Gold Market Diary (August 9, 2010)
For the week, spot gold closed at $1,205.40 per ounce, up $24.40, or 2.07 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, rose 3.40 percent. The U.S. Trade-Weighted Dollar Index decreased 1.51 percent.
Strengths
- China has moved to further develop its gold market, increasing the number of banks allowed to trade bullion internationally and announcing measures that will encourage development of gold linked products.
- Central banks gold sales under the Central Bank Gold Agreement continue to be miniscule with roughly just 6 of the 400 tonnes allowed coming to the market so far.
- Another big gold company acquisition was announced earlier in the week. While some have criticized the deal as being on rather lofty terms this is positive for the valuations of the junior and mid-tiered mining companies. In one year, the deal may be viewed as a real bargain considering that the fundamentals surrounding further price gains in gold are likely to get more intense.
Weaknesses
- Over the prior three weeks, gold back ETFs have seen net liquidations but appeared to have stabilized this week. Hallgartens’ mining analyst Christopher Ecclestone suggests gold ETFs have become a lobster trap for the mining industry and mining investors, particularly in reducing the availability of funds for project financing.
- Both gold and the dollar enjoyed a price rise when Europe’s sovereign credit issue came to a head in May but have subsequently traded down. Keep in mind, the faster money was long gold and the dollar as the euro tanked and credit spreads went to all time highs. When the market saw Europe was going to pull out the guaranteed-to-pass stress test, there simply was no easy money to be made after that point. After all, European bonds and an oversold euro offered the next best trade to capture alpha for investors. Fortunately, these distorted bond and currency prices have now run their course with the easy money pocketed again. The next trade to go long on again favors gold.
- South Africa’s Department of Mineral Resources faces a credibility issue over their granting of certain non-platinum mineral rights to a director of one their larger platinum miners who subsequently resigned and diverted the assets to his own black economic empowerment company.
Opportunities
- Research company Ipsos completed a survey across 24 countries representing 75 percent of global GDP and found Asian investors are more likely to buy gold to a much greater extent than Americans or Europeans. Of the 19,000 investors interviewed a quarter said they were “somewhat or very likely” to invest in gold in the next six months. Three quarters of the respondents in India and Indonesia and more than half of those in China said they would invest in gold. Only 10 percent of the respondents in America and Europe said gold would be a likely investment.
- John Embry, Sprott Asset Management’s chief investment strategist, said “I would expect the last few months of the year to be quite robust which in a seasonal sense is often the case, but this time I think its going to be more robust than usual…If it’s not between $1,500 and $2,000 in the neat 18 months, I’m dead wrong.”
- Media speculation surfaced that President Obama will direct Fannie Mae and Freddie Mac to reset mortgage rates for all distressed homebuyers or else forgive the underwater portion of their overextended mortgage debt as a way to boost popularity and buy votes in the fall elections. As the estate tax is set to go from 0 to 60 percent next year, Warren Buffet and Bill Gates announced a pledge campaign to sign up billionaires to give away half their wealth.
Threats
- For all the naysayers that espouse there is no chance of a double dip in the economy, David Rosenberg, of Gluskin Sheff Associates, has a few more sobering comments. Consumer prices in the U.S. have fallen three months in a row (as measured by the PCE price deflator) and the last time this occurred in beginning of 2009 there was a strong plummet in the economy.
- The new orders component is down 12.2 points in the last two months. The last time this happened was October 2008 and in fact is a 1-in-25 event. There is only a 4 percent chance this would occur at a time that is not in or near a recession.
- Household employment has contracted three months in a row and the chance of that happening without the U.S. either being in or heading into a recession is unlikely.
