Hi Jay...thought you would like to see this:
Fundamentals are pushing gold into super-bull territory
Market Watch
Victor Hugo
>>Canny traders in China, Dubai and Malaysia last year established active gold exchanges to cater for the demand for gold bullion and coins. Traders on the bullion and futures desks know where the major pressure of buying is coming from. They say that in recent weeks much of it came from China, Japan and the Arab world.<<
Sceptics who don't believe the bull run in gold will last assume that its price is being driven mainly by war fears and terrorism dangers.
I say no, there is a much more fundamental reason.
A shift is happening in global investment patterns - out of paper and US assets and into hard assets and other countries.
The weakening US dollar and Wall Street are illustrating this shift, telling traders to expect strength out of gold's technically classic "rocket acceleration" pattern.
Other macro indicators suggest why money is moving out of the world's largest economy. The next bubbles due to burst are US property prices and US treasury bonds. No country in a declining growth environment can sustain record-high levels of personal, corporate and public debt, a huge trade deficit, the cost of a war on terrorism - as well as potential for a war in Iraq and in North Korea.
The action of the dollar in the past two years suggests the world has decided that the big growth years of the US are over and it is time to move into something else. Some of that money is already moving into gold.
Canny traders in China, Dubai and Malaysia last year established active gold exchanges to cater for the demand for gold bullion and coins. Traders on the bullion and futures desks know where the major pressure of buying is coming from. They say that in recent weeks much of it came from China, Japan and the Arab world.
Traders don't act without reason. They take into account that North Korea can now land missiles with nuclear bombs on the US west coast . And they most certainly believe US president George W Bush and his British counterpart, Tony Blair, must know more about the dangers from Iraq and terrorism than they can say.
Another factor in gold's favour is that there is some evidence that central bankers the world over have acted in concert since at least the mid-1990s to support a stronger dollar and a weaker gold price - and to achieve returns from what was seen as a depreciating asset.
Through complicated short sales, leases, swops and outright sales, a significant portion of reserve assets in the form of gold has disappeared. In its place is merely a claim against a financial institution or bullion dealer for its return.
Yet that institution or bullion dealer - now also under pressure in a declining earnings environment - is having to buy in physical gold or its equivalent in futures contracts, very expensively, at a higher gold price than expected.
A further dumping of the dollar, for whatever reason, could fuel a rocketing gold price to above 500/oz - which would, in turn, fuel more short covering and more demand for the physical metal.
The mines can produce only so much; they need years to expand production. Since 1996, demand for the metal has exceeded supply. Central banks sold their holdings - and this kept the gold price down - but now those banks are no longer sellers. In fact, they may be sweating about how to buy back the gold that enabled their profitable swops and leases.
The fundamentals are in place for one of the biggest gold price squeezes in history. Technical and long-term cycle factors are also strongly confirming this view. An (unlikely) quick war in Iraq won't kill the gold price.
While the gold price remains above the $332/oz area, medium- and long-term technical trend profiles indicate that there is a super-bull trend under way.
The fundamentals and cycles suggest there will be more upside in coming months but technically, there is scope for several days or weeks of consolidation before the next push. Even sceptics will want to be aboard when the gold price goes above the $359/oz or other technical resistance levels again.
When gold shares fell by 40-50% between May and November last year, fuelled by a stronger rand, it felt like gold bulls had got it all wrong. It was difficult to buy gold shares during that phase because most stockbrokers and many commentators were warning of limited upside.
Nobody has a perfect crystal ball, yet there is lots of evidence that this is a dip-buying opportunity for gold shares. A higher gold price is likely on the technical, cycle and fundamental supply-demand factors mentioned above.
Perhaps the biggest risk is that the rand strengthens in coming months as the global community sees prospects of good relative growth in South Africa , as well as good debt discipline. Our analysis systems show tentative behavioural evidence for the rand moving to the R6.50/ area, or even stronger, in the next 18 months.
In that scenario, JSE gold shares may pause and not do much until the rand price of gold shows scope to work above R3 300/oz again.
But a stronger rand will be great for long-term growth and inflation. And gold sales will have their day even if the rand strengthens beyond consensus expectations. A gold price of $500 or above - perhaps before the middle of next year - will encourage many a gold bull.
In conclusion, I believe gold shares are at useful buying levels. Buy now, and buy more in dips.
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