Gold Market Diary (July 19, 2010)

Gold Market Diary (July 19, 2010)

For the week, spot gold closed at $1,193.00 per ounce, down $18.80, or 1.54 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, fell 4.40 percent. The U.S. Trade-Weighted Dollar Index fell 1.64 percent.

Strengths

  • Purchases of small gold bars in India have risen sharply due to dealers stocking up for a second round of religious festivals.
  • India’s gold underlying exchange-traded funds moved upward 76 percent in June compared to a year earlier.
  • An investment company using artificial intelligence has a defensive stance and holds a large allocation of its portfolio in gold stocks. This company’s gain in 2009 was more than double that of the Dow Jones Industrial Average.

Weaknesses

  • China’s most respected credit ratings agency Dagong downgraded the U.S. to an AA rating with a negative outlook.
  • Gold prices took a hit on Friday on rumors of redemptions at a major hedge fund and unwinding of short euro, long gold trades. While media reports are downplaying the likelihood of a double-dip recession, credit markets are less certain. Perhaps there have been more gold swap trades laid on over the course of the week.
  • In Australia, the Association of Mining and Exploration Companies noted the new prime minister has not yet followed through on her long-promised dialogue with miners.

Opportunities

  • China Gold Association forecasts China’s gold demand to rise 12 percent this year and further increase next year because “Chinese investors have shown their willingness to buy more when prices are on the rise.”
  • Silver prices could also get a lift—a preliminary prospectus for the launch of a new physical silver trust has been filed.
  • Japan’s biggest bank recently proclaimed assets held in Japan’s first exchange-traded funds backed by gold may increase eightfold in a year as investors seek to protect their wealth in the country with the world’s largest public debt.

Threats

  • The chief economist for Citigroup has called gold the subject of the “longest-lasting bubble in human history and is based on nothing more than a set of self-confirming beliefs.” But on the other hand, firms with an interest in equities often cite that gold has no utility but will promote their latest growth stock story in a company that likely will never make any profits.
  • Goldman Sachs has raised its medium-term gold price forecast to $1,355, but estimates gold prices will fall in 2011. It has suggested that gold miners start selling gold forward, but most companies remember how Ashanti Goldfields and Cambior lost control of their companies by following hedging strategies suggested by investment bankers. Academic studies show hedging the gold price is exactly the wrong risk mitigation variable to fix as a constant.
  • In South Africa, progress has been made in the move toward mine nationalism. Supporters want to create a state-owned mining company that could take 60 percent ownership of new mining operations.
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