By Julian D. W. Phillips, GoldSeek

We are hearing from some sources that the gold price will tackle previous highs then fall to $850.   We did hear this before gold rose to $1,100, with many believing that then there would be a correction to $850, but it didn’t happen then either.   What happened was that gold held its ground then broke upwards through resistance to set itself on track for higher prices.

If previous highs are hit and if a double top is formed, then a major correction could come about.   But there are two ‘ifs’ there, which is not solid ground on which to stand.

It is at these times when we bring in the fundamentals.   Many will say that the Technical picture can stand alone.   Well in a situation that has to read a Technical picture still to come, that would be dangerous.

In the last few years the gold market has changed considerably from essentially a market where there was little investment interest to one where investment interest dominates the market.   That investment interest is now at Sovereign wealth fund and central bank level, areas well beyond past market shapes.   Past shapes defined the Technical patterns we now see.   Technical patterns that are now being set are based on a far bigger, different natured market too.  The Technical picture is still very valid, but must be tempered by the new fundamentals.   So let’s not ignore these changes when assessing future price moves.

One only has to watch the media, written and watched to see that it is so easy to fall victim to persuasive, if unbalanced presentation.   TV journalists in particular have to present a story, one with drama and presence, simply to keep the audience watching.   This can easily detract from realities.   For example, Mr George Soros was accurately quoted as saying that gold was the “ultimate bubble”.   The press interpreted that as him discrediting gold.  However, to the contrary he was pointing forward to the future of gold, when it would become the “ultimate bubble”.   How do we know, simply because he has been buying the shares of gold Exchange Traded Funds and shares in Nova gold, a gold exploration company.   So it is more likely that he is buying into gold with a tremendous gold price rise in view.   This is now obvious, but to date we have not seen a change in the views on his position.   He’s read them, better than they read him.

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By Julian D. W. Phillips, GoldSeek

To make the point, we ask you, “Which is better, a glass cracked in the higher part of the glass or cracked in the lower part of the glass. Now replace the glasses with the $ and the €. Both are now under question.

The Devastation of Falling Confidence

On the left hand side the picture is of a $50 Bill as you see it today.   On the right hand side is a picture of a $50 Bill from yesteryear then called a “Gold Certificate”.

It was exchangeable for $50 worth of gold when gold was fixed at $20 an ounce.   Note the same President’s picture there [what would he think?].   The modern note is not exchangeable for any gold let alone 2.5 ounces.   And therein lies the problem of valuing any Dollar bill.   Its backing is your confidence in the government and the monetary authorities issuing it, as a reliable measure of value.    But the U.S. is not alone.   The Euro is going through a similar loss of confidence.

Now, put in your mind’s eye into a situation where the currency has the backing of gold and the government overseeing the currency.   The dual support gives it far more value.   Now you have a currency without the backing of gold and with the backing of a government trying to control the state of the economy by printing vast quantities of money in the belief that when the time is right they will withdraw it and re-establish monetary stability.   History alone gives us due cause to be prudent, doesn’t it!

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By Przemyslaw Radomski, GoldSeek

We’ve started our previous essay, by describing several interesting facts about the U.S. Dollar. We wrote the following:

We’ve recently read something (http://www.lewrockwell.com/margolis/margolis179.html) that can elucidate the enormous, almost incomprehensible, size of the U.S. government debt. The numbers are so huge that it is difficult for most people to get a handle them.

If you had spend $1 million each day from the time of the establishment of the ancient city of Rome-about 2,700 years ago-until today, you would have accumulated about $1 trillion in debt. But hold on. You would have to double that figure to get to the $2 trillion in foreign debt that must be repaid or refinanced each year by the U.S. government, a feat accomplished in only a few short years.

It doesn’t take a genius in economics to understand that when you print ever-increasing supply of fiat currency, it will inevitably lose its value.

Since fundamentals are one thing, and the short-term situation is quite a different thing (people, and thus markets that they create tend to act emotionally in the short-term), we decided to also provide you with the analysis of USD charts.

