GF338[1] Gold Report

Issue 338

October 10th, 2011

Week in Review
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N EXT WEEK IN GOLD FORECAST MATRIX/GOLD ETF

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CENTRAL BANKS

Physical demand has surged across Asia after the recent decline in gold prices and this is leading to a tight supply of gold bars in Singapore and Hong Kong. A physical dealer in Singapore said that he believed "supply is going to be tight until the end of October. It's difficult to generate enough stocks without any selling back from the market." We‘re seeing far more buying on this dip and far sooner than on previous sell-offs. In the last week the gold price has been in consolidation mode, but we‘re seeing rising bottoms and higher tops in the consolidation, which bodes well for the market. Indeed, our Point & Figure chart is now targeting $1,870. The woes of the financial markets in the developed world have becomes worse as politicians are dragging their feet at a time when they should be acting.  In the U.S., government has ceased to govern, passing the buck to the Fed. The Fed can supply blood to the system, but it relies on government to get it to circulate efficiently. A banking crisis is on us in the Eurozone and the first symptoms or deposit withdrawals have been seen for a while now.  Angela Merkel, Chancellor of Germany, is warning of greater losses to be borne by lenders to Greece. We may be about to see the trigger pulled on the Eurozone banking crisis on this central topic. Translated into the gold price, this means that the consolidation process we‘re seeing now is providing the floor that investors in Asia crave. Don‘t expect to see greater falls in the gold price. Continue buying the dips. Physical gold sales have slowed to a trickle, but demand is rapidly increasing. Gold market mood is now good. It‘s extraordinary that the economically healthy, emerging world is constantly persuaded that gold buying is wise by a developed world whose foundations are under assault. Poor government and banking crises are a cancer to confidence. Everyone realizes this, but it seems that they can‘t do anything about it. Gold has a long way to rise in the future!

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VIETNAM : L ESSON IN FAILING MONEY

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WHY GOLD ISN‟T $2000, YET…

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I NFLATION , MONEY CIRCULATION = GANGRENOUS LIQUIDITY, RISING GOLD PRICE

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OIL

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US DOLLAR GLOBAL CURRENCIES & GOLD

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GOLD :USD SPOT PRICE

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GOLD STOCK TECHNICALS

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GOLD STOCK NEWS - NEW!

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PORTFOLIO

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CONSULTATION
Disclaimer

Gold fundamentals are intact. Current prices are a buying opportunity!

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Next Week in Gold

With the consolidation pattern maturing with rising highs and rising lows, expect the gold price to make a sharp move higher. As markets react, the trigger may be deeply significant news or confirmation of the bad news we already know. The overall state of the developed world financial system is poor, so it need not take a major drama to propel the gold price higher. Asia is now happy to buy at the $1,600 to $1,660. The remaining leveraged positions are much smaller than before the fall from over $1,800 and will not cause nearly as much downward pressure on the gold price as before if the news is bad for gold (which we think unlikely). A further selloff will be sharp, deep, and short-lived. With the gold price so oversold, expect any breakout in the gold price to see a large number of either new investors or re-investors coming into a market that is, at best, thin.

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Forecast Matrix
Short-Term Gold [spot price] Metal Stocks [HUI] US Dollar [US $ Index]
Supports Resistances Action Support Resistance Action Support Resistance Action $1,525-$1,550, $1,600 $1,764, $,1,700 $1,650 Upside bias, choppy trading 520-525 575-625 Upside bias -- Volatility 74-76 78-80 area, 82 Neutral, toppy

Mid-Term
[3 – 6 Months]

$1,750-$1,900+ Bullish 600+ Upside bias 74-82

Gold ETF‘s
45,000,000 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 2004

2005

2006

2007

2008

2009

2010

As of the 6th October 2011 we have seen only 2.74 tonnes of gold sold from the God Trust and from the World Gold Council‘s sponsored gold Exchange Traded Funds. The bulk of that was outside the U.S.A.While New York nearly always starts the day by selling off gold, we can see that the physical gold sales have slowed to almost a halt in the last week.

Short-Term NY Gold ETF
42,000,000

40,000,000

38,000,000 Aug-11

GoldForecaster.com

Sep-11

Oct-11

This is significant because it matches the lack of physical sales elsewhere. Indeed Asian demand, as we said earlier, is surging now. Developed demand and more importantly supply is holding the gold price back and will continue to do so, so long as mnainstream investors continue to show confidence in their financial system. This has been on the want since 2008 and will continue to be so until the fundamental ailments of the developed world financial system go unresolved.

Investors in the SPDR now hold 1,693.69 tonnes.

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Central Bank
Sales/Purchases - As of the 30th September 2011 Central Bank Gold Agreement 2009 - 2014
Selling Signatories
Total Announced Sales

Remaining Announced Sales 2009-2014 205.35 0 0 0 0 0 0 0 0 0 0

From Oct 2009 Year 1 Sales 9.66 109.76 0 23.4 180 15.6 4.8 7.5 200 10 2 99.2

Oct 2010 Year 2

Russia Bangladesh Philippines Saudi Arabia Thailand Belarus Venezuela India Sri Lanka Mauritius Mexico Bolivia South Korea Total Purchases

1 102.9 10

27.0 2.6

0

558.96

104.7 7 25 215.0

Notes to table: 1) This now includes the unannounced sales. 2) We have extended the Table to include meaningful purchases outside the agreement. 3) Germany’s sales are for coins, which we do not regard as part of the announced sales for the purposes of this report. 4) The remaining sales for individual countries will be corrected once the three monthly figures are available. The total is the most accurate figure, but will then be adjusted too.

From February 5th to September 30th 2011, gold and gold receivables (asset item 1) remained largely unchanged with the exception of small amounts of coin trading between the European central banks. These sales are not in the spirit of the Central Bank Gold Agreement.

