Precious Metals Market Update #2

Precious Metals Market Update #2


We have stated in previously that there are at least four factors that would very quickly trigger much higher gold prices in the short to medium term;

1. persistently higher crude oil prices resulting from, or accompanied, by any disruption in the output of crude and/or refined products.
2. a lowering or collapse in the US dollar internationally. The US dollar is running at its highest levels in several years against other currencies; meanwhile the US in running the largest current account deficits in all history.
3. lower stock markets in the US. Stock markets have never enjoyed uncertainty; ie Middle East tensions and the ongoing US presidential election saga.
4. inflationary and higher interest rate environment. Eventually higher fuel and debt servicing costs must lead to higher prices.

Any one of these four key elements kicking in will lead to an explosive gold price. It is anyone’s guess what could happen to the price of gold should all four converge at or around the same time. Recent weeks market action spell danger for the current status quo. It is further interesting to note that each of these global economic components is complexly intertwined with the other – each effect the other.

Maybe this could help explain Alan Greenspan’s comment made two years ago when he said “Central banks stand ready to lease ever increasing amounts of gold, should the price start to rise”

Despite many analysts repeatedly predicting that crude would be back to the mid $20 a barrel, crude has continued to trade above $30 for most of the year. Inventories of all refined products remain at lowest levels in many years. OPEC output is at 95% of capacity.

(Bloomberg) Vienna November 12 – OPEC will leave output targets unchanged at their meeting today, OPEC ministers said, focusing instead on future cuts to match expected slow down in demand and prevent an oil price drop early next year.

Potential for disruption in supply from the Middle East continues;

(AFP) November 8, BAGDAD – Sanctions hit Iraq has hinted that it could halt crude exports in protest at delays in the UN approval process for imports and the release of oil revenues. “What interest and what need does Iraq have in continuing to pump crude when oil revenues are piling up in banks and contracts for imports piling up at the secretariat of the UN sanctions committee?” asked Deputy Prime Minister Tareq Aziz.

With OPEC already pumping at 95% of capacity, any significant supply disruption will send crude much higher than its present levels.

The US current account deficit with the rest of the world is over US$1 billion PER DAY – estimated to be over US$400 billion this year, and continues to grow.

Again, as we have stated in the past, any competition to the US dollar from the Euro, as the world reserve currency, will result in a dumping of US dollars by nations that currently hold dollars to settle their international trade, hence, lowering the value of the dollar.

Earlier this month, the UN approved Iraq’s demand to be paid for its crude in Euros rather than US dollars. Now both Jordan and Venezuela are talking about having oil shipments settled in Euros. Could this be the start of the US dollar displacement as the world’s reserve currency?


Conservative analysts believe that technology stocks will lead the broader market down from its now ten year bull market run. On Friday November 10th, the NASDAQ closed on a new year low, taking out quintuple bottoms, followed by Monday’s closed below the psychological 3000 points.

Underpinning much of the fantastic growth in the technology sector in recent years, has been the belief that internet usage will continue to grow exponentially, radically transforming business, and our economies, for many years to come.

A recent report in the Financial Times (1st November “International Economy”) indicated that internet usage may already be reaching a plateau. The report from PwC shows that a total of 44% of homes in the US access the internet with usage at 4.2 hours per week down from 5.3 hours a year ago. The report found that 9 out of 10 homes use the internet for research and e-mail only, confirming our view that there is still a large degree of resistance to online shopping.

The internet is convenient, but it does not justify the valuations it has seen in the last couple of years. The same is true of PC chipmaker companies and the recently fashionable biotech sector. Even with the NASDAQ at 3000 points, it has a long way to go, to the downside, to reach reasonable valuations.

All year manufacturers, producers and service industries have been absorbing higher operating costs, rather than passing price increases through to the consumer. This is effecting companies, bottom lines as reflected in recent earnings warnings. This in-turn is adversely effecting the stock market.

The Fed’s mid November meeting leaves interest rates unchanged, with a bias toward tightening.

Other market news of interest;

(Reuters) November 6th, Washington � President Clinton signed legislation on Monday providing $435 million in relief to some of the world’s most indebted countries.

It authorizes the International Monetary Fund to sell gold “off market” to finance its participation in the initiative.

Bill Murphy’s take on this (from Gold Anti Trust Action committee); “It is supposed to mean that the IMF gold, (presently) valued at $42.20 oz on the books, will be revalued by selling it to countries like Mexico, who will re- sell the same amount right back to the IMF at today’s prices – it is a bookkeeping maneuver.”

In other words IMF revalues the gold on its books at today’s value while taking the international credit for helping impoverished nations that it indebted in the first place.

A rumor circulating (early November) claimed that a South African dealer was filling a buy order for the US Fed for 50 metric tons of gold. “these transactions are done outside the normal market and therefore do not (positively) effect the price of gold.” The question is asked; why is the Fed in the market to quietly buy gold? (source – We have reported from this website for sometime that there is quite clearly an undisclosed source of physical gold entering the market, to artificially supply the gap between new mine supply and demand (estimated at 1500 ton per year). Maybe this could help explain Alan Greenspan’s comment made two years ago when he said “Central banks stand ready to lease ever increasing amounts of gold, should the price start to rise”

What happens when an explosive gold price, coupled to high demand, meet decreasing supply? Low gold prices in recent years have taken its toll on many producers. In a market that suffers acute supply short falls, it is strange that prices remain so low in light of massive demand.

Meanwhile the supply side continues to shrink as producers continue to reduce output and close mines, while exploration worldwide grinds to a virtual standstill.

Vista Gold reported that its nine-month gold output fell to 11,830 oz from 53,859 oz in the same period last year.

Canada’s Kinross Gold has stopped mining at its Regugio mine in Chile, according to partner Bema Gold. Regugio mine has a cash cost of $320 oz (source

“Although sound money may not be everything, everything is nothing without it” Professor Steve Hanke at April 2000 Senate Banking Committee hearings.

by Philip Judge