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By Andy Hoffman, GoldSeek

Today’s announcement by the Chinese government that they plan to buy the remaining 191 tonnes of IMF gold (if it even exists) is possibly the most important event in the ten-year gold bull market, and perhaps could turn out to be the inflection point from when the public believes the propaganda about gold and starts to disbelieve, yielding the commencement of the latter stages of the PM bull and the early stages of American economic, political, and social chaos.

China is the only entity on earth with the financial backing to take on the U.S.-government led gold Cartel, with the ability at literally any moment to take them out and cause the price to soar to unimaginable levels.  Until now, they have been very coy about their statements about gold, as given their huge hoard of roughly $2.5 trillion dollars (largely held in U.S. Treasuries), they are very concerned about a dollar (and frankly all fiat currency) crash.  In fact, they were complicit in creating the dollar bubble by pegging the yuan to the dollar and thus creating massive, artificial U.S. consumer demand for Chinese products via the creation of massive U.S.-based debts to purchase Chinese manufactured goods.  Thus, no one is more aware of the precarious state of their dollar holdings, and what is likely to occur to them in the coming years.

Given this sensitivity, China has NEVER made public statements about its intentions in the gold market, until about six months ago when it announced (no surprise to us “goldbugs”) that they had acquired 450 tonnes of gold over the past five years, bringing their total holdings to 1,054 tonnes (only about $40 billion worth).  That statement spoke volumes about Chinese intentions, particularly when they shortly afterward starting making PSA’s to the Chinese population encouraging (no, URGING) them to buy physical gold and silver.  The Chinese are quite aware that “REAL MONEY” was getting ready to break away from the U.S. government-led rigging that has suppressed them for years (and thus propped up the dollar), and you can be sure they do not want their population stuck in fiat dollars (not to mention pounds, Euros, etc.) when “REAL MONEY” retakes over its historic role.

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By Justice Litle, GoldSeek

To the degree that the gold price falls (and the dollar rises), we are witnessing a giant geopolitical chess game in progress.

As you have no doubt heard, Beijing is sitting on something like $2 trillion in excess reserves. It’s actually more than that. According to Michael Pettit, a noted in-country China watcher, the figure is “pretty close to $3 trillion” depending on how you account for it.

This massive sum is no guarantee against a China market crash. Pettit goes on to point out that China’s huge reserves amount to “5-6% of global domestic product.” This is the same rough percentage as the total central bank reserves accumulated by the United States in the 1920s.

It was fashionable to sweat the hoard of U.S. reserves back then, just as it is fashionable to sweat China’s hoard now. In the late ‘20s, John Maynard Keynes spoke of “all the bullion in the world” piling up in America’s coffers. And yet, despite all that backstopped loot, 1929 still happened. The 1930s still happened.

More evidence that even a rich-as-Croesus central bank can lose control, perhaps… or never had true control in the first place. This makes sense when you think about the monetary “pipes” analogy we used just recently in these pages. It’s no easy to trick to pump a vast quantity of cash into the system without seeing it pool stagnantly – or making the boiler explode. Bernanke and crew are like plumbers wearing oven mitts. Are the Fed’s Beijing counterparts really that much smarter?

Of Gold and the Dollar

But anyhow, moving on to today’s inquiry: Does China want a lower gold price?

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By Julian D. W. Phillips, GoldSeek

Claude Trichet, head of the European Central Bank dismissed talk of Greece exiting the Euro as their national currency.   The fact that he felt it necessary to issue such a statement meant that the prospect was being discussed outside the E.C.B.   Instead, the EU is considering sanctions against the country to bring it into line with the E.U.   The stress is high in the Eurozone!

The short-term traders in the gold market, particularly those in the U.S. [COMEX most of all] have traded on the back of the $:€ ratio moving the gold price up when the $ fell and down when it rose.   If there is a danger of any part of the Eurozone splintering off from the €, then the € could weaken heavily.   It may well occur when the $ is weakening too, softening the fall against the $.   With both currencies weakening at the same time, the market rates would give a semblance of stability and so persuade the short-term traders not to move the gold price.   So this relationship would belie the dangers to the currency world.   Which way would you jump with your gold investments?

Like the perceived ‘link’ between the oil price and gold, a relationship that was abandoned by short-term traders when the oil price spiked then fell heavily, the inverse relationship between the $ and gold likewise is based on poor fundamentals and is due to head the same way.  When it breaks and gold “de-couples” from the € gold will rise with the $ and throw Traders into a near-panic.   Will you be ready when this happens?

