Gold Investments Market Update

Gold
Gold is up in London and is up in early trading in New York this morning. Gold was up $1.80 to $925.40 per ounce in trading in New York yesterday and silver was up 10 cents to $17.77 per ounce. The London AM Gold Fix at 1030 GMT this morning was at $931.75, £473.55 and €588.30 (from $917.75, £464.80 and €580.854 yesterday).

With the dollar remaining weak (despite the G7 talk) and oil again closing at new record highs yesterday and surging to a near record price today (above $113.00), gold’s role as hedge against inflation will likely see it supported at $900 and again challenge resistance at $950 in the coming days.

While supply disruptions in Mexico were the ostensible reason for the most recent spike in oil, the real reason as ever is an extremely tight global oil market where supply is finding it increasingly difficult to keep up with rampant demand, particularly in Asia. Indeed supply is falling in many large producers showing that the theory of ‘peak oil’ is looking increasingly real.

This was evidenced in the front page story in the Financial Times which outlined how oil production in Russia may have peaked. Russian oil production peaked last year, the vice-president of Lukoil, the country’s second largest oil group told the Financial Times. Leonid Fedun said Russia’s oil production of 10 million barrels a day was the most he would see “in his lifetime”.

With oil production declining sharply in Mexico and the North Sea and concerns that Saudi Arabia and other OPEC members are not being transparent in reporting their production numbers, peak oil seems to have arrived and this has obvious ramifications for the global financial system and economy.

Oil is an important factor but one of only a myriad of strong fundamental factors creating demand for gold. Sharply falling house prices, volatile currency and stock markets are also leading to safe haven demand. Also, in response to the global credit crisis, central banks have opened the monetary spigots and we are now in a world of massive and unprecedented money supply growth and credit creation. This is hugely inflationary. The finite currency that is gold will continue to outperform most assets given these risks and the increasing risk of stagflation.

The fundamentals driving the gold market remain very sound with oil remaining near record highs, peak oil, the dollar and sterling under pressure, house prices falling and the credit crisis remaining a serious concern. Under these circumstances gold looks very well supported above $880 per ounce. We could see gold further consolidate between $870 and $950 in the short term prior to surpassing the psychological $1,000 level again in the coming weeks.

Gold is likely to continue to surprise to the upside and it remains a contrary non mainstream investment with only a tiny, tiny fraction of the world’s investment public having invested in it. We are a long, long way from the mass participation and then mass mania seen in property and stock markets in recent times.

Support and Resistance
Support is at $880 and $905. A close below $905 could see us retest the recent lows at $880. Resistance is now at $950 and $1,000.

Silver
Silver is trading at $17.76/17.86 at 1415 GMT.

PGMs
Platinum is trading at $1990/2000 (1415 GMT).
Palladium is trading at $459/464 per ounce (1415 GMT).

Mark O'Byrne

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