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Gold to Surge towards $1000 on Today's US Fed Interest Rate Cut

Commodities / Gold & Silver Jan 30, 2008 - 12:34 PM GMT

By: Mike_Clark

Commodities Gold was down $2.60 to $924.80 per ounce in trading in New York yesterday and silver was up 6 cents to $16.74 per ounce. Both rose to new highs yesterday and have traded sideways to slightly down in Asian and European trading. A monthly close above $900, the first ever, would obviously be very bullish from a technical point of view.


The Federal Reserve's likely 50 (or at least 25 basis) point cut today after last week's emergency 75 basis point cut could lead to gold challenging $1,000 in the very short term as there are now negative real interest rates (with the key discount rate less than the rate of inflation) in the world's largest economy which is very inflationary. Bernanke's strategy is an emergency one, fraught with risks of an even sharper increase in inflation or even stagflation and such low interest rates are not sustainable as they will put significant pressure on an already very weak dollar (see FX below).

The dollar is again slightly weaker (75.40 on the USD Index and 1.4806 and 1.9915 versus sterling and the euro) and oil is stronger after yesterday's sharp increase. Oil (NYMEX February) is up 0.70% to $92.25 this morning. Should the dollar break below support at its recent lows at 74.484 there could be a further very sharp sell off.

The London AM Fix at 1030 GMT this morning was at $923.75 (down from $916.50). Gold fell marginally from its recent new record highs in British pounds and euro. It fixed at £463.94 (down from £466.55 yesterday) and €623.90 (down from €627.75 yesterday).
http://www.lbma.org.uk/statisti cs_current.htm

The South African production problems are not a one off and there are critical infrastructural challenges to the mining industry in South Africa which will likely result in a continuation in the falling supply of gold - from over 1,000 tonnes in 1970 to less than 280 tonnes today.

The FT reports that Eskom (the SA state electrical utility) said electricity supplies to mining companies would improve this week but South Africa's state power company is expected to start rationing power to customers as early as March. "The clear risk is that there will be more and more supply disruptions and, given South Africa's complex mining sector and renewed focus on worker safety, this promises further disruptions in ore extraction and processing," said Michael Jansen of JP Morgan. Mr. Jansen expects gold to peak at between $950 and $975 an ounce but said the risk of a move through the $1,000 level remained acute.

Of huge significance and unacknowledged by many analysts is the increasing likelihood that central bank gold reserves cannot be mobilised in order to cap the gold price. This was recently outlined by two Citigroup analysts, John Hill and Graham Wark, who wrote that central banks faced a choice between a global recession and their continuing “control” of gold. They said that the avalanche of central bank bullion sales earlier this year was “clearly timed to cap the gold price”, which is the Gold Anti-Trust Action Committee's (GATA) long held contention. But central banks have chosen to focus on staving off global recession. “We believe that the policy resolution to the credit crunch will take the form of a massive, extended ‘reflationary rescue' in a new cycle of global credit creation and competitive currency devaluation which could take gold to $1,000/oz or higher.”

GATA's full page ad being published in Thursday's Wall Street Journal could result in a sharp move up in the gold price. It alleges that the gold reserves of the United States have not been independently audited for half a century and claims to have proof that those gold reserves and those of other Western nations are being used for the surreptitious manipulation of the international currency, commodity, equity, and bond markets. The ad alleges U.S. gold reserves held at depositories such as Fort Knox and West Point may have been seriously depleted. GATA asserts that the objective of this manipulation is to conceal the mismanagement of the U.S. dollar so that it might retain its function as the world's reserve currency. The U.S. Treasury denies the claim, insisting the stock is accounted for regularly.

Support and Resistance
Strong support now remains at $840 to $850 which was previous resistance and interestingly the 50 day moving average (DMA) is now up to $842 and Fibonacci support is at $840. With the weekly close above $900, it now becomes technical support. A monthly close above $900, the first ever, would be extremely bullish and could lead to $1,000 gold in very short order.

FX
Again the FX market waits with bated breath to see what the Fed will do this evening. Acting like a spoilt child the market wants 50 basis points and will throw a tantrum if this is not delivered. A cut of this size will fuel the Carry Trades again in the short term, however the truth will be told through the gold market as the metal will indicate the underlying dissatisfaction with the monetary policy myopia.

A 50 basis point cut could trigger the euro to a new high against the Greenback through the psychological 1.5000 barrier. With the ECB still issuing staunch rhetoric hinting at higher rates and the prospect of the Bank of England cutting by 25 basis points next week the trend of weakening sterling against the euro is set to continue at least until the mood at the ECB changes.

Silver
Silver is trading near new 27 year record highs at $16.72/$16.78 at 1100 GMT.

PGMs
Platinum is consolidating at higher levels and trading at $1680/1690 (1100 GMT). The continuing power outages affecting production in the gold and platinum mines in South Africa (the world's largest producer of platinum) will result in platinum continuing to be well bid.
Palladium was trading at $387/393 an ounce (1100 GMT).

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