What is the € really?

In 1999 the € arrived in the global monetary system with great fanfare.   The Deutschemark disappeared; the French Franc disappeared alongside many other European national currencies, including the Greek Drachma.   In their place, came the €.

What happened in reality was that the days of fixed exchange rates returned without the hassle of different currencies.  Diverse economies in the Eurozone were joined together without national boundaries, allowing trade funds and capital to flow unfettered by European borders.   As a result, the strong got stronger and the weaker more vulnerable to these flows.   But many benefits have come with the system as employment opportunities abounded and a pool of cheap labor were able to access jobs all over Europe and capital flowed to where it was used most efficiently.   In addition the strength of the zone has grown enormously as it became an economic bloc bigger than the U.S. in population and hopes to equal and outrank the States in the future, economically.

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By: Julian D. W. Phillips, GoldSeek

General view of U.S. influence on the gold price

We have to ask ourselves what prompts investors large and small to go out and buy gold for their portfolios.   Are they moved by a single piece of news that is seen on television or one piece of U.S. economic news?   No, the average gold investor has accumulated reasons over time, which convinces him that it is wise to hold gold.   But the real truth is that the gold market is global and affected by a vast number of investors each with his own reasons for buying gold from Mongolia to Manhattan.   And at this moment in time, it is the non-U.S. investor that is driving the gold price.

We all tend to believe that the most visible news will be the most influential on the gold price, particularly when reporters and commentators shout it out.  Recently how many times have you seen talk of the Fed pulling back on Quantitative Easing and raising interest rates as a reason for selling gold?   The current picture of the Fed’s Balance Sheet is a broad gauge of its lending to the financial system.   Its liabilities rose to $2.274 trillion this from $2.216 last week. This shows that Quantitative Easing is rising still.   This was primarily due to a jump in Agency mortgage-backed securities, which rose to $968.59 billion from $908.74 last week.    So, interest rates are unlikely to rise for some time.   As far as gold goes, interest rates affect the exchange rate, which affects gold, but if it leads to a ‘real’ U.S. recovery, it has a bad affect on the gold price.

Is a real recovery in the U.S. on the way now?   We revert to a statement we made after the credit-crunch first hit in 2007, where we said firmly, that the Fed would not do anything until consumer confidence was visible and the housing market was recovering visibly too.   We maintain this position.   This is not the case yet.   With such an altered consumer landscape now, where savings are on the screen, debt-repayment a priority, making sure that one is not bitten twice, where businesses nurse cash-flow so as to be able to retain a good ‘acid’ [liquidity] ratio, the time for such moves by the Fed is still a way off.   They are as aware of the dangers to ‘confidence’ as we all are of ‘tightening’ too early.   They have to wait for a good recovery, one where employment of non-service staff is growing visibly.   That day is still far off.   Will that be bad for the gold price?

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One explanation for the increase in today’s gold price is that it is adjusting for the past 26 years of monetary inflation. The consequences of the adjustment in the gold price will be a decrease in American’s net worth and an increase in their food and energy costs.

Under a gold standard, or in a market, citizens can exchange their paper currency for gold. The gold standard gold price equals the supply of currency in circulation divided by the total supply of a country’s gold bullion. The graph below illustrates the relationship between the gold standard gold price (black line) and the actual gold price (red line) since 1950.

In 1950, the gold price was $34.72 and the gold standard gold price was $38.77. In 1971 gold price was allowed to float against the US dollar, it naturally increased. The reason for the increase was the gold price was adjusting for the 30 years of monetary inflation created by the Federal Reserve Bank. The graph below illustrates the gold standard gold price (black line), based on weekly currency data, and the daily gold price (red line) between 1979 and 1983.

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By Julie Crust and Jan Harvey, Reuters

LONDON — Investors in major gold producers may enjoy some long-overdue gains next year as companies hope to cash in on the precious metal’s ability to sustain historically high price levels.

Gold’s pullback from record highs above $1,225 an ounce this month is seen by some analysts as a key stage in its longer-term uptrend. Sustained price gains are likely to be supportive for miners in a way occasional forays to record highs have not been.

