Asian Buying to Propel Gold Higher

03/21/07

Dollar, Euro, and Asian Currencies:

The dollar spent the last two years between 81 and 92. I don’t see any change from this up and down pattern for the next two years. I am dollar bearish, just not against the currencies which the dollar index is measured against.

The Euro is a train steadily moving backwards. I am not bullish on the Euro beyond 1.38, a level which I believe is its maximum upside for the year.

What you should really pay attention to are the Asian currencies. Below I listed the one year charts for the Chinese RMB, Philippine Peso, Thai Baht, and Indian Rupee.

Chart: US Dollar/Chinese RMB

Chart: US Dollar/Philippine Peso

Chart: US Dollar/Thai Bhat

Chart: US Dollar/Indian Rupee

You can see the action by the dollar index had no bearing on those currencies, which are appreciating at a rapid rate. Remember how in five years the Euro went from 0.88 Euro to $1 to now $1.36 (50% gain)? I see another 20% upside in the RMB and the Baht, as they have gained only 10-20% from the dollar.

I continue to be very bullish on Chinese and South East Asian real estate. While Singapore, Hong Kong, Taiwan real estate prices have gone up 100% in the last five years, prices in Kula Lumpur and Bangkok are only beginning to take off and represent excellent value. I have never been bearish in key US housing markets (NY, SF, LA), and I am still neutral. A $2 million, 2000 sq foot apartment on 5th avenue in NYC suddenly doesn’t look so far out-of-reach to the new Russian oil millionaires. In fact, prices of prime real estate in Singapore and Hong Kong are about on par with Manhattan.

Gold and Silver:

Gold had a false breakout in February. However both gold and silver retested solid support at their 200 DMAs. The Asian gold market has been very strong, partially due to the increasing purchasing power from their strong currency. Typically, when the cartel thrashes the gold market, Asian buyers would stay on the sidelines for three days until margin calls and panic tech-fund selling was done. This is not what I saw in the past week, a surge of Asian gold buying right after New York and London closes down the day before. The last time I remember seeing urgency by Asian gold traders to buy was in November of 2005 when gold broke through key resistance of $450 and raced to $730 in six short months.

The XAU over Gold ratio again tells us the current sentiment for gold stocks is at an extreme low and that we are likely right at the bottom for gold and gold stocks at this time.

Asian Markets:

The uptrends for the Nikkei and Shanghai remain intact. There is no “pending” financial crisis in Asia. Any pending crisis (if at all) is in the US, and since the US dollar is the world’s reserve currency, any problem ranging from an equity correction to mortgage fallout is not something monetization (ie. printing money) and lowering interest rates couldn’t fix.

S&P 500:

Equity bears don’t get too excited, the chart says the uptrend for the S&P500 will remain intact.

CRB and Oil:

We wrote in February:

As we expected oil and the CRB made a healthy recovery. Both indices are still way below their 200 DMAs, so there is still room to move up. We do however expect the 200 DMA resistance level to hold, should it be challenged.

As expected, Oil and the CRB both rebounded up to their 200 DMAs and then failed. We see a narrow trading range for oil, with the downside from here being minimal. Any upside at this time will be capped at the 200 DMA.

Conclusion:

Sometimes traders are so focused on the dollar/gold price that they are blindsided by the fact that the gold market is international and the Chinese, Thai, and Indians are key players. The respective currencies for those countries have strengthened continually and remarkably in the last six months. In turn this has provided greater purchasing power for those Asian investors.

Sentiment for gold equity investors is extremely low judging by the XAU over gold ratio. The strong support for gold from Asia is not being accounted for by North American gold equity investors. We believe such bearish sentiment will turn on a dime when gold takes out its 2006 high of $730.

If gold clears the $650 hurdle this week, I would be very surprised if gold doesn’t try for its all time high of $850 by September. As opposed to last summer, this summer will be anything but dull for the yellow metal investors.

John Lee, CFA

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