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Vietnam
Lesson in Failing Money
The Vietnamese government is to allow six institutions to sell up to six tonnes of gold from their stock to increase supply in the domestic market. Partly private DongA Bank, Asia Commercial Bank, Techcombank, Eximbank , Sacombank and SJC will buy and sell gold at the same price quoted by SJC. In March 2010 the central bank ordered Vietnamese gold traders to close offshore trading accounts in a move to restrict gold transactions to help stabilise the domestic currency, the dong. The State Bank of Vietnam granted quotas to banks and gold trading companies to import at least 13 tonnes of the metal in August and September to cut the premium. Domestic prices remain far higher than international prices and hit a record gap of 4.3 million dong ($206.4) a tael above the world price on Sept. 26, according to domestic gold trading companies. (One tael is equivalent to 37.5 grams or 1.21 troy ounces) The wide gap has been putting pressure on the dong, which weakened to 21,550 per dollar on the unofficial markets on Wednesday, or 3.6% below the weak end of the central bank-mandated trading band. The dong tends to fall against the dollar in the unofficial markets whenever there is a high premium because speculators accumulate the greenback to smuggle gold to take advantage of the premium, traders said.

SJC was selling a tael at 44.12 million dong ($2,120) in Hanoi, around 1% lower than a day earlier.
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Why Gold Isn‘t $2000 yet…
Why isn‟t the Gold Price going through $2,000 now?
The gold price went over $1,900 and looked as though it was going to mount $2,000, but since then has fallen back to $1,600 and is in the process of consolidating around the lower $1,600 area. It was expected that it would have moved a lot higher faster, but that hasn‘t happened, yet. In the face of Italy‘s downgrade to A2 by the ratings Agency, Moody‘s summary that,
―There has been a profound loss of confidence in certain European sovereign debt markets, and Moody‘s considers that this extremely weak market sentiment will likely persist. It is no longer a temporary problem that might be addressed through liquidity support, and several euro-area governments are increasingly affected by the loss of confidence.‖

The downgrading was expected as are further downgrades for the different Eurozone members. Why shouldn‘t the gold price be on its way through $2,000 to higher levels?

The „Downturn‟
The news over the last few weeks has sent global financial markets down heavily as a slow recovery morphed into a downturn and, at best, a flat economic future in the developed world. These falls have been accompanied by tremendous worries that there could be a major banking crisis that will cripple the Eurozone economy as a whole, not just the debt-distressed nations. In France, growth is now at zero; in Greece it‘s somewhere south of a 5% dip in growth, well into recession. Greater austerity simply adds to the fall in government revenues, defeating their purpose of reducing their deficit. All of this implies an ongoing shrinkage of the Eurozone economy. This hurts investor capacities in all financial markets and wealth throughout the Eurozone. Cash becomes ―king‖ as investors flees markets to a holding position, waiting for much cheaper prices before re-entering markets at lower levels. The path to deflation is then made. Deflation in its early stages causes tremendous de-leveraging. That‘s the selling of positions to pay off loans taken to increase positions. It may come about because of investor prudence, banks calling in loans, stop-loss triggers and margin calls (where the level of debt against positions becomes too high and forces sales). This often (and particularly in the case of precious metals) has nothing to do with the fundamentals of the market. It‘s simply the position of investors. This happened in the precious metal markets as well. This is why gold and silver prices fell.

De-leveraging
As was the case in 2008 and often through history, the process of de-leveraging is a short-lived one, even when it‘s savage. Downward pressure on prices disappears once an investor has sold the positions. Leveraged positions are the most vulnerable of investor-held positions and can make up the froth or ‗surf‘ in the markets, which cause the volatility levels to increase when drama strikes. In 2008, these positions were huge because there had been two and a half decades of burgeoning markets that encouraged greater risktaking. Since then, while leveraging has taken place, it has been less and rapidly removed when dramas hit. In 2008 we saw a similar drop in prices from $1,200 to $1,000 [20%], which equates to the fall from $1,910 to $1,590 [16.9%]. In 2008, the precious metal prices then slowly rose as buyers started to come in from all over the world. It took over a year for prices to recover back to $1,200.

Change in Market Structure
Today the shape of the precious metal markets is quite different and particularly that of gold. In 2008, central banks were sellers; today they are buyers. In 2008, the Chinese gold markets were small. Since then Gold Forecaster 337

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they‘ve grown to such an extent that they‘re soon to overtake India. These are two dynamic features that give demand a totally different shape to 2008. More than that, the impact of the developed world, longterm, has diminished quite considerably. It now represents less than 21% of jewelry, bar, and coin demand. The emerging world, as a whole, represents over 70% of such demand now. The bulk of the world‘s physical gold that comes to the market is dealt at the London twice daily Fixings. The balance that‘s traded outside the Fixings is the most short-term price influential amounts, producing the swings that resemble the waves on the seashore. It‘s these traders and speculators that often persuade long-term buyers to stand back and wait for the prices to swing to the point that persuades them to enter the market. The drop from $1,900 had this effect on investors. Now that the fall has happened, we see a surge in demand from the emerging world to pick up the slack in the market. We’ve no doubt that central banks are buying the dips as well. So once the selling from the developed world has stopped (emerging market demand waits for this before buying, allowing the fall to extend further) in come the buyers happy that they‘re entering the market at a good time. Because of this change in market shape, expect the market to take far less time to find its balance and allow demand to dominate.

2012 Recession Battle

The I.M.F. has just warned that the developed world will enter a recession in 2012. Will that be negative for the gold market? We don‘t think so. The world has seen the recovery peter out, the sovereign debt crisis arrive, and now sees the I.M.F. recommend that the Eurozone banks be recapitalized. What does this mean for precious metals?
Cast you minds back to the recapitalization of U.S. banks under the TARP measures whereby the Fed bought the toxic debt investments of the banks against fresh money. When we say fresh we mean just that, newly created money in the trillions. This did lower the perceived value of the dollar inside and outside the U.S. The effect on gold was palpable as it rose back through $1,200 and onto new highs. Already we‘re hearing rumors of an E.U. government minister‘s plan to walk the same or similar road. With the recent past in mind, we‘re certain that will lower the perceived value of the euro and see euro investors seek places to cling onto the value of the euro. This time round, expect markets to discount these actions in the same way. The downturn will therefore be fought with new money creation in the same way the U.S. did it from 2008 on.

