For the week, spot gold closed at $1,105.40 per ounce down $7.80 or .70 percent. Gold equities, as measured by the Philadelphia Gold & Silver Index (XAU) bounced back with a 4.55 percent rise for the week. The U.S. Trade-Weighted Dollar Index (DXY) stalled with just a 0.19 percent gain.
Strengths
- Investing in gold in the past decade, 1999-2009, would have resulted in tripling the initial investment whereas equities lost about 10 percent, including reinvested dividends. (See Commentary Above)
- The difference in yields between the 2- and 10-year Treasury note widened to a record of 286 basis points as investors bet the U.S recovery will fuel inflation and reduce demand for government debt sales. Also noteworthy is the difference between yields on Treasury Inflation Protected Securities (TIPS) due in 10 years and nominal notes, a gauge for consumer prices, climbed to 2.36 percent, the most since July 2008.
- Canada’s Finance Minister Jim Flaherty has said China, with the world’s largest currency reserves of $2.3 trillion, may increase holdings in Canadian dollars because of the country’s low debt levels relative to other G7 nations. China is seeking a hedge against a declining U.S. dollar.
Weaknesses
- More than 200 institutions sold 25 tonnes of gold from the largest bullion-backed exchange-traded fund for the month of November. However, the institutional sales have been offset by 51 tonnes of non-institutional purchases, which mitigate downward pressure on the gold price. Some of the money leaving gold bullion has been reinvested into equities of companies that produce gold.
- The Washington Post reported there are currently 25 states that have run out of unemployment funds and have borrowed $24 billion from the federal government to cover the gaps. The Department of Labor estimates that by 2011, 40 state funds will have been depleted by the surge in jobless claims.
- Equifax said small-business bankruptcies in California rose 81 percent compared with the previous year for the 12-month period ending September 30. Nationwide, filings were up 44 percent.
Opportunities
- In the chart above, Egon von Greyerz, shows just how small the precious metals market is in relation to large companies like Microsoft and Exxon. Global privately held bullion is only about three times the size of Microsoft’s value, a miniscule number for global ownership. In total, privately held physical investment in gold makes up only 0.7 percent of total investable financial assets. Mr. Greyerz argues that currently the average fund manager and investor relatively has no exposure to gold, but says that a doubling in the allocation to gold would be supportive for the gold price in the future.
- China’s sovereign wealth fund has reportedly received a capital injection of up to $200 billion from the country’s foreign-exchange reserves, which many speculate will be used for continued investment in commodity- related assets. About $50 billion of the infusion will be used to fund China’s largest banks to meet tighter regulatory requirements.
- The deputy governor of the People’s Bank of China has said that it is getting more difficult for governments to buy U.S. Treasuries because the country's shrinking current-account gap is reducing supply of dollars overseas. Governor Zhu said the United States cannot force foreign governments to increase their holdings of U.S. Treasuries and then addressed where demand for that debt would come from. It has been estimated that foreign governments would need to increase their holdings of U.S. debt by as much as 40 percent over the short-term; a big leap of faith at the moment.
Threats
- Californian Governor Arnold Schwarzenegger is expected to appeal to Washington for billions of dollars in federal help. California, with an economy that is more than three-times the size of Greece, is rapidly running out of money and faces a $6.3 billion budget gap this year and a $14.4 billion shortfall next. California’s unemployment rate hit 12.5 percent in October, they have the second highest rate of home foreclosures in the nation and have the lowest credit rating of any state.
- We've talked about the dire choices many state and local governments face because of falling income and retail sales taxes several times over the past year. This is still an issue that has not been addressed as much of the stimulus money to the states has gone towards sustaining social safety nets and not new job creation.
- A Barclays survey shows that a “double-dip recession” is the most underpriced risk in financial markets.
