Deepening Credit Crunch Supports Bullish Gold Trend

By: Mark_OByrne

Gold was down $3 to $972.00 per ounce in trading in New York on Friday and silver was up 3 cents to $20.16 per ounce. In Asian trading gold rose to $980.22 but has sold off slightly in early European trading. The London AM Gold Fix at 1030 GMT this morning was at $973.15, £481.52 and €633.03.

Last week, gold was up by 0.06% and silver was up 1.97%, thereby consolidating at higher levels after the recent strong gain in prices.

With oil prices remaining near record highs, the dollar likely to remain under pressure (see FX Commentary below) and the credit crunch deepening, gold is likely to continue to outperform other asset classes for the foreseeable future. In the short term anything can happen in these volatile markets but over the medium to long term gold's fundamentals remain extremely sound.

With many major stock market indices down some 3% for the week, gold's safe haven attributes were once again seen. Since the beginning of the year gold has had a near inverse correlation to major stock indices as seen in the table below.

The credit crunch is deepening and may soon degenerate from a serious liquidity crisis to an even more serious solvency crisis (Bernanke himself has warned that there probably will be bank failures). The FT reports that turmoil in the credit derivatives markets is having an increasingly brutal impact on the wider financial system as a vicious cycle of forced selling drives risk premiums on company debt to new highs. The trend accelerated on both sides of the Atlantic last week as investors rushed to unwind highly leveraged positions in complex structured products.

As ‘recession' has reentered the modern financial lexicon in recent weeks, so will ‘systemic risk' and ‘financial contagion' in the coming months.


http://www.research.gold.org /prices/daily/

Another indication of how gold remains in the early to middle stages of a secular bull market was seen in the lack of coverage of gold's recent record highs in most of the financial and business press in Ireland, the UK and the US. Only a few publications such as the FT, the Telegraph in the UK and Marketwatch and Bloomberg in the US have been reporting on gold's record highs. Gold remains a near taboo in much of the media and when it is covered it is nearly always negatively and disparagingly.

This is a classic contrarian indicator. When gold appears as front page news in the non specialist business press than it may be time to take profits or at least reduce allocations to gold. However, at the moment the vast majority of investors are completely unaware of gold's performance and indeed completely unaware of even how one would invest in gold. Not one in some 50,000 people has ever bought a Gold ETF or a Perth Mint Certificate – never mind holding a Credit Suisse investment grade gold bar.

This will change in the coming years. Glossy property supplements will be replaced by commodity supplements and there will likely be the emergence of dozens if not hundreds of small companies selling various forms of commodity and precious metal investments. Hundreds of new property companies (both for indigenous and overseas markets) and the proliferation of “buy to let” specialists and mortgage brokers (both prime and subprime)  was a clear indication that property had entered the mass participation stage of a global property bubble .

We are a long way from that in the precious metals markets with only the smart money, pension funds and sovereign wealth funds having begun to enter the precious metal market in recent months. The average investor does not know what investment grade gold is let alone how to buy it. This is a strong indication that we remain in the early or intermediate stages of this bull market.

Support and Resistance
Support is now at $950 and below that at $930 and $915. With another strong weekly close above $970, the $1000 price level remains a realistic short term price target and $1,200 remains a realistic possibility in the coming weeks.

FX Commentary
With respect to the FX markets it was a case of more of the same. Weaker than expected US Employment data released on Friday sent the dollar to a new lifetime low against the Euro at 1.5450 before the dollar found some short term support. Sterling also remained strong against the Greenback reaching over 2.0200 British Pounds to the dollar. Further carry-trade unwinding has pushed yen higher across the board as risk aversion abounds.

Meanwhile the Euro remains in a tight range against the Pound holding above 0.7600 and still firmly eyeing the 0.7700 level.

While commodity currencies remain underpinned by strong commodity prices the South African Rand continues to be pressurized by political and systemic issues trading over 8.000 to the dollar.

Silver
Silver is trading at $20.03/20.08 at 1100GMT.

PGMs
Platinum is trading at $2032/2042 (1100GMT).
Palladium is trading at $476/481 per ounce (1100GMT). 

By Mark O'Byrne, Executive Director

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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