Global Watch - The Gold Forecaster
Indian Demand...Chinese Gold Prices

Julian D.W. Phillips
Dec 05, 2005

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

Indian Demand this week
There is no doubt that the Indian buyer is still looking with absolute disbelief and distrust at the market in gold. Buyers are grumbling and sellers are delighted because gold has risen from Rs 6,100 to Rs 7,500 a 23% increase in the last three months. Retail sales have come down 40 to 50%, with scrap taking the place of imports to top up stock levels, which have barely moved in the last few months, across all Indian States.

India was importing 50 tonnes a month previously, which gives us an indication of the level of scrap sales. Imports are zero in the last three months. Indians are now selling! So knock 150 tonnes off last year's levels of imports for the second half of the year, to date.

It could be that India continues to rely on scrap sales for the next 2 - 3 months, but after that going forward to April / May, would Farmers and Fathers with daughters wanting a gold dowry, enter the market as buyers at the high levels? That remains a possibility. Impatient daughters and wives [with raised eyebrows] won't wait and don't care about prices. Indeed the higher the price the better the dowry?

The question is at what price will Indians begin to dishoard? Forget the $ price, they don't look at $500, they look at Rs 7,500 and rising up Rs 1,500 in three months. Bear in mind that they get used to a price and then they come to believe it will hold, but this takes time, but how long? The answer lies in the gold price action.

• 'Spiking' will precipitate large volumes of dishoarding, but will that be at Rs 8,000 or more?
• A steady consolidation followed by mild, but consolidating, appreciation will discourage dishoarding.
• Short "Spikes" with pullbacks to a previously established 'floor' will possibly attract Indian physical buyers.

If the rest of the gold market keeps the gold price high and rising dishoarding will come out and Indians have 20,000 tonnes of gold hoarded. But they love gold. They will only dishoard if they believe the gold price is too high and going to come down. If they believe it is high but going to stay there, or go higher, they may well accept the fact and buy. They just don't want to be caught by dropping prices, when they can profit or buy back lower down. They are in a mental whirl at the moment and perhaps struggling with the price more than any other sector of the market!

So the next question, after they have dishoarded, at what price [after it has made a 'floor'] will they return to the market. After all, the only reason they will dishoard is to buy back at a lower price.

We are certain of one fact and that is Indians don't stop buying gold, they simply postpone their purchases until the price is right!

Chinese Gold Prices
Chinese consumers keep buying, despite the rising, exorbitant, retail price of the gold in a market where the premium is way above the international price.

In Nanning, the capital city of Guangxi Zhuang Autonomous Region, gold price has jumped to 176 Yuan or 22 US$ per gram [U.S.$709 per ounce], this is 40% higher than the $ price in London. In Shanghai, the gold price is 157 Yuan per gram [U.S.$632.52 per ounce], 25.25% higher than the U.S.$ gold price.

Nothing could better illustrate why the Chinese gold market is still in its infancy and will remain so until the gold distribution network in China is considerably better developed, so dealers cannot get away with such mark-ups. Should this distribution network develop, not only will the premium on the retail price of gold drop, but the potential volumes that the Chinese market could take, would absorb any amount of dishoarding from India where there is a superbly developed distribution network.

What an opportunity, if the authorities permit such a development? Imagine the arbitrage opportunity there now? Forget any potential revaluation of the Yuan having a negative impact on the Yuan gold price. The development of the Chinese distribution network, will, of itself lower the premium but raise the international gold price as the potential increase in sales, draws in the gold from global markets!

This is where the bullion banks should be focussing their efforts.

(1-1/2 decade long dollar index chart) What sticks out is the violent decline in the Dollar Index from a 2001 high of 121.21 to an early 2005 low of just above the significant support of 80. With rising rates continuing in the US, this bear market rally looks have entered the final leg of this rally run-up.

There are a few upside targets where we should see this "bounce" top. Around 92-93 is the first target with a blow-off rally capable in the next month possible of extending this quickly to the 95-98 levels. The latter is difficult to foresee with the fiscal dangers the U.S. Dollar is encountering. That said, a violent fall in the U.S. Dollar may not be in the immediate horizon, but technically, it appears we have the likelihood of a year+ out of falling back to the major support level of 80. That is the battle line we have outline to you for over a year now and continues to be a major level to watch in the future.

Dec 02, 2005
Julian D.W. Phillips

321gold Inc