We mentioned briefly in the market section at the start of this issue that there has been a change of tides, and possibly a change as fundamental as a change of current. Yes, last week will be seen in history, as an important one for the global economy and gold alongside other precious metals. We write this section because until last week the price range of gold was seen only in the context of May 2006 price ceiling of $730. After all what could have sent the gold price towards new highs? Yes, jewelry demand was robust, but with India price sensitive, particularly to jumps in the gold price, this factor alone could not have produced new highs. The balance of supply demand factors while, again, good, do not seem capable of producing a run up in the price either.
So the spur had to come from investment demand, which in turn had to be spurred on by $ factors, or the oil price or an item sufficiently significant to damage monetary or economic confidence, or create a large dose of new uncertainty. Yes, a general decay of confidence and rise in uncertainty would be sufficient to bring in investment demand on a sustained and large way. Indeed, when Central Banks are put on the defensive and have to react ‘as need be’, the feeling of loss of control grows and creates a climate that precipitates long-term demand.
With the past month and more happenings signaling a breakdown in vital confidence, the trigger for a growth in investment demand was pulled and the funds flowed into the gold Exchange Traded Funds in quantities that were much larger than before. 26 tonnes a week for two weeks started the story. With the cut in Fed funds rate now established and more to come, the fundamentals for gold and silver have never been better.
Unfortunately, they are factors that will send wave after wave of changes in the global economy, fragmenting the monetary and economic unity that we have come to believe is the norm for the world. The signal we have been given is that we should expect tension on many fronts now – currency – political - trade and the resources front that cannot be reversed. The next big leg of the gold ‘bull’ market is underway.
As investors, you have a need to keep in touch with these events and how they affect gold and other precious metals, just as you would need to keep in touch with the balance sheets of the companies you invest in. To date most gold and silver advisors have written about the definable market factors influencing the gold and silver prices, as well as the health of companies into which to invest. We have added the global gold markets and global currencies, alongside macro-economic features to this understanding. But this has to broaden still further.
Now for one’s understanding of the gold and silver markets to remain at a professional level, there is a critical need to understand the factors that drive investment demand alone and they lie outside the shape of most commentator’s analyses. Now, it will be absolutely necessary to comprehend each currency affecting the global economy and to understand the political factors that affect it. For instance:
—If oil demand runs ahead of supply, which countries will have to ration the oil that they can buy? How will such a scene lead to higher gold prices?
— Just how far will the $ drop that it is close to breaking critical support levels and what collateral damage will this cause in the currency markets? Will gold reflect this fall more dramatically from now on?
— What will be the knock-on effects of these events that are shaking the global economy, not just the events alone? How will this affect confidence and the growing levels of uncertainty?
We at Gold & Silver Forecaster will continue to cover these facets of the gold and silver markets, translating them into language you can translate into investment strategy.