Second Time Round
There‘s a significant difference between 2008 and now. In 2008, the credit crunch was new to investors and shocked the markets into overreactions. In 2011, we‘re not shocked, but expectant of what lies ahead. In 2008, the developed world economy had considerably more resilience than it does now, so the situation is more serious and less likely to be believed as the panacea for the developed world‘s economic crisis. Because the gold and silver prices rose so strongly after that time and in the face of those ―solutions‖, the same will be expected today. In 2008, confidence in the financial system as well as in the monetary system appeared unassailable, but not this time. While the developed world (outside of the gold ETF‘s in the U.S.) has not been the main driver of rising gold prices, this time we would not be surprised to see their resilient confidence in their world snap and a frantic search for safe-havens follow. If we see a repeat of the 2008 breakdowns in the near future, they‘ll slaughter remaining confidence in the monetary system and the ability of its governments to set matters straight. What then for gold and silver?

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Gold and Silver & Round 2 of the Credit Crunch
Bankers and governments will never willingly welcome gold back as a fully functioning and accepted part of the developed world‘s monetary system. That would be seen as a defeat for them and the banking system they so carefully developed over the last forty years. The only reason they‘ll accept it, is because they have to. There‘ll be no alternative to such a move. We‘ve seen banks forced to use gold as collateral of late to increase the availability and cost of inter-bank loans as they face liquidity dramas of their own, on their own. Last year, we saw 600 tonnes of gold held by the Bank of International Settlements as swaps for foreign currency loans. These have now been repaid. So gold has seen an active place in day-to-day dealings in the money systems of the developed world. If the crises worsen or confidence among the banks deteriorate further, such a role will have to be recognized and may filter into government/banking relationships –apart from acting as important reserve assets in the central banking system. Once central banks are pushed into that position, they will want to control the main, gold markets. As it is, emerging nations have recognized the importance of gold by buying it for their reserves in the last 2+ years. It seems pretty clear that when they do it‘ll be a quick, almost overnight, capture of the market. In 1933, when the U.S. central bank confiscated U.S. citizen‘s gold, they waited two years before devaluing the U.S. dollar by 75% –from $20 an ounce of gold to $35 an ounce of gold. If they do take control of the developed world gold market and their citizen‘s gold, they‘ll seek a mechanism to support the huge money creation exercises we‘ve already seen in the last two years, and expect to see more of this. Part of the exercise will be to ensure a gold price that will reflect the past, present, and future money creation needed to restore growth and confidence in the monetary system that they run.

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Inflation, Money Circulation = Gangrenous Liquidity, Rising Gold Price
Definitions
According to the Oxford Dictionary, Inflation the general increase of prices and fall in purchasing value of money Deflation reverse or reversal of inflation Stagflation state of inflation without the corresponding increase of demand and employment A situation arises where the quantity of money is not as important as how far its circulation reaches. It slowly becomes insufficient to buy the needs and wants of the population at the periphery of the economy. For instance in stagflation, there may be money around but it‘s not producing the economic flows that it should. This can also be tied to the extent of the circulation and the velocity of money itself. There may be sufficient money around but is becomes locked up in Treasury bonds and not lent into the economy to stimulate economic activity (such is the case now). Asset prices rise in this environment and further make inadequate the money for purchasing such assets. Alternatively, the reduction of money can happen in situations, like today, when mortgages are at an all time low of 3.94%, but through fear of falling house prices (reducing creditworthiness) potential job losses and the consequential need to save for the rainy day, house buying drops off. Every situation produces a reduction in the available supply of money and precipitates liquidity crises. This is from where the major threat to monetary stability comes. In our global world, with its plethora of national currencies, a nonnational asset becomes protection against inflation, deflation, and stagflation across the globe. Why should this be good for gold? Gold is both an international asset and international cash. It‘s the combination of these qualities (and the liquid nature of gold, in the most difficult of situations) that set it apart from paper money and other assets. It‘s these qualities that will force the monetary system to bring gold back into the global, monetary system in one way or another.

“Normal” Inflation
Today in every country across the world, there is inflation –even when a country is in recession. When we hear the reports on inflation changes, we usually hear just one rate affecting the currency zone we live in. In reality there are several types of inflation, each driven by a different set of forces. The serious food inflation being suffered by much of the world has reached 70% in some parts of the world. This is a result of demand and supply pressures. The pressures on the poor are the most worrying from this source of inflation. Some households spend a large percentage of their income on food, so such rises have a serious impoverishing impact on their lives. In the developed world, where a much smaller percentage of disposable income is spent on food, such inflation is not as pernicious. To the investment world, the differences show the impact on the ability to invest, the shortage of liquidity for citizen‘s everyday lives. Where it‘s possible, this type of inflation can be managed by increasing the amount of food grown –so increasing supply and lowering local prices. Take a look at oil and other energy inflation. The fact that the oil price is easily managed by oil producers makes any inflation from this source manufactured to suit the needs of those people. As the world runs on oil, price rises affect everyone to a greater degree. Oil prices reflect the sum total of global demand. China, where economic growth is bringing the poor (i.e. low oil-utilizing population) into a world where oil takes a growing part of their lives, is seeing rapidly increasing demand. As half the world falls into this category, we foresee demand from that source growing almost exponentially. The developed world may be going through

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a falling demand phase, but this could fail to lower prices as the emerging world is more than compensating for such falls.

Energy Inflation
Worse still, in the majority of nation‘s oil, demand represents a major import to every nation. The foreign exchange needed to pay for this has to come from the income from exports (except in the case of the U.S., where they have run a trade deficit for several decades through the printing of new money, which is a leading U.S. export). Oil price inflation is of a different nature as it affects profitability of business and therefore the economic performance of nations themselves. Falling oil prices have a stimulatory impact on nations as money rises in oil purchasing power, when oil prices fall. Again, we see an impact on general liquidity. Oil price inflation is considerably more pernicious, for oil payments represent a draining of money from a nation because oil payments leave the developed world and arrive on the shores of oil producers, sucking wealth out of those oil importing nations. The same happens with cheap imports. Consequently, we‘re seeing a draining of wealth from the West to the East. The only way to stop this is to lower oil demand and raise the prices of imports (i.e. Protectionism). In today‘s global economy, this is proving no alternative. The burden on smoothing out the three liquidity problem makers –inflation, deflation and stagflation—falls upon the shoulders of the country‘s central bank.

