Gold Investments Market Update

Gold
Gold was up $8.70 to $946.10 per ounce in trading in New York on Friday and silver surged 58 cents to $18.66 per ounce. Gold particularly continued to surge in Asian and early European trading.
Gold also surged in British pounds and euro. The London AM Fix at 1030 GMT this morning was at $958.75 and gold fixed at new record highs in most major currencies – at£481.62 and €636.32.

The latest mooted IMF possible gold sale story was rightly treated with disdain by the markets and gold has rallied on the old reliables of surging oil and a sharply falling dollar.

Oil surged to new record inflation adjusted highs at $102.08 and the dollar has fallen sharply against a basket of currencies and to new record lows against the euro at 1.5065. The market is now convinced that the Fed will cut rates by 0.50% at the next FOMC meeting in March. Federal Reserve Vice Chairman Donald Kohn said that a very weak U.S. economy was a bigger worry than inflation risks. Thus the Federal Reserve appears willing to risk a massive inflationary spiral and will keep cutting interest rates which is very gold bullish in the current macroeconomic environment..

The economic data in the U.S. yesterday was very bad and even worse than had been expected. U.S. consumer confidence hit a five year low in February (it came in at a recession indicatory 75.0 much worse than the expected 82.0 expected), with expectations at their worst level for 17 years. Home prices dropped a steep 8.9% in just 3 months and home foreclosures surged 90% in January after the latest in a long line of mortgage rate resets to come. Producer prices rose at more than double pace economists estimated. U.S. producer prices jumped 1 percent in January on rising energy costs and posted the biggest 12-month gain in more than 26 years. Producer prices were up 7.4 percent from January of last year, the steepest climb since October 1981, the Labor Department said. The man on the street would say that this figures are at the low end of the real inflation scale and hedonic adjustments and other statistical gimmickry is disguising the true rate of inflation in the U.S. economy.

With oil again above $100 and the Reuters CRB Commodities Index surging to new nominal highs at 405.47(up 4.21), inflation is set to accelerate in the coming months despite a sharp slowdown in economic growth. Stagflation has arrived as is clearly being shown in the markets and in the surging gold price.

While the stock markets have again remained resilient despite horrendous economic news one has to wonder how long this resiliency can last. One also has to wonder whether the President’s Working Group on Financial Markets (http://en.wikipedia.org/wiki/Working_Group_on_Financial_Markets) is actively intervening in order to maintain calm and avert a panic in stock markets. U.S. Treasury Secretary Henry Paulson recently said that the Bush administration will continue to monitor capital markets closely and advocate strong market discipline and robust risk management. “Working through the current stress is our first concern,” Paulson said in a prepared statement to the House Committee on Ways and Means, “Through the President’s Working Group on Financial Markets, we are also reviewing underlying policy issues because it is just as important to get the long-term policy right.” The members of the President’s Working Group on Financial Markets, which includes the SEC, play an active role in overseeing the stability of the financial system and some have asserted that they act as a ‘Plunge Protection Team’ and will intervene in and manipulate stock and other markets in order to maintain confidence and prevent market crashes.Gold and silver remain in the middle stages of a multiyear 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 and $1,200 is now a realistic possibility in the coming weeks.

Silver
Silver is trading at $19.31/35 at 1200GMT.

As we stated yesterday, 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.

PGMs
Platinum is trading at $2145/2155 (1200GMT). Platinum is flat and appears to be taking a breather and consolidating prior to further likely price increases in the coming weeks.
Palladium surged and is trading at $546/552 per ounce (1200GMT).

Mark O'Byrne

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