EXPECTATION OF COMEX GOLD FOR THE YEAR 2010 WITH FUNDAMENTAL AND TECHNICAL ANALYSIS ::

EXPECTATION OF COMEX GOLD FOR THE YEAR 2010 WITH FUNDAMENTAL AND TECHNICAL ANALYSIS ::

INTRODUCTION ::
• The Gold rally continues with prices posting fresh all time highs in early October, the rally is expected to continue within an $850-$1,400/oz trading range in 2010.
• After the turmoil in the financial markets last year a strong rebound has been seen, but with numerous large issues unresolved the rebound seems unsustainable.
• The fact Gold prices are this high suggests there is still a lot of fear in the markets. If a double dipped recession unfolds, prices could have considerably further to run.
• The outlook for Gold remains bullish, as it continues to provide a hedge against weakness in fiat currencies and further turmoil in the markets. It should also provide protection against inflation at a later date.

BRIEF VIEW ::

The onset of the financial crisis in the summer of 2008 saw Gold prices sell-off sharply, which to many people was a surprise as given the turmoil in the markets and fear for the banking system, Gold should have been attracting safehaven buying. Indeed it was, but the buying could not absorb all the selling on the back of deleveraging that was happening as the market sold liquid assets to pay margin against their less liquid assets. The sell-off saw prices drop to a low of around $682/oz in October 2008, before the buying once again dominated and investors and traders moved into Gold to protect their capital against the uncertainty swirling around the financial markets. After rebounding to $1,006/oz in February 2009, Gold prices then consolidated in a broad sideways range between $865-$990/oz as the market digested what had happened and what was likely to happen going forward. The fact Gold prices have broken out to the upside of this consolidation pattern is bullish for Gold, but is also a warning that the market feels there is more trouble for the financial markets in the weeks and months ahead. Whether this trouble comes in the form of a double dipped recession, a dollar or bond crisis, or stagflation, inflation, or deflation, remains to be seen Factors driving Gold prices The dollar – After the dollar weakness seen between 2006 and mid-2008, the dollar started to rebound in July 2008, (see chart opposite) as risk reduction gathered pace and US companies repatriated assets previously held overseas. In addition, the market turned to its traditional safe-havens which included the dollar. However, the dollar’s rebound ran out of steam as the US’s policies to tackle the financial crisis became clear – notably to push more money into the failing systems and to finance this by borrowing and by means of quantitative easing. The creation of more debt and the increase in money supply by quantitative easing, have not surprisingly raised concern that the dollar is being devalued. In turn the down trend in the dollar has resumed with the dollar falling against most currencies. Interestingly enough, the better- than-expected economic data that has boosted the US equity markets has so far failed to underpin the dollar, which is a sign of deteriorating confidence in the dollar. However, once the US makes it clear that it has a policy to soak up the extra money supply, then the combination of this and economic recovery (when it eventually gets going) is likely to see the dollar turn higher. However, if the prospects for growth and loose monetary policy are also seen as being inflationary, then a stronger dollar will not necessarily mean weaker Gold.

INFLATION FEARS ::
At present, there is little inflation around; indeed, deflation is more in evidence, although the market does not seem too concerned about deflation as the underlying fear is that all the quantitative easing and global stimulus packages will end up being inflationary. Although in theory governments should be able to tighten monetary policy to out- manoeuvre inflation, there is concern that slow growth and high unemployment rates will make it hard for governments to be proactive and any delay in tightening policy when the time come s, could see inflation take hold. As a result, the threat of inflation down the road is another driving force for Gold, even if it may be premature to be too concerned about it at the moment.
De-hedging – At the start of the bull market for Gold, which roughly coincided with the start of de- hedging, the total hedge book stood at 3,107 tonnes (99.9Moz). Eight years later it has already fallen to 458 tonnes (14.7Moz). As the hedge book shrinks the level of de-hedging has not surprisingly slowed, but is still running at around 125 tonnes a year and is likely to continue to provide support next year. However, after years of providing support de-hedging will become less of an issue in the years ahead and then the combination of high Gold prices with improving prospects for economic recovery and therefore less need for safe-havens, could well start to see producers look at re-establishing hedges. Although the current wishes of shareholders of mining companies is for no, or limited, hedging, that might change if the bullish outlook for Gold changes as we move into a new economic era. However, we would expect the next hedging wave to be done via put options and not outright forward/futures sales.
For the moment the mood amongst producers is, in the majority, still bullish for the Gold price in the period ahead.

 Central Bank Official Sales –

 For the fourth year running sales made under the Central Bank Gold Agreement (CBGA) have failed to reach the maximum amount of 500 tonne s allowed by the agreement. In the CBGA year that ended in September 2006, sales were 104 tonnes short of the 500 tonne allowance; in 2006/07 sales fell short by around 24 tonnes; in the 2007/08 period sales were 143 tonnes short of the limit and in the year to 26th September 2009, sales totalled 160 tonne,340 tonnes short of the limit. So for CBGA-2 as a whole , sales of between 1,880 and 1,900 tonnes were some 75% of the permitted 2,500 tonnes. On 7th August, 2009, a ne w fiveyear CBGA was announced by its 19 signatory members, but the annual quota was cut to 400 tonnes, even though the IMF has said it plans to sell its 403.3 tonnes of Gold during CBGA-3. However, with China and Russia looking to increase Gold reserves, net supply from official sales may be limited in the years ahead.

