Gold Market Diary (July 5, 2010)

July 4, 2010

3 minute read

For the week, spot gold closed at $1,211.60 per ounce down $44.00 or 3.50 percent. Gold equities, as measured by the Philadelphia Gold & Silver Index fell 8.30 percent. The U.S. Trade-Weighted Dollar Index fell 0.99 percent.

Strengths

Gold reserves for the International Monetary Fund (IMF) fell by 15.25 tons in May to 2,966.83 tons. This appears to indicate that they will continue to sell their remaining 137.5 tons on the open market as compared to via off market transactions with other central banks.
Russia increased their gold holdings by 2.46 tons in May and has added gold every month since February. Recent purchases in the past years from China, Russia and India, combined with a decline in gold sales from European central banks demonstrates gold's growing attractiveness among the group.
The top gold ETF in the U.S. has now passed $50 billion as nervous investors have continued to put their trust in gold as double dip rumors are striking fear in investors.

Weaknesses

The gold price recorded its heaviest one day decrease in five months on Thursday, deteriorating almost 4 percent to a five-week low. This sell off, one day after quarter end, seems more to reflect an unwinding of a short euro/long dollar and gold trade.
Over the last couple of weeks, the euro has strengthened and the dollar has fallen, but gold had been holding up. It's unlikely it was just a coincidence that the trade came off right after quarter end.
India's gold imports in June were 29.9 tons, which is nearly a 75 percent depreciation from a year ago due to gold's ongoing price accelerations.

Opportunities

A recent UBS poll of over 80 reserve managers concluded that gold was expected to be the strongest asset class for the rest of the year, and 22 percent of the managers foreshadowed that gold would be the most important reserve asset of the next 25 years.
David Levenstein, founder of Lakeshore Trading, asserted “the price of gold is exhibiting classic bullish signs of higher highs and higher lows. And, it is very encouraging to see that the increase in price is not moving in a vertical line. This gentle gradient illustrates good solid buying as opposed to panic buying.” Levenstein says gold will reach $1,350 in the near future.
The gold price could well double in nominal terms over the next three years says Rick Rule founder of Global Resource Investments. However, the circumstances surrounding such a move could include severe social unrest and massive volatility.

Threats

Rick went on to note, gold obviously will not move in a straight line to higher prices. As an example, he noted if one looks back to the bull market from 1970 to 1980 when gold ran from $35 per ounce to a high of $850 per ounce. People don't remember that gold moved from $35 to something like $210 or $215 by 1975 and then fell from that number to about $110.
People who were right about the secular move in gold but leveraged themselves up, many of them got stomped out by a cyclical decline and actually went bankrupt despite having the right long term trade.
On March 29, 1999, the Dow traded through 10,000. Today the Dow closed at 9,687. The War on Terrorism is approaching ten-years with little resolution in Afghanistan. Efforts to jumpstart the economy by issuing more debt to get out of debt have not delivered much confidence. Obviously, changes in taxes do matter when it comes to the behavior of consumers but government policies are directionally heading towards more regulation on capital returns combined with higher tax rates.