Gold Market Diary (October 25, 2010)

Gold Market Diary (October 25, 2010)

For the week, spot gold closed at $1,328.45 per ounce, down $39.95, or 2.92 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, fell 4.48 percent. The U.S. Trade-Weighted Dollar Index rose 0.43 percent for the week.

Strengths

• Investors have snapped up more than 1,500 tons of silver in the past two months alone, which is more than 5 percent of the total annual silver supply and proof sales of silver coins are booming. The director of the Canadian Royal mint says it has already sold in excess of 30 percent more of its silver Maple Leaf coin than last year’s record 10 million ounces.
• The head of South Korea’s central bank told a parliamentary committee on Monday that the nation should “give careful consideration” to increasing the amount of gold in its foreign exchange reserves holdings.
• “Gold is not going to move much lower when you have the FOMC ahead of us in early November, the G-20 preparations later this month and the full summit next month,” said a Credit Agricole analyst. “These are all potentially friendly towards the gold market, certainly the FOMC, where it is expected that they will embark on further easing,” the analyst said.

Weaknesses

• China surprised the financial markets on Tuesday by raising its short-term interest rates by 25 basis points, the first tightening since December 2007. This news gave immediate lift to the dollar, and weakened the gold price.
• The completion of the buy-back of one the largest outstanding forward gold sales booked several weeks ago and prior rate hikes by China have typically led to short-term weakness in gold prices.
• A holding company controlled by billionaire Carlos Slim said its mining unit hedged the price for part of its future output of gold, copper and other metals for the next three years. Forty-three percent of gold output was hedged over three years for $1,189 an ounce.

Opportunities

• With gold prices above $1,300 per ounce, skeptics question whether this is yet another asset class bubble about to burst. Peter Schiff, President of Euro Pacific Capital, disagrees; he believes the U.S. dollar will continue its downward trajectory – in turn, adding to the value of gold. “I think we’re still relatively early in the game," he says. "It’s not rock bottom prices, but prices are not high for the metals, especially given what central banks are going to do,” i.e. more quantitative easing.
• Scotia Capital is one of the latest firms to raise its forecast on gold, stating gold prices will reach $1,500 per ounce by the end of this year. The firm’s report said, “We believe momentum is now in the precious metal camp with talks of further quantitative easing from the U.S. Fed and from other central banks. We see no reason right now for gold’s long- to medium-term rise to be halted and expect it to continue to rise, with short-term corrections as it meets technical resistance.”
• UBS also raised its gold price predictions through 2012. The Swiss bank raised its average price forecast for gold from $1,205 per ounce to $1,228 per ounce for 2010, from $1,295 per ounce to $1,400 per ounce for 2011, and from $1,175 per ounce to $1,250 per ounce for 2012.

Threats

• Fitch Ratings said the growth in South Africa's gold production output in the three months ending August 2010 is unlikely to be sustained over the long term, given the growing international cost competitiveness of gold mines located outside of South Africa.
• China plans to further cut export quotas for rare earth metals next year, China Daily reported. This will further pressure importing nations to swiftly find new sources of supply. China, which accounts for more than 90 percent of the world's production of rare earth metals, plans to cut export quotas by up to 30 percent in 2011.
• Market strategist and historian Don Coxe noted on his weekly conference call that the freezing of the foreclosure process by the courts is likely not an issue which can be quickly dealt with and could be a prelude to falling home prices if there is not a path to resolution.