For the week, spot gold closed at $1,214.38 per ounce up $37.28 or 3.17 percent. Gold equities, as measured by the Philadelphia Gold & Silver Index gained 4.71 percent. The U.S. Trade-Weighted Dollar Index continued its upward march rising 1.58 percent.
Strengths
- Chinese and Indian gold demand remained strong in the first quarter of 2010 despite high gold prices. The inference is that consumers in these two important nations are becoming accustomed to higher gold prices. Indian and Chinese demand rose 698 percent and 11 percent, respectively, in the first quarter.
- Recent data shows Indian gold imports improved by 23 percent last month and accelerated by 71 percent during April compared to the same periods a year ago.
- Debt contagion fears in the euro zone have led to strong buying in gold coins, gold bars, and gold exchange-traded funds during May.
Weaknesses
- The Wall Street Journal is featuring a three-part series called “The Gold, The Bad and the Ugly.” In the first installment, the Journal highlight some positive aspects of gold, but included a graphic showing the gold price overlaying the previous rise in the Nasdaq Composite and an index of homebuilding stocks to question whether gold is the next bubble.
- If the gold price were to rise to about $2,350 per ounce, this would just be the inflation-adjusted price of gold in 1980 dollars. Also of note, if one compared the amount of gold the U.S. held relative to its debt in the 1970-1980 cycle, the amount of debt outstanding today would put gold roughly in the $40,000 per ounce range.
- A $165 billion bailout package has been introduced by Congress to fund current shortfalls for union pension funds in distress. The bill could impose an almost infinite liability on taxpayers due to the pensions having to be paid out until the workers die.
Opportunities
- Wang Zhenying, deputy director-general of the Department of Financial Market Management at the Shanghai office of the People's Bank of China, stated that China should improve gold investment products and develop more of them considering the country’s savings of more than 30 trillion Yuan.
- Protection of wealth is a major trend that will continue according to Deutsche Bank as it increased its gold price forecasts for this year and the following two years. Predictions have been pushed to $1,215 for the end of 2010, $1,450 for the end of 2011, and $1,600 for the end of 2012.
- President Obama recently issued an extended moratorium on permits to drill new deepwater wells for the next six months. The U.S. Minerals Management Services, which is the second-highest revenue producer for the government behind the IRS, manages the nation’s natural gas, oil and other mineral resources, and now will have essentially no income coming in the door. This delay in drilling could cut 4 percent of U.S. supply and have a big impact on the Gulf as close to 20 percent of Gulf coastal states’ wealth is reliant on the oil and gas industry. Besides pushing oil prices higher, gold prices typically rise when oil strengthens.
Threats
- To help investors understand the logic behind the proposed Australian windfall profits, Australia defined a windfall profit as anything that exceeds a return on assets of 5.3 percent, which is equal to Australia’s ten-year bond yield. This clearly shows Australia’s strategy of penalizing investments that could produce returns greater than buying government debt.
- Julius Malema, leader of the Youth League of the Africa National Congress, noted that despite objections from President Zuma, nationalization of South Africa’s mines could be implemented as a policy in 2012.
- China is considering amending its resource tax to a more supply-demand outlook as new policy would implement taxes based on value of production instead of current quantity of production benchmark. Although a change in policy, this reformation has the potential to force prices higher as the marginal cost of production is likely to rise.
