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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Gold Stocks Expected to Continue to Consolidate After Recent Gains

Commodities / Gold & Silver Oct 09, 2007 - 12:59 PM GMT

By: Gold_Investments

Commodities Best Financial Markets Analysis ArticleGold
Gold has continued to weaken in Asian and early European trade after yesterday's nearly 1% sell off. Gold was down $8.70 in New York from $741.30 to $732.60.

Gold was trading at $729.50/ 730.00 at 1200 GMT. Gold's weakness is likely due to profit taking and the U.S. dollar continuing to strengthen and oil prices and commodities weakening on concern regarding the robustness of the U.S. economy.


Interestingly, while the dollar has strengthened against most major currencies, it has weakened against the 'commodity currencies' such as the Aussie and Kiwi dollar. The Aussie dollar hit a 23 year high against the U.S. dollar overnight breaking through 90 cents. Most analysts believe that it will reach parity (as the Canadian dollar has already done) in the coming months. The dollar also weakened against the Swiss franc (1.1886 Swiss francs, up from 1.1861).

UBS, Switzerland's largest bank, the world's largest wealth manager and the world's biggest gold trader, raised its 2008 gold price forecast to $760 per ounce from $650 per ounce.

UBS said the changing macroeconomic outlook and price-elastic components of gold's supply and demand showed clear signs that the gold market has adjusted to the sharp increase in price of the past few years.

The potential for further weakness in the U.S. dollar and the ongoing economic uncertainty stemming from the U.S. sub-prime crisis has led UBS analysts to predict gold prices will now be stronger over the next two years than anticipated. 'The past twelve months has seen strong jewellery demand growth despite higher prices,' said John Reade, UBS metals analyst. 'Potential for a weaker US dollar, concerns about the credit crunch and the impressive rally have brought investors back to gold in ways not seen for years, or in the case of safe haven buying, decades.'

Forbes, quoting UBS's John Reade, continued that gold prices often rise during times of heightened economic uncertainty, as it serves as a store of value when other investments begin to look too risky. Gold also moves in an inverse relationship to the US dollar, as it serves as an alternative investment against the currency with the largest global circulation. Gold has rallied up to its highest point in almost 28 years over the past month, holding well above 700 USD due to the dollar's recent decline and the ongoing fears rippling throughout the financial markets.

Analysts at UBS expect gold's recent push upwards to attract further investment in the medium term. 'Although gold looks a little over-done in the near term and some consolidation may result, we expect further waves of investment and speculation over the next 12-18 months,' said Reade at UBS.

Forex and Gold
The USD has continued its tentative rally Tuesday and is trading at 1.4032 and 2.0295 against the EUR and GBP respectively.

As pointed out above the dollar's recovery remains tentative and it has actually weakened against commodity currencies and the Swiss Franc (CHF).

This morning the U.S. dollar is up to 78.83 from its all time record low at 77.657, or some 1.5% from its low. This is to be expected given its fall of 5.5% from 82 in mid August.
This looks like a dead cat bounce and while the U.S. dollar may have a counter trend rally back to 80, this will likely be a short term reprieve within a secular bear market.

Silver
Spot silver was trading at $13.21/13.23 (1200 GMT).

PGMs
Platinum was trading at $1350/1356 (1200 GMT).
Spot palladium was trading at $354/360 an ounce (1200 GMT).

Central Banks and Gold
The recent unbalanced and extremely biased Bloomberg article on gold, 'Gold is a Bad Hedge, Questionable Investment' had this curt and simplistic line which is liable to mislead investors: "Moreover, the world's biggest holders of gold, major central banks, aren't overly eager to keep owning it."

The fact is that some western central banks have indeed been selling gold as per the Washington Agreement. However, sales are slowing down and there are even some doubts as to whether the agreement will be renewed.

Also of importance and ignored in the article is the fact that the largest holder of gold in the world remains the U.S. Federal Reserve. It has 8,133 tonnes of gold or 76.1% of total foreign reserves and they have sold very little gold in modern times. Interestingly, the U.S. Congress has refused to sell the Federal Reserve's gold. Indeed when certain members of the IMF have mooted the possibility of selling the IMF's gold reserves, the U.S. Congress has refused to endorse the idea.

The article ignores the fact that many central banks in South America, Russia, the Middle East and Asia are adding gold to their reserves. The emergence of huge Sovereign Wealth funds are adding to this demand. These central banks are buying gold as it is a good hedge against inflation and macroeconomic risk and will continue to be so. Especially in an age of fiat paper currencies.

The FT had an excellent article yesterday http://www.ft.com/cms/s/0/bbc9f120-7538-11dc-892d-0000779fd2ac.h on how a 'Hedge Fund Collapse is on the Way' and this and the continuing decline of the dollar will lead to huge demand for gold:

"The dollar is going to continue weakening. It's the end, probably, of the dollar's dominance in the international arena." If Asian and Middle Eastern central banks come to the same conclusion and start to switch a slice of their vast foreign reserves out of the greenback, he believes gold will be a prime beneficiary. "After the [second world] war gold was the balance of foreign exchange reserves, now it is tiny," he says. Figures from the World Gold Council indicate that 76.1 per cent of the foreign reserves of the US are currently held in the form of gold, 63.2 per cent of those of Germany and 56.9 per cent of those of France. Yet the proportion of gold held in Asia, where foreign reserves are growing fastest, remains negligible. Just 0.1 per cent of South Korea's reserves are held as gold, 1.1 per cent of China's and 2.4 per cent of Russia's. "If we are entering a period where there are question marks about developed economies, and the dollar in particular, I would be increasing gold to 5 per cent in my reserves."


World Gold Council

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