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What Do Gold Price Fundamentals Say about the Future of Money?

Commodities / Gold & Silver 2009 Oct 02, 2009 - 02:23 PM GMT

By: Julian_DW_Phillips

Commodities

Best Financial Markets Analysis ArticleThe gold price is now holding just below $1,000 and consolidating. Why is it at a high point having fought to get there over the last 18 months or so? Since it first broke through the 30 year high of $850 it has held its ground. It has steadily built a base over $850 and is moving if it has not already moved to a clear Point of Resolution, where it will show itself as either having had its day or is at the beginning of a new day. Which way will it go? As many believe that it move the opposite way to the $, it is telling us that the $ is also at a Point of Resolution.


The atmosphere surrounding the $ at the moment is telling us that it is about to descend possible to the lowest level ever seen against the €. The objections to the U.S. $’s behavior are not only coming from China but now from Europe. The U.S. keeps saying they have a ‘strong $ policy’, but few now believe this. Overall the ‘official consensus’ is that the $ should descend another 20+%, but this will hurt the recovery badly. Consequently, the gold price is waiting for action on this front. Will central banks try to ‘manage’ the $ exchange rate up or will they let it fall, or is that just too simple a pair of conclusions?

Central Bank Buyers and Sellers….

Gold since the dawn of man has been money, but in our lifetime [if you are younger than 40] gold has ceased to be money, but it has held an important place in the reserves of the developed nations, in particular. And now we are watching European signatories of the Central Bank Gold Agreement, which has bee on the go since the turn of the century, slowing their gold sales to barely a trickle. Why are they not selling more?

Yes, the I.M.F. has now agreed it will sell 403 tonnes and opened its way to sell either in the ‘open market’, which will affect the gold market, if only to do so slowly, or to sell direct to another buying central bank in large amounts at market related prices. If a major central bank like China or Russia buys direct, they will want the lot at a market related price, we would imagine. But don’t think for one minute that European central banks are making way for the I.M.F. in this new Agreement. Look at the Table of sales in this latest issue and you will see that in essence they have completed their sales!

So we must ask ourselves, why have central banks on balance become net buyers?
Again, the darkening of the monetary skies is telling us that they are regaining their respect for the shiny metal. This implies a dropping confidence in paper money.

Supply….

With the “accelerated supply” of gold, produced in the eighties and nineties of last century having eaten up most of the known, large gold deposits, it is increasingly difficult to source new and viable deposits. Yes, it is different in China, where the government is favoring gold production, and gold individual gold ownership [as a hedge against uncertain paper currency values] and is now beginning to issue the Yuan internationally, to assist in holding down its exchange rate.

The only source of quick gold supply comes from a rapidly rising gold price persuading gold holders to sell their gold [because they think the price has peaked]. This happened in India earlier this year where 900 tonnes of gold was sold as scrap gold.  However, with India being a nation who sees gold as money and as security, they will sell because they think the gold price will fall only. Once it has formed a new ‘floor’, back in they go, as they have started to do now.  So expect scrap sales to decline quickly around current gold prices. After all, to Indians, gold is the ultimate money! They will always continue to favor it over paper money, as financial security.

Demand….

Investment demand….
By this we refer to non-central bank demand. With the advent of the gold Exchange Traded Funds, institutions across the world, who had not previously been allowed to own gold [in the form of bullion and coins] were now able to directly impact the gold price by buying the shares of these funds. In turn, these funds went into the gold market and bought gold itself, with this money. We believe that up to 1,500 tonnes of gold is held in these funds, so far, and the demand has hardly been tapped yet. That is only in three years, showing how much even institutions want a safe-haven against the uncertainties building up in the future. Expect this demand to continue to burgeon!

Private demand….

Traditional bullion demand itself, is strong from China westwards to the U.K. Just look at the London Fixings each day and you will see the five Bullion Banks buying and selling twice a day and setting a fixed price for all transactions between themselves. This can involve from small to huge tonnages [this tonnage is not disclosed]. Central Banks, Bullion Banks and high wealth individuals buy and sell at these fixings through the ‘fixing’ process. The demand is a far more international and an overall gold market reflection than COMEX or the gold E.T.F.’s. With the gold market a 24 hour market, opening with Asian demand, prices quoted before London opens tends to reflect Asian demand, London reflects European demand and when the States opens, COMEX reflects U.S. demand.

This demand and investment demand have proved to be the most remarkable and heavy form of new and old demand over the last three years and looks set to continue to grow and perhaps substantially, from now on. It will want to see clear evidence of economic or currency breakdown, before it jumps rapidly though.

But why will Demand overshadow Supply?

Here we are at $1,000 and demand is still strong overall. What is this telling us?

  • It tells us that a glance into the future of the global economy, of global currencies has and is still making major global, institutional central banking and high wealth individuals trepidatious.
  • They look at the global currency world and see it heading into uncharted waters, where the U.S. $ may fall into the hole it dug itself into.
  • They look at the recovery itself and see that little has been done to avert the causes of the ‘credit-crunch’ except to repair the damage it did.
  • They see a major shift in economic power away from the States and Europe to the East. This upending of the present balance of economic power is bound to deeply disturb the financial world.  

They see that a combination of all of this is a dubious place for the prudent investor! Prudence is found in a place where such risks do not rule. Alternative investments such as gold and silver have proven to be the place to be since the beginning of this century.

The Impact on the Gold Price?....

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Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

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.

Julian DW Phillips Archive

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