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Metals Exchange



In March 1997, long before he knew he would be honoured with the Nobel Prize, Mundell had predicted that "Gold will be part of the international monetary system in the twenty first century". This was a bold and controversial statement, and perhaps an ominous one. Gold may again serve as the ultimate hedge in chaotic conditions. Its return to its traditional role as universal money is unlikely, however, unless the time should come when the dollar, the euro, and the yen have all failed to function as acceptable means of payment across international borders. Peter L. Bernstein ("The Power of Gold" - page 372).

The preceding quote, from the best book I know of on Gold's place in financial history, mentions the possibility of a collapse of the fiat currency system. Can anyone imagine a situation whereby the yen, dollar and euro were all useless in terms of international trade? Sure, it's unlikely, but people should always assess the possibilities and allocate their capital accordingly. Maybe that means some people have 5% in gold, or others maybe 10%, while others dismiss unilaterally and have no gold? Fair call, but as Mr. Taganaki said the other week, Japan will look at its dollar asset allocations. Japan's reserves of gold are less than 2% of total reserves. Where does gold go if they lift it to say 5% .... Same for China? OPEC ruminations regarding what they will accept for their oil also will play a hand in what occurs going forward.

I'm not saying it will happen but people need to assess risks.


The yellow metal has recovered from its brief foray below $400 and is again comfortable above $405. The test of $410 leads us to the same $411-13 resistance that we encountered for the past few weeks. Dollar movements will probably overshadow the fundamentals for the metal in the near term. This $412 level should prove tough to break through, as should the $403 support. Although someone late in Comex is giving gold again down to $405. Gold was well bid in Japan all day and held into Europe. As usual, pressure was brought to bear on gold in the early U.S. session.

India is still buying and Shanghai premiums are as high as have been noted since deregulation.

Bloomberg reports that Barrick (ABX.NYSE) sees higher prices for gold as being sustainable. "We are in a sustainable gold rally, based off weak U.S. economy and dollar weakness" - Barrick EVP, Alex Davidson today at a South African gold conference.... they address their hedge book liabilities if that's the case. Just as an observation, if this rally is long term, their hedge book mark to market liability will continue to grow and erode shareholder value. Hedging is great in a bear market but can really bite your backside when companies are not flexible in their policies and attitudes.


Silver is still bubbling away although we could see some savage short term moves. Expect the $6.20-25 level to hold under pressure and very interested to see how well it can move up through the $6.50 level. I'm still expecting a $7 handle in a few weeks but hey, we could be waiting a bit longer (please note this is not advice - just my opinion). Just remember the supply-demand LAW. It's the only one that counts in metals! I just can't find the supply to keep silver at these levels. The demand isn't falling (contrary to what one reads regards digital photography, etc). There is only one way this can end and that is, in my opinion, higher silver prices denominated in depreciating paper (again just my view).

Base metals are all solid. Nickel has performed best and copper had another up day. CRB index is still above 260. Coffee, sugar, crude oil and heating oil are all up and cotton and livestock are down. Monthly CRB chart has us at highest for about 15 years. OPEC cut quota's to drive prices in dollars higher. But there's no inflation.

Currency moves are driving metals at present although it appears the metals moves are amplifications of the currency strength or weakness. Expect more and more "Greenspanisms" as the volatility in currencies gets wilder. Lucky the G7 dudes all wanted less volatility in currency. Currencies go where they want to, no matter what hot air gets blown around.


No positions in stocks mentioned.

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