Gold Market Diary (March 20, 2010)
For the week, spot gold closed at $1,106.04 per ounce up $4.14 or 0.38 percent. Gold equities, as measured by the XAU Gold & Silver Index were essentially flat this week. The U.S. Trade-Weighted Dollar Index gained 1.12 percent.
Strengths
- The Fed decision to hold interest rates exceptionally low for an extended period gave gold a modest gain this week.
- While inflation is perceived to remain tame, this may be wishful thinking. As we outlined last week, a recent IMF Staff Position Note “Rethinking Macroeconomic Policy”, released earlier in the quarter, is making the argument that traditional inflation targeting of 2 percent may not be optimal and opens the discussion of inflation at 4 percent.
- Another data point which highlights how tenuous the low inflation argument could be is the recent compliance of only 53 percent by OPEC with their promised 4.2 million-barrel-a-day output cutback. With no substantial job creation forecast in the pipeline and unemployment near 10 percent, why are oil prices above $80 per barrel?
Weaknesses
- The Index of U.S. Leading Indicators rose 0.1 percent in February; the smallest gain in close to a year, but the index is up for eleven straight months, the longest streak since 2003–2004.
- The most recent CPI reading in the U.S. showed an annual rate of 2.1 percent, down from 2.6 percent recorded in the prior month.
- Traditional arguments for no significant inflation center on low capacity utilization, high unemployment, and stable expectations. It is really the stable expectations point that tends to be the most important of these three factors. History is full of accounts where high trajectories of inflation are achieved despite factories operating below capacity and unemployment rates that are double digit. One really only needs inflation expectations to change.
Opportunities
- Moody’s put out a report on the five biggest AAA-rated countries, the U.S., the U.K., Germany, France, and Spain are all at risk of soaring debt cost and will have to implement austerity plans that threaten social cohesion. Moody’s noted, growth alone will not resolve this increasingly complicated debt equation.
- Japan also stands out as a potential sovereign debt risk. With a gross debt-to-GDP ratio of over 200 percent, Japan can ill afford to raise interest rates beyond 1.5 percent, anything much higher and they could default.
- As Martin Murenbeld of Dundee Wealth Economics recent noted, we are entering a multi-year period of sovereign debt problems that stem from excessively liberal fiscal policies over the last 30 to 40 years. Unwinding benefits which are enshrined as fundamental rights will be difficult and this enforces the positive long-term macro picture for gold.
Threats
- The Council of Ethics of the Government Pension Plan of Norway has been asked by two global trade unions and four Norwegian trade unions to divest their holding in Mexico’s largest diversified miner due to alleged labor, human rights, and environment violations. Norwegian pension funds have a history of divesting their holdings in other mining companies.
- Australia’s junior mining sector faces continued growth constraints. While countries like Canada have exploration tax credits available for flow-through shareholders to foster growth and potentially lead to the construction of a mine that has a sustained economic benefit, Australia is talking of upping royalty taxes on the mining sector. Fewer mines and fewer jobs get built when tax rates are uncompetitive.
- When addressing the issue of higher royalties, Australia’s Colin Barnett noted while this may be a period of increasing property, the demands on the West Australian Government are immense.
