Is Gold Consolidating?

July 5, 2008 | By | Reply More

Gold eased back a little in Fridays European trading as the greenback steadied against the Euro and sterling and oil was a fraction down after reaching an all time high a shade off $146 a barrel the day before. What we are seeing is gold consolidating at this level.

In a nutshell nothing much happened in precious metal, currency and oil trading while the US enjoyed the Independence Day holiday.

This is an indication that the US has not yet lost its role as by far the most important and influential prime mover of markets.

We can argue that times are changing, that the economic status of the US is diminishing and that may be true, but at this moment in time it far outstrips the BRIC, the oil producing and European economies combined in dictating global market and economic direction. Its impact is likely to continue for a good few years yet despite the dangers to the dollar, escalating war costs, increasing inflation, poor leadership, et al.

With this in mind, it is not surprising that gold is steady around the $930 an ounce mark at a time when seasonal factors have in the past tended to work against the prices of the yellow metal and silver being sustained.

Even the most avid bulls must be realizing that the general market deterioration is unlikely to be halted until summer ends at the earliest. Repeated attempts to call a bottom by self-interested market analysts have so far proved a failure. With the jobs of brokers, bankers and fund managers remaining in jeopardy do not be surprised to hear yet more premature bottom fishing tips, dressed in the guise of value investing, hitting the media.

Of course there are and will be companies that will ride out the storm or even benefit during this undoubted recession, the problem is that market psychology becomes indiscriminate in hard times, not least because over leveraged traders have to pay up for their losses. Even the best performers can get harshly marked down.

At the same time there is still plenty of money that has to find a profitable home and where better than in markets vital for mans´ well being and where demand outstrips supply. Soft commodities hit the target and, we would argue, so do gold and silver. Both have played a vital role in mans´ desire to prosper in face of adversity.

A pocketful of gold is the best guarantee for a full stomach. It is this reason that these two metals, for thousands of years the basis of all currencies and perceived by virtually all the peoples of the world as the ultimate store of value despite the U

S, with other nations following like sheep, going off the gold standard in the nineteen seventies. So much easier to print money without being accountable than guarantee exchanging paper for precious gold.

We urge our readers not to risk missing out on gold and silver. Yes, there will be buying opportunities all the way up to $2000 an ounce. Yes, the price may pull back to $900 an ounce, may be even less. But right now $930 seems a pretty fair price to get in at with an upside looking a better bet than a plunge to below $900 an ounce.

Platinum Group Metals (PGMs) present a different scenario. Despite platinums´use in jewelry, the majority of demand for PGMs is industry based. Advances in science and technology seem to find more and more applications for these metals on an almost weekly basis. Most offer the virtue of a supply shortfall for reasons previously discussed on this site.

They are all at, or near, their all time highs and could be set to go much higher but yet we have reservations.

There are indications that the recession (no apologies) will not be confined to the US and other Western economies but will spill over into a global downturn, quite possibly severe. Note the inflation levels in China, the Gulf States etc.

Sooner or later this may result in a sharp cut in manufacturing activity. China for example is becoming a major car producer as well as importer but what is the point of millions owning a nice new car if gasoline becomes scarce and expensive.

However such is the diversity of uses for PGMs it is probable that demand will be sustained as new applications go into everyday production but it is important to research and evaluate each of the metals before taking the plunge. The safer way is an ETF or tracker.

Lastly the miners are facing a host of problems wherever they are operating. Common to all is escalating costs, not only of current production, but also exploration and development. If you get it right you will get a bigger bang for your buck than putting your money into the metal but of course the risk is that much greater.

We love a punt on miners, particularly the juniors, but will not risk a cent on any miner whose principal production source is South Africa, South America (except Mexico or Brazil) or any other country with an unreliable political environment. China is probably OK but there are other options, mainly Australia and Canada.

Until next time when we will have a long hard look at the prospects for uranium and nuclear energy. 

 

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