Gold Market Diary (June 7, 2010)
For the week, spot gold closed at $1,219.90 per ounce up $5.52 or 0.45 percent. Gold equities, as measured by the Philadelphia Gold & Silver Index fell 2.80 percent. The U.S. Trade-Weighted Dollar Index continued its upward march rising 2.03 percent.
Strengths
- U.S. Mint May gold coin sales hit their highest level since 1999. Silver coins sales also were halted until more silver blanks could be acquired. Rand Refinery noted sales of Krugerrand gold coins soared by 50 percent due to investor demand over the euro crises.
- In an interview with The Gold Report, when asked what hedge is most favorable against a collapse of the euro, CD Capital founder Carmel Daniele stated, “The safest bet is gold. It’s the safest currency. It’s become a currency.”
- In the prior week, the German five-year bond auction failed for the first time since September 2008. Dealers were left holding 22 percent of the issue, which was priced to yield only 1.47 percent. In contrast, Portugal sold bonds yielding 3.70 percent. Seems that investors figured, why buy German debt when I can buy higher yielding Portuguese debt, guaranteed by the German government?
Weaknesses
- South Africa’s first quarter gold production fell 15 percent quarter-on-quarter, continuing their decrease in output.
- Kevin Rudd, Australia’s Prime Minister, said the government has no plans of reforming the resource super profits tax. KPMG, one of the top accounting firms, noted that $69 billion worth of resource projects had been placed on hold in Australia due to uncertainty over the tax.
- Gold prices slipped almost $17 on Thursday and commentators cited the current strength in equities and decreased risk aversion was unfavorable for gold investors and could subdue gold prices in the short term. The sudden drop could also have been due to the International Monetary Fund (IMF) asking for a bid on some of the gold they currently have in the pipeline to sell. Latest estimates place the IMF with about 153 tonnes left to sell. Interestingly, one of the gold ETF’s inventory rose by 21.3 tonnes on the same day.
Opportunities
- The second largest pension fund in the U.S., California State Teachers’ Retirement System, will vote soon on whether to invest in commodities as a hedge against the risk of increased inflation
- Michael Jalonen, of BofA Merrill Lynch Global Research, highlighted that for 20 of the last 22 years, bullion has enjoyed late summer/early fall gains averaging 13 percent on the back of renewed jewelry demand. A rally in bullion has also tended to support some spectacular rallies in the gold mining stocks. Jalonen notes bullion could rise to $1,300 per ounce by October 2010.
- While there may be days where gold could see a quick sell off, these are likely going to be opportunities to accumulate gold and gold equities as governments policies are out of step with economic reality. A recent report by Eric Sprott and David Franklin outline “A Busted Formula” and it is an excellent overview of economic problems our nation faces. When the U.S. government spends $117,933 to create a job that won’t pay anywhere near that amount of income, or takes on $2.5 trillion in debt to get GDP to rise by $200 billion, it is like running a business where you buy dimes for dollars.
Threats
- Indications of a double dip in Europe have been becoming more visible as restrictive policies and an assortment of troublesome data, such as weakening consumer spending and manufacturing reports are becoming more consistent, according to a recent ISI Group report. What is distressing is the lack of realization that the odds of such an outcome in the U.S. are just as strong.
- Corporate debt markets continue to struggle. Global new issues declined to $70 billion in May, less than half of what was issued in April and the lowest since August 2003. Investment bankers are hesitant to bring new deals that may not go well.
- Warren Buffett, recently subpoenaed to testify before Congress, predicts a negative outcome for municipal debt in the U.S. In fact, New York, recently has stopped paying contractors of private construction companies and told them to continue work or they will sue them for breach of contract.
