Gold Market
For the week, spot gold closed at $1,093.35 per ounce, down $37.58 or 3.32 percent. Gold equities, as measured by the Philadelphia Gold & Silver Index (XAU), fell 8.10 percent rise for the week. The U.S. Trade-Weighted Dollar Index (DXY) jumped 1.24 percent.
Strengths
- The Financial Times has reported the Russian central bank has already started buying Canadian dollars and securities in a bid to diversify its foreign exchange reserves. Analysts have said the move could be a sign of increased diversification of emerging market central bank assets away from the dollar and into investments in commodity-linked currencies.
- Russia’s central bank increased its gold reserves last month by 800,000 troy ounces, or 4.1 percent, from 612.73 tonnes to 637.62 tonnes. The increase in dollar terms was equivalent to $22.4 billion as of January 1.
- Liu Yuhui, an economist at the Chinese Academy of Social Sciences, has said China may scale back purchases of U.S. debt again on concerns the dollar will decline. A Treasury Department report shows China trimmed holdings by $9.3 billion in November to $789.6 billion.
Weaknesses
- The week was dominated by risk-aversion as the U.S. dollar strengthened because of news that China’s economy expanded by 10.7 percent in the fourth quarter of 2009, modestly above consensus. As a result, China has been asking banks to curb lending, restricting overall credit growth to tame inflation because of an over-heated economy. Also, European sovereign credit risk fears continue to grow as Greek credit default swaps widened by 33 bps to 348 bps.
- Commodities across the board were hit on the news that China’s tightening would lead to less demand for raw materials. The head dealer at a prestigious brokerage firm in Chicago said that China was the driving force behind commodities and that there is now a wave of asset liquidation that triggered more profit-taking.
- The dollar was also buoyed after Republican Scott Brown won a U.S. Senate seat in Massachusetts and vowed to prevent healthcare reform in Congress, which eased concerns that the cost of the proposal would lead to higher debt levels.
Opportunities
- Inflation expectations have risen sharply in the U.S. and Europe in the past three months against a background of economic growth. Demand for inflation-indexed government bonds continues to rise amid expectations that interest rates will rise this year to subdue rising prices.
- The world continues to look to China as the main driver of growth. The World Bank has raised its forecast for the global expansion in 2010 to 2.7 percent from 2 percent last June and also predicted 9 percent growth in China.
- Dennis Gartman, Editor and Publisher of the Gartman Letter, has rescinded his remarks over a stronger dollar outlook made last December, and has said that President Obama’s remarks on financial overhaul, which limit bank proprietary trading and other activities, will cause capital to seek investment elsewhere. Gartman suggests a positive material shift in sentiment towards gold as the U.S. dollar may weaken further over uncertainty in the financial system.
Threats
- At the start of the year the consensus for most market strategists was for a strong first half in 2010 with some weakness expected in the second half of the year. The recent bout of profit taking may have to run its course and would impact all asset classes, but just as in 2009, gold based assets were some of the best investments to own.
- The Federal Housing Administration will raise the up-front Mortgage Insurance Premium, which is paid by borrowers, from 1.75 to 2.25 percent, marking the second time in two years it has raised its premium. New borrowers will also be required to have a minimum FICO score of 580 to qualify for the 3.5 percent down payment program, otherwise borrowers will have will be required to put down 10 percent.
- Australia’s Secretary to the Treasury Ken Henry has recommended that individual state levies on miners be replaced with a uniform tax expected to be 40 percent. This could narrow the profit margins for some of the miners.
