Gold Continues To Fluctuate

August 19, 2008 | By | Reply More

As I write spot gold continues to fluctuate between $787- $802 an ounce since last weeks close. Remembering that the yellow metal has dropped from $970 an ounce since July 22nd, less than 20 trading days, who can doubt that this is a severe set back for even the most ardent gold bulls, and that includes ourselves.

At the same time commodities of every hue have followed suit, seemingly ignoring likely global demand/supply fundamentals but led by the conception that looming recession in the US and other Western countries will encompass the remaining global economies.

Now this is where we have a strong opinion that we are not afraid to express. Before we do please remember that we are not recommending that you act based upon our reading of the current climate.

Mr Market has proved us wrong on too many occasions in the past for us to think that we are infallible. That still does not stop us from putting our money where our mouth is with some success, albeit limited.

We do not think that any BRIC country will suffer from anything more than a slight downturn in the booming economic activity that they have been enjoying for the last few years. Trade between them is also growing, have a look at the latest figures on trade between India and China and the 2009 projections!

It is crucial to remember that these nations have rapidly growing middle classes with money to spend on raising their lifestyles to Western standards.

They have huge resources of cheap labour. Their infrastructure, ranging from roads, power, banking and finance, retailing, virtually anything you can name, needs vast sums of money and materials to bring them up to modern standards.

This work is already underway and importantly these countries have the financial resources to pay and continue to pay. Arguably the most important edge that they have is that they are not hamstrung by the multitude of restrictive practices that have been imposed upon employers in the West.

In contrast to the US, the UK and other European nations they are building from a far lower base but now have the resources that allow them to be far less reliant on trade with the US in particular.

Encouragingly for gold bulls there are signs that a degree of decoupling from the price of oil are becoming evident.

There will always be a likelihood that one will influence the other to some extent but we feel that for the last year the very close link has been unhealthy, illogical and an indication that speculative interest by fund managers and others who do not have an extensive knowledge of the commodity markets have been the main drivers of the scenario that has been unfolding for the last six months.

Hopefully they have now been driven out of commodities back to where they belong in stocks and shares.

Where does this leave the precious metal sector for the next two years? Gold is the main driver of all precious metal prices, including the miners, whether we like it or not.

Throughout the group supply is down year on year and at the present time demand is up. Taking gold out of the equation, the expectation amongst investors is that global industrial demand, led by the US, will be substantially reduced as recession takes hold.

This outlook has had a dramatic effect on platinum, palladium and rhodium, essential metals to auto manufacturers.

We have seen no sign yet of lowering demand for cars from Russia, China, India and not to forget the oil rich Middle East. Quite the reverse, India, for example, is showing its confidence by building a new oil refinery despite not being a producer.

To us platinum looks like a ‘must’ buy, production continues to fall with no end in sight until the South African power problem is resolved, 2010 at the very earliest estimate.

Whether gold will drop to $750 an ounce in the next few weeks remains to be seen. If it does we will sell off all our stocks except miners at any price and buy.

Please do your own research and make your own assumptions without relying on our opinions but whatever investment decisions you make, this present market climate requires patience above all. Patience we are told is a virtue, perhaps we should now be told that it can also be profitable.

Taking gold out of the equation, the expectation amongst investors is that global industrial demand, led by the US, will be substantially reduced as recession takes hold reaching every sector including quotes for life insurance and annuities.

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