“Once prices stabilize, whether it’s at $1,000 or $1,100, you will find significant buying coming back to the gold equity market,” said RBC Capital Markets analyst Leon Esterhuizen.

“I would expect people to buy the equities up to the gold price level at that time, because then you are basically gearing up for the next run.”

General pricing levels for gold equities were at least $200-300 behind spot prices when the metal was trading around $1,200 an ounce in anticipation of a pullback, Esterhuizen said.

Gold has fallen more than 9 percent after surging last month on the back of central bank buying and dollar weakness, fuelling hopes the metal may be building a base at higher levels.

Most major gold miners have underperformed 2009’s 27 percent rise in bullion prices. Strong local currencies have raised costs for many, outweighing the impact of higher metal prices.

South Africa’s Harmony Gold, the fifth-largest gold miner, is the biggest underperformer of the world’s top 10 gold producers. Its shares have dropped 19 percent this year, mainly due to the strong rand.

“Gold companies have been bad at forecasting production and costs,” said Theresa Gusman, global head of commodities at DB Advisors, the asset management subsidiary of Deutsche Bank.

“As production has fallen short of expectations and costs have continued to increase, it has been very good for the gold price — but for stock prices it has been bad.”

For graphic showing the relative performance of selected gold miners and bullion, click on: here

Russia’s biggest gold miner, Polyus Gold, was the only top 10 producer to outperform bullion. Its shares more than doubled helped by rouble depreciation, resolution of a shareholder conflict and good growth prospects.

“It’s the company with the largest organic growth profile among the major and mid-sized gold miners,” said Vladimir Zhukov, metals analyst at Nomura Research in Moscow.

Gold companies historically have not been good at delivering returns on capital compared with, say, copper producers, but analysts say majors such as AngloGold Ashanti, Newmont and Barrick may soon be delivering greater returns.

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It’s all gone wrong. The momentum has stopped. Gold’s run has been stunted. Now we need to work out if this is a short term top or a more permanent feature.

Gold looks very pivotal right now. All eyes are on the direction of the dollar. Any hints of interest rate rises will induce a bullish dollar sentiment which would in effect result in a lower gold price. Because of today’s uncertainty the gold price is being held ransom by speculators reacting to news and data.

Investor sentiment can turn quickly and have severe consequences. After the 1980 spike, gold dropped from its top of $850 to near $500 in less than 2 months. At that time interest rates were running rampant and there was a lack of confidence that the dollar would survive. And today the dollar is still calling the shots.

One of the reasons for gold’s ascent over this decade is the value central banks and sovereign wealth funds have placed on it. Traditionally, money has been backed by a certain amount of gold, much like an ETF today. Gold has inherited a value unlike any other commodity. Its value is not derived from what you can do with it… there’s not much you can. In fact, much of the gold ever mined sits in vaults rarely touched.

Gold is valuable because it is an alternative to fiat money. This is the sole reason for its recent climb. Over the last decade, gold’s ascent is really a reflection of the decline in confidence of currencies across the world.

We’ve mentioned before China’s 2 trillion dollar surplus in foreign reserves, we’ve seen central banks from around the world diversifying and buying into gold as an alternative. And it’s this support that, in our opinion will keep the value of gold climbing higher.

Central banks have been banking on the dollar and now they’re all trying to lessen the impact of its devaluation. It’s the equivalent of putting all your eggs in one basket and finding it has a hole inside.

This week all eyes were on the US to see how the Federal Reserve were going to deal with the fiscal stimulus the central bank had pumped into the system. Any wording that gave signs of higher interest rates would determine the outlook for the US dollar and the price of gold. In fact, this never came. The Fed announced yesterday that they will be keeping interest rates low for “an extended period.”

Interest rates will be kept low because of the huge amount of government debt. It’s not feasible yet to hike interest on the huge volume of debt still in the system.

The brief dollar rally which has unraveled over the past few days has given investors new optimism in the dollar. But this optimism is misplaced. Nothing has changed, there’s still a huge amount of US debt. The reason behind its rally has more to do with the problems of other currencies in the wake of Dubai. Greece, Ireland and the Austrian bank problems have all surfaced and these could be just the start.

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