Central Bank Money Management
In terms of ensuring price stability, central banks have to balance the needs of their economy with the money supply available to it. Price stability is achieved when they succeed in balancing the two; however, with governments adding to their burdens by passing some of the responsibility for growth and economic stimulation onto them, they find that they‘re forced to bend the rules of price stability, and often. In the present economic climate, with a recession impending or underway, central banks across the developed world have turned to quantitative easing (significantly increasing money supply through money market and Treasury market operations) to increase money supply and overall liquidity to encourage the banks to find it easy to lend and give the economy the liquidity it needs to grow. This hasn‘t worked nearly as well as had been hoped, for the deflationary forces and slowing growth have discouraged bank lending – businesses and consumers have not sought this extra money. As a result, it has found its way into government bonds and bills against central banks using somewhat toxic assets as collateral. There are two possible solutions:  The first is to allow the very painful, politically unpopular, recessionary/depressionary forces to shrink the economy, forcing growth in economic activity, to be followed by greater monetary demand from that growth to bring about a growing economy. Today that would not be politically workable.  The second is to rapidly increase the money supply to stop any stagflationary or deflationary shrinkage of the economy.

A Different Type of Inflation
There is an analogy that may be useful to the reader. The human body needs blood to feed and nurture it. The body requires a certain volume of blood, going at a certain speed and circulation to the outer reaches and capillaries of the body. Interfere with these processes and the body loses its health. The Fed is the supplier of money and can to some extent influence the speed at which it travels. When the circulation slows, the Fed can add quantities of money to speed it up (i.e. quantitative easing). By lowering interest rates, it‘s hoped that the circulation is improved, and the speed at which the money travels regulates the nurturing ability of that money. But it takes government to exercise the body so that it makes its blood system healthy. When government fails to exercise, the blood systems come under pressure.

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Today we find central banks in a very difficult position because the additional money supply has simply expanded the volume of money without forcing its circulation to reach consumer levels effectively. It has found its way into unutilized ‗pools‘ –banks and Treasury bonds where it‘s of little use to the economy overall. So, economic activity continues to shrink alongside dropping demand and employment. That‘s why the Fed, in a cleft stick, issued this statement,

―The Fed ―will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability.‖
Bernanke may not be finished after attempts in August, September to strengthen record monetary stimulus with unconventional tools. The central bank‘s near-zero benchmark interest rate and $2.3 trillion of housing and government-debt purchases since 2008 have failed to produce self-sustaining growth in the economy and employment. The Fed is scared of deflation; they‘re more concerned with preventing deflation rather than containing inflation. Deflation destroys businesses and wounds the economy, long-term. Inflation just drops the value of money.

Budget Deficits
This is where budget deficits can hurt liquidity. In 1930, the U.S. federal budget surplus had turned to a deficit that grew rapidly as the economy contracted. Today we‘re watching to see just if and how far down that path we‘re going. If inflation takes off, then it‘ll be necessary to let interest rates rise in line with the rate of inflation to prevent real interest rates from dropping. Rising interest rates will bring the Treasury market prices tumbling. No government can afford that –the interest payments required to service government debt is far too high and getting higher. Rising interest rates for government exacerbates that demand and lowers overall national liquidity. This introduces another kind of inflation, monetary inflation, which is totally unrelated to the other types. Monetary inflation can, if improperly managed, lower the value of money by itself. A simple illustration is a cake with a $1 price tag. If you double the amount of money available to buy the cake, then likely the price of the cake will rise to $2 to compensate for the cheapening of money. In a deflationary climate, such inflation acts to reduce deflation and if played right, produces price stability (low blood pressure countered by high blood pressure). But as the situation develops, it becomes increasingly difficult to balance the two, leaving the situation moving to the mercurial. It‘ll then take just a slight imbalance to send either deflation or inflation off at a gallop. Today, we see a growth in the money supply through quantitative easing of huge proportions. It did benefit the banks, but it has not reached ground level where the consumers are. U.S. bank deposits have continued to rise, since December 2007, with domestic deposits jumping from $1.1 trillion to $8.1 trillion. Despite this, we sit with a stock market declining into a ‗bear‘ market, and cash becoming ‗king‘ as in a bear market. The stimulation of the average Joe hasn‘t happened. Rather he‘s cutting his debts and saving like never before. This, in itself, is defeating the increase in liquidity and causing a liquidity crisis (blood quantity and circulatory problems). The economy continues to deteriorate, and unemployment remains unacceptably high. In the face of the growing liquidity crisis, the developed world will turn once again to the printing presses, but this time more forcefully. They‘ll not accept defeat and allow the liquidity crisis to cause a depression. Suddenly alarm bells ring. These conditions are the same as in the past when awful hyperinflationary conditions were triggered in Germany and France after the First World War! Today the Bank of England has opted for more quantitative easing. We do expect the E.C.B. to move down that path shortly. The deepening crisis has already forced the ECB back into emergency mode. It has reintroduced six-month euro funding, a measure it had previously mothballed, and extended limit-free funding in all its operations until at least mid-January.

Why a Liquidity Crisis Benefits the Gold Price
As we mentioned from the outset, ―Gold is at once an international asset and international cash. It is the combination of these qualities and the liquid nature of gold in the most difficult of situations that set it Gold Forecaster 337

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apart from paper money and other assets.‖ It cannot be overprinted. Its price does not fall in deflation. At the start of deflation, it can be used to create liquidity when other asset prices are falling (such as we have seen in the last fortnight) but once the most dire of liquidity needs are satisfied, holders of gold cling onto it as its price either holds or rises while other asset (i.e. equities and commodities) prices fall. It becomes a value anchor for the wealthy.

If (as has happened in the past) liquidity crises breed inflation, then gold prices rise as the value of money decreases. Thus gold becomes an asset, as well as money, protecting the holder against the three horsemen that strike capitalism –deflation, inflation and stagflation.
Future Gold Prices
At the moment we‘re seeing the gold and silver prices consolidate. Silver is building a floor between $28 and $32. Gold is building its new floor between $1,600 and $1,650. The shape of the chart is telling us that the consolidation has an upside bias targeting $1,870 in the near-term. But of greater significance is a ground swell that is building up, pointing to far higher peaks and far greater volatility, reminiscent of the early 1970‘s. Certainly, should anything go wrong with the fine balance of price stability between increasing liquidity and deflation, then expect to see a fundamental change in the behavior of money in general and in particular, gold and silver. The two will reflect the instability that will infest the paper money world.

