Gold Market Diary (September 20, 2010)
For the week, spot gold closed at $1,274.30 per ounce, up $28.05, or 2.25 percent, for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, rose 3.64 percent. The U.S. Trade-Weighted Dollar Index fell 1.55 percent for the week.
Strengths
- Gold rose to a new record high of $1,279.60 this week as investors increased their safe haven demand and as the result of the release of weaker-than-expected industrial production data out of the euro zone. In addition, gold rose on the forecasts that central banks will be net buyers of gold this year for the first time in two decades.
- The market rally has come with inflation expectation expansion, with the 5-year forward TIP increasing nearly 20 percent in September. Ted Scott, director of strategy at F&C Asset Management, said “because gold had always performed well in periods of high inflation, this was often the sole reason investors held it in their portfolios. But in spite of bond yields plummeting recently, reigniting fears of deflation and a double-dip recession, gold had continued to strengthen, showing it was more than just an inflationary hedge.”
- Marc Faber, publisher of the Gloom, Boom & Doom Report, said “Gold is the one financial asset for which investors do not have to worry about a default or bankruptcy, making it attractive in times of financial uncertainty and the rising geopolitical tensions that may be coming. I believe geopolitical problems will rise in the next 10 years and could have a devastating impact on financial assets.”
Weaknesses
- Record high prices dried up demand for gold in India. One dealer in the world’s largest gold market was quoted as saying, “Demand is absolutely nil. People are not even making inquiries.” India’s gold collection under ETFs for August almost doubled to 12.1 metric tons as investors sought to hedge to protect wealth from global economic uncertainty.
- The Dow-gold ratio (the Dow Jones Industrial average divided by the gold price in ounces) is currently at 8.4 and is approaching its 20-year low.
- Billionaire financier George Soros believes gold is still the ultimate bubble and said, “While (gold) may go higher, it is certainly not safe and it is not going to last forever.”
Opportunities
- A PriceWaterhouseCoopers study noted more large pension funds will invest in mining and suggested, “As the potential for commodity scarcity escalates, M&A activity in the global mining sector will likely intensify, mimicking a ‘global arms race.’”
- One of the trends in gold in 2009 that generated positive investor interest in gold was the news of central banks adding to their gold reserves. Thus far in 2010, activity from that sector has been light, but we are now seeing signs of renewed central bank interest, which may act as a catalyst for further investor interest.
- Doug Casey, chairman of Casey Research, forecast “the Greater Depression” is ahead and that gold will be one of the most important assets to own. He predicted that the gold “could enter a stage where the price rallies by up to $50 a day over the next few years.”
- Richard Russell, writer for Dow Theory Letters, wrote “ This great gold bull market is something that one sees maybe once or twice in a lifetime…I’ve said before that we’ve already gone through the first psychological phase of the gold bull market, and that we are now deep in the second phase of a bull market. If my instincts are correct, the third speculative phase in gold lies somewhere ahead. Often during the third phase, the item makes more for investors than all their profits through the first and second phase.”
Threats
- Nevada lawmakers warned miners that the state’s budget situation is bleak and that things will only get tougher in 2011. The state Legislature told miners that mining is one aspect on which the state has been overly reliant.
- Fannie Mae recently released a survey showing that 63 percent of Americans believe that housing is a “safe” investment, down from 83 percent as the boom was turning to a bubble.
- According to Moody’s, allowing President Bush’s tax cuts for high-income earners will have no effect on aggregate consumer spending because they would otherwise save this money.
