Gold Break Out
We continue to be encouraged by the price action of gold in the face of a strengthening U.S. dollar. Typically, gold and the dollar move in opposite directions, but so far this year gold is up 6 percent, and at the same time the dollar has appreciated 4 percent.
Gold has also been appreciating against other major currencies in the developed world, as the chart above shows. The Eurozone, Britain and Japan are all struggling with rising fiscal deficits and the after effects of the global financial crisis.
In fact, the price of gold in euros made another record high as the threat of a sovereign debt default by Greece and other indebted countries in Europe continues to threaten the stability of the continentâs primary currency.
In our view, this gold âbreakoutâ against the worldâs primary paper currencies highlights goldâs growing allure as a store of value against further currency debasement caused by governments spending with little restraint. Gold appears to be reassuming its role as an alternative currency unencumbered by political liabilities.
For the week, spot gold closed at $1161.10 per ounce up $34.30 or 3.04 percent. Gold equities, as measured by the XAU Gold & Silver Index climbed 3.34 percent. The U.S. Trade-Weighted Dollar Index rose 0.16 percent.
Strengths
- Acquisition activity has picked up lately in the gold mining sector.
- Australiaâs largest gold miner recently offered to buy the second largest gold miner listed on the Australian Stock Exchange. This transaction would allow the acquirer to raise their gold exposure, as a percent of assets, which has been diluted somewhat by their recent increase in copper production
- In Canada, the Meliadine gold property will be acquired in a friendly takeover by their largest shareholder. This acquisition will help to consolidate the acquirerâs strategic position in Nunavust region where they have just commissioned the Meadowbank Gold Mine.
Weaknesses
- The unemployment rate remained unaltered at 9.7 percent
- In the month of March, 162,000 jobs were gained. This is the largest monthly gain within the past 3 years, but may not be a trend reversal.
- The total unemployment rate actually rose for the second month in a row, hitting 16.9 percent, as 238,000 unemployed people were re-classified as ânot in the labor forceâ.
Opportunities
- As a follow up note to the Memorandum of Understanding between the Industrial & Commercial Bank of China and the World Gold Council highlighted in the prior week concerning new initiatives in gold marketing to their general population, it should be noted that in this region individual wealth is likely rising faster than anywhere else in the world. Some analysts project this trend to yield a gold price of $1,500 by year end and potentially $2,000 to $3,000 per ounce in the next several years.
- One of the worldâs largest producers of copper recently noted that if predictions of demand growth for copper by China and India proved to be even remotely true it would be hard for global suppliers to meet demand. Next year the copper market is expected to see a meaningful supply deficit.
Threats
- The Credit Suisse stock basket of highly leveraged equities has outperformed even the most risky assets such as banks, homebuilders, and small cap stocks since the March 2009 post crisis lows. While this certainly reflects improved credit conditions there may also be speculative elements to this which could trigger a correction with a movement to higher rates in the U.S.
- Morgan Stanley has argued there are substantial risks to the medium-term inflation trajectory. Their rationale centers on their belief that central banks may decide to opt for a bit more inflation now, rather than find oneself in a more precarious position a few years down the road because of unsustainable debt levels.
- Protest turned to riots and then an overthrow of the government in Kyrgyzstan this week. At least 65 protestors were killed after government forces opened fire on their citizens upon their objection to over a 200 percent increase in electric and heating bills. Some 5,000 protestors installed a new interim government.
