Where is the Price of Gold Going?

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Published : October 26th, 2004
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• Arbitrageurs 'smooth' the price of gold to the Euro price of gold.

• The Euro price of gold is the market price of gold, despite the attention on the $ price of gold.

• Central Banks appear to be selling around 8 tonnes of gold a week only.

• Argentina may well be buying the same amount each week.

• Physical demand for gold is strong and steady and does not reflect the $price of gold, but the price in the currency of the buyer.

The Arbitrageurs!
Why so much Fund buying and selling of gold you may well ask? It is a stark contrast to the behaviour of the Hedge funds ahead of the Iraq war, when they drove the gold price up from $320 to $390, then all the way back again, once the war had started. Why?

Notice, if you will, what the gold price does throughout the day. Every time the $ changes its value against the Euro, the price of gold changes moments later. Every time there is a small change in the price of the Euro against the $, dealers perform arbitrage transactions. An Arbitrageur simultaneously buys and sell [or the reverse] gold in different markets [e.g. Comex and London] in order to profit from price variations between those markets. This means they buy/sell gold in the Euros or $s and profit on the difference.

It takes moments and the profit may be only cents, but in volume and many, many times during the day and a dealer can make a tidy sum on a low risk basis, every day. But the Dealers must know where the price is being made and must not hold a risk position for any length of time.

Hence, at present, they have their eyes fixed on the physical buying and selling of gold, and other fundamental factors that really do dominate the price.

The Price of gold - what is it?
For a moment, place yourself in the shoes of the European Central Banks. They utilise the Euro, so will account for any proceeds they achieve in that currency [except for Switzerland who still use the Swiss Franc.]. So they will be motivated by the Euro price of Gold not the $ price of gold.

A quick look at the Euro price of gold shows that it has fallen from its recent peak of Euros 340 per ounce to Euros 333, before recovering to the present Euros 335 at present. Certainly there is no 'spike'in the price here.

A careful look at the price at present shows that it is the Euro price of gold, that dominates the market and has been led, very strongly by the London "Fixing" price of gold, that has dominated the market.

Central Bank Sales outweighed by purchases.
Earlier this month we produced an article that highlighted the silence of the participants to the Central Bank Gold Agreement on actual gold bullion sales under that agreement. The only sales that are definite were those in the table here. This tiny amount is being sold at the moment, in the absence of other sales. Only Switzerland and Holland are sellers:

• Switzerland has followed a pattern of selling around 7 - 8 tonnes of gold per week. This means that they will complete their sales by the end of January 2005, if they stay true to form.

• Because Holland has stated it is waiting for price 'spikes', it may well be absent from the market at present. We have no way of forecasting what they consider an appropriate price at which to sell. What is clear is that they do not have the amounts needed to manage the price of gold, so will not be selling with the intention of 'capping' the gold price. They have indicated that they will try to get as much as they can for their gold. This should therefore reflect a price 'spike' in Euros, which has not happened of late.

• Will Germany jump into the 'gap'. This is neigh on impossible, at present, as the laws of Germany have to be changed first, before the Bundesbank can enter the market. From both the talk and the lack of activity on that front, we will be given ample warning before these sales are imminent.

• And France? They too, appear to be taking an extremely low profile on this subject, telling us that no announcement will be made until early 2005. Perhaps by then the subject will have faded away?

• If the Central Banks who were party to the agreement are not going to sell, their silence on the subject will be consistent with their aim of acting in a manner that will not disrupt the market.

Central Bank Purchases, may outweigh Sales by Central Banks.
With the surprising, but persistent buying by the Central Bank of Argentina, throughout 2004, to date, it could well be that the activity of the Central Banks, netted out, is that on balance they are buyers! With the net activity being so far below last years sales of around 510 tonnes, a significant drop in 'Official' supplies has and will continue to occur, if not eliminated.

Physical Demand not $ price driven
It is now clear that the demand from the Indian subcontinent could well top 900 tonnes this year. The price in India is a Rupee price, not a $ price. The average Indian buyer of gold is unconcerned by the $ or the Euro price. It is a point of reference to the Rupee price only.

The jewellery manufacturers can import gold legally against a letter of credit and the smaller Indian banks pay them a premium for the U.S.$. This creates gold at a price lower than London, despite transit costs etc. It can be as much as $8 $ 10 lower, even in U.S. $s! In Rupees, with that currency gently strengthening, the gold price has held at a very even level, whilst the $ price of gold has been rising a little. As a result, there is unlikely to be even the slightest dent in the demand for gold from India, particularly as we remain in the festival season.

Where is the price of Gold going?
With these factors playing on the gold price the pressure is for a continued rise in the price of gold in all currencies, faster in those that are weak and slower in those that are strong. For sure, the price of gold is acting as a currency itself.

Not the full picture.
There is much more to be said on the factors that drive the gold price, which we have not covered here. To get the full picture of these factors, and more importantly, how they interact and synthesize to define the gold price in the main currencies, one has to follow it on an ongoing basis in our newsletter, "Gold-Authentic Money". Should you wish to get this picture, please see the subscription details below.

By : Julian D. W. Phillips

Gold/Silver Forecaster – Global Watch


Please subscribe to www.GoldForecaster.com for the entire report.


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Julian Philips' history in the financial world goes back to 1970, after leaving the British Army having been an Officer in the Light Infantry, serving in Malaya, Mauritius, and Belfast. After a brief period in Timber Management, Julian joined the London Stock Exchange, qualifying as a member. He specialised from the beginning in currencies, gold and the "Dollar Premium". At the time, the gold / currency world exploded into action after the floating of the $ and the Pound Sterling. He wrote on gold and the $ premium in magazines, Accountancy and The International Currency Review. Julian moved to South Africa, where he was appointed a Macro economist for the Electricity Supply Commission, guiding currency decisions on the multi-Billion foreign Loan Portfolio, before joining Chase Manhattan the the U.K. Merchant Bank, Hill Samuel, in Johannesburg, specialising in gold. He moved to Capetown, where establishing the Fund Management department of the Board of Executors. Julian returned to the 'Gold World' over two years ago and established "Gold - Authentic Money" and now contributing to "Global Watch - The Gold Forecaster".
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