Gold Remains Firm on Stagflation Fundamentals

By: Mark_OByrne

Gold closed at $901.70 in New York on Friday and was down 40 cents and silver closed at $17.33, up 1 cent. Gold was up over 4% last week and the close above $900 may prove important from a technical point of view in the coming weeks.

Gold remained strong in Asia and in early European trading but has since succumbed to profit taking after last week's gains on a stronger dollar this morning. There appear to have been large long positions with stop losses at $900 and this contributed to the severity of the sell off this morning. As usual this large sell off is very counter intuitive and difficult to explain as there is no ostensible reason for the sell off. With the U.S. government and Treasury Secretary having clearly said that currency intervention is a potential policy tool, it would be naïve to completely rule out some intervention in order to further support the dollar. The best way to do this would be to sell the euro and gold and buy the dollar as these are widely monitored barometers as to the health of the U.S. dollar.

With the fundamentals remaining as sound as ever and inflation and stagflation concerns rising internationally - look for this sell off to be brief and shallow (like previous sell offs).  Especially as oil prices remain near record levels (up some 0.3% this morning to over $135 per barrel) on fears that Saudi Arabia's promise to boost output may not be enough to quell supply concerns – especially after a pipeline was bombed by militants in Nigeria last week. Peal oil production concerns as seen in the North Sea, Russia, Mexico and elsewhere is also leading to oil remaining at higher prices.

Peak Gold? - Australian Gold Production Plummets
The news this morning that the world's third-largest gold producer, Australia, saw gold production fall 7 percent over the past year, a far deeper than expected decline will give the bears pause for thought and is another positive for gold over the medium to long term.

There is increasing belief that next year's tally in Australia could be even lower given a mounting serious power problem in Western Australia after a pipeline explosion on early June cut power supplies to many of the gold mines. West Australia typically accounts for about 80 percent of the nation's gold yield each year. It will be August before gas begins to trickle back to the mines, the pipeline's operator, Apache Corp estimates.

Last week saw further evidence of the likelihood of peak gold production with the plummet in South African gold production (see http://blog.goldassets.co.uk /category/market_update/  ). Of the world's three biggest gold producers (China, South Africa and Australia), only China has managed to increase gold production in recent years and this Chinese gold is used in China to meet the rapidly growing demand for gold as jewellery and as an investment in China. Thus Chinese gold is not exported into the international market which remains the supply demand balance in gold is becoming increasingly tight and likely to lead to markedly higher prices.

Silver
Silver is trading at $16.64/16.70 per ounce (1400 GMT).

PGMs
Platinum is trading at $2042/2052 per ounce (1400 GMT).
Palladium is trading at $471/475 per ounce (1400 GMT). 

By Mark O'Byrne, Executive Director

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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