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Gold & the Dollar

$1000 is now less than enough to buy one ounce of gold...

FOR MORE THAN 18 months we have watched the Gold Price churn below $1000 and in the process form three tops, before breaking out to above $1050 in early October 2009, writes Julian Phillips at

Why will it not fall back to well below $1000 and possibly as far as $850 this time?

My colleague Peter Spina has given a great deal of detail below, in this issue (for subscribers) and has warned, precisely, of the various support and resistance levels to watch out for. This information is critical to help in your buying and selling considerations.

But for many months now, while traders played gold against the US Dollar, the Gold Price has been precise in its inverse correlation to the US currency. We believe that this has mistakenly led commentators to place far too much emphasis on the Dollar as the inverse measure of gold.

We say this because the moves occurred at a time when many facets of the gold market were absent from the gold market, such as investment demand, low jewelry demand and central bank demand. Traders held sway over the Gold Price and it is they that decided how the moves of the Euro/Dollar exchange rate would directly affect the price of gold.

This lacked a reasonable basis to it. For why should the Gold Price be tied to the Euro? Such a relationship implies that the Dollar in isolation is the most important factor in the gold market. We counter that and say yes, Comex Gold Futures are a US market, and such traders do have enormous pricing power, but when the full force of all sides of the gold market come into play, Comex diminishes in importance, just as the waves of the sea are of less important than tides are when seeing where the sea will climb to on the shoreline.

Yes, the state of the Dollar is important in pricing gold, and the greenback is the 'hub' of the currency world. But to gaze at it alone is to ignore the much bigger world of Gold in its entirety, acting together in synthesis, in deciding the metal's gold.

This is amply demonstrated by the fact that the US Dollar is sitting not far off the same place against the Euro as it was when gold was just below $1000. We now foresee a larger de-coupling from the Dollar by gold as we move forward. Yes, the waves of the Dollar will ebb and flow and continue to cause traders to move the Gold Price against the Dollar as before, but the tide of investment demand and other factors in the gold market will flow and dominate these moves over time.

While the claims of the article in Britain's Independent newspaper, saying that France, China, Russia and select Persian Gulf oil producers were going to price oil in a 'new' currency were denied, the market is convinced that this will happen in time, even if it takes another decade. The reaction in the gold market was to bring in new investment demand via bullion itself, to prompt heavier central bank selling, to slow scrap sales and to cause traders to add some more gold to their holdings.

On top of the consolidation phase the Gold Price has been going through over the last 18+ months, this was a breakout pointing to an end of that phase. Now it sits on top of the $1000 level, which forms a huge support to the price.

This showed a tipping of the see-saw against confidence in the monetary system. It was due to the realization that very little is going to be done to effectively reform the currency world and bring back stability to these markets. More than that, it was the realization that world governments just don't have the real political will to ensure a stable world currency system. There are just too many conflicts of interest for them to do so.

Meanwhile, the system decays on a broad front. The very fact that the hub of the currency world, the US Dollar is losing favor so quickly sends out a bigger warning to investors and the global economy. Just take a look at what central banks have been doing in the last few months.

Foreign currency holdings grew by $413 billion last quarter, the most since at least 2003, to $7.3 trillion. Nations that report currency breakdowns put 63% of this new money into the Euro and Yen in April, May, and June. That's the highest percentage in any quarter with more than an $80 billion increase. Until now China has expressed concern about the behavior of the Dollar alongside other nations but were hesitant to act like this, because of the damage it would do to the exchange rate of the Dollar. Now the realization of the fact that the Dollar will weaken is prompting action.

Imagine if oil was priced in a 'basket of currencies, that diversification would be unstoppable and the Dollar would face a major crisis. Now, it is only a question of when.

Some commentators are saying Gold is rising because of inflation fears, but inflation is not likely to accelerate until the global recovery is strong and deflation has evaporated. And yet gold continues rising.

What concerns foreign holders of the Dollar is its exchange rate. This means far more than US goods getting cheaper and European goods getting more expensive, it means the future worth of the Dollar in terms of all other currencies. For instance, if Europe sells goods to China, it prices them in the US Dollar. The buyer and seller need to price those goods in a way that allows them to budget correctly and be able to pay correctly and make their profit on the deal.

If the US Dollar (which has nothing to do with the underlying transaction) then falls, then Europe gets less Euros to pay the supplier. This gives a great incentive not to use the Dollar in these transactions. If that trend takes off, then the Dollar will be used less, globally, and cause an excess of Dollars to float around the system, taking it even lower. The Dollar's 37% share of new reserves fell from about a 63% average since 1999.

The point for gold is that even central banks are wary of the US Dollar and consequently expect uncertainty to spread like the plague through other dependent currencies, as they try to keep their exports competitive in the world market. Despite it being money in earlier times only, Gold remains the only money that can be exchanged when confidence is lost and still hold its value. This reality is rapidly rushing at us and is why gold is rising in price.

Among financial professionals the need to quantify, to measure, to relate is insatiable. Look back across the last few years of the gold market. Gold was thought to move against oil. This was dropped when the facts showed differently. Gold was thought to be anti-inflationary. While it has these properties, the price is rising in the absence of inflation at the moment. Growth or the lack thereof was tied to gold's performance, but when deflation hit and gold held its price that was dropped too. In general the Gold Price was thought to be a tied into something in the US alone. Is this because of the myopic view of US markets or is it really a reality? Clearly, Europe and the rest of the world are involved in the gold market too. In fact 90% of the world's bullion is dealt in London!

So we have to counter this hunger to quantify and recognize that there are a huge number of times in our lives and our markets when reason and measurability are absent. The gold market is reflecting one of those times right now. When emotions creep in, many such professionals go into denial, until they can find something else to measure that emotion against. By that time the damage has often been done. The point of the Independent newspaper report was that it precipitated pent-up emotion against the US Dollar. Now the Dollar will be seen in that negative light, not as a strong currency dominating world currencies. It is moving to pariah status if it keeps on this road. It is too late for political 'spin'.

When the Titanic sank, there was a point in time, when the 'unsinkable' ship in the passenger's minds, changed to a sinking ship. The breakout in the Gold Price was just such a point in time.

What has happened imperceptibly is a change in measuring value. Until now, everything was measured in the US Dollar. It was the ultimate measure of value for over half a century. With uncertainty, led by global central banks, other measures of value are now needed. Where can they be found, amongst other currencies?

The ailments hitting the US Dollar can affect other currencies, all of which are controlled ultimately by their central banks and governments. If the US Administration can't hold financial confidence why should any other currency do so? The road down for the Dollar will eventually lead to something that cannot be debauched by governments. The actions of the Chinese and Russian central banks, tells us that they trust a 'basket of currencies' (which minimize the impact of any individual government) and, to some extent, gold.

For years now we have said a day will come when the Gold Price won't be say $1000, but that $1000 will be worth an ounce of gold. We've arrived.

Ready to Buy  Gold...?

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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