By Julian D W Phillips
The Federal Reserve's 0.75% cut to its key lending rate in mid March did not impress the market, which was expected a full 1% or more, writes Julian Phillips of www.GoldForecaster.com...
The impression given was that they might not be effective in calming the credit markets and returning the economy to growth. The insinuation that the fight against inflation had not stopped also encouraged the thoughts that the United States cannot avoid slipping into a recession and a self feeding one at that.
But after the announcement, another set of actions took place that were not normal market moves. Indeed they gave the distinct impression that they were intervention of very large proportions.
First the Gold Market and silver prices began to tumble, followed by a recovery in the Dollar, all of which happened in an almost straight line. Markets don t do that to the extent seen last week.
But then we remembered the warning given by the G 7 Group of rich nations, that they would act jointly to calm irrational market moves . They would not say when and how they would do it, so they would not lose its effect. And it is extremely difficult not to conclude that this happened last week.
The short term future of the markets has to take this into account so we must look at what we can expect to happen, both if this did not happen and if it did.
If no G 7 concerted action took place last week...
An analysis of the Gold Market action of last week shows that the tumble took place just ahead of the recovery of the Dollar, but with that in mind we have to acknowledge that the Gold Price was very sensitive to any move in the US currency at that point in time, so it would react as it started to move.
Both gold and silver dropped in a vertical line with no hiccups at all, however a most unusual move taking 10% off gold and 20% off silver. This alone is an argument, but a difficult one to use as convincing. Then we look at the other factors involved.
Wise investors place protective stops in position at levels they need to protect against losses and to retain profits, so when a precipitous fall takes place they are taken out of the picture automatically. This can and will increase the downward pressure on the prices. Initially all the action was on Comex, the US gold and silver futures market. On gold, we also saw a sell off in the gold exchange traded trust funds of 25 tonnes in two days.
Here at Gold Forecaster, we believe the initial selling on Comex was huge and triggered the run. If no interference in the Gold Price took place, we would expect any fall in the Dollar that occurs from now on will be accompanied by a build up in long positions in both these markets. As with any consolidation weak holders are shaken out and buyers come in to pick up bargains. This will happen in gold and silver.
Indeed, over the long term we forecast that the exchange rate of the Dollar will not be the main influence on the gold and silver prices but inflation, which is rising steadily and should accelerate as more attempts are made to prevent the global economy from entering recession.
We do not believe that the up trend in gold and silver, based on fundamentals has been altered this month by one iota. It has simply been delayed until this phase of consolidation is over. Hence the sharp drop should be followed by a hefty bounce and more consolidation. With the up trend unchanged, on that basis it is only a matter of time before the rise resumes in gold and silver.
If G 7 concerted action did take place last week...
If the G 7 rich nations decided that the fall in the Dollar had to be calmed they would have moved in quickly and forcefully to achieve this calming, so that investors and other market players would stand back and react accordingly.
This is certainly how he big investors reacted. The rise of the Dollar was quick and intense following the Fed s 0.75% cut to interest rates, and it held there before the long Easter weekend and the following end to the first quarter on March 31st.
Good timing for a calming strike? Both Gold Prices and silver plummeted as a result of trading action on Comex, but the picture is clearer when we look at silver.
There are solid reports of silver shortages building up across North America, from dealers to the mints. It appears far more serious than a simple delivery problem. Investment demand has not blinked an eye lid during the last week when this action took place, increasing by over 130 tonnes.
So why did the silver price plummet on Comex? Was it in sympathy with the US Dollar s rise and the fall of gold? If it was a calming raid only on the Dollar only, the fall in the gold and silver price was collateral damage only and will bounce back from whence it came the moment the Dollar falls again.
To confirm the G7 action we would expect over time to see the following.
Large surplus holders of the Dollar would see an opportunity to start selling large quantities of them knowing that at last the G7 were prepared (for a while at least) to buy them, so holding up the price as very, very, large quantities of the US currency are unloaded on the world s exchanges
Speculators in the style of George Soros would join the party and add tremendous pressure on the Dollar exchange rate knowing that at some stage, as history shows to be inevitable, the G7 will stop holding rates up allowing a very profitable tumble for these speculators
The time it takes to calm the markets, each time the rate becomes irrational , simply postpones the day when the Dollar reflects its true international value.
We therefore believe that any such G7 moves if indeed they re taking place postpone and heighten the decay in the global money system and precede more intense intervention such as Exchange and Capital Controls.
JULIAN PHILLIPS one half of the highly respected team at GoldForecaster.com 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.
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