Central Bank diversification –

 The global financial crisis has exposed how vulnerable central banks are to the dollar and US Treasuries. As a result, a number of large sovereign holders of US dollars and Treasuries have started to diversify their holding. China surprised the market in April 2009, when it announced its Gold reserves had increased 76% to 1,054 tonnes since 2003, when it held 600 tonnes. However, this higher holding still represents only 1.9% of total reserves. With China holding over $2 trillion of currency reserves and with some 70% of this in dollar denominated assets, China is heavily exposed to the value of the US dollar and not surprisingly is keen to diversify. There is talk that China might buy some of the Gold that the IMF is selling, but China is also likely to prefer to continue buying Gold from its domestic producers. In 2007, China surpassed South Africa as the world’s largest Gold producer with production reaching 282 tonnes in 2008 and rising 13.5% in the first half of 2009. In addition, Russia has continued to build up its Gold reserves. It bought 69 tonnes in 2008 and in the January to August period this year, it has bought a further 62 tonnes. As of September, it held some 568 tonnes, or 4.3% of its reserves. Back in November 2005 it stated that it would be appropriate to hold 10% of its reserves in Gold, which would mean increasing Gold holdings to 1,320 tonnes. Holding 10% of reserves in Gold is about the average that all countries hold although, however, the Euro area holds an average of 59.7%, the US holds 77.4%, while Japan holds just 2.3% and Korea holds just 0.2%.

TECHNICAL OUTLOOK ::
After a long period of consolidation after the run up to $1,006/oz in February 2009, prices have broken higher out of the triangle and are in the process of setting fresh all time highs. At present prices do not look too extended and the stochastic indicators are looking strong too. The strong rally in August 2007, went from $640/oz to $1,032.50/oz, a move of close to $400/oz, so with this latest bullrun starting around $680/oz a similar run would take prices towards $1,100/oz. As far as pull backs are concerned, the uptrend line at $970/oz should provide support as should the $1,000/oz area. A move below the uptrend line would then suggest a possible pull back to around the $900/oz area, where the 60 week moving average lies. The stochastics did recently cross lower but failed to move down too far and have now crossed higher. A similar situation was seen in January 2009 and after the stochastics crossed higher again price went on to rise $200/oz. With prices breaking into new high ground, we would target $1,250/oz as the next major upside target. (After the move above $850/oz prices climbed 21.5%, so a similar percentage move from $1,032.50/oz is $1,254/oz). Overall we expect Gold to extend its gains, but once the next peak has been established another long period of consolidation is likely to follow as the market adjusts to the price rise.

FORECAST & CONCLUSION ::

Gold is going through a very interesting time, but there are a multitude of factors influencing the price some of which are quite contradictory such as the presence of deflation and the fear of inflation. We also have an uneasy feeling that after the near catastrophic events seen over the past twelve months, the sharp recovery seen since March seems too good to be true and for that reason it probably is. Indeed given the massive governments’ stimulus packages and bailouts mainly paid for with borrowed and printed money, there is considerable uncertainty as to what lies ahead. The global imbalance between those countries that have massive dollar debt and those with huge dollar reserves, is also coming to a head as the US seems set on a path to devalue the dollar by means of quantitative easing. In addition, the weak dollar is prompting competitive currency devaluation and with numerous former ‘hard’ currencies trying to lose value, it is not surprising that faith in fiat currencies is waning and those with money are looking to diversify into assets with intrinsic value, of which Gold and other commodities are top of the list. Indeed this might well be what is driving base metals higher, even though demand is weak and stockpiles are mounting. The fact US dollar creditors are talking about the need for another global reserve currency shows that they are losing faith in the dollar. Overall, given the parlous condition of the world’s financial markets in recent years, it is doubtful that the short-sharp asset-bubble deflation seen in the second half of 2008 and first quarter of 2009, resolved the matter completely. There are still many unsolved problems and imbalances that need to be settled and as there does not seem to be any easy way to fix them, the financial system and the heavily indebted countries are likely to experience more hardship in the future. The Western financial system has always had been founded on confidence, and in 2008 this confidence was shattered. The rebound across markets this year has restored some hope but with many of the underlying issues unresolved, this new dawn may prove false. If events take another turn for the worse, the fear seen in 2008 is likely to be renewed and another flight to safety could well keep the bull market in Gold go ing for a considerable while longer and a take prices considerably higher. It seems likely that there is still a big window of opportunity for Go ld to shine in the months ahead. At some stage, the problems facing the global economy, especially those in the West, will be solved and a return to normality will unfold. When that process begins, safe-haven assets are likely to be sold. However until such time, Gold is likely to remain highly soughtafter as a store of wealth and we would not be surprised to see Gold prices rise to, perhaps significantly, new highs. There are likely to be periods of widespread risk reduction that carry Gold prices lower too, but each dip is expected to attract strong scale down buying from investors and fabricators. Overall, we would expect the bulk of trading between now and the end of 2010 to be within the $850/oz to $1,400/oz range.