Just How Solid Is the Gold Price?
By: Julian D. W.Phillips, Gold/Silver Forecaster - Global Watch

Thisis a snippet from the Gold Forecaster. The newsletter that covers allpertinent factors affecting the gold price [with a 95% accuracy rate].-

The goldmarket has fallen dramatically in the last few days. Where will thegold price go now? You will have a large amount of Technicalcommentary at hand to tell you and the bulk of this will pointdownwards. Is that enough to make the market follow theirpredictions? It would appear so, because Technical analysis is a vitalpart of gold investor information. The U.S. gold market, whether itbe COMEX of gold Exchange Traded Funds have, to date, dominated the goldprice itself. These markets place an overridingemphasis on the Technical picture. Major buyers, follow theseshort-term moves and players carefully pick the time of their ownactions in the light of the short-term picture, and then dominate thegold price through their actions.

But we need to stand back to see clearly the shape of the goldmarket. An analogy we have often used is thatthe gold market is similar to the sea shore. Youhave the moment to moment wave action. On adaily basis you have two tides indicating longer term averages thatinfluenceshort-term prices then you have the currents that completely dominatethe sea. But it is the noisy reactive movementsof the waves that attract the most attention. Whilethey can become frothy in reaction to the wind and extend their movesin and out every seven or so waves they are subject to the tides andcurrents. Tides are simply more forcefulexpressions of waves but currents always dictate sea moves.

The parallel is found inthe gold market. Traders are the short-termplayers chasing quick profits, with heavier weight players againprofit-driven, chasing the bigger slightly longer-term profits. But the biggest players don’t play for profits in thegold market, but invest to retain value over the longer term.

The goldmarket for most of man’s history has served as just that, a reliablemeasure of value as true money. The currencyexperiment of the last 40 years has been a departure from that, but inthe last 10 years we have seen the return of respect to gold by thebiggest investors in the gold market. We believethat this will continue to happen and that such investors will quietlyand unobtrusively dominate the gold price goingforward. A big 20% dipserves them well.

So what do the three sides of the gold market tell us now?

TheTechnical picture points down but into a large barrier of support. The short-term traders point to the strong $ rally,if not a turn in the fortunes of the $ and take the gold price down asfar as their short-term [wave] actions allow. Thebigger slightly longer-term speculators [tide] feel the same at themoment going short or just closing longpositions.

Large gold investors in the U.S. presently sit on the sidelinesand have a tendency to sell small amounts into the market.Their present anemia encourages the speculators to sell and apicture is nowpresented that the market is worthy of a fall. Howfar still remains to be seen. This makes thegold price look weak and dangerous. And in theshort-term the speculators may still have their way. Whatof the big long-term investors from all over the world [sea currents]? What do they feel about the gold price and how willthey act in this market?

To seethis one has to realize that the bulk of the world’s gold is not dealtinside the U.S.A. but outside it. The U.S. hasto go there to get the bulk of its physical gold too. Theloud and noisy short-term U.S. markets such as COMEX are heard all overthe world, but have little but superficial real power.For instance, if PresidentObama gets his way and prevents U.S. banks from proprietary dealing[using its own money to trade markets] their presence on COMEX will haveto diminish. What is that presence now? They hold an overwhelming number of “short positions”on COMEX that they will have to close. COMEXhas always had an extremely low number of physical deliveries takingplace, for each contract represents a future delivery time and so arematched against the opposite number of opposing trades disappearingbefore delivery must take place. So buying andselling simply takes net profits or losses, but usually doesn’t pay morethan a 10% margin or so for the privilege. Yes,COMEX should hold sufficient gold to deliver the net amount of sellingover buying and vice versa, but this is a relatively small amount.

For amajor bank such as JP Morgan to be made to deliver on its [‘short’contracts] would mean that they would have to go out and buy that goldfirst, so they could deliver it to the market. COMEXdoes not hold that amount of gold in stock. Thefact that President Obama has put this on the table must have J.P.Morgan trying to cover itself and want to unload into the market. If long-term speculators take long positions in thehope that the huge short covering will take place and hold the goldprice up, then the amount of short covering deals will far outweigh thede-hedging we’ve seen over the last few years. Isthere enough gold out there for them to do that?

Now gooverseas and look at the large players. Russiabought 24 tonnes of gold in December as part of a persistent buyingprogram which we believe China is doing surreptitiously too. That’s apart from individuals from Mumbai toShanghai, in large numbers, buying as part of their long-term savingsplan too. Thedemand for physical gold is ignoring potential interest rate rises inthe U.S. they simply buy gold as financial security. Itknows nothing of Technical price action, except to look for a ‘floor’price to reassure them that when they buy the price won’t fall again. Most of all it does not buy for a future profit! The cultural difference between Western and Easterninvestors is enormous and telling!

Justthink of it, half the world is getting richer by the day and steadilybuys gold. They ignore the day-to-day waveaction and look at the tides, to get the right entry points. Like acurrent they are unstoppable. This type ofdemand, like a sea current, gives solid support to the gold price andensures that the upward trend stays in place. Itdoesn’t chase prices and doesn’t take profits, except rarely. It absorbs supplies.

What isthe future of the importance of the U.S. futures and options markets tothe gold price? It has to wane in theface of the current of new investment money and investment of new wealthgained from the Western developed world. Gonealready are the days when it could take the gold price from $300 to $390then back to $326 at their whim. Now they too,have to read the market with a vision wider than the Technical picture.

Is the gold market solid in the face of these realities? Yes, indeed, telling us that any heavy fall in thegold price will invite long-term investors of all shades into the goldmarket.Lighter falls will invite those already waiting to enter themarket. The distance the gold price has come isrelevant to a profit seeker, not one buying to hold as financialsecurity!