Burgeoning Inflation Very Positive for Gold and Commodities
Commodities / Gold & Silver Feb 19, 2008 - 07:52 AM GMTBy: Mark_OByrne
Markets were closed in New York yesterday and the action centred on London where gold sold off initially and tested support at $900 prior to rallying strongly and this strength has continued in Asian trading with gold rising above $910 per ounce. Silver traded similarly, testing support just below $17 and then bouncing; in Asian trading silver has risen above $17.20 per ounce.
Commodities Surge and Burgeoning Inflation
With commodity markets surging internationally, gold is very well supported and looks to be consolidating prior to challenging the recent highs and targetting $1,000 in the coming weeks. Oil is back above $96, wheat is up 90% in the last 6 weeks and the entire complex of base metals and soft commodities are showing strong gains. The rise in prices of commodities will take a few weeks to feed into the supply chain, affect the already embattled consumer and be reflected in inflation statistics.
This is obviously very inflationary especially with the Federal Reserve expected to continue cutting interest rates and negative real interest rates in an increasingly stagflationary environment. Money supply growth in the U.S. continues to surge and the reconstituted U.S. money supply (M3) figures show a very inflationary 18% growth.
Supply of Gold Decreasing Internationally
Meanwhile supply continues to decline and the situation and outlook in South Africa continues to deteriorate and is seriously affecting the supply of gold and particularly platinum. South Africa and indeed most of the major gold producing countries are experiencing a decline in gold production. Indeed China is the only major gold producer in the world to have increased production last year.
Mali, sub-Saharan Africa's third largest gold producer, expects its gold output to fall 12 percent this year to 50.11 tonnes after a sharp decline last year. Gold output in the West African country fell 9 percent to 56.75 tonnes in 2007 as its established mines neared the end of their productive lives.
Gold mines internationally are nearing the end of their productive lives and there have been no major exploration discoveries in many years. While the concept of 'peak oil' is now recognised as a reality by most, the concept of peak natural resources and peak gold, silver and platinum is less well known.
Finite Natural Resources and Peak Gold, Silver and Platinum
Scientists have acknowledged the reality and the respected New Scientist has reported on it, especially in its 'Earth Natural Wealth: An Audit' report. The Wall Street Journal has also reported ( 'A Metal Scare to Rival the Oil Scare' ) how man's voracious demand for the earth's natural resources may lead to us 'running out' of some of them: "Scientists who have tried to estimate how long the world's mineral supply can meet global demand have made some gloomy predictions."
This is especially the case with the unprecedented movement of billions of people in BRIC and other emerging economies moving from 'peasant class' to middle class in one of the greatest social and economic transformations the world has ever seen.
In the same way that peak oil has been recognised in recent years so too will the reality of peak precious metals be realised in the coming years when the price of the earth's precious finite resources soar to levels previously thought impossible.
FX
Yesterday was relatively quiet due to the U.S. holiday, most of the action was in Sterling as it reacted negatively to the Northern Rock nationalization news. The British Pound fell against all the major currencies and pushed the Euro to 0.7550 against the Pound in this morning's trading session.
The Euro is again regaining its strength against the Greenback, trading up to 1.4760 against the dollar. We have seen the Euro gradually creeping higher against the dollar in the last few trading sessions and having consolidated over the past two months it could be ready to test the 1.4970 highs again.
A combination of carry trade appetite and the publishing of the RBA's minutes of the recent Monetary Policy meeting, saw both the Australian Dollar and the New Zealand Dollar trend higher against the Greenback.
Support and Resistance
Gold has consolidated nicely in the $850 to $935 range. Strong support is now seen at $860 and even $900 looks well supported. Any close on a daily basis above $935 should see us challenge $1,000 per ounce in a matter of weeks.
Support is at $886 which was the low on Tuesday February 5th. Next support is at the monthly low on January 21st of $861. Strong support is at $850 to $860. There appears to be strong physical demand internationally for gold in the $890s and thus gold is unlikely to fall far below $890 except for a short period of time.
Silver
Silver is trading at $17.24/28 at 0900GMT.
PGMs
Platinum continues to reach new record highs above $2,000 and is trading at $2140/2150 (0900GMT).
Palladium has continued to surge and is trading at $478/482 an ounce (0900GMT).
Technically palladium has broken through resistance at $450. Long term chartists will be looking to palladium's recent record highs in 2001 at $1,100 per ounce as a price target in the medium term.
By Mark O'Byrne, Executive Director
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