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Global Watch - The Gold Forecaster
Gold Price - Drivers in the first half of 2005 and beyond?

Julian D.W. Phillips
Sep 19, 2005

Excerpts from the "Global Watch - The Gold Forecaster."

That was the week that was
But the most significant change in the last day has been one of perception. When the gold price returned towards its peak, most observers were suspicious and cautious. No-one wanted to set the pace. The consolidation was treated as a 'peaking', but the buyers, physical and funds kept nibbling at those positions that were triggered by activated stops. This carried on until yesterday, when all resistance dropped away and the sprint from $450 to $460 began. Now the performance in the € is far more spectacular than in the $ as you can see by looking back at the last issue, at the London Fix in the € which was €356 in the morning. Now we are at €376. Any doubts about de-coupling should have been dispelled by tis move. Gold is on its way, s we hope you went long at $456 or thereabouts as per our recommendation last week. It is looking at $480 as it brings $500 into its sights, before consolidating again. Having accepted the $450 area as its support the market opens the opportunity for long positions, but always with protective stops at support.

The next expected dampener on the gold price comes on the 26th of September, which marks the beginning of the next Centtral Bank Gold Agreement year. Whilst the programme will begin then Sweden's paltry 10 tonnes is unlikely to darken the brightness of gold. But it must have become more and more apparent that a switch to an income producing currency is a poor investment and one that may have more politics than finance involved in the decision. Will they accelerate their sales and cap the price at these levels or will they spread their sales over the whole year? Again their pattern of selling will reveal their attitude to the gold price. And the big question is what will Germany do? Will they postpone thei option to sell for another year or will they sell now? Either way the market will pull in its horns around that day!

Gold Price - Drivers in the first half of 2005 and beyond?
Here we give you only a part of our commentary on the GFMS figures and show how it fits into the picture that will dictate the next year's gold market.

In the latest GFMS report evidence was provided by the most respected of companies that gather statistic on the gold market. [Next issue we will publish the extremely well qualified opinions on the Indian gold figures from Daman Prakash, which will give you a deep insight into the Indian gold market.]

At no time have we changed our long term forecast for the gold price. Sad to say, we believe that as gold climbs from stage to stage, it will reflect a steady decay in world financial conditions. When we started this series of publications we were aware that over time the structural pressures on the global financial scene would degenerate, which would spur the gold price upwards. Pause for a moment and look back over the last year and you can see what we mean. The decay in general global economic conditions we have seen over the year will accelerate over next year. We feel that the positive forecast for gold will be at least correct, but more likely an underestimation for next year. GFMS forecasts sharply higher gold prices, especially towards year-end.

We see beyond the gold market into the various parts of the global economy and see that the structural decay we have seen in the oil market will spread and permeate the gold market, which will take very little tonnage to produce a price gear change in the gold price, taking it way beyond a 20% rise.

However, the fundamental factors behind the gold market and the potential for people dissatisfied with prospects for other parts of the financial system to come to the gold market has never been greater. We are on the brink of a truly dynamic gold market right now, reaching far higher prices than projected even by the positive GFMS!

Physical demand - With Middle and Eastern economies having enjoyed strong economies in the last year, they have increased both their presence and impact on the physical market. Indeed, volumes from the Middle East have been growing steadily over the last few years. This is not only from the investment quarter, but also in jewellery, as Italy fades into a minor role as Jeweller to the developed world. Gold jewellery in the Middle and further Eastern parts of the world is high quality gold reflecting the gold price in its price, with little jewellery content in the price.

Gold buying has grown from Saudi Arabia through the strongly developing gold hub of Dubai and to Turkey, where their jewellery trade is primarily responsible for overtaking Italy's. This growth will continue to impact more and more on physical demand and diminish the strong seasonality of the gold market. In the first half of the year the strength of the physical market drove prices higher even after the Indian marriage season finished in May. GFMS informed us that jewellery off-take came in 200 tonnes higher in the first half. This demand is unlikely to wane as the general level of wealth is rising. In the context of a global market this factor overrides any consideration of whether the U.S. housing market bubble is going to burst or not. U.S. economic factors primarily affect U.S. demand.

I seriously doubt whether Ibrahim in Dubai knows much about U.S. house prices, nor Sanjiv in Mumbai?

Price stability: Middle Eastern and Indian physical demand is for gold close to pure and at a price that reflects the gold content of the jewellery, unlike demand in Europe and the States where the price of gold jewellery goes far higher than its gold content, which is often of a lower quality. Hence, the price of gold and its stability comes to the fore. When gold prices held certain levels after rising, the market comes to accept them as sustainable, so moves in to buy. Prices in the first half of 2005 have held relatively steady to gently strong, until this last week. Of course, in India gold is bought from income, which clearly buys less as the price rises, but buy they will, if the price is at sustainable levels. However, income levels are rising as are the incomes of sons who have moved into high positions in foreign countries, but who still respect the family and their elders, who still realise the long-term benefits of gold as a holder of wealth.

This led to a sharp rise on last year's figures by way of an increase of 140 tonnes. GFMS believed that prices "around $430 were seen as quite 'normal' and sustainable. So, any dip below this typically led to bullion dealers seeing a flurry of buy orders materialise."

Going further to the South and East we cross into India where demand reached record levels of 500 tonnes [Our Indian expert, Daman, has much to say on this in the next issue] against 340 in the first half of last year. With prices rising in the second half of last year, much as is expected of the second half of this year, total off-take for the year could reach 650 - 800 tonnes dependent on the perceptions of price stability the market believes.

Jewellery fabrication
Rose 16% or around 200 tonnes in the first half, with India, the Middle East (in particular Turkey and Saudi Arabia) and China seeing the largest gains. GFMS highlighted this saying, "the figure you should focus on is jewellery demand excluding scrap. And this surged by not that far off 30%. That all traces back to a 11% drop in first half scrap. It may seem odd to have a drop in scrap in the face of high and rising prices but, in the light of expectations for prices to at least stay steady, then it makes perfect sense."

Central Bank sales - Net official sector sales in the first half of 2005 reached 407 tonnes, the highest half-yearly level ever recorded by GFMS and more than twice the total seen over the first six months of 2004. Hardly any gold was bought by Central Banks in 2005 to date, but we hear from Argentina that this may be on their Agenda. But so far this is only talk.

If we recall the survey taken by the Bullion Banks in early 2004 ahead of the Central Bank Gold Agreement. They intended to sell as much gold as the market could bear whilst permitting a stable gold price. This is how the 'ceiling' of 500 tonnes was established. With demand rising as it is now this tonnage is clearly inadequate to hold the gold price down.

So we have seen a change in tactics by the signatories of that agreement in the way they are selling their gold. We are now informed only by some of the signatories in advance of sales, but by most, after the event. The signatories now inform the market that during the agreement they will sell certain amounts. They state that the timing of these sales will not be given. This permits the sales to occur during price 'spikes' ostensibly to maximise sale proceeds, but also bringing a measure of control over the price into a clear focussed action. Called maximising profits by them and price management by other than themselves, even this tactic is insufficient to cap the gold price.

This was evidenced by them reaching their 'ceiling' nearly three months ahead of the close of the first year of the agreement. With demand continuing to rise and grow, 500 tonnes is going to be increasingly ineffective to hold the price down. The signatories must then decide, when to sell or whether to spread their sales across the year, for it is clear that they will provoke a 'spike' in the price again, if they reach their 'ceiling' too early next year. They cannot add to the amount they sell until 2009.

Sep 16, 2005
Julian D.W. Phillips

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