-- Posted Tuesday, 28 October 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
Oct 28 a.m. (USAGOLD) -- Gold has been edging higher since registering an outside day, with a higher close on Friday. The market missed forming a key reversal by less than five dollars. Ongoing probes above initial resistance at 736.22 are encouraging with potential back to the first Fibonacci retracement at 776.56.
Given the volatility in all markets of late, it's always difficult to ascertain with any degree of certainty if moves in one direction or another are sustainable. Sharp market gyrations seem to have become the rule rather than the exception.
Broad-based concerns about the economy, systemic risks, inflation, deflation, the fate of the dollar, have all been driving strong safe-haven interest in physical gold. However, prices have dropped rather considerably in recent weeks as a result of massive deleveraging of commodities in the paper market.
Despite softer prices, we've seen nearly insatiable demand for physical gold. The Calgary Herald reported yesterday that the Royal Canadian Mint has doubled its output for gold twice in the last eight weeks and still they are rationing coins. David Madge, director of bullion services at the Royal Canadian Mint said, "We have never produced more than what we are producing right now. We just can't keep up with all the demand."
Finding one ounce bullion coins is increasingly difficult and supplies are likely to get even tighter going into year-end. A seemingly endless supply of buyers clamoring for a product that is in short supply. All the economics classes I've ever taken would suggest that prices must increase, but supply and demand fundamentals seem to have been suspended. At least for the time being.
We've dedicated a great deal of time to explaining the deleveraging phenomenon and the resulting suppression of the paper price of gold. Jonathan and I discussed this topic at length in a VideoBrief, which you can view by clicking here. There has also been considerable speculation, albeit difficult to prove, about direct intervention to prop up the dollar and lessen the appeal of gold.
It is difficult to say how long it will take for deleveraging to run its course. At some point, the realities of the physical gold market are likely to start re-exerting themselves. We've already seen the gold/oil ratio rebound from below 7 to nearly 12. Similarly the gold/silver ratio has gone from around 50 back in July to over 80 today. Both are good indication of just how resilient gold has been compared to some commodities.
Physical gold remains the preferred choice for wealth preservation and hedging against systemic risks. Gold is also the ideal hedge against inflation. Given all of the liquidity that has been pumped into the system this year, and factoring in that another interest rate cut of 25bp or 50bp is likely tomorrow, it's difficult to envision a scenario where rampant inflation is not a major issue down the road.
Tomorrow's Fed decision on rates may set the near term tone in all markets. Another rate cut is widely expected. The government's answer to the credit crisis and the anticipated recession is exceedingly easy monetary policy. However, that is a recipe for currency devaluation -- and yet the dollar remains near two year highs.
Once again, one has wonder if recent dollar gains are sustainable. They certainly seem to be counter-intuitive based on the realities of current and anticipated interest rate differentials.
If the greenback starts showing renewed signs of weakness, we would anticipate a rebound in gold back toward 776.56. Above that, a move back above $800 would likely trigger stops on short positions and further heighten interest in the yellow metal.
