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As we write, the gold price is
at $1,364 having bounced off support at $1,324. It is now consolidating, so
we have to ask is it about to return to an upward movement longer-term? If it
is just consolidating before another strong drop we need to know because it
could mean that the long-term upward trend will be broken. For sure the gold
market has moved into one of those high risk areas where one expects a sudden
and a strong mover, either way. But if it is going to rise, then we are at
the point where we should be entering or re-entering the market. The trader
may well find himself taking a 'spreading' position and the medium or
long-term investor must decide to go in or stay out. The Technical picture is
not as conclusive to them as they would like, so they may only enter once
they see a clear direction. What process should an investor go through when a
market is in this condition?
Adjusted Mind-set
Before we continue, we would like to adjust the common
perspective on the gold price. Prior to the de-linking of gold from the
dollar in 1971, gold was thought of as the only real money. Currencies were
measured against gold. The fact that President Richard Nixon and his
Administration cut the dollar's link to gold and made it the sole global
reserve currency did not change that. People's perception of money in the
last 40 years has changed and today people's reference point for gold is the
U.S. dollar price. With the sovereign debt crisis and quantitative easing
influencing the value of currencies since 2007 most people now question the
value of the dollar as a 'measure of value', while continuing to see it as a
'means of exchange'.
This takes us back to the need for a 'measure of value'
and an adjustment in our perception of the future of gold. With the head of
the World Bank highlighting the need for gold to be a value reference for
currencies we have arrived back [in thought, if not in deed] at gold being
real money. We want to go further than that so that we have a correct
perspective of what is and will, happen to global currencies in the future.
We would suggest that one should not see the gold market as going up or down,
but currencies that are going up or down against gold. Once we have
that perspective in mind a clear picture of gold emerges in the currency
world and exchange rates.
To clarify; since the turn of the century, the euro has
moved from below €300 to Friday's €999.92 at the Fix in London.
Since the turn of the century, the U.S. dollar has gone from $275 to Friday's
$1,355. From that viewpoint we can see that it's currencies that are in a
'bear' market, not gold in a 'bull' market, while gold is simply rising to
where it was originally [there is still some way to go on this too]. Looking
back over the past forty years with that perspective shows should have fallen
far more if they were to accurately reflect their buying power.
If currencies are then in a 'bear' market do we expect
them to recover? The maxim, what goes up must come down, takes on a whole new
meaning when one applies that to currencies. It nimplies that gold will not
fall back to where it came from.
What do the Fundamentals tell you?
Currency fundamentals
- The
first question becomes, what will happen to the dollar and the euro?
Both the Eurozone Sovereign debt crisis and the coming U.S. sovereign
and state debt crises, point to a further real devaluation of both the
dollar and the euro. The exchange rate between the two may not vary that
much over time as they both slide down together masking what is really
happening. But as one of the fundamentals that point the way for gold,
we fully expect currencies to continue to lose value in the hands of
their governments and central banks.
- The
internationalization of the Yuan may cause people to say that the Yuan
must rise in value to reflect the economic strength of China. We would
argue against that saying that China has pegged the Yuan to the dollar
to retain part of its global competitiveness via the Yuan. It does not
make sense for them to risk losing such business through an appreciation
of the currency. It is far more likely that the Chinese would remove the
need for such an appreciation through the persistent issuing of the Yuan
globally to take the pressure to appreciate, away from the currency.
- We
go even further and say that it is incumbent upon all but the resource
producing countries [where local currency values are secondary to the
international price of those resources] to do what they can to prevent
the appreciation of their currency. We have witnessed both Japan and
Switzerland [not resource producers] talk and intervene [Switzerland
through interest rate declines] one way or another to prevent an
excessive appreciation of those currencies. This is why the head of the
World Bank put forward the suggestion that gold be the reference point
for value in the first place.
Therefore the conclusion we reach for 2011 is that
currencies will not appreciate in value significantly in 2011
Demand and Supply Fundamentals
[We will be going through the detail of these later this
month in upcoming issues of the Gold Forecaster]
Supply
- Let
it be enough at this stage to say that newly mined gold supplies will
not increase by more than a single figure percentage if at all.
- Central
bank supplies [we include the I.M.F. in this] will fall by 400 tonnes as
the I.M.F. sales have been completed now. Central bankers are now buyers
of gold.
- The
only other source of supply will be from the current holders of gold. We
have seen around 100 tonnes supplied by the holders of the shares of
gold exchange traded funds [SPDR in the States has been the supplier]
but whether this came from holders seeing a recovery slowly accelerate
and persuading them to turn to equities, remains to be seen. They could
have been either redeeming their gold from the fund or selling to buy
physical gold offshore [worried about confiscation of their gold by
governments sometime in the future?]. However, other sales of gold have
been sparse.
- Will
higher prices trigger 'scrap' or current holder sales? We must wait and
see.
Demand
As a theme in the gold market it is appropriate to point
out that gold is not only an investment but because of its liquidity
justifiably can be called cash. If gold is being accepted as collateral by
U.S. banks now, we deem it to be cash. While many believe that selling an
investment actually does close the position, we realize that selling an
investment requires buying cash or moving into another investment. Cash is an
investment. Investors must ask themselves, what type of cash are they
referring to? This starts to describe the path of gold back to money
acceptable by the banks [something that must be abhorrent to them now]. When
seen in this light gold, as an investment, adds another facet to its
desirability as an investment.
The largest source of demand in 2010 and in the years
before that has been from investment demand. In that figure we prefer to
include Indian demand. It has been classified as jewelry demand in the past,
but this does not accurately define the purpose behind the buying. The same
applies to Chinese demand. Whether jewelry of bar or coin, investors in those
countries are buying as a long term investment that hopefully will give them
financial security. With India taking well over 500 tonnes of imported gold
this year and China importing over 210 tonnes we prefer to add these amounts
to Western investment demand whether it is in bullion form or the shares of
the SPDR [in particular] Exchange Traded Funds shares. Will one of the
several structural crises rushing at us from the horizon encourage more
investment in gold? Will the recovery have fund managers, currently holding
gold, move them to get out and chase equities of fixed interest investments?
We doubt it.
In the developed world gold's high prices enhance the
attraction of gold. In 2010 we saw a recovery in the developed world's
jewelry market back to former levels even at these high prices. There is no
reason, except much higher prices, to think that jewelry demand will now
fall.
Industrial demand is on the rise in hi-tech applications
that are price insensitive, so demand from this source should move in step
with the global recovery.
On balance
Weigh the facts above and ask yourself, which way do you
think the gold price will go? Where the Technical picture may be either
indecisive of confusing, how do these facts guide you? If you believe that
the problems of 2010 will be rectified and the developed world move into full
recovery, then there may be better opportunities in equity markets.
If you don't see a rosy future then the above may point
you to stay in gold or get into it.
Julian
D. W. Phillips
Gold/Silver Forecaster
– Global Watch
GoldForecaster.com
Is your
wealth effectively structured to avoid the pernicious effects of the
regulatory climate that we have moved into? It should be and we can help you
to do so professionally and within the law. Please contact us for any help
regarding this at: gold-authenticmoney@iafrica.com.
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