Gold Market Diary (July 12, 2010)

Gold Market Diary (July 12, 2010)

For the week, spot gold closed at $1,211.60 per ounce down unchanged for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index gained 3.14 percent. The U.S. Trade-Weighted Dollar Index fell 0.55 percent.

Strengths

• Gold ETFs took the number two spot for asset gathering in June, pulling in $2 billion. Also, in the first half of 2010, these funds led all funds in net inflows, pulling in $7.3 billion as investors continued to seek out a safe haven for their assets.
• Gold demand in China gained 59 percent in the first half of 2010 due to declining stock markets, governmental efforts to cool the property market, and general unstableness of the global economy fueled investor actions.
• Gold’s role as a reserve asset has been underlined as the Bank of International Settlements (BIS) record gold swap highlights its risk-free position. The fact that countries in financial distress have swapped rather than sold gold suggests that they want to hold on to gold in the longer term.

Weaknesses

• China’s State Administration of Foreign Exchange (SAFE) recently stated “the gold market is too small, illiquid and volatile to be considered suitable for asset allocation.”
• The China statement along with the initial release of the BIS note on their gold swap agreement was a headwind to higher gold prices this week. Investors pondered what if the country which swapped its gold for cash became insolvent would the counter party sell the gold?
• U.S. gold coin sales are falling as in June the U.S. mint sold 19,000 fewer one-ounce coins compared to the same month a year ago.

Opportunities

• CLSA, an Asian brokerage and investment group noted “the only safe investment will prove to be gold bullion since gold is the only asset which will protect purchasing power in both an inflationary and deflationary environment.”
• Scotia Capital raised their short term gold forecast to $1,500 and increased their long term forecast by 14.7 percent due to their prediction of rising inflation and investors hedging against global debt and equity market troubles.
• GFMS, a respected precious metals consultancy group, said on Wednesday that the price of gold could possibly reach above $1,300 driven by steady growth in investment demand.

Threats

• Tony Parry, senior analyst at Resource Capital Research, bearishly indicated the gold price was driven by words such as “crisis” and “banks” specifically in the Euro-zone. Parry views the gold price to sink below $1,200 for the remainder of 2010.
• Patek Philippe’s Chairman, Thierry Stern, said the company has bought gold futures to defend against high gold prices, which are threatening the luxury goods industry. Stern said he does not know where gold is going and that every time he feels it is going up, up, up.
• Beginning in 2012, gold coin purchases greater than $600 will be required by federal law to report the transaction to the Internal Revenue Service.