Gold Mar­ket
For the week, spot gold closed at $1,065.85 per ounce down $15.00 or 1.39 per­cent. Gold equi­ties, as mea­sured by the XAU Gold & Sil­ver Index gained by 4.27 per­cent for the week. The U.S. Trade-Weighted Dol­lar Index gained by 1.07 per­cent.
Strengths

• The U.K.’s Royal Mint more than dou­bled gold-coin pro­duc­tion last year as investors diver­si­fied into phys­i­cal assets. Out­put rose to 125,469 ounces from just 46,315 ounces dur­ing the pre­vi­ous year, accord­ing to data from Bloomberg News. Sales of Amer­i­can Eagle coins by the U.S. Mint increased 66 per­cent last year to 1.43 mil­lion ounces.
• The Russ­ian Gold Indus­tri­al­ists’ Union said Russia’s gold pro­duc­tion rose 11.2 per­cent in 2009 on a year-over-year basis to 205.2 tonnes. Out­put of gold pro­duc­tion by refin­ing the metal from scrap rose 52.4 per­cent to 12.4 tonnes.
• Accord­ing to the Indian Bul­lion Mar­ket Asso­ci­a­tion, 37 tonnes of gold were imported dur­ing the month com­pared with 27 tonnes for Decem­ber and 30 tonnes in Novem­ber. The increase was pri­mar­ily attrib­uted to jew­el­ers shift­ing to the pre­cious metal as record prices began to drop.

Weak­nesses

• Dur­ing the week, gold posted its biggest one-day loss since 2008, hit­ting a three-month low. This came as risk aver­sion resur­faced through­out global mar­kets, trig­ger­ing mas­sive sell­ing in the metal and other com­modi­ties. Also, tight­en­ing in Chi­nese mon­e­tary pol­icy may have caused the Reserve Bank of Aus­tralia to remain reluc­tant in rais­ing rates once more because of spec­u­la­tion there will be a lack of demand for the region’s com­modi­ties, a prime con­trib­u­tor to its over­all eco­nomic growth.
• The erup­tion of pol­icy and sov­er­eign credit risk, most notably in the euro zone area, has resulted in a flight-to-quality caus­ing the U.S. dol­lar to strengthen rel­a­tive to a fal­ter­ing euro. Greece’s fis­cal imbal­ances com­bined with Spain and Portugal’s weak bond auc­tion ear­lier in the week wit­nessed ris­ing bor­row­ing costs and credit default swaps for the region. Spreads were fur­ther exac­er­bated on fears that strik­ing Greek work­ers would hin­der Greece’s plan to shrink its mas­sive deficits to accept­able Euro­pean Union standards.
• Bloomberg has reported that com­mod­ity investors in China are reduc­ing their open inter­est in futures mar­kets ahead of the country’s biggest national hol­i­day. The direc­tor of research from Wanda Futures Co. said the exit of funds from com­modi­ties is accel­er­at­ing and that any rally may have to wait until the country's New Year cel­e­bra­tion ends.
• Reserves for the world’s largest bullion-backed exchange-traded fund fell 21.7 tonnes or 1.9 per­cent in Jan­u­ary, against a rise of 63.36 tonnes or 8.1 per­cent in the same month of 2009.

Oppor­tu­ni­ties

• Andy Smith, Senior Met­als Strate­gist of Bache & Co., believes the lat­est cor­rec­tion in the gold price is a very oppor­tunis­tic event for fur­ther sov­er­eign and cen­tral bank gold buy­ing. The Inter­na­tional Mon­e­tary Fund still has 191 tonnes of gold avail­able for pur­chase. Smith has also said that India, Mau­ri­tius and Sri Lanka may buy more gold at depressed prices to aver­age down ear­lier pur­chases at much higher prices.
• The World Gold Coun­cil has demanded tax ben­e­fits for gold invest­ments in India, pri­mar­ily for work­ing women and the bot­tom level tax bracket. The Coun­cil has also said that gold should play a more sig­nif­i­cant role in the sus­tain­able growth of the Indian economy.
• The White House has unveiled its plans to dou­ble U.S. exports in a bid to boost the econ­omy and reduce the deficit by pledg­ing to pur­sue more trade agree­ments, increas­ing pres­sure on trad­ing part­ners to open mar­kets and by the cre­ation of an export pro­mo­tion cabinet.

Threats

• A Bloomberg news colum­nist expressed that China’s large for­eign exchange reserves pose a severe risk to the global econ­omy. If the dol­lar were to col­lapse, actions taken by cen­tral banks to sell the cur­rency could shake global mar­kets more than the U.S. credit cri­sis has. Also, excess reserves can over­heat an econ­omy as it sells its cur­rency to increase invest­ments abroad, trig­ger­ing an imbal­ance from an excess in the money sup­ply which leads to higher lev­els of inflation.
• The Reserve Bank of Zim­babwe failed to redeem sched­uled bonds it issued to min­ing com­pa­nies instead of cash pay­ment for gold deposited with the cen­tral bank by min­ing com­pa­nies. The cen­tral bank has already failed to pay for gold deliv­ered to it by min­ers in 2007 and 2008, lead­ing to the issuance of the nego­tiable bonds, and now intends to extend the term of the bonds for six months. This is a major blow to min­ers as they strug­gles to recover since they can­not have access to for­eign cur­rency to con­duct their business.
• The African National Con­gress of South Africa is push­ing for the nation­al­iza­tion of at least 60 per­cent of the country’s min­ing sec­tor which will involve expro­pri­a­tion with or with­out com­pen­sa­tion. How­ever, ana­lysts say the pro­posal is unlikely to become gov­ern­ment pol­icy, but it has still man­aged to rat­tle investors.
• The U.S. gov­ern­ment intends to cut more than $1 tril­lion from the deficit over the next decade by allow­ing bil­lions of dol­lars in tax breaks to expire by the end of the year and pos­si­bly send­ing per­sonal income tax rates to higher lev­els. Investors may also pay more on their earn­ings next year as well, with the tax on div­i­dends jump­ing to 39.6 per­cent from 15 per­cent and the cap­i­tal gains tax increas­ing to 20 per­cent from 15 percent.

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., and a Toronto, Canada native, which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories. Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.” He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies. Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications. Read more from the author/contributor here.

Comments

Comments are closed.