Gold
Gold was up $3.50 to $910.50 per ounce in trading in New York on Friday and silver was up 16 cents to $16.41 per ounce. Both surged again in the early hours of Asian trading overnight and gold rose as high as $921.35 and it remains near record highs in early European trading.

Gold was up 3.4% last week and silver was up nearly 2% and both are up some 10% year to date. In normal market conditions, correction and consolidation would be expected and likely. However, these are not normal market conditions – and that is putting it mildly.

The London AM Fix at 1030 GMT this morning was at $916.50 (down from $921.25 on Friday). Gold fell marginally from new record highs in British pounds and euro. It fixed at £465.28 (down from £462.79 yesterday) and €623.22 (down from €625.64 yesterday).
http://www.lbma.org.uk/statistics_current.htm

The dollar weakened a little (75.857 on the USD Index and 1.4722 and 1.9834 versus sterling and the euro – see FX below) and oil (NYMEX February) has fallen 1.4% to $89.25.

It is a very important week ahead in the U.S., and thus for all major markets. The Fed makes its interest rate announcement on Wednesday. Then, on Friday, the key U.S. employment report is due and this should shed light of whether the U.S. is in or soon to be in a recession. The tone of the statement accompanying the Fed’s emergency rate cut last week pointed to a further easing this week but probably 25 basis points rather than the 50 basis points some were expecting last week.

With the credit crisis deepening and volatility in markets set to increase, risk aversion will likely result in increased diversification into gold. Allocations to gold remain non-existent to minuscule in the majority of individual and institutional portfolios and indeed in pension and sovereign wealth funds. Central banks remain the largest holders of gold (although ETFs are becoming significant holders) and will again likely become net buyers of gold, especially in Asia and the Middle East as they seek to hedge themselves from macroeconomic and currency risk posed by the U.S. economy and currency.

South African Supply to Decline Even More due to Unprecedented Power Outages
The dollar and oil may take a back seat for the moment to the important news from South Africa that there has been no electricity or power to run the mines. Production of platinum and gold has stopped entirely due to the extraordinary situation.

While the mining companies themselves are understandably trying to reassure the market, Escom, the state owned utility has said that power could be out for some 4 weeks but that problems could persist for as long as 5 years. It said that completely cutting off the electricity supply to the mining companies and other big industrial players was an "emergency or force majeure". The power firm said it judged the electricity supply system to be at a very high risk and the stability of the electricity network could have been compromised if it had not asked the big industrial consumers to cut back on power demand to a minimum. The problems were blamed on high demand for coal and also a chronic underinvestment in the electricity network and infrastructure in recent history.

A decline in supply from the world’s second largest producer (marginally lower than China who recently surpassed it) is very bullish for gold and platinum especially with demand internationally remaining very robust. The problems in South Africa will not be magically resolved as these are long term structural issues that must be tackled. Already South African gold production has fallen from over 1000 tonnes in 1970 to 272 tonnes in 2007 and the point of peak gold production has likely already been reached. Fundamental infrastructural and power issues challenging the mining industry will not help already falling production levels in South Africa.

Support, Resistance and ‘Collapse’
Gold’s technical movement last week was textbook bullish with it having a powerful outside day, key reversal to the upside on Thursday and it tested support and previous resistance at the old record highs at $850 and then bounced aggressively. Even more significantly it closed above $900 on a weekly basis for the first time ever.

The power outages in South Africa adds to the bullish fundamental set up as it will likely lead to a decline in production in what is already a very tight supply demand situation.

Talk of gold declining to $800 is diminishing fast and looks to have been overly bearish. Not to mention uninformed hyperbole about a ‘collapse’ in the gold price. Given the current financial and economic environment such speculation shows a remarkable lack of knowledge regarding financial, economic and monetary history. Besides showing a marked degree of ignorance – it is interesting that similar alarmist rhetoric was used when gold reached $600 and $700 per ounce.

Gold will only be at risk of ‘collapsing’ when it has reached its inflation adjusted high of some $2,200 per ounce or when it has performed as it did in the 1970s. It rose from $35 to $850 or some 3,000% in 10 years. Thus gold would have to increase 3,000% or from $250 to $7,500 to simply match its performance in the 1970s. If that happens then gold likely will collapse as that type of outperformance is not possible in any market.

Strong support now remains at $840 to $850 which was previous resistance and interestingly the 50 day moving average (DMA) is at $836.47 and Fibonacci support is at $840. With the weekly close above $900, it now becomes technical support. Gold’s rise has been swift and normally we would expect a period of consolidation prior to any further price increases, however we are not in a normal financial times and thus the traders loved big round number of $1,000 is likely challenged in the coming weeks.

FX
As stock fell in Asia and financial markets concerns persist the yen rallied against the euro and the U.S. dollar. Continuing dovish comments from Blanchflower, the member of the Bank of England’s Monetary Policy Committee weighed on sterling and the British Pound fell across the board. The Bank of England is widely expected to cut interest rates by 25 basis points on the 7th of February, however given current market conditions and the outlook for UK residential and commercial property, a larger cut cannot be ruled out.

The trend higher in commodity currencies continues as the underlying commodities themselves outperform other asset classes. The Australian, New Zealand and Canadian dollars all rallied against the Greenback in the Asian trading session.

Silver
Silver surged to new 27 year record highs at $16.55/$16.59 and is trading at $16.42/$16.46 at 1145 GMT.
Gold Investments believes silver will reach $20 in the first half of this year and may trade as high as $25 per ounce.

PGMs
After platinum’s surge of $100 to new record highs on Friday it has seen some profit taking and consolidated at higher levels and was trading at $1660/1670 as per above (1145 GMT). The power outages shutting the gold and platinum mines in South Africa (the world’s largest producer of platinum) will result in platinum continuing to be well bid.
Palladium was trading at $375/381 an ounce (1145 GMT).

Note

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