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Oil
Oil slipped back to $76 at one point in the week before recovering to finish at 86.34. Like many of us, oil producers are waiting for events to unfold. Libyan oil is at over 1.5 million barrels a day and we‘ve heard no talk of cutting production. It‘s more than likely that oil producers want the oil price lower –if only to stimulate developed world economies. It‘s becoming clearer that they may lose short-term, but would sell far more if a recovery did actually happen. It‘s a difficult formula to balance, weighing the gains of stimulating the Western world against growing demand from the emerging world. But a key concern of oil producers is the value of the currencies used to pay for the oil. If one takes the oil price over the last three decades, then one can see why it‘s at current levels.

The oil price is now a reflection of the sum total of the global economy.
It‘s more than likely that, should emerging demand prove resilient and overwhelming western demand, then oil producers will engineer the oil price to maximize income from the emerging world, irrespective of the developed world. That‘s when politics wade in.

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US Dollar
U.S.A.
This week, the U.S. government was emasculated again. The President‘s Jobs bill failed to pass into law. To outsiders, the image of the rich versus the poor is emerging as Republicans fight tax increases on the wealthy and the Democrats try to protect spending on the needy. Inside the U.S., the perceptions seem to be quite different. We‘re now at the beginning of confidence failing in Capitalism as the bulk of the lower classes are not benefiting from the system. If these movements grow they will undermine the strength of the U.S.A. But of greater significance to gold investors is the failing confidence in the banking system. The antagonisms that have built up since 2008 against bankers have worsened as the financial disadvantage of the poorer citizens has been illustrated. Unless these moves are addressed quickly at government level, they will become fuel in deeper divisions in the U.S. With the middle and poorer classes carrying the weight of numbers (and votes) expect the money issue to become a very unpleasant election issue in the future. Of more importance to gold investors is the impact the growing political divisions will have on the government deficit, interest rates, Treasury markets, and inflation in the future. The battleground is the monetary system, which is not designed to hold up under such pressures. Whether the exchange rate against other currencies wavers or not, confidence in the dollar also means confidence in the systems behind it. It‘s this weakening that‘s constantly favoring gold worldwide. At some point in time, a thundering herd of investors will turn to gold, but ahead of that day the numbers as a percentage of investors will remain low.

Back into Negative Interest Rates?
History has shown that negative interest rates are not uncommon. We‘re seeing them now and markets appear happy to live with it. (Thanks to Bullion Vault) In the US, for example, real interest rates on government bonds were negative for a quarter of the years between 1945 and 1980. The average real rate in those years was minus 3.5%, and it was as low as minus 9% in the years immediately after the war.

The findings for the UK are even starker –nearly half the years during the period saw negative real rates, which for liquidation years averaged minus 3.8%.
World War I and Depression debts were importantly resolved by widespread default and explicit restructurings or predominantly forcible conversions of domestic and external debts in both the nowadvanced economies, as well as the emerging markets. Notorious hyperinflations in Germany, Hungary and other parts of Europe violently liquidated domestic-currency debts. Gold Forecaster 337

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The incentives to reduce the debt overhang are more compelling today than about half a century ago. After World War II, the overhang was limited to public debt (as the private sector had painfully deleveraged through the 1930s and the war); at present, the debt overhang that many advanced economies face encompasses (in varying degrees) households, firms, financial institutions, and governments. Another route to follow outside these draconian measures is…

Prescribed Investments?
When there are not enough investors to hold up government and state finances, investors can be forced to invest. A system called ―Prescribed Investments‖ is used, where fund managers usually at institutional level (not individual levels) are ordered to hold a percentage of their investments in government and States bonds. Usually a desperation measure, they‘re effective even if they further undermine the monetary system. So what is next? Even the Fed is circumspect about this. The Fed ―will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability,‖ Bernanke said this week. More does need to be done. The balance between more quantities of money and improving its total circulation is extremely difficult to control. It becomes mercurial, threatening the balance of the entire economy if it slips away. Bernanke may not be finished after attempts in August and September to strengthen record monetary stimulus with unconventional tools. The central bank‘s near-zero benchmark interest rate and $2.3 trillion of housing and government-debt purchases since 2008 have failed to produce self-sustaining growth in the economy and employment. ―The recovery from the crisis has been much less robust than we had hoped,‖ Bernanke said. Fed officials expect a ―somewhat slower pace of economic growth over coming quarters‖ than they did in June.

Technical Update
Short-term (0-3 months)
The USD is finding strong resistance around 76-78, where further upside appears limited [78-82] with a huge long-term, historical supports in the lower-70‘s. Downside is possible, but limited as well. It‘ll be a period of consolidation in the lower-to-upper 70‘s (sideways action) but the true measurement of paper monies is in gold and silver. This is just a relative indicator of weakening fiat currencies.

Long-term
(6-12+ months) US Dollar index is looking suspect again. Support hasn‘t launched the Dollar Index back to the lower 70‘s; it appears it‘ll test the lower 70‘s in the coming months ahead. Should 70-72 area be breached, then expect a significant drop in the USD that will send gold soaring. This is a huge support area going back many years. The upside could be a rise in long-term rates. If yields rise, then the USD could see strength, but this would trigger big problems with the huge debt interest being paid. Gold Forecaster 337

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Global Currencies & Gold
Eurozone and Global Debt Crisis
Currency debasement benefits financial, banking, and sovereign government interests in the short term at the expense of citizens –particularly the frugal savers and those on fixed incomes such as pensioners and social welfare recipients. In the long term, society as a whole suffers from virulent inflation and hyperinflation as it can lead to the collapse of governments and societies as paper assets and currencies lose their purchasing power. Gold and silver protect against this risk.

