Gold Market Notebook (5/15/2010)

Gold Market Notebook (5/15/2010)

For the week, spot gold closed at $1233.18 per ounce, up $24.78, or 2.05 percent. Gold equities, as measured by the Philadelphia Gold & Silver Index, rose 6.94 percent. The U.S. Trade-Weighted Dollar Index gained 2.09 percent.

Strengths

• Gold prices reached a record high near $1,250 as worries about the long-term success of the eurozone bailout package increased gold’s safe haven appeal.
• Gains from the strong rally in the broad equity market on Monday, following the weekend announcement of a trillion-dollar Greek rescue package, were largely wiped away by Friday.
• A gold vending machine was installed in Abu Dhabi’s Emirates Palace Hotel. The gold-plated machine dispenses various size gold bars and coins at prices that are constantly updated to reduce the risk premium.

Weaknesses

• Gold output in South Africa fell 12.7 percent in March compared with the same month in 2009. This is a recurring theme.
• Mincom, a software and service provider, completed a survey that showed the biggest obstacle to organic growth in the gold and copper industry is delays in getting new mines operational due to the slow pace of government approvals.
• Few in the U.S. realize the nation’s role in bailing out Greece. The U.S. will provide a substantial amount of funding for the 250 billion euros pledged by the IMF.

Opportunities

• There is a perception that inflation will remain low indefinitely due to slack labor markets and plenty of spare capacity coupled with modest growth.
• For the past nine weeks International Strategy and Investment (ISI) has been tracking signs of “Inflation Greenshoots” in its Weekly Economic Report. The findings, ISI notes, are quite surprising.
• ISI noted that inflation in Greece has accelerated sharply due to tax increases. This is the hidden ace that could change consumer perceptions about inflation and gold. It is very difficult to arbitrage away the economic cost of an increase in taxes and the subsequent lowering of investment returns.

Threats

• As Akshaya Tritiya (considered as the traditional day to purchase precious metals by millions of Hindus) approaches, gold demand in India may drop 50 percent as a result of high prices and market volatility
• PIMCO, the world’s largest bond fund company, expects the U.S. to see an increase in inflation in the medium term as governments find they can only deal with the debt problem by printing more money.
• Corporate savings and profits have grown while investment has plunged. Optimists argue there is a wealth of money on the sidelines that will propel this bull market higher, while others wonder if any upcoming projects will generate after-tax returns attractive enough to take on the risk.