
invest in gold and we are seeing this in growing volumes at the
moment. But last year saw new types of investment demand in the
developed markets of the world. The World Gold Council wisely
launched several gold "Exchange traded Funds", who
issued shares against physical holdings of gold in bank vaults.
The extent of the demand was not fully gauged!
Many institutions and funds
had been restricted to enjoying the benefits of gold through
gold mining shares, often disliked, as the attendant risks were
higher than they wanted. With the E.T.F.'they are now able to
buy shares that move exactly in line with the gold price. Currently
moving towards 600 tonnes over the last year and more, demand
appears to have no limit. The money under management by these
institutions is vast. As the gold price rises, so does the demand
for these gold shares. There is no ceiling on this demand. No
such demand existed in the seventies!
The Structure of
the Gold Market, today!
A market moving like today's
has always been a 'spike' or 'bubble', set to burst, because
one assumes that those who bought it must sell once the profit
is achieved. But today's market has the above ingredients in
it, which describe a far broader and deeper market than ever
seen before. This market is more a haven from other investments
including currencies and fixed interest securities. So the reasons
to sell would have to be founded on the fears of such investors
being removed. A cursory glance at the above describes the likelihood
of matters worsening across the globe and gold coming into its
own as a solid investment when others move out of that particular
category.
- We see no small speculators
flooding the market, indeed the traders of note the hedge funds
are low profile in this market.
.
- There is no panic in the buying,
buying on the dips when possible. The investors are competent
professionals taking a position in a long-term investment.
.
- This market is not the gold
market of a year ago, where the players could move prices either
way, where large quick sales from Central Banks would have burst
such bubbles.
This is a market that wants
to go higher, much higher!
May, 2006
-Julian
D.W. Phillips
email: gold-authenticmoney@iafrica.com
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