E.C.B.
European Central Bank President, Jean- Claude Trichet, fronting a policy decision for the final time, said the E.C.B. will resume covered-bond purchases and reintroduce year-long loans for banks as the sovereign debt crisis threatens to lock money markets. The E.C.B. will spend €40 billion ($53 billion) on covered bonds starting next month and will offer banks two additional unlimited loans of 12 and 13-month durations, Trichet said after policy makers left the benchmark interest rate at 1.5%. He also said they‘ll continue to lend banks as much money as they need in its regular refinancing operations at least until July 2012. ―The new purchases will have the capacity to be conducted in the primary and secondary markets and will be carried out by means of direct purchases,‖ Trichet said. ―They will start in November and are expected to be fully implemented by the end of October 2012.‖

Greece
German Chancellor Angela Merkel said that Europe‘s rescue fund will only be used as a last resort to save banks, and investors may have to take deeper losses as part of a Greek rescue. ―Time is running out‖ to establish if [bank] recapitalization is necessary‖, Merkel said. ―If a country cannot do it using its own resources and the stability of the euro as a whole is put at risk because the country has difficulties, then there‘s the possibility of using the EFSF,‖ the European Financial Stability Facility, she said. Using the rescue fund is ―always tied to certain conditionality.‖ Signals that European politicians may step up efforts to aid banks and push investors to accept bigger losses as part of a Greek bailout reflect international pressure to end the debt crisis and domestic opposition to expanding rescues. Moody‘s Investors Service followed its three-level downgrade of Italy on Oct. 4 by warning that euro-area nations rated below the top AAA level may see their rankings cut.

The United Kingdom
The Bank of England unexpectedly expanded its bond-purchase program to £275 billion [$421 billion] from £200 billion after keeping its key rate at a record low of 0.5%. Inflation is at 3.0% in the Eurozone and 4.5% in the UK. Thus negative real interest rates continue which continues to make non-yielding gold attractive. Negative real interest rates have been a key driver of higher gold prices and will likely continue to be. Despite deepening inflation, there‘s speculation that both banks will reduce interest rates, if not today, then at the next meeting. This would likely put further pressure on both the euro and the pound and see gold make further gains against both currencies.

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 Moody‘s Investors Service cut the senior debt and deposit ratings of 12 U.K. financial institutions, concluding the government would be less likely to provide support for them if they became financially troubled.  Lloyds TSB Bank Plc, Santander UK Plc and Co-Operative Bank Plc had their ratings lowered one step by Moody‘s, while RBS Plc and Nationwide Building Society were cut two levels. Seven smaller building societies were cut from one to five levels. Clydesdale Bank was confirmed at A2, with a negative outlook. It‘s pretty much a vote of no confidence in European officials. Either the virus is already in the U.K. so they had to respond, or they don‘t believe the problem will be sorted out. This is a warning to us all that the Eurozone debt crisis and its contagious effect on the rest of the world is far closer than we thought.

Should even an inkling of this happen, gold and silver will become the most popular and respected of investments on the planet.
Prime Minister George Papandreou‘s Cabinet also passed €6.6 billion of austerity measures last night to cut the 2012 deficit to 6.8% of gross domestic product, missing the 6.5% goal previously set with the EU, International Monetary Fund and European Central Bank, known as the troika. The danger is that the more the austerity the greater the recession and the lower the cash flow to repay the deficit. It‘s a Catch-22 situation. Chancellor Merkel stated last week that investors may have to take deeper losses as part of a Greek rescue as she signaled Germany‘s readiness to join efforts to recapitalize banks. 50% cuts were talked of but this may rise as high as 70%. This will be so damaging to the banking system that we‘re rapidly approaching the scene when, time is running out to establish if recapitalization is necessary. Merkel said that ―if needed, there will be an adjustment‖ in investors‘ share of a €159 billion ($212 billion) second aid package for Greece, pending a report by international auditors on Greece‘s finances due before a meeting of European finance ministers next month. Signals that European politicians may step up efforts to aid banks and push investors to accept bigger losses as part of a Greek bailout reflect international pressure to end the debt crisis and domestic opposition to expanding rescues. Policy makers increasingly want to build a large solvency buffer. Banks in core Europe need to be recession-proofed and banks in the periphery depression-proofed. There is no secret at all that European authorities and the European Commission are all working together on a plan to bring more official capital, more public-sector capital into the banking sector. But will it restore confidence in the euro and its debt crisis? There are few who believe it will…

U.S.A. Worried
The Federal Reserve Bank of New York may ask foreign lenders for more detailed daily reports on liquidity as the U.S. steps up monitoring of risks from Europe‘s sovereign debt crisis. Regulators held informal talks with some of the largest European lenders about producing a ―fourth-generation daily liquidity‖ or 4G report. The reports may cover potential liabilities such as foreign-exchange swaps and credit-default swaps. The U.S. has already increased the number of examiners embedded in these banks. U.S. Treasury Secretary, Timothy F. Geithner, has warned that failure to bolster European backstops would threaten ―cascading default, bank runs, and catastrophic risk‖ for the global economy. U.S.-based money funds, which buy short-term commercial paper, have been shunning securities issued by some banks based on the continent, and European Central Bank Governing Council member Yves Mersch said Sept. 28 that liquidity shortages pose the main risks to the region‘s banking system. Euro-zone banks and other institutions were more than $350 billion in debt to the Fed‘s emergency-lending facilities at one point during the 2008-2009 financial crises. U.S. prime money-market funds cut their exposure to euro- zone bank deposits and commercial paper, or short-term IOUs, to $214 billion in August from $391 billion at the end of last year Gold Forecaster 337

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A Run on Gold
Should this happen, we cannot say how many banks will find themselves in a similar position. This almost certainly will precipitate an investment charge into gold in the Eurozone and possibly, the U.S., simply to protect as much of the value of their euro investments as possible. We believe that a Greek default is inevitable. The key question is when this default will occur and how it will be managed. Greek bonds have tumbled, and insurance against default has soared as markets put the probability of insolvency at more than 90%.

We warn subscribers who are unhappy facing extreme volatility to stay on the sidelines because even gold and silver will suffer volatility; however, having watched gold floor this week, expect such volatility to be to the upside!

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Gold: U.S. Dollar Spot Price
Resistance: Next Week: $1,800-$1,850, $1,764, $1700 area Supports:: $1,525-$1,550, $1600 area Stabilizing around $1,600-$1,650. Volatility coming off record extremes but remains as liquidity falls.

