Gold Remains the Preserve of the Smart Money

By: Mark_OByrne

Gold was up $11.80  to $918.20 per ounce in trading in New York on Friday and silver was up 60 cents to $17.11 per ounce. Gold has continued to rally in Asia and early trading in Europe and is up to $924. Silver has also risen and is up to $17.30 per ounce.

Gold also rose in the other major currencies and rose to new near record highs in euros and sterling. The London AM Fix at 1030 GMT this morning was at $925.50 (up from $908.25). Gold fixed at £474.37 (up from £465.53) and €635.91 (up from €620.516).

While gold would be expected to  consolidate after its recent outperformance  (up 11.1% YTD) the real and growing fundamental reasons to go long gold continue to increase and gold could continue to surprise to the upside. Most of the financial press ignored gold's continuing ascent to new record highs over the weekend. Indeed those who remain skeptical are largely those who have not bothered to inform themselves of the real fundamentals creating this new multi year bull market in gold. Gold remains the preserve of the smart money.

Oil prices surged some 4% on Friday and the commodities complex in general and wheat in particular also surged. This will inevitably lead to higher inflation as these markedly higher prices feed through into higher prices for foodstuffs and raw materials.

Continuing geopolitical risk was seen in  President Chavez of Venezuela's threats to suspend oil exports to the U.S. if ExxonMobil succeeds in getting billions of dollars in Venezuelan assets as compensation for expropriated oil fields.In his weekly radio and television show on Sunday, Chavez condemned the US oil giant "bandits" and "white-collar criminals", and said the clash with the company was "the tip of an iceberg that is economic war". Venezuela, one of the world's top 10 oil producers, is the fourth largest US supplier of foreign oil, with daily exports of some 1.3 million barrels or some 15% to 20% of U.S. oil requirements.

Another important factor with bearish long term implications for the dollar was mooting by OPEC of pricing oil in euros. The threat to the petrodollar was made by OPEC's secretary general Abdullah al-Badr who told a weekly magazine that OPEC could switch the pricing of oil from dollars into euros within a decade. The Organization of the Petroleum Exporting Countries could adopt the euro to combat the decline of the dollar, Badri told the Middle East Economic Digest (MEED), published in London.

"Maybe we can price the oil in the euro. It can be done, but it will take time," he said.

The dollar's recent status as the global reserve currency would obviously be threatened by any such move.

FX
Little of note came from the G8 meeting in Japan over the weekend. Calls for the Chinese to allow their currency to strengthen quicker were, as always, part of the rhetoric. The Euro and Sterling have steadied against the dollar this morning following on from significant pull backs against the Greenback last week. The Yen has continued to strengthen against all the major currencies through the early morning session.

Of note this morning were increased hawkish comments from the RBA which helped to underpin the Australian Dollar in Asian trading. With more hikes from the RBA now expected, further gains in the Australian Dollar are on the cards. Most commodity currencies gained on the continuing strength in the underlying commodities. The South African Rand again bucked the trend as continuing worries with respect to power supply and political concerns persisting

Support and Resistance
Strong support is at $850 to $860. Just because strong support is here does not mean that gold will reach these levels. Indeed there appears to be strong physical demand internationally for gold in the $890's.

Silver
Silver is trading at $17.31/36 at 1230GMT.

PGMs
Platinum continues to surge to new record highs and is trading at $1908/1918 (1230GMT).

Palladium has again surged by even more than platinum and is trading at $443/448 an ounce (1230GMT).

By Mark O'Byrne, Executive Director

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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