Gold Market Diary (June 14, 2010)
For the week, spot gold closed at $1,226.70 per ounce up $6.80 or 0.56 percent. Gold equities, as measured by the Philadelphia Gold & Silver Index rose 3.70 percent. The U.S. Trade-Weighted Dollar Index fell 1.04 percent.
Strengths
- The gold price reached an all-time high of $1,252 as investors sought an alternative to paper currencies as concerns over debt problems continued in Europe.
- Signals of rising demand were apparent in the latest data produced by the largest gold ETF. The ETF saw $4.4 billion in inflows during May, the second-highest month ever, and total tonnes held by the ETF rose to a new record high of 1299 this week.
- Similar to what happened in 2009, central banks are beginning to hop on the gold bandwagon and developing more of a buyerâs role in the gold market. Russiaâs central bank has increased their gold reserves by $1.8 billion and decreased their currency reserves by $6.6 billion. In addition, the worldâs largest gold producer, China, essentially buys all the gold produced within the country.
Weaknesses
- Some investors took profits on gold once it hit a new high. This is more of a short-term call and proceeds were likely rolled into equities in oversold equity markets. Even a 10 percent correction in bullion would break goldâs uptrend.
- Gold coin demand has slowed in early June as the U.S. Mint stated sales of only 30,500 ounces as of June 9. If this rate holds up, then June sales will be less than half of the 190,000 ounces purchased in May.
- Gold production in South Africa, the worldâs fourth-largest gold producer, continued its downfall as output declined 6.2 percent in April compared with a year ago.
Opportunities
- UBS is forecasting gold to reach $1,500 an ounce within a year on fears that the financial problems in Europe will intensify.
- Paul Walker, CEO of Gold Fields Mineral Services (GFMS), sees increased potential of a double dip occurring due to the actions in Europe. Walker indicated that if a double dip occurs and the sovereign debt crisis enters other countries, long-term demand for gold will be very robust.
- George Soros recently noted we have just entered Act II of the financial crises and the crisis is far from over. Soros has made significant investment in gold mining stocks. Ned Douthat, Chief Equity Analyst at Ockham Research, also recently noted that with gold hitting an all-time high, he thinks investors may be able to find more value in some gold mining stocks rather than in the metal itself.
Threats
- As the safe-haven value of gold becomes more attractive, rumors are soaring that governments around the world are contemplating a tax on gold profits. This may be unlikely, since investors in gold bullion are already penalized on their profits at the much higher collectible tax rate versus long-term gains levied for owning gold mining stocks.
- Some major U.S. asset managers are choosing to hold gold in foreign nations for fear the government may repeat President Rooseveltâs confiscation and revaluation of gold in 1933. Many experts believe Rooseveltâs policy actually pushed the U.S. deeper into recession. Essentially, the government expropriated individual wealth by compelling them by law to sell their gold to the government at $20.67 per ounce and subsequently revalued gold to $35.00
- Commodity Research Bureau recently developed a graph that shows the historic cycle of commodities since 1900. The graph infers a 10-year bull market is generally followed by a 20-year bear market. The 2000-2009 bull market could lead to long bear market for commodities. However, itâs important to understand that gold is being treated as a financial asset not a commodity. Unlike copper or natural gas, trading in the forward curve of gold prices is non-mean reverting.
