Gold Market Diary (October 18, 2010)

Gold Market Diary (October 18, 2010)

For the week, spot gold closed at $1,368.40 per ounce, up $21.66, or 1.61 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, rose 0.61 percent. The U.S. Trade-Weighted Dollar Index fell 0.47 percent for the week.

Strengths

• The price of gold reached another record high of $1,382.50 per ounce this week on speculation the Fed will further ease monetary policy due to the weak initial jobless claims report.
• Gold, according to the World Gold Council (WGC), can be an integral part of a cost-effective investing strategy for both the short- and long-term without giving up return. The WGC’s research has also shown that even a small allocation of gold in a portfolio may decrease the Value at Risk (VaR). Also, the WGC’s research showed gold differs from other assets in a number of ways, one being that it tends to exhibit lower volatility on negative returns than it does on positive returns.
• “There is a distrust of currencies, and gold is the only solution,” a head of bullion trade in Geneva said. “A lot of money is going into precious metals and there’s demand from India because of the country’s festival season,” he said.

Weaknesses

• The 2010 Ernst & Young Business Risk Report revealed that capital allocation is the number one risk this year for mining companies. The volatility of prices, cash flow, risk appetites and availability of capital during the recent global financial crisis have all made the decision on how to allocate capital in mining and metals companies more complex, the report noted. The second-most important risk of concern to mining companies was skills shortages. Third was cost management.
• According to Financial Research Corp., total net investment in gold from this year through July was $2.7 billion compared to $22 billion invested into emerging markets mutual funds and approximately $155 billion invested in bond funds. The amount invested in gold was minimal. According to GFMS, Ltd., the London-based consultancy, U.S. investors bought about 45 metric tons of gold bars and coins in the first half of this year, less than half the amount purchased the year before.
• Institutional investors fear a government policy mistake far more than inflation, terrorism, a housing double dip, a weak dollar, poor earnings or any other potential risk to the economy, according to a survey of 100 mutual fund, hedge fund and pension fund managers by Citigroup Global Markets. “Government Policy Missteps” garnered more than a third of the votes. Another 15 percent cited “Protectionism,” which is also strongly-tied to the actions of the White House and Congress.

Opportunities

• Goldman Sachs has raised its 12-month forecast for gold to $1,650 an ounce, citing expectations for further quantitative easing in the U.S. and prospects for long-term interest rates to continue falling. Thus, Goldman said it is raising its gold price forecasts to $1,400, $1,525 and $1,650 on a three-, six- and 12-month horizon. Goldman said its updated forecasts point to an average of $1,575 an ounce in 2011, which is $175 higher than previously expected.
• Gold may climb to $1,400 an ounce by the end of the year as investor demand will remain strong because of low interest rates, the European sovereign debt crisis and fears about an economic slowdown, GFMS said. Paul Walker, CEO of GFMS, recently said “The investment climate for gold at the moment is very strong, so there is no doubt that it could go higher, the price could exceed $1,400 and is unlikely to drop below $1,300 within the next six months.”
• As investor demand for access to gold markets is increasing rapidly. Two money managers in China are vying to launch the country’s first gold funds by the end of the year to meet investor demand for the precious metal. “The products would for the first time give Chinese fund investors’ full exposure to a new asset class and explore investment opportunities in gold,” one of the fund managers said.

Threats

• Citibank recently reported their caution for gold in long term by saying, “We expect prices to rally further in the short term, but we have less conviction for sharper moves one year from now as the global recovery gains traction and policy actions start being unwound.”
• Natixis’ head of commodities research said “We are projecting that at some point in the next three to six months we will have reached the peak and gold prices will decline from then on. So we will be looking for prices to perhaps fall below $1000 per ounce by the end of next year.”
• Don’t be an idealist and believe that quantitative easing will fix anything. Everybody is expecting the Fed to pick up the free money tab of “cash-for-clunkers” and other programs at the expense of tax payers. Government policies that create additional debt so we can buy things we can’t afford and, in turn, make company earnings look better does not address key structural imbalances. Don’t be a pessimist either. “Even in the worst of times someone turns a profit.” Rules of Acquisition, Number 162.