Gold Market
For the week, spot gold closed at $1107.50 per ounce up $0.50 or 0.05 percent. Gold equities, as measured by the XAU Gold & Silver Index fell 2.76 percent. The U.S. Trade-Weighted Dollar Index gained 1.11 percent.
Strengths
- The decision by the Fed to keep record low interest rates has helped keep a floor under gold.
- A story this week highlighted the record outflows of cash from money-market funds and concluded investors are becoming more comfortable with taking risk.
- However, another survey reported that despite the S&P 500 rising more than 70 percent since its low on March 9 only three out of every ten people have increased values of their portfolio throughout the last year. Perhaps most of the cash is being used to meet living expenses and not wealth creation.
Weaknesses
- The Commodity Futures Trading Commission will soon debate whether there needs to be position limits on metals such as gold, copper, and silver to prevent price manipulation. Currently, there does not appear to be enough support for such a measure on the commission.
- Initial jobless claims fell 14,000 to 442,000, which is the lowest level in six weeks. Also continuing claims fell to the lowest level since December 2008.
- The sales of new homes surprisingly fell to a record low, raising some questions about the strength of the consumer.
Opportunities
- Martin Murenbeeld of Dundee Wealth Economics recently stated, “Sovereign debt problems in the developed economies will be exacerbated in the coming years by pension and health care costs of retirees, furthermore, and are hugely bullish for gold".
- Portugal’s credit rating was lowered by Fitch this week and further added to the woes of the euro. The dollar has been the short-term beneficiary of this flock to safety but the U.S. has its own problems that will exacerbated by further expansion of our entitlement programs.
- Gold-copper porphyry deposits are being pursued as the next panacea of growth for some of the major gold mining companies. Unfortunately, the gold grades are very low and the economics of the mining project will depend on what the copper price does in the future. The problem is that the capital requirements are often in the $3 to 4 billion range. With copper prices being twice as volatile as gold it will be difficult to imagine that these projects will command a premium valuation.
Threats
- In Carson City, Nevada a district court judge has allowed a ballot initiative to move forward that would change tax from “net proceeds” to “gross proceeds” of mines. In states such as Nevada that are searching for new sources of revenue, this change would have increased the mining industry’s tax bill more than 300 percent based on 2008 tax receipts.
- If an aid agreement is not put into action for Europe, the dollar could continue to strengthen in the near term as the Euro decreases, causing gold to look unattractive to traders.
- Seasonally we are entering a weak phase for gold prices until jewelry buyers return at the end of the summer to replenish stocks, however the fragility of our economy probably doesn’t give one much reason to short gold at this point.