Short Term: Gold is drifting towards a strong resistance area, 1700-1750 which may

provide difficulty as the market settles down from the recent rally then pullback. Volumes are light, liquidity lower meaning the volatility will continue – choppy trading with an overall upside bias, trend forming. Good support below should the market need to consolidate a bit more ($1500-1550)

The gold price has a big technical support zone in the $1,500-1,600 area. Look for the gold price to trade around $1,600-1,650 area for the time being before it regains its footing and starts to build on new momentum. This could take weeks.

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Gold Stocks: HUI
Resistances: Next Week:
550 area, 570-575, 575625

Supports:: 520-525

Upside bias

Short-term: Gold stocks on a rally here with a few upside targets to look out for if the gains

continue. 550 area (200DMA) then a break of that level brings 570-575 into play. A big resistance zone above up to 615-625, should gold stabilize and equity markets remain firm, then we could see this rally drift up into this area.

Should fear and panic hit the buyers and send them in retreat, we could see some damage break our 520525 support zone. A break brings a 5-10%+ quick technical sell-off. After the big gold/silver price pullbacks, the likely course is weeks of choppy trades, bringing swings up and down with the general trend going higher. Very attractive fundamentals –risk/reward, which will continue to attract capital as Q3 earnings are released in the next weeks. Producing gold stocks will benefit the most with many juniors also making quick comebacks as risk (riskiest gold stocks – junior, exploration stocks) was sold off the fastest and as fear turns into greed, which will rally these tiny companies as well. Stick with market leaders before this sell-off ensued (PVG.to, ANV, etc). They‘re most likely to rally the first and limit your downside risks. Gold stocks are showing the first signs of a HUGE breakout! The upside here is quite significant, the valuations in many gold stocks relative to the gold price at extreme levels. Simply put, gold stocks need to catch up to the higher gold price and this could mean the HUI moving past 610 to 900-1,000 in the coming year. Big opportunities ahead with a cautious eye needed on the general equity markets should another selloff drag gold stocks partially, or just initially, lower with it – any such pullbacks remain excellent opportunities as a multi-year breakout is underway!

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Gold Stock News
Caza Gold Drilling Intersects 0.54 Grams per Tonne Gold Over 83.1 Meters at the Balleza Gold Project on the Moris Property in Chihuahua, Mexico
http://news.goldseek.com/FeaturedPR/1317736522.php

Caza Gold Corp.‘s has received assay results from the first four holes of the recently completed Belleza Project‘s 12 hole program at their Moris property‘s in Chihuahua, Mexico. A total of 3,519 meters were drilled in August and September. The table of results in the news release shows that so far all four holes have recovered potentially surface mineable grade and thicknesses, with the best hole announced in the headline. This drill program tested about 300 meters of strike length within a total 7 km long mineralized structure that hosts numerous prospective bulk tonnage epithermal vein type targets. The Balleza project is within Caza‘s 16,209 hectare Moris Property, which is located adjacent to Hocshchild‘s Moris Mine and about 10 km west of Aurico Gold‘s Ocampo Mine, and has excellent infrastructure for an exploration stage project.

Batero Gold Appoints Dr. Darryl Lindsay as Chief Operating Officer
http://news.goldseek.com/FeaturedPR/1317737386.php

Batero Gold‘s newly appointed CEO Dr. Darryl Lindsay is a geologist with over 20 years of experience developing major South American porphyry projects from discovery to feasibility with groups such as SRK Consulting, CODELCO, and others. Most recently Dr. Lindsay was responsible for designing and implementing social and environmental programs in relation to operating permits for Corriente Resources, whose Mirador copper porphyry in Ecuador was acquired in 2010 for $678 million by the Chinese owned Tongling Nonferrous Metals Group (CRCC Tongguan).

Galore Advances Exploration Program at Dos Santos
http://news.goldseek.com/FeaturedPR/1317823211.php

Galore Resource is preparing to begin a ground magnetic geophysical survey to help identify drill targets at their Dos Santos exploration project in northern Zacatecas, Mexico. Galore has the option to earn 100% of Dos Santos, which has two prospective projects with large underexplored areas along the contact of igneous and sedimentary rocks at El Alamo and Los Gemelos. Trenching at El Alamo found 54 meters of 0.97 g/t gold, and a vein at Los Gemolos assayed 34.3 g/t gold across 1.7 meters near an artisanal mine and mill. Dos Santos is located in the historic Conception del Oro mining district adjacent to Goldcorp‘s Camino Rojo deposit, and is about 35 km from the major miner‘s Penasquito mine

Gold Resource Corp. Increases Q3 Production by 87% - Approx. 25,200 Gold eq.
http://news.goldseek.com/FeaturedPR/1317961403.php

Gold Resource Corp. announced that their El Augila Project in Mexico forecasts Q3 metal production ending in September has increased by 87% from the previous quarter, Q2 2011. The mine began commercial production in July, 2010 and has now reached an annual production rate of over 100,000 AuEq ounces per annum. They are on target to produce about 75,000 ounces AuEq in 2011 and are ramping up to their designed production rate of 140,000 ounces AuEq per annum in 2012. This new quarterly production record is attributed to increased head grades at the Arista Mine, plus optimizations at the mill that have increased recovery, and is a quantity that establishes Gold Resource Corp. as a significant gold producer.
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Gold Resource Corporation Declares Monthly $0.05 Dividend
http://news.goldseek.com/FeaturedPR/1317849842.php

COLORADO SPRINGS, CO -- Gold Resource Corporation (NYSE Amex: GORO) declares its instituted monthly dividend of $0.05 per common share for September payable on October 24, 2011 to shareholders of record as of October 17, 2011. Gold Resource Corporation is a low-cost gold producer with operations in southern Mexico. Gold Resource Corporation commenced Commercial Production on July 1, 2010 from its El Aguila Project's operations in the southern state of Oaxaca, Mexico. This is the fifteenth dividend in as many months of commercial production and ninth of 2011. This dividend increases the total dividends declared since commencing Commercial Production to $0.53 per share to date ($0.35 for 2011), returning over $28 million to the owners of the Company, its shareholders.

