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ROSS NORMAN - Gold Trading In a Vacuum

It would be tempting to ask whether gold really is still a safe haven
asset. With events of epic proportions taking place in financial markets
gold sits relatively mute with a price action defined by narrow ranges and
declining volumes and volatility.  Hardly what many would expect but then
many things are behaving out of character.

The best explanation of gold's modest gyrations is quite simply that its
is very simply trading inversely with the US dollar to the exclusion of
almost every other influence that normally comes to bear on it. Prevailing
dollar strength manifests itself best perhaps in India where prices are at
or near all time highs. The fact that gold anomalously mirrors the Euro
and equities is an indirect result of something else - and that is the
dollar ... end of.

Perhaps more importantly are the incredible micro wafer-thin volumes - be
they interbank trades, COMEX futures volumes, physical flows or even
mining equity trades. The gold market is soft - it is wafting... as such
gold's technicals have less validity today than they do at other times -
prices are very, very soft and liquidity non-existent as they are in other
markets. There are not forces marshalled to attack/defend key levels - it
floats gently. But don't take this seeming apathy as a sign that actually
all is well with the world... don't visualise a feather floating on a hot
Summers breeze.

Political and economic leaders are not covering themselves with glory over
the crisis and with a constant and deafening barrage of bad news coupled
with the increasing noise of the doomsters - then perhaps this is what
shell-shock looks like. As the head of China Investment Corp said - "more
devastating than the economic crisis has been the handling of the economic
crisis". But then its difficult to get consensus in Europe for a project
which is fundamentally flawed and without populist support.

In short, gold has not lost its mojo, it has not lost its safe haven role
- its simply doing what every other business sector is doing and just
sitting on its hands. Our world at Sharps Pixley is awash with people we
know in business who are simply bidding their time - gold itself is no

What I am at a loss to explain to you is why physical gold flows in Europe
have been quite so appalling in the year to date.  Ask any refinery or
physical trader. If I was holding Euros myself I would be deeply
uncomfortable and tempted to hold an increasing proportion in gold on the
basis that there as some chance that they would all be valueless in a few
months time. Whether that's a 5% chance or a 50% chance is a better of
personal opinion/conjecture.

What we are sure of however is that the rationale for owning gold is
better today than it was 5 and 10 years ago... and we see little prospect
of that altering. The supply/demand balance remains deeply favourable and
unlikely to change - and the chance that we will be back to sound money is
equally unlikely for some years to come.

Ad Multos Annos
Ross Norman
Sharps Pixley, London

28 May 2012 | Categories: Gold

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