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50% Gold Trading Range?

Might long-term investors want to trade a possible 50% range in the Gold Price...?

with the Gold Price pulling back towards $900 after threatening $1,000, writes Julian Phillips at the The Gold Price hit $985 then pulled back into the $930s.

Why the failure to reach and breach $1,000 an ounce? Traders didn't want to be in the lead in taking gold over $1,000. Now the market needs time to re-group and build up strength. Long-term investors have been on the sidelines since gold ran through the $900 level and Comex Gold Futures & options speculators have jumped in 'boots and all' taking it up on a technical basis to just below the $1,000 mark.

Where now? Speculative players have bought nearly 225 tonnes of gold-equivalent in the last four weeks. So many analysts see the Gold Price backing off to $850 or less, before running up to $1,200.  If correct, this would give us a healthy trading range of over 50%...a range that even long-term investors should contemplate taking advantage of – if it is going to happen, of course.

But what of the fundamental picture? After all, it has been the long-term investor that has driven the Gold Price over the last year, and he focuses on the fundamentals using the Technical picture to pinpoint his entry and exit points only. Where is he looking for, what is his perspective on such possible moves?

To determine if such a large range in which to Trade Gold will take place based on fundamentals, we have to look at the levels of uncertainty long-term investors now see ahead. The signs of an economic recovery are being glimpsed like tiny fires in a dry forest, and some are even growing fast amid the cold wintry recession. In fact, the US economy shrank slightly less in the first quarter than initially estimated, while corporate profits rebounded so it seems that the recession is moderating.

Everybody wants an economic recovery. Everybody needs it! And the mood is certainly responding to hopeful signs. Central banks have fueled the money supply with floods of newly printed money which are still filling in the holes left by deflation and general illiquidity in the banking system. US consumer confidence also rose to its highest level in eight months in May and a report showing business activity in New York City expanded in May for the first time since January 2008. That offers another hint that the recession is abating.

Yes, lending remains difficult, but long-term Treasuries are seeing a steep rise in yields – suggesting the "safe haven" panic is over and longer-term interest rates are picking up as credit demand and flow rise. But gold reflects a global economy, so we have to include global interest rates, global lending restraints, and the condition of the global consumer too, to get the right background for gold.

China, for example – the second most critical factor in a global recovery – is pumping up its economy and trying to switch to local growth from primarily export sales. Manufacturing in China is climbing. As liquidity feeds the US economy the first beneficiary is China as US citizens seek out low price Chinese imports in shops like Wal-Mart.

The oil price – certainly a common denominator of the global economy – has climbed over $70 per barrel, but we have to temper this fact by highlighting that speculators are already piling into oil while looking to the longer-term shortage that will occur once the real recovery takes place. Take out this speculation and what price is oil? We maintain it will reflect the state of the global recovery to a large extent.

Overall, the global economy is showing convincing signs of growth starting up. Nevertheless, the reliance on the US consumer's disposable income remains the key to global growth. This has to gain traction. But the deflationary holes are large and it seems that some of the new money out there is re-kindling inflation, not simply turning deflation around.

There are no instruments to accurately measure deflation and its path while measuring the detailed impact of the effect the new money is having. Much of that money is going where it shouldn't and not going where it should! So we are in a wait and see mode, where inflation is not showing but deflation is still shouting, but not as loudly as before. When the mixture all comes together, we do expect to see deflation overwhelmed, as much by rising confidence, as by new money. But inflation has to take off for the same reasons.

But is this enough to change the climate for gold? Will this stall the Gold Price? No, we think not, because the Gold Price did not rise simply because of dropping consumer confidence, but because of the fears and uncertainties coming out of systemic failures. Has the flood of new money resolved the systemic failures or instigated more? A look at the current path of the Dollar hints at the answer. The fears publicly expressed about the Dollar by the largest holder, China, add to that answer.

US Treasury secretary Timothy Geithner may be moving to a revered position in the US, but when visiting China and hoping to allay concerns that Washington's bulging budget deficit and ultra-loose monetary policy will fan inflation, he got a dose of reality which those outside the States have to face. "Chinese assets are very safe," Geithner said in response to a question after a speech at Peking University. The opposite of inscrutable, the Chinese students laughed out loud.

Does the rest of Geithner's global audience, with far more at stake than US citizens realize, take him seriously? The Beijing-based Global Times greeted Geithner by publishing a survey of Chinese economists who called big holdings of US debt "risky". There is little doubt in foreigners minds that the present monetary policy of the US is undermining both the Dollar and US bonds. As China is the biggest foreign owner of US Treasury bonds, holding $768 billion in Treasuries as of March (it could be as much as twice that level) that laughter tells us what will happen to Gold Investment as the Far East continues to recover and grow, and why gold faces such a glowing future.

The Dollar remains the global reserve currency but cannot be sold freely by China or other major holders wanting to avoid a collapse in their stockpile's value. Promises of a future strong Dollar have been heard for several years now, but the US will benefit heavily from a weak currency instead. Prudence demands that a measure of portfolio diversification be adopted for the long-term. If the politicians fail again, the cost to all Dollar holders could be heavy.

What has become clear is that the global economy cannot be governed by US solutions within the United States, which are not solutions for the globe. We foresee US solutions precipitating more systemic failure in the rest of the world to greater and smaller extents over time.  The prospect of floods of money being created to stem deflation...only to be then withdrawn to stem inflation...does not take into account the ripples that will flow through the world even if they will work inside the domestic States (which we doubt). This seems to be the Treasury Department's plan, one which will clash headlong with confidence levels over time.

The only way that normality (as in the bubble mentality pre-July 2007) can be achieved is through the constant nurturing of consumer confidence uninterruptedly. Confidence has a delicate nature and is increasingly difficult to restore if damaged even once. It's more difficult if damaged twice and nigh on impossible to restore if damaged three times. As it is, the stance of China is the stance of smaller economies too – all trying to reduce their reliance on US trade for income and on the US Dollar for savings. Such a position favors Gold Bullion tremendously. And even US citizens, though loyal to the State, are fully aware of the risks to their wealth and have shown their views by Buying Gold even as signs of an economic recovery flicker into life.

It's become crystal clear that an economic recovery and consumer confidence are not repairing the global monetary system. They are not restoring confidence in the Dollar. There is little evidence that a recovery accompanied by potentially explosive inflation will encourage investors to turn from gold to Dollar investments. Quite the contrary, the potential for more devastating systemic failures is growing on the back of an economic recovery as trade and money flows resume in a world where half of it are up and coming and taking their portion of the globe's available resources. The present climb of world oil prices reflects that well. We have moved into a economic and monetary climate where risks have never been so high and are rising. Uncertainty and fear of the future, are at peaks never before seen since the World Wars.

The last two years have taught so many the virtues of silver and Gold Investment, and the Gold Price has reinforced these. Prudence and perspicacity demand that competent investors hold at least a good portion of their wealth in gold and silver. In a worst case environment gold and silver have proved many times that they rise considerably with a real appreciation. Fundamentally, it is now time for gold and silver to take an important place in the world of real value as paper values are sincerely questioned.

We are of the belief that gold will continue on its upward path until there is substantial and convincing evidence that we have a monetary system that can withstand the potential systemic failures on the horizon now.

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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