Daily Market Update

Gold Investments Market Update

Gold was down $7.30 to $937.40 per ounce in trading in New York on Friday but silver was up 10 cents to $18.08 per ounce. Gold continued to weaken in Asia but has strengthened somewhat in early European trading and is trading at $934.10 per ounce.

Another mooted IMF gold proposal (more below) may have led some weak longs to liquidate positions yesterday. But after recent week’s surge in gold and last week’s sharp (4.5%) increase in the price of gold, the market was overbought in the short term and ripe for a correction. It was interesting that silver has remained strong despite gold’s less than 1% sell off.

Gold also fell in British pounds and in euro. The London AM Fix at 1030 GMT this morning was at $934.00 and gold fixed at £473.68 and €627.94.

More Proposed IMF Gold Sales
Counterintuitively, this newest in a long line of mooted IMF gold sale proposals (Gordon Brown among others mooted the possibility in 2005) may again be bullish for gold. When Gordon Brown telegraphed his sale of British gold reserves in 1999 the market was initially concerned that the sales could lead to falling gold prices. This concern was proven false and look how gold has performed since – rising from below $300 to over $900.

Similarly when the IMF has sold gold previously, gold has fallen initially and then rallied in price in the medium and long term. As Jim Sinclair of JS Mineset has noted, “it is important to note that their sales all have taken place at times when major bull markets were either just beginning or, as in 1976-1980, at the start of the major parabolic move to then all time highs.”

Also, it is important to note that there is considerable doubt as to whether this sale will take place. The IMF and Treasury do not decide, rather the U.S. Congress, who control the IMF, and they have been opposed to IMF gold sales in past and may be again. Marc Chandler, currency strategist at Brown Brothers Harriman & Co., said in a research note that he U.S. Congress could block the Treasury’s initiative. “Previously Congress opposed IMF attempts to sell gold in both 1999 and 2005, but McCormick hinted at having Congressional support now.”

Also Reuters have reported (http://in.reuters.com/article/businessNews/idINIndia-32142520080225) that the timing of any possible sales is also in doubt. U.S. Treasury Under Secretary David McCormick said on Monday it was still unclear when the U.S. Congress would be asked to approve proposed International Monetary Fund gold sales and the move would depend on implementation of the IMF’s reform agenda. There is no mention of when a vote on the issue might be made.

As usual the proposal was long on possibilities and hints and short on detail and concrete facts.

Finally, even if it proceeds, the sales will be staged in a manner similar to the 500 tonnes quotas of the Washington Agreement. In other words, it won’t be dumped on the markets in one go and that is a specific concern that accompanies any major government gold sales. Indeed, there is an opinion that none of the gold will see public sales but be snapped up by governments who are quite prepared to shore up central bank reserves or sovereign wealth funds with inflation proof hard assets and the finite currency and monetary reserve that is gold.

So, the impact of any possible IMF gold sales is likely to be minimal. In fact, the markets may already be discounting these gold sales in the current price of gold which may partly explain why silver is outperforming gold and may well continue to do so. These sales have been mooted on various occasions in the last 8 years and nothing has materialized and gold has risen by nearly 250%.

Were the IMF actually to start selling gold then we may actually see gold surge in value in a typical sell the rumour and buy the news market movement. Central banks have been selling a part of their gold bullion reserves (very shortsightedly) under the Washington Agreement in recent years and yet gold has surged in price.

There is a growing chorus of market analysts who seriously doubt the possibility and efficacy of gold sales by the International Monetary Fund and the IMF looks unlikely to depress gold prices and support the dollar which may be the ultimate motivation of any sale. Mario Innecco, a broker at MF Global in London, told Bloomberg some 2 weeks ago “Every time the IMF has sold gold it has actually triggered more buying interest. It will just make it easier for the big sovereign buyers” – the big central banks outside the G7 who want to build up their gold reserves – “to snap up cheap gold from the IMF.”

Market analyst, Rick Ackerman observes that the gold contemplated for sale by the IMF, is a tiny fraction of the gold needed by nations, especially in Asia and the Middle East, seeking to hedge their huge dollar surpluses. Ackerman predicts that the dollar-surplus holders will gladly hoover up any amount of gold the IMF wants to throw on the market and that it will turn out to be “the day the hard-money advocates called the bankers’ bluff.”

Attempting to sell the IMF gold is another short sighted illusory panacea which will create more problems for western financial institutions in the long term. Indeed it may ultimately lead to a further increase in the wealth and power of Asian and other emerging economies and diminution in that of western economies and particularly the U.S.

We believe gold and silver remain in the middle stages of a multi year bull market as none of the fundamental factors driving prices higher have dissipated, indeed many are strengthening and becoming even more important – particularly the real possibility of stagflation.

Support and Resistance
Strong support in gold is now seen at $890 to $900. Short term support is now at $925 and below that at $915. The $1000 price level remains a short term price target but further short term consolidation may be needed prior to reaching that big round number.

Silver is trading at $18.11/16 at 1200GMT. Silver remains undervalued and $25 looks likely in 2008. Silver’s nominal high of $50 per ounce is likely to be reached in the next 3 to 7 years. Nearly all other commodities have reached their nominal record highs and some have reached their inflation adjusted record highs. Silver remains the laggard and this will likely change soon as silver plays catch up.

Platinum is trading at $2112/2122 (1200GMT).
Many assume that the surge in platinum in recent weeks must be a speculative blow off and will result in a sharp selloff soon. This is highly unlikely as this has not been a speculatively driven market.

The FT reports that CFTC data showed a reduction in the speculative net long position for a sixth consecutive week in spite of prices rising to record levels amid concerns about the South African power crisis causing a supply shortfall this year. John Reade of UBS said the data was a clear indication that speculators were not the driving force behind rising platinum prices. “Over the counter buying from funds and investors, together with some producers scrambling to cover contractual requirements have been behind the move in platinum (prices) this year,” said Mr. Reade.

Mr. Reade said that “supply deficits of more than 700,000 ounces a year will result over the next three years. The only way the market can be brought back to near balance is for higher prices to displace jewellery demand and encourage scrap (supplies) and profit taking from investors.”

The shortfall in platinum production appears to be creating a structural change in the platinum market that will result in materially higher prices and $3,000 per ounce is being spoken of as a realistic medium term target.

Palladium surged to over $513/519 per ounce (1200GMT).

Mark O'Byrne
Executive Director


No posts available