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Strategies & Market Trends : China Warehouse- More Than Crockery -- Ignore unavailable to you. Want to Upgrade?

To: RealMuLan who wrote (2075)	12/17/2003 7:28:17 PM
From: RealMuLan	Respond to of 6370

Don't be fooled, this run in gold is real By Malcolm Maiden December 15, 2003 Print this article Email to a friend Gold has had a banner year. The stuff that glitters jumped by $US4.70 an ounce overseas on Friday to $US410.10 and has now risen by $US87.35, or 27 per cent, since April 8, when it hit $US322.75. Gold was $US351.60 at the start of the year, almost 17 per cent below its current level, and is trading at prices last seen at the end of the 1980s. The technical pivot of the rally has been the decline of the US dollar, which produces a virtually automatic increase in the $US gold price. The greenback hit record lows against the euro on Friday and is now about 30 per cent below its peak in the first quarter of 2002: the $US gold price has risen by the same amount over the same time. But there are reasons to believe that this is not a fool's gold rally. The US dollar is not expected to recover strongly anytime soon, for one thing. The US domestic and trade deficits are running at a combined $US1.5 billion ($2 billion) a day, and America's cash interest rate of 1 per cent is half that of Europe's, 2.75 percentage points below Britain's and 4.25 percentage points below Australia's, and unlikely to change in the near future. advertisement advertisement The US Federal Reserve is not signalling an imminent rise, and the market believes the Bush Administration is happy to have a weaker currency buttressing its attempt to kick-start the economy. There also have been some fundamental changes in the gold market itself. Chief among them is the decline of the gold hedging "contango" by goldminers, a practice which, perhaps not coincident-ally, began in the late '80s when gold was last above $US400. The forward-selling contango works best when there is a wide gap between market interest rates and the rate that central banks charge to lend gold. It involves the miner committing to sell gold in the future to a bullion bank, at the prevailing spot gold price; the bullion bank simultaneously borrowing an identical amount of gold bullion from a central bank, for the same amount of time that the gold futures contract covers; the bullion bank then selling the borrowed gold on the open market at the spot price (the same spot price that has been used for the forward sale); and, finally, the bullion bank investing the proceeds in the money market, where it earns more interest than will ultimately be paid on the gold loan from the central bank. smh.com.au