Gold Market Diary (4/5/2010)

Gold Market Diary (4/5/2010)

For the week, spot gold closed at $1,126.80 per ounce, up $19.30, or 1.7 percent. Gold equities, as measured by the XAU Gold & Silver Index climbed 8.2 percent. The U.S. Trade-Weighted Dollar Index fell 1.7 percent.

Strengths

• The gold price climbed for a third week in a row.
• While the S&P 500 Index gained 5.4 percent in the first quarter, putting in four quarters of consecutive gains, its momentum is starting to wane as each successive quarterly return has been lower. At the same time, most Wall Street strategists are calling an end to economic worries and trying to make the case for investors to get long equities after the easy money has been made.
• A recent case in point: strategist calls at two of the biggest banks ended their bets on a falling-dollar trade last week as their recommendation lost 2.8 percent.

Weaknesses

• Home prices rose 3 percent in March, marking the eighth straight month of gains, but home prices are still down 0.7 percent over the past year. While this may be the smallest annual decline in three years, it is still a decline and suggests it may be too early to call a bottom.
• Despite the growth in consumer confidence this month, most consumers are still pessimistic about the future of the current business and labor conditions.

Opportunities

• China’s largest bank by assets and the World Gold Council have agreed to combine forces to formulate new gold investment products and programs. The Memorandum of Understanding will continue to push gold as an investment for its general population.
• The World Gold Council noted that gold consumption for the next 10 years in China is expected to double (see Frank Holmes commentary in this Investor Alert). If such predictions were to unfold, known gold reserves in China would be depleted in just six years.

Threats

• California’s state treasurer sent letters to the major investment banks reminding them that California is a big part of their business when it comes to debt issuance. Bill Lockyer wrote “I do, however, worry about firms selling our bonds, on one hand, and trading (credit default swaps) on our bonds, or otherwise participating in the market, on the other.”
• In the letter, Lockyer made specific inquiries into the banks’ role in the credit default swap markets and whether this activity could adversely affect the California debt issuance and the borrowing cost paid by taxpayers.
• These comments are in the same vein as Greece’s prime minister calling for an end to the CDS market on its debt because it was driving up borrowing costs. Sovereign credit risks, international and domestic, remain a serious issue and will not go away simply by not pricing that risk in a public market.