Advisor Alert: Gold Market

The following summaries are part of the weekly Advisor Alert produced by US Global Funds for the week ending December 4, 2009.

Gold Market

For the week, spot gold closed at $1,161.60 per ounce down $16.03 or 1.36 percent. Gold equities, as measured by the XAU Gold & Silver Index lost 0.85 percent for the week. The U.S. Trade-Weighted Dollar Index gained 1.04 percent.

Strengths

• In a recent study, John Paulson’s hedge fund holds more gold than many nations including: Brazil, Australia and Romania. His reasoning for being so bullish on the metal is that there are roughly $200 trillion investable assets in U.S. dollars in the world, but only $800 billion of that wealth is in gold.
• Societe Generale and Gold Fields Mineral Services have announced the rate at which gold miners cut their hedging positions rose to 3.18 million ounces in the third quarter, up from 980,000 ounces in the second quarter. This was driven mainly by the world’s largest gold producer completely eliminating its hedge book ahead of schedule, in order to enter the next year fully exposed to the gold price.
• The U.S. mint has announced it will suspend sales of the world’s most popular bullion coin, the American Eagle, after inventories were depleted due to increasing investment demand. The mint has sold 1.19 million ounces of American Eagle coins this year, an increase of 75 percent from the same period last year. Sales are set to resume as soon as the mint has sufficient inventories to meet demand.

Weaknesses

• Gold finished the week slightly down as the Labor Department reported a better than expected jobs report which fueled optimism for a sustained recovery. The news has made investors question whether the Fed will raise rates sooner than expected, prompting the dollar to strengthen and causing gold to erase record highs earlier in the week.
• The Wall Street Journal has reported that European banks have an aggregate $40 billion exposure to Dubai’s $80 billion in liabilities, of which $60 billion are incurred by Dubai World. Credit Suisse analysts estimate that the total write-down from the $40 billion exposure may amount to 5 billion euros after taxes, or an increase of 5 percent in loan loss provisions, if banks wrote down 50 percent of their $40 billion exposure.
• Bloomberg has reported that copper may decline from its highest price this year on speculation that prices no longer reflect the outlook for supply and demand. Inventories in warehouses monitored by the London Metal Exchange expanded for a 23rd session, and rose to the highest since April.

Opportunities

• According to BCA analysts, at current prices, the U.S.’s gold reserves back only 15 percent of the monetary base. At the peak in gold prices in the early 1980s, the U.S.’s gold reserves were worth more than the outstanding monetary base. This means that gold would have to rise to $8,000 per ounce to back the entire monetary base.
• China Youth Daily has cited Ji Xiaonan, head of supervisory committee at the state-owned Assets Supervision and Administration, saying hat China should increase its gold reserves to 6,000 metric tons within 3-5 years and possibly to 10,000 tons in 8-10 years. Xiaonan has also said Dubai’s debt crisis could be China’s opportunity to increase gold and oil assets.
• UBS and Goldman Sachs have both increased their gold forecast for 2010 to average about $1,300, as more investors and central banks purchase bullion to preserve wealth against a declining dollar.

Threats

• South Africa’s electricity utility, Eskom has submitted a revised proposal to the National Energy Regulator of South Africa outlining a tariff increase of 35 percent per year verses the original 45 percent increase over the next three years. Such a the tariff would make electricity 200 percent more expensive in three years’ time and will cause gold miners’ costs to increase between 15 and 25 percent.
• China, the world’s leading gold producer, may have record output this year as miners expand production to profit from an increasing gold price, according to the China Gold Association. The country’s gold output may climb 10 percent to 310 metric tons, compared with 282 tons in the previous year. Annualized growth in China’s gold production was 9.5 percent in the past 8 years.
• In a Washington Post commentary, Federal Reserve Chairman Ben S. Bernanke has said removing the central bank’s authority to supervise the banking system and tampering with its independence would seriously impair economic stability in the United States.