Gold Market Diary (November 15, 2010)
For the week, spot gold closed at $1,368.75 per ounce, down $24.90, or 1.79 percent for the week. However, gold equities, as measured by the Philadelphia Gold & Silver Index, actually gained 0.55 percent. The U.S. Trade-Weighted Dollar Index surged 2.09 percent for the week on somewhat of a reversal that QE2 was fully priced by the markets.
Strengths
- World Bank President Robert Zoellick wrote in the Financial Times that gold should be used as an “international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.”
- Zoellick later said that he was not advocating a return to a gold standard for exchange rates, but described the metal as “the elephant in the room” that policy makers needed to acknowledge.
- “The dollar is losing its relevance especially with the emergence of Asia economies, so a more neutral benchmark may be required. Gold, amid all the recent uncertainty, is proving its worth,” said ANZ's senior commodity analyst, Mark Pervan.
Weaknesses
- Gold reached an intraday record high early in the week of $1,422 as investors bought the metal on inflation concerns and reemerging euro sovereign debt problems. However, as the week came to a close, a new round of profit taking emerged on concern over rate hikes in China and increased CME margin requirements for silver speculators.
- Gary Shilling, who correctly predicted the collapse in the U.S. housing market, noted the stock market is overvalued and foresees a significant selloff within a year.
- The Federal Reserve is targeting an increase in asset prices, particularly in stocks, to create a wealth effect, and investors have responded by bidding up prices significantly before the official announcement. A sustained recovery does not appear to be in the cards after insiders sold a record $4.5 billion of their personal holdings in company stock last week
Opportunities
- China is boosting domestic minerals exploration spending in an effort to reduce the country’s dependence on imports of iron ore and copper. China plans to spend $4.48 billion over the next five years to explore for minerals in 21 provinces to reduce its reliance on imported mineral products.
- Commerzbank expects gold to reach $1,450 per ounce by the end of 2011, supported by quantitative easing from the U.S. and worries about countries trying to devalue their currencies.
- “The dollar is going to be debased in a major way, and that’s reflected in a rising gold price,” said Felix Zulauf, president of Zulauf Asset Management. “If it remains within conventional boundaries, then I think $2,500 within the next two, three years is possible. Most likely it will eventually get outside of conventional boundaries when the situation worsens, and then it can go much higher in terms of U.S. dollars.”
Threats
- A Bloomberg poll of over 1,000 investors, analysts, and traders resulted in 75 percent of them saying that QE2 will have little or no effect on joblessness and more than half also said that the action will not increase U.S. growth over the next year.
- In terms of the Fed, David Rosenberg of Gluskin Sheff noted we may have seen the last of quantitative easing. In 2011, there will be three new voting Federal Reserve Bank presidents who have verbally opposed the easing initiatives.
