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.
