-- Posted Thursday, 21 September 2006 | Digg This Article

Gold Investments 63 Fitzwilliam Square Dublin 2 Ireland Ph +353 1 6325010 Fax  +353 1 6619664 info@gold.ie www.gold.ie

20th of September, 2006

Current Gold Market
The gold market has fallen from its recent highs to find technical support just below it's 200 day moving average price at $585. Technically gold is beginning to look well again after the recent sell off. The Relative Strength Index (RSI) is the lowest it's been in over a year. The weekly histograms look like they may have bottomed. The full stochastics are above their preceding decline low. And the 8-week rate-of-change (momentum), although still negative, is contracting. Gold has become oversold.

We believe this represents a great market entry point, especially in light of the medium and long term fundamental factors. It is possible gold could move lower in the near term. The 250 day moving average should represent significant support at $566. Three months have passed since its June low of $546 and gold has not been lower since then and has been consolidating. Should the $546 price level and the psychologically important $550 price level hold (and we are confident they will) then it will be an indication that the bull market of the last 5 years is set to continue. The key factor in technical analysis is to make “the trend your friend” and as can be seen in our gold chart below – the trend in gold is still clearly up. Therefore we believe a range of between $550 and $650 represents a good buying opportunity for the medium to long term investor.

Besides now being an excellent buying opportunity due to these strong technical reasons it is also important to remember the big picture and the extremely strong fundamentals behind the rising gold price. These are Inflation Risk, The US Slowdown, Global Demographics, Energy, Global Warming and Geo-Political Risk and below we outline the ramifications of these major trends for the global economy and the price of gold.

Medium Term Market Factors (0 - 24 months)

Inflation Risk
The Federal Reserve, ECB and Bank of England have repeatedly stated their concern that inflation must be brought under control. Why are they worried? The answer is simply that left unchecked inflation can become very difficult to control once it begins to permeate the economy. Modern monetary policy is akin to game of dominos. The only effective weapon central banks have is to tinker with the interest rate. By increasing the interest rate they can soak up excess cash from the monetary system thus reducing demand for goods, this in turn forces industry to become more competitive, which in turn stabilises prices. This is great in theory, but what sometimes happens is that industry then gets squeezed from the consumer led demand side which are reacting to higher interest rates aswell as the rampant energy driven supply side where the cost of raw materials are increasing exponentially. The danger is the economy can stall forcing capital to take flight and bunker down until the storm runs its course. Review the following article that makes the case for concern quote well.

The US Slowdown
The US housing market looks like it is in the early stages of a very serious price correction. US foreclosures have increased 53% this year. HSBC bank has stated in their latest Macro Economic report that "....the "bubble-zone" (eighteen states plus DC,mostly on the West and East coasts), the overvaluation may be as high as 35-40% even after taking into account low interest rates and incorporating tax relief on interest payments. The "bubble zone" is admittedly not the entire country, but it accounts for 50% of US GDP or some $6 trillion. This is nearly the size of the German, French and UK economies put together. In other words, it’s big." Inventories of unsold houses in the US have risen substantially, (please see chart). In addition the house price appreciation of recent years is rapidly decelerating. The worry is that the if the US consumer stops spending money (borrowed or earned) which could stall demand for goods from countries all over the world. It should be stated the market has not crashed, but the risks are very very real.

Globalisation
We now live in a globalised economy. Our world and it's nations has never been so wired, interconnected and interdependent as they are today. This integration or globalisation permeates every aspect of our lives: from the people we marry, the languages we speak, the food we eat, the jobs we have to the news we read. Even our money in Europe is the result of that very same move towards closer integration. There are so many benefits from removing trade barriers and embracing foreign cultures that it is almost impossible to fully quantify them all. Globalisation has catapulted Ireland from a poor agricultural nation on the periphery of Europe to one of the richest per capita nations on earth. But it is high time that we not only recognise the benefits of this integration but the risks too. The plain and simple fact is that we should be very concerned with the global political and economic health of our world. When Middle East tensions rise we need to understand exactly how such events can effect our economy. The global dynamic has changed and events on the other side of the world may have a direct impact on our lives within a matter of days.

Thus investors are now looking at ways of capitalising upon these winds of change while also taking stock of the risks - one of the best ways of managing such risk is by allocating 10% of your portfolio to gold. It allows investors to reduce volatility in a portfolio by acting as a counter weight to global tensions that may occur from time to time. A classic example of this can be seen in the demise of the US Dollar versus the Euro. Over the last 5 years the Dollar has lost 30% of its value against the Euro. European investors in US shares have thus experienced significant currency losses. During this same period, gold priced in USD has gained 124% and is also up significantly in all major currencies.

Longer Term Factors (24 Months Plus)

Global Demographics
It is estimated that their are 6.5 billion people in the world with the population expected to grow to some 9 billion by 2050. The majority of this growth will come from Asia and Africa. Economic activity in Asia is growing at a startling pace, China's GDP is growing at a breathtaking 10% a year while India is second in the league with a GDP growing at 8.2%. Thus we are beginning to witness the massive transference of wealth from the west to the east. China now enjoys one of the world largest foreign currency reserves, weighing it at a whopping $940 billion. As China and her citizens grow wealthy their influence in the world increases. It seems very likely demand for commodities will increase substantially from where they are today, and those with the power and the wealth will have a significant affect on the price of precious metals.

Asians have long had a love affair with gold, choosing it instead of their fragile banking systems to store and protect their wealth. India is the world's largest consumer of gold and her recent new found wealth is increasing demand again for the precious metal. China recently liberalised its long standing restrictive gold ownership laws allowing its citizens to accumulate gold bullion for the first time since the Communist ban on gold ownership in 1945. We believe that if China, India, Brazil and Russia and other emerging markets continue to grow and prosper, which seems likely, the demand for gold will continue to climb as a finite global currency, as a means of storing wealth and as a hedge against an increasingly complex and unstable world.

Energy
We are using up our supply of fossil fuels. Due to enormous demand and limited supply oil prices have risen 650% in the last 8 years. Oil is a critical component in almost every product and many of the services we use. With rising energy costs our economies will faulter if alternative sources of energy are not found soon. Emerging economy's oil demand is increasing at a far faster rate then originally estimated. China's consumption is running at levels it was not predicted to hit ten years from now.

Global Warming
The scientific world has now concluded that global warming is definitely taking place and will have a detrimental effect on our planet. Our climate is warming up, due in large part to the increasing amount of carbon dioxide in our atmosphere. The Artic oceans could be ice free by 2050, sea levels could start to threaten many coastal communities. We have seen an increase in natural disasters, from hurricanes to drought, desertification and floods which have destroyed communities. We do not know how these changes will effect the global economy but we do believe that change will bring significant adjustment and that adjustment may create volatility and uncertainty.

Geo-Political Risk
The world is becoming increasingly populated with more and more people chasing finite and depleting natural resources. Inevitably conflicts occur as ideologies and nations find themselves competing and scrambling to control these key resources. Tension and war often follow, sometimes these are proxy wars, sometimes they are the more serious direct kind. The last five years have seen enormous changes in how we view the world and its threats. Many people have grown disenchanted with their political leaders. Religion and intolerance have increasingly crept into political dialogues. Statements of fact from our political leaders have been entirely and shamelessly fabricated. The last five years have seen an erosion of the United Nations and its influence in the world. We see ourselves wondering "where have all the smart people gone, how on earth did we become so collectively ignorant so fast, what happened to accountability, to democratic principles, to the watchful eye of the media". There are many many reason for concern about the direction the world is being taken in.

-- Posted Thursday, 21 September 2006 | Digg This Article

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