Gold Consolidating and Expected to Resume Uptrend

By: Gold_Investments

Gold
Gold was flat yesterday and was up 20 cent from $729.70 to $729.90.
It traded slightly down in the New York Access market and has traded sideways in Asian and early European trading. At 1200 GMT gold was trading at $727.40

If short term support at $724 is breached to the downside, there is a possibility of gold consolidating at lower levels. Strong support and robust physical demand is seen at previous resistance at $690 to $700 and the 50 day moving average at $693. However, in a bull market much anticipated corrections sometimes do not materialise and given the very strong fundamentals the gold market could continue moving higher.

The fallacy that gold's bull market is purely a function of dollar weakness is seen in the table below.

One of the best indicators that gold is again in a multi year secular bull market is seen in the fact that gold prices are rising in all fiat currencies internationally (http://www.gold.org/value/stats/statistics/prices/index.html). Or to put it more accurately, the value of major currencies is falling in terms of the universal finite currency that is gold. This is no surprise as money supply growth of 10% plus in most major economies is very inflationary. Conversely, the global supply of gold is relatively flat at some 1.5% per annum. Basic supply and demand economics means that it is extremely likely that gold will become more valuable in terms of paper currencies in the coming years.

Alan Greenspan warned in London yesterday that a long period of low prices and stable growth is coming to an end and central banks today have to pay more attention to inflation pressures. "We're beginning to see this extraordinary period of disinflation and economic growth is coming to a halt," . . . "We now have to be very sensitive to the fact that inflationary pressures could well get out of hand."

Today in the FT, Ajay Kapur writes that "In a world of fiat currency, central bankers can increase the supply of money at the stroke of a pen. Fiat currencies are not backed by gold, or any other asset, just the good faith users place in the government and its printing press. So these are really “faith-based” currencies, prevalent almost everywhere today."

Alan Greenspan himself told a Senate Banking Committee in May, 1999, "Gold still represents the ultimate form of payment in the world. . . . Fiat money, in extremis, is accepted by nobody. Gold is always accepted."

Worryingly, his loose money successor, Ben Bernanke, said in a speech in November 2002, 'Deflation: Making sure 'It doesn't happen here' , that "Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology called a printing press , that allows us to print as many dollars as it wishes at essentially no cost". Those who truly understand and worry about the insidious danger inflation poses to our economies are no longer calling Bernanke, 'Helicopter Ben' rather his recent actions have resulted in him being upgraded to 'B52 Ben' or 'Weimar Ben'.

With money supply expanding hugely internationally and the printing presses running overtime in order to ease the global credit crisis, gold will once again become the asset class of choice of investors internationally seeking to protect themselves from the global fiat currency debasement which is taking place and accelerating.

A reminder of the difficult and dangerous nature of the mining industry and risks faced by miners, their employers and investors in the sector was seen in the terrible mining accident in South Africa. The Times of London reports that more than 3,000 miners were trapped a mile and a half underground in a South African goldmine after the lift shaft was shattered by falling equipment. Rescuers were last night frantically trying to free the workers at Elandsrand mine, at Carletonville, west of Johannesburg, amid fears that air at the bottom of the shaft was running out. The miners' union said that 3,200 workers had already spent a day in a cramped underground space where temperatures could reach 40C (104F). “We are very worried because . . . they might be suffocating,” said Lesiba Seshoka, a union spokesman. Amelia Soares, of the Harmony Gold Mining Company, South Africa's third biggest gold mining outfit, said that nobody had been injured, but admitted that the miners faced a critical period while a complicated rescue was being organised.

Harmony's share price fell 5%. As gold production internationally appears to have peaked or will soon peak, mining companies are having to go deeper and deeper to mine gold and this creates much risk to gold miners.

Forex and Gold
The USD has continued to rally and has rallied back to 1.4128 and 2.0335 against the EUR and GBP respectively.

News that the Vietnamese central bank and Qatari sovereign wealth fund are diversifying out of U.S. Treasuries and USD denominated assets show that the dollar's recent reprieve is just that and it will continue to weaken significantly in the coming months.

The Telegraph reports that "Vietnam, which has mid-sized reserves of $40bn, is seen as weather vane for the bigger Asian powers. Together they hold $3,575bn of foreign reserves, over 65% of the world's total. China leads with $1,340bn, but South Korea, Taiwan, Singapore, and even Thailand all built up massive holdings. The concern is that once one or two members of the region jump ship, it could set off a broader scramble. None of them want to be the last one left holding a devalued asset. Vietnam's central bank said this week that it would move "gradually" to a floating currency.

Separately, the gas-rich Gulf state of Qatar announced that it had cut the dollar holdings of its $50bn sovereign wealth fund from 99% to 40%, switching into investments in China, Japan, and emerging Asia.

The move is intended to increase long-term returns for future generations, but it can easily be seen as a vote of no confidence in US economic management.

The drastic shift by the Qatar Investment Authority is a warning that petro-dollar powers with some $3,500bn under management may pull the plug on the heavily endebted U.S. economy -- which needs to suck in the majority of the world's savings just to stay afloat."
(The Telegraph: Dollar's double blow from Vietnam and Qatar - http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/10/03/bcnviet103.xml)

Silver
Spot silver was trading at $13.22/13.24 (1200 GMT).

PGMs
Platinum was trading at $1354/1360 (1200 GMT).
Spot palladium was trading at $358/363 an ounce (1200 GMT).

Oil
Oil prices fell Thursday in Asia after an unexpected increase in U.S. crude oil inventories.
Light, sweet crude for November delivery fell 13 cents to $79.81 a barrel in Asian electronic trading on the New York Mercantile Exchange by late afternoon in Singapore. The Nymex crude contract fell 11 cents to settle at $79.94 a barrel.

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