Gold Market Diary (November 1, 2010)

Gold Market Diary (November 1, 2010)

For the week, spot gold closed at $1,359.40 per ounce, up $30.95, or 2.33 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, rose 3.80 percent. The U.S. Trade-Weighted Dollar Index fell 0.36 percent for the week.

Strengths

• Meng Qingfa, a researcher with the China Chamber of International Commerce, was quoted by the International Business Daily as saying that China should eventually boost its gold reserves to a level equal to that held by the United States. "Doubtlessly, if the yuan is set to become an international currency like the dollar or the euro, China has to get a huge gold reserve to support it, and a reserve of 1,054 tonnes is far from being enough," Meng said. U.S. reserves stood at 8,133 tonnes as of the end of June, significantly higher than China's current level of 1,054 tonnes.
• David Levenstein, a respected commodity analyst, recently noted his belief why gold has a strong future. Levenstein stated, “…no matter what your local politician tells you, the world is in a shambles. Most industrialized countries have slow GDP growth, high unemployment, huge sovereign debt as well as major budget deficits and interest rates at practically zero. Furthermore, around the world we are seeing rising commodity prices and major currency fluctuations. All this is going to lead to further currency debasement, and possibly both collective and unilateral government intervention in the forex market.”
• Commerzbank said Indian jewelry demand is currently accustomed to higher gold price levels. Commerzbank’s research indicated that India could very likely reach last year’s level of gold imports

Weaknesses

• With respect to the recent decline in the price of gold, Dennis Gartman, editor of the Gartman Letter, noted that “the inevitable correction has taken and may still be taking place in gold and we welcome that correction. It was and is much needed and the process of correcting has taken gold from being materially…perhaps even egregiously…overextended back toward long-term technical health.”
• As an investigation of the silver market by the top U.S. commodity regulator entered a third year, a member of the Commodity Futures Trading Commission (CFTC) said that there have been “repeated attempts” to influence prices. A five-member commission began investigating allegations of price manipulation in the silver futures market in September 2008.
• The CFTC said in a 2008 report that it had received “numerous letters, e-mails and phone calls” during the last 2 years alleging silver prices were being manipulated . The day after the release, JP Morgan Chase Bank and HSBC Holdings were hit with lawsuits accusing them of conspiring to drive down silver prices.

Opportunities

• Investor, mathematician and former fund manager Michael Berry, is bullish on gold, which he expects will double to around $3,000 per ounce within the next five years.
• Paul Horsnell, managing director of Barclays Capital, predicted that gold will first correct to $1,310 – $1,325 in early 2011, before rising steadily toward $1,450 by the middle of the year, based on support from central banks in Asia which are looking to diversify more of their reserves into gold. Horsnell predicts that gold will subsequently climb to his $1,850 target by the end of the following year, based on strong demand from emerging markets and factors limiting the supply of gold.
• John Embry, chief investment strategist of Sprott Asset Management, recently noted that the world remains in a financial bind, the likes of which it has probably never seen, and those people calling for corrections or bubbles in the gold market are flat out wrong. Embry added, “…everything I look at suggests much higher prices over the next 12 months.”

Threats

• In a recently released research report, based on two studies of South Africa’s energy future, RBC Capital Markets analyst Leon Esterhuizen highlighted “the very real possibility of the country running short of power for the most part of the next five years.” This could threaten platinum production in the region.
• A Bloomberg survey of traders, investors and analysts showed that the majority expect gold to decline next week, following this week’s negative reversal. Ten of 19 respondents were bearish on the yellow metal, while seven were bullish and two were neutral. The survey has been running for six years, and has correctly predicted the following week’s movement in 193 of 333 weeks, or 58 percent of the time.
• The aggregate S&P pension deficit was $264 billion at the end of 2009, and currently is around $380 billion, according to Bank of America Merrill Lynch. This would be the largest current deficit for all indexes. In another transfer of wealth, General Motors announced a $6 billion injection into its pension and health care plans versus a repayment to taxpayers.