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Just How Solid is the Gold Price?

Commodities / Gold and Silver 2010 Feb 05, 2010 - 07:11 PM GMT

By: Julian_DW_Phillips


Best Financial Markets Analysis ArticleThe gold market has fallen dramatically in the last few days. Where will the gold price go now? You will have a large amount of Technical commentary at hand to tell you and the bulk of this will point downwards. Is that enough to make the market follow their predictions? It would appear so, because Technical analysis is a vital part of gold investor information.

The U.S. gold market, whether it be COMEX of gold Exchange Traded Funds have, to date, dominated the gold price itself. These markets place an overriding emphasis on the Technical picture. Major buyers, follow these short-term moves and players carefully pick the time of their own actions in the light of the short-term picture, and then dominate the gold price through their actions.

But we need to stand back to see clearly the shape of the gold market. An analogy we have often used is that the gold market is similar to the sea shore. You have the moment to moment wave action. On a daily basis you have two tides indicating longer term averages that influence short-term prices then you have the currents that completely dominate the sea. But it is the noisy reactive movements of the waves that attract the most attention. While they can become frothy in reaction to the wind and extend their moves in and out every seven or so waves they are subject to the tides and currents. Tides are simply more forceful expressions of waves but currents always dictate sea moves.

The parallel is found in the gold market. Traders are the short-term players chasing quick profits, with heavier weight players again profit-driven, chasing the bigger slightly longer-term profits. But the biggest players don't play for profits in the gold market, but invest to retain value over the longer term.

The gold market for most of man's history has served as just that, a reliable measure of value as true money. The currency experiment of the last 40 years has been a departure from that, but in the last 10 years we have seen the return of respect to gold by the biggest investors in the gold market. We believe that this will continue to happen and that such investors will quietly and unobtrusively dominate the gold price going forward. A big 20% dip serves them well.

So what do the three sides of the gold market tell us now?

The Technical picture points down but into a large barrier of support. The short-term traders point to the strong $ rally, if not a turn in the fortunes of the $ and take the gold price down as far as their short-term [wave] actions allow. The bigger slightly longer-term speculators [tide] feel the same at the moment going short or just closing long positions.

Large gold investors in the U.S. presently sit on the sidelines and have a tendency to sell small amounts into the market. Their present anemia encourages the speculators to sell and a picture is now presented that the market is worthy of a fall. How far still remains to be seen. This makes the gold price look weak and dangerous. And in the short-term the speculators may still have their way. What of the big long-term investors from all over the world [sea currents]? What do they feel about the gold price and how will they act in this market?

To see this one has to realize that the bulk of the world's gold is not dealt inside the U.S.A. but outside it. The U.S. has to go there to get the bulk of its physical gold too. The loud and noisy short-term U.S. markets such as COMEX are heard all over the world, but have little but superficial real power. For instance, if President Obama gets his way and prevents U.S. banks from proprietary dealing [using its own money to trade markets] their presence on COMEX will have to diminish. What is that presence now? They hold an overwhelming number of "short positions" on COMEX that they will have to close. COMEX has always had an extremely low number of physical deliveries taking place, for each contract represents a future delivery time and so are matched against the opposite number of opposing trades disappearing before delivery must take place. So buying and selling simply takes net profits or losses, but usually doesn't pay more than a 10% margin or so for the privilege. Yes, COMEX should hold sufficient gold to deliver the net amount of selling over buying and vice versa, but this is a relatively small amount.

For a major bank such as JP Morgan to be made to deliver on its ['short' contracts] would mean that they would have to go out and buy that gold first, so they could deliver it to the market. COMEX does not hold that amount of gold in stock. The fact that President Obama has put this on the table must have J.P. Morgan trying to cover itself and want to unload into the market. If long-term speculators take long positions in the hope that the huge short covering will take place and hold the gold price up, then the amount of short covering deals will far outweigh the de-hedging we've seen over the last few years. Is there enough gold out there for them to do that?

Now go overseas and look at the large players. Russia bought 24 tonnes of gold in December as part of a persistent buying program which we believe China is doing surreptitiously too. That's apart from individuals from Mumbai to Shanghai, in large numbers, buying as part of their long-term savings plan too. The demand for physical gold is ignoring potential interest rate rises in the U.S. they simply buy gold as financial security. It knows nothing of Technical price action, except to look for a 'floor' price to reassure them that when they buy the price won't fall again. Most of all it does not buy for a future profit! The cultural difference between Western and Eastern investors is enormous and telling!

Just think of it, half the world is getting richer by the day and steadily buys gold. They ignore the day-to-day wave action and look at the tides, to get the right entry points. Like a current they are unstoppable. This type of demand, like a sea current, gives solid support to the gold price and ensures that the upward trend stays in place. It doesn't chase prices and doesn't take profits, except rarely. It absorbs supplies.

What is the future of the importance of the U.S. futures and options markets to the gold price? It has to wane in the face of the current of new investment money and investment of new wealth gained from the Western developed world. Gone already are the days when it could take the gold price from $300 to $390 then back to $326 at their whim. Now they too, have to read the market with a vision wider than the Technical picture.

Is the gold market solid in the face of these realities? Yes, indeed, telling us that any heavy fall in the gold price will invite long-term investors of all shades into the gold market. Lighter falls will invite those already waiting to enter the market. The distance the gold price has come is relevant to a profit seeker, not one buying to hold as financial security!

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By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2009 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - 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-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips 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-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

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