Gold Market Diary (December 20, 2010)

Gold Market Diary (December 20, 2010)

For the week, spot gold closed at $1,375.45 per ounce, down $10.55, or 0.76 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, fell 1.99 percent. The U.S. Trade-Weighted Dollar Index gained 0.39 percent for the week.

Strengths

• The Commodity Futures Trading Commission (CFTC) reported that commodities future positions have reached an all-time high. Bart Chilton, a CFTC commissioner, stated that “speculative money from the likes of hedge funds, index funds and pension funds is coming into commodity markets at a blistering pace.” While record futures positions appear to imply prices are at extremes, it should be remembered that for every buyer there is a seller with the opposite view.
• Chinese gold buying still appears to be robust as outlined in a recent Financial Times article. Inflation fears are driving retail demand to hedge and higher prices apparently aren’t acting as a deterrent.
• Meanwhile in the U.S., the first gold ATM was recently installed at a mall in Boca Raton, FL. The ATM will dispense bullion bars and coins. It will be interesting to see how new retail consumers react to being able to their exchange U.S. dollars for gold.

Weaknesses

• Gold and silver were both subject to profit taking this week as some speculated that U.S. equity markets will see double-digit gains in 2011.
• The U.S. dollar remains firm as the euro remains a major potential source of strength for further dollar gains.
• If anybody thought Congress got the message on fiscal responsibility from the tenuous elections in November they were mistaken. The omnibus spending bill introduced this week contains 6,600 earmarks worth $8.3 billion. Surveys show Congressional approval at an all-time low.

Opportunities

• Goldman Sachs recently predicted that precious metals will give investors the best returns among commodities in 2011. Goldman Sachs estimates precious metals will gain 28 percent in 2011.
• UBS became the latest investment bank to raise its gold forecast for 2011, lifting it from $1,400 to $1,550 per ounce. UBS said “we expect European debt concerns, continuing implications of quantitative easing and an ongoing safety drive to fuel investor demand. Absolute faith in fiat currencies remains shaky. Gold is currently behaving as a currency rather than a commodity.”
• As reported in the Financial Times, the world’s largest mining companies are expected to spend up to $120 billion next year. This is three times the 15-year average. Mining support services should perform well in this environment. In a separate survey of top gold mining executives conducted by Price Waterhouse Coopers, 70 percent of the executives expect to use additional cash inflows from higher prices to look for new projects. This should be positive for further acquisition activity.

Threats

• The U.S. Securities and Exchange Commission (SEC) voted Wednesday to propose three separate measures pertaining to mining. These include: Governing the use of conflict minerals, requiring mining companies to disclose payments made to the U.S. or foreign governments, and mandating disclosure of mine safety and health records by mining companies to their investors.
• European central bankers still believe if they just show the market that each is willing to buy the other’s debt, there won’t be any banking problems in their system. Thus, the problem will just go away. This only makes sense if you believe a social welfare state can always be funded by rich people.
• David Rosenberg, chief economist and strategist at Gluskin Sheff, says Federal Reserve Chairman Ben Bernanke gave the quote of the decade when he said in October 2007 that the housing and subprime crisis was going to be “contained.” Bernanke proclaimed “it is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions.”