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Game-Changing Gold

The change in the gold market needs fudamental analysis...

WE HAVE spoken of a complete change of tone and shape in the market place in the last few weeks that has altered the future of Gold Investment, writes Julian Phillips at Gold Forecaster.

It has taken 10 years for this to happen, but it is here at last.

When gold was floated off from the Dollar and the US refused to exchange US Dollars for gold, gold was considered to be money still. The message didn't sink in to the public for some years. The Gold Price rose from $42.35 to $850 in a series of neat moves during the 1970s. But all central banks had subscribed to the US inspired change in the monetary scene before it hit $100.

No, they didn't accept the Special Drawing Rights of the International Monetary Fund (IMF), but they did accept the Dollar as the sole global reserve currency when it became apparent that this was the only currency they could use to buy oil with.

First the US sold gold, then the IMF – both sales failing to discourage investors, but the campaign was changed in course to accelerated sales of gold from producers to overwhelm keen buyers, which it did successfully. The scheme lent producers gold ahead of new mining production, with which they repaid the loan.

Quite a time before the price peaked at $850 investors became wary of Buying Gold shares, letting the bullion price run by itself, to the peak. Gold shares and bullion were considered very acceptable institutional investments by all ahead of this change.

Gold itself gradually went off investor's screens and into the shadows as a barbarous relic. It took years before the world accepted the fact that central bankers, including European ones, were against gold and were following policies that undermined the price. Even Gold Mining shares were treated with disdain. For the next 15 years gold from around 1985 gold was sidelined.

The negative perception and undercurrent of potential central bank sales militated against a rise in the Gold Price. This situation lasted right up until 1999 and the announcement of the "Washington Agreement". Oddly enough this was an Agreement to sell gold by European Bankers (they had not done this before) but turned the price around to the positive side.

At the time the Gold Price was at $275. From there it slowly rose. What changed the scene? It was the statement that gold was a valued reserve asset in the eyes of central banks and that the sales were limited to specific quantities. This immediately removed the perception that gold sales would continue until all central bank held gold would be sold into the 'open market'. Supply could then be measured accurately.

It was clear that demand could now overcome supply eventually. Producers slowly realized that the days of falling prices were over and they were vulnerable to losses, (through the scheme that accelerated Gold Mining production) if prices rose above the proceeds they hoped to achieve over years from their previously hedged positions. They started Buying Gold to cover their exposures.

But just as the market took a very long time to realize Gold Prices were going to go down, again the market has taken nearly 10 years to realize that gold was coming back onto investor's screens. With the three central bank gold agreements still in front of us, the common perception still remains that central bank's are sellers. It has taken most of this year for the market to accept that central banks have stopped selling and are now net buyers.

Institutional acceptance from central banks through Sovereign Wealth funds through the many types of funds down to individuals, is now gold's path into the future. The implications of this for the Gold Price are enormous. These changes must form the foundation of our approach to gold from now on, with all other factors affecting gold subordinated to this. Right now Asia is leading the way in this appreciation.

Some analysts in the past took the performance of the oil price as a direct guide to coming Gold Prices. We believed that at best its influence was and still is indirect. It pointed a general direction when growth and speculation, prior to August 2007 was such that the oil price rocketed to $145 a barrel. As the bubble popped the oil price fell back to $35 a barrel, but gold didn't fall. Now with Russia trying to sell as much as it can and the Opec oil cartel keen to hold prices around $80 the oil price is "under the control" of oil producers.

In time, once the global economic recovery is established, growth in Asia together with the recovery maturing in the West will see demand outpace supply, taking the oil price up to new territory. But, until then its function as an indicator of future Gold Prices has been undermined.

For most of this year and years before, the Dollar/Euro exchange rate was taken particularly by short-term traders as a direction finder for the Gold Price with, at times the Gold Price in Dollars cleaving to the rate. Many times the price of gold decoupled from the Euro as it rose against both currencies, but on a day-to-day basis the Dollar's fortunes still trigger moves in the Gold Price.

Why? Inside the United States, speculators and traders see this rate as being a measure of the value of the Dollar. It harps back to when currencies were complete measures of value. When the Dollar weakened, it was seen in isolation to other currencies, particularly the only other really major currency, the Euro. But now the true picture that the Dollar is the trunk of the tree that all currencies stem from is becoming clear. Consequently gold now has a record of moving up against all currencies.

This is symptomatic of the structural faults in the monetary/currency systems. At the turn of the century the Euro price of gold was well below €300 and took some years to rise through this level, but now it has just broken through €800.

With China rising from insignificance to growing prominence, plus the tensions rising from a Dollar-pegged Yuan – and greater trade tensions on the way – the time for another global currency to barge into the world scene has come. This promises some ruptures and ructions to the extent that it is now prudent to retain and or buy gold for national reserves and for investment protection against currency swings. A future of uncertainty and lack of global cooperation is on the horizon.

So what relevance does the Dollar/Euro exchange rate have on this scene? Why should the Gold Price move with the Euro? The breaking away from this ratio is more significant than gold's relationship with oil. This break takes gold away from all currencies and places it as a measure of the entire system.

While we do expect the markets, particularly in the short-term, to take time to be weaned off this relationship, it has, is and will happen.

This leaves gold in a new world. This was what drove the Gold Price up to $850 the first time. This time those central banks, which control the world of money are now turning back to gold. Where will they be happy to see gold? And in what role? We will have to wait and see.

It is incumbent on all of us who follow the Gold Price and its influences to re-address these changes in the gold market and to adjust to this new shape and new future.

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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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