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Can the G20 Stop Gold's Bull Run?

The lack of decisions & confidence at the G-20 meeting suggest further strength for gold...

The G-20 MEETING last week was hoped to be a watershed for the global economy, writes Julian Phillips at

It was hoped the group of leading economies would accept there has to be a global solution to the financial crisis. Those solutions had to include the full cooperation of all key governments, including China, before we could hope for a sound recovery of the global economy.

But all we just got was more superficial statements with no real action. Expect yet another crisis as confidence is lost, not only in currencies, but in global money systems.

The Gold Price has shattered overhead resistance from the 2008 high at $1032, which is now support. Reaching above $1,060 this week, gold is now due to consolidate these sharp gains, we believe.

Gold Investment demand (meaning for Bullion itself in Europe and Asia) is growing. Physical demand is also coming in from India as the wedding season takes off, but at lower levels than seen in recent years. Speculative demand in US Gold Futures has also surged, taking the net speculative long position to new record highs in line with the Gold Price.

There is no wavering in global confidence in gold, in short, even after the G-20 meeting. As that summit in Pittsburgh progressed, and statements came out of the conference, the inclination of the Gold Price was to struggle to hold ground and we saw it slip from $1,017 to $992.

The Dollar meantime appeared to hold ground in the $1.46 per Euro area, but that's ground which it has since lost. A look now at the real results of the G-20 should point the way forward.

After Ben Bernanke's massive issuance of new money through Quantitative Easing a major fear is that any withdrawal of this money will renew deflation at a more destructive rate.

"We will avoid any premature withdrawal of the stimulus," said the G20 communiqué, assuring us that worldwide this money will stay in place. With the Fed having stated that interest rates are not going to be lifted for some time to come, the US Dollar is now the "Carry Trade" financing currency of choice, enabling speculators to borrow cheaply and lending into a country with higher interest rates for an easy-looking return. Previously it was the Yen, but the Yen kept on rising and taking away profits from the transactions. With the Dollar now likely to fall further, the Dollar offers borrowers a currency that is going to be cheaper to repay, leaving interest-rate profits intact or even extending them.

So, the attempt to resuscitate economic growth through stimuli means the key global reserve currency is weakening against the bulk of the world's other currencies. This is Gold positive.

While the 'carry trade' will enjoy the weakness of the US Dollar, the currency will however be protected by its very size and only be allowed to fall gradually. Other Dollar dependent currencies will not fare so well. It appears more than likely that Britain's Pound Sterling is headed for a "brutal collapse". We have talked about Capital and Exchange Controls for some time now, so brace up for these in the UK. It will bring UK investors streaming into gold.

Another part of the communiqué stated, "We will adopt policies needed to lay the foundation for strong, sustained, and balanced global growth." Perhaps we misunderstood something here. We thought that this planning had been going on for some large number of months and that this conference was going to reveal these policies? There is little to rely on here.

What we do know is that China is not going to allow itself to pay for past US mistakes in any reformations, so we foresee at least some conflict of interest to prevent such an objective. Nothing solid here; again gold positive!

The communiqué called for "global architecture that meets the needs of the 21st century." Sounds inspiring but with the International Monetary Fund being put forward as the body that will monitor each nation's progress and possibly provide the new global reserve currency in the form of Special Drawing Rights (even though this failed before) nothing was done to re-distribute voting shares within the body. China will certainly not go along with a body where the US has the final say on resolutions the IMF makes. (Some 85% of member votes are needed to pass any resolution' the US has 16.83% of the body's votes, i.e. the casting decision.)

With the economic power of the East rising rapidly and the developed world facing a potential lurch back down into a deeper recession, this matter has to be addressed before a start is made on a 'global architecture to meet the needs of the 21st century. Until this issue is properly addressed, no progress will be made on a reformed global monetary system. At the moment the issue is not expected to be addressed until early 2011 by the Fund's 186 member countries.

The reassurance that "economic stimulus measures" would remain in place "for some time" is reassuring, but as we see disturbing signs that far more is needed than we have seen to date. While German car sales were up 28% in August, the Center for Automotive Research says sales will fall by a million next year: This will be the largest downturn ever suffered by the German car industry. Fiat's Sergio Marchionne warns of "disaster" for Italy unless Rome renews its car 'cash for clunkers' subsidies. Chrysler too will see some "harsh reality" following the expiry of America's scheme this month. Some expect US car sales to have slumped 40% in September and worse in October, unless these policies are made more permanent.

More than that, where are we in terms of the "recovery"? We were led to believe it was taking off rapidly and that 2010 would prove to be a return to prosperity. The figures are now painting another picture, China's exports were down 23% in August, Japan's were down 36% with industrial production dropping by 23% in Japan, 18% in Italy, 17% in Germany, 13% in France and Russia, and 11% in the US. What can we expect by way of a response? It has to be more stimulation and more currency issuance. Of course if all do this in concert then all will fall in value at the same rate, giving the appearance of stability. Gold investors won't buy this claim, and gold will reflect that fall in buying power.

With all the repairs being made to the global banking system, surely the banks are fuelling growth now? The reality is that US bank loans have been falling at an annual pace of almost 14% since early summer. M3 money has been falling at a 5% rate, M2 fell by 12% in August, the commercial paper market has shrunk from $1.6 trillion to $1.2 trillion since late May, and the Monetary Multiplier according to the St Louis Fed's data is now below ineffectual (at 0.925).

In Europe, M3 money has been contracting at a 1% rate since April. Private loans have fallen by €111 billion since January. Europe is headed for a new credit crunch now. And what of all those Eastern European bad loans? What happened to gold when this happened last time round was a rise in its value. Now that we're going round for a second time, the road to gold will be shorter, as uncertainty and fear reach new heights.

So with this bad turn in the global economy, after the powers that be tried to make us believe that all is going to be well, we seem to have come to a major turn and a bad one. So why should we abandon gold? When we look at the G-20 meeting yet again we ask, was there anything said there that changes the global economic and currency picture except more good intentions in the face of a decaying system? So where will gold go now investors are wising up. How high and just how far will the Gold Price move? Could this be the start of the real 'bull' market in gold?

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JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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