Northern Gold Reports Results for Seven Garrcon Deposit Drill HolesIntersects 202 Meters at 0.33 g/t and 55 Meters at 0.97 g/t
http://news.goldseek.com/FeaturedPR/1317824553.php

Northern Gold Mining has released 7 more holes from their Garrcon deposit in Ontario, for a total of almost 9,000 meters in 30 holes. The cross section below and table of assays in the news show these infill holes continue finding long intervals of surface mineable gold grades similar to surrounding holes. Geostatistically, this continuity and tighter hole spacing should help increase the resource confidence and category. More cross-sections of drill holes at the Garrison deposit similar to the one included below can be found on the company‘s website: http://www.northerngold.ca/files/Garrcon-Cross-Sections.pdf

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Eurasian Minerals Identifies Bedrock Sources of Gold Mineralization and Adds to Property Position at Koonenberry Gold Project, Australia
http://news.goldseek.com/FeaturedPR/1317922848.php Eurasian Minerals Inc. announced they have discovered gold in an outcrop at their prospective early stage Koonenberry Gold Project in Australia. This 2,360 square kilometer property contains numerous gold occurrences along a 100 km long belt of favorable rocks. A rock chip sampling survey has found 8.71 g/t gold in a vein outcrop that contains visible gold. The company‘s geologists have noticed that rocks at this green field exploration project have some geological similarities to the nearby Victorian Goldfields, which have produced over 80 million ounces of gold from many famous historic mining districts such as Ballarat and Bendigo. Eurasian‘s Koonenberry project is located in the Province of New South Wales near the eastern edge of the ―Broken Hill Block.‖ This nearby rock unit hosts the world class silver and lead mines built by Broken Hill Proprietary Co. Ltd. in the late 1880s. Today BHP Billiton is the world‘s largest diversified mining company.

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Gold Stock Portfolio
Symbol ANV AU FCX GFI GG GOLD NG Entry Price 5.43 39.79 45.7 16.94 30.92 17.21 11.07 Current Price 37.34 41.16 36.03 15.32 47.62 101.37 7.07 Return 588% 3% -21% -10% 54% 489% -36%
Strong Long-Term Buy Long-Term Buy Long-Term Buy Strong Long-Term Buy Strong Long-Term Buy Hold Long-Term Buy

Juniors & Exploration Stocks
Symbol BAT.v BRD.to EST.v FAU.v GORO MD.v MRO.V NGM.V PVG.to TLR TMM.v Entry Price 2.55 1.58 0.65 0.40 1.20 1.75 0.85 0.40 9.80 0.68 0.75 Current Price
2.39 1.13 0.67 0.36

19.38 1.5
0.46 0.315

9.95 0.69 2.9

Return -6% -28% 3% -10% 1515% -14% -46% -21% 2% 1% 287%

STRONG BUY - REPORT (June, 2011)

Strong Long-Term Buy
Strong Long-Term Buy NEW BUY - Junior Gold Producer

Strong Long-Term Buy
Strong Long-Term Buy

Strong Long-Term Buy
Strong Buy - Report Pending Strong Long-Term Buy Strong Long-Term Buy Strong buy on pullbacks

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Consultation & Restructuring Service
For the last few years, Julian Phillips has been a consultant with the Gerson Lehman Group based in Austin Texas. During this time he has spent many hours educating and discussing a full range of topics on Gold, Silver and Platinum with some of the world‘s leading institutions, from Wall Street to Hong Kong, from the U.K. to South Africa. This service will now be offered to subscribers at the rate of $250 for a 30 minute consultation and $450 for a one-hour consultation. To take advantage of this opportunity, please follow the steps below. 1. Prepare and forward a list of questions to him the day before the consultation via 2. [email protected] 3. Julian will then accept the questions, unless beyond his knowledge. 4. The consultation will answer the questions received and give additional information so time is utilized most effectively. 5. Payment must be made prior to a consultation through www.GoldForecaster.com via the payment platform. 6. Send an e-mail arranging the time for a consultation [he is based in the same time-zone as Paris [GMT +2 hours]. 7. Once arranged and confirmed, phone him on + 27 11 849 4205He reserves the right to reject any request for a consultation.

Structure yourself against Exchange & Capital Controls before the major disruptions.
Great efforts are being made to hold up the USD$, markets and the system, but there is still time to take action to protect your investments from the reach of drowning governments and markets. We at GoldForecaster.com are well experienced in the means to lower ones exposure to Capital Controls in one‘s country. Please contact us for this service through the contact [email protected] if you wish see if we can assist you to avoid the dangers of Capital Controls. It is a service we offer outside the newsletter and will be handled on an individual basis to ensure privacy. It is a fee-based service. Here are some comments from a Subscriber that enjoyed our Consultation Service: Your insights – which have been more accurate than anyone else's so far – are tremendously helpful. One account doubled, another tripled – in just a few weeks. My assets ballooned from about $120K to now over $460K, and counting, thanks largely to your publication. Thank you so very much! – Subscriber

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* Legal Notice / Disclaimer
This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina only and are subject to change without notice. Gold Forecaster Global Watch / Julian D. W. Phillips / Peter Spina assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.

* Disclosure
The owner, editor, writer and publisher and their associates are not responsible for errors or omissions. The author of this report is not a registered financial advisor. Readers should not view this material as offering investment related advice. Authors have taken precautions to ensure accuracy of information provided. Information collected and presented are from what is perceived as reliable sources, but since the information source(s) are beyond our control, no representation or guarantee is made that it is complete or accurate. The reader accepts information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Past results are not necessarily indicative of future results. Any statements non-factual in nature constitute only current opinions, which are subject to change. The information presented in stock reports are not a specific buy or sell recommendation and is presented solely for informational purposes only. The author/publisher may or may not have a position in the securities and/or options relating thereto, & may m ake purchases and/or sales of these securities relating thereto from time to time in the open market or otherwise outside of the trading timeframe listed above. Nothing contained herein constitutes a representation by the publisher, nor a solicitation for the purchase or sale of securities & therefore information, nor opinions expressed, shall be construed as a solicitation to buy or sell any stock, futures or options contract mentioned herein. Investors are advised to obtain the advice of a qualified financial & investment advisor before entering any financial transaction.

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