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Interesting take on Gold

http://www.stockhouse.com/bullboards/viewmessage.asp?no=6980292&t=0&all=0&TableID=0

PriceGold Monitor
M. Murenbeeld &
Associates Inc.

The Nov. 19th headline
"Gold soars above $400" on CNN.com might have been a bit premature, but there was
a new high of sorts this week: the a.m. fix of Nov. 17, at $398.00, was the highest fix
of the year to date. We fully expect the $400 level to be broken before long, even if we
have forecast in the recent past that gold might not close the year above $400.
We noted last week that we don't get too uptight about "levels of resistance"; there are undoubtedly good reasons why some price levels, i.e. $400, prove to be more resistant
than others. Take the case where a central bank, say one of the WAG signatories,
writes calls at $400. The buyer, a dealer, will be deltahedging the exposure - bringing
more supply to the market as the price reaches for $400. The net result is "stickiness"
at $400. Simply put, "resistance" comes from the fact that a central bank (or other
large holder) is quite willing to sell gold at a particular level.
Lest we forget, central banks (and others, including miners) are still selling gold!
To remind the reader of this fact - and the albeit small probability that there will be
even more selling in the future - I quote from a meeting held in Dakar of African finance
ministries and others. "We estimate … that selling half the IMF's gold reserves would amply finance all the extra reduction necessary for the heavily indebted poor countries (HIPC)" the statement noted. Now, as the reader undoubtedly knows, the IMF has been besieged again in recent years to sell some of its gold holdings which total 103.4million
ounces, or 3217 tonnes. In fact, as the price of gold goes higher and the world's debts rise, one can be assured that
With Cdn $
Without Cdn $
January 1999 = 100

GOLD PRICE
US$ - Friday p.m. fix
M. Murenbeeld & Associates Inc. calls for more gold sales will multiply. (Contrary to comments I hear often: "as the price of gold rises central banks will realize the error of their ways!", higher gold prices intersecting with higher public debt levels makes for a potent selling argument.)
The reason we don't worry unduly about more official selling of gold (we do worry, however) is that there are equally good arguments to suggest any damage will be muted. For one thing, the IMF sold gold in the late 1970's (in 1976, and the US sold some gold in 1978). But the reader would be hard pressed to see the impact on a price chart for
that period. Gold was well bid in the second half of the 1970's. Indeed, when the
world really wants to buy gold, there is little that can sink the price; the extra supply is sucked up! We are slowly inching toward another period where gold could be very well bid indeed. Another reason is the hoard of US Dollar reserves China and Japan have
amassed in recent years. Japanese currency reserves have probably broken $600
billion as we write, while Chinese currency reserves are now north of $400 billion.
(This is nuts, of course!) As I recite tirelessly, Japan can buy (easily) 600 tonnes of gold
a year (the amount we assume will be sold annually under WAG2) out of only the
interest earnings on its currency reserves.
I can hear some of my friends say - Martin, give up on this idea; it isn't going to happen! And indeed, it may not. BUT, again this week someone with the China Agricultural Development Bank argued that "it was time to increase gold reserves for China … to 4 5%". Currently Chinese gold reserves total 600 tonnes, or just under 2% (with gold valued at $375) of China's gold plus foreign exchange reserves. China would have to
add some 700-800 tonnes of gold to its reserves to get to 5%. This isn't a huge amount,
and if the IMF and Europe decide to sell a lot of gold, bullion would clearly have to find
other champions. However, if China and Japan both moved to the 15% gold reserve level
that the ECB chose, well, then over 12,000 tonnes would have to be purchased.
Staying with China for the moment, it is rumored in Canada that Tyra Banks' bra - as seen on the Victoria's Secret fashion show this week - was the "Trojan Bra that launched a trade war" (NP, Nov.20). Just so that the reader is up to speed, the US this week imposed temporary quotas on bras, bath robes and other apparel made in China. (Note that the US also has already imposed steel tar-iffs.) Let me be clear here: a tariff is currency devaluation by other means! US consumers will pay more to wear Tyra Banks' bra, meaning their Dollar's purchasing power is devalued. But as opposed to the Chinese exporter receiving the full amount of the sale, some portion of the revenue now ends up with the US government. (This is not always bad business, by the way. Historically,before income taxes, tariffs were governments' preferred way of collecting taxes! And the government of a big country like the US could do exceedingly well robbing foreign producers of "surplus" revenue with judicious tariff rates!) From a currency perspective however, the die is cast. The US wants a lower Dollar - i.e. the US wants a higher Yuan/ Renminbi. China can acquiesce or China can retaliate.
Retaliation leads to more retaliation and, if not stopped, to conditions not unlike the 1930's - a collapse of world trade. While it is much too early to speculate on such horrible conditions, it is important to note that some 1930's conditions are threatening the world economy today. Countries are vying for economic growth; demand needs to rise because employment needs to be maintained/ rise. The policies that beget more demand are "reflationary" policies - rapid money supply growth, negative real interest rates, large
budget deficits and currency
devaluation. And all these
policies are good for gold! Indeed,
gold rose in the 1930's
in order that reflation could
commence.
There is little doubt here
that the Renminbi will rise
against the Dollar. Japan has
done its best to keep the Yen
down, but that currency too is
now rising. We read into these
developments further declines
ahead for the Dollar.
Indeed, in a (sic) separate development, the governor of the Peoples Bank announced that China will gradually move toward full convertibility of the Yuan. (US tariffs are a sign that China should "please hurry up!") What to conclude? The macro-economic environment is quite favorable for gold! Unfortunately, given the recent bombings in Turkey, so is the political environment. And developments on both fronts are unlikely to turn unfavourable for gold anytime soon.
Gold Watch: (1) The Bank of China started trading gold on on the Shanghai Exchange on behalf of individuals this week. This is a first since the establishment of the People's Republic in 1949. We'll see how it goes! (2) "For the next decade we aren't going to do any more hedging", noted Peter Munk, Chairman of Barrick, this week. Barrick stock has behaved better in recent days, and dealers tell me that there was a noticeable impact of this decision in the bullion markets. Our interpretation? Don't count on de-hedging to end in 2004! (3) Like everyone else, we keep an eye on what others forecast for gold.
Not everyone is bullish, it turns out! The ANZ Bank sees gold rising to $419 before averaging $385 in 2004. The chief commodity strategist at SG predicts gold prices will
fall as producers stop hedging and funds rethink their long positions. But there is no urgency, he notes, for producers to resume hedging until gold falls to $350-300. Dresdner sees gold at $435 in 2004, but with a low of $325 in 2004 gold will only average $375. I knew we were bullish, but I didn't think we were that bullish! Our baseline projection has gold averaging just above $400 next year.
(4) Risk Ranges: Narrow $375-$415, Wide $365- $430. Our short-term bias remains
neutral because gold remains slightly ahead of the Monitor Model. Its value fortoday is $389! Gold looks strong however.