SWOT: Gold Market

Gold Market

For the week, spot gold closed at $1,113.20 per ounce, down $2.20, or 0.20 percent. Gold equities, as measured by the XAU Gold & Silver Index (XAU), lost 3.13 percent for the week. The U.S. Trade-Weighted Dollar Index (DXY) gained 1.51 percent.

Strengths

• Data from India’s Association of Mutual Funds show that new accounts created by gold exchange-traded funds surged 57 percent between March and September, and that assets under management of six gold ETFs has risen 72 percent in the last year.
• Russia’s central bank will reportedly increase its gold reserves next week by almost 5 percent by purchasing 30 metric tons of gold worth $1 billion from Gokhran, the state repository.
• The United Nations has recently licensed its own gold bullion coins for minting. These coins will feature the UN logo and will be made in Europe for worldwide distribution.

Weaknesses

• Abu Dhabi pledged $10 billion in aid to Dubai in order to avert a debt default. However, renewed focus on sovereign credit risk following Standard & Poor’s downgrade of Greece and weakness in the euro zone banking sector helped fuel a flight to safety in financial markets. This led the U.S. dollar to 3½-month highs relative to the euro and a correction in the gold price.
• Also contributing to the strength in the U.S. dollar was the release of improved economic data, which caused speculation among investors that the Fed might raise rates sooner than expected to combat inflation.
• Retail gold sales in Dubai were stagnant in November and the first half of December as high prices, coupled with the emirate’s debt crisis, have made consumers more cautious on spending.

Opportunities

• Gold’s appeal as an alternative investment is supported by a resurgence in inflation across China, U.S., India, Sri Lanka and Pakistan. As the above chart from ISI shows, the 29.7 percent growth in money supply in China could cause its inflation rate to accelerate to 12.1 percent versus a current reading of -0.2 percent. Food-price inflation also continues to rise in India, hitting its highest in 11 years. Food prices escalated 20 percent during the week ending December 5, following a 19-percent spike during the previous week. Oil prices have increased, and the weakest monsoon since 1972 combined with several floods in some areas of the country hurt farm output and caused shortages.
• John Embry, chief investment strategist at Sprott Capital Management, believes net central bank purchases of gold are virtually assured in 2010. He says Chinese officials are strategically positioning themselves for the purchase of the 200 metric tons of gold currently for sale by the International Monetary Fund by waiting for a price correction to buy at a discount relative to the Reserve Bank of India’s earlier purchase.
• Société Générale forecasts continued strength in investor inflows into commodities into the first half of 2010, helped by central banks keeping monetary policy essentially loose. SocGen also expects gold prices to reach $1,500 per ounce before mid-2010.

Threats

• Credit Suisse said the biggest threat to the global economy in the coming year is the unwinding of the U.S. dollar "carry trade,” in which investors borrow from nations with low interest rates and use that money to buy higher-yielding assets. Economists at the bank say such transactions may involve between $1.4 trillion and $2 trillion, and that “unwinding” the investments could cause volatility in currencies, commodities and emerging market stocks.
• Bloomberg reported that the Japanese yen may swap positions with the U.S. dollar as the new funding currency of choice. Japan’s central bank has said expansion of quantitative easing measures are being formulated in order to combat deflation. Investors are betting the Bank of Japan will keep its near-zero target rate through the next year amid speculation that the Federal Reserve will abandon this strategy sooner. This may mean a stronger U.S. dollar versus the yen.
• Reuters reported that the U.S. Committee on Foreign Investment planned to recommend to President Obama that he reject a plan between a miner developing a Nevada gold project in partnership with a Chinese mining firm on national security grounds because the mine is near a military installation.