Gold Market (December 27, 2010)
For the week, spot gold closed at $1,380.10 per ounce, up $4.65, or 0.34 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, gained 1.03 percent. The U.S. Trade-Weighted Dollar Index rose 0.13 percent for the holiday-shortened week.
Strengths
- Gold managed to close the shortened holiday week with a modest gain after two consecutive weekly losses.
- Gold markets are likely to close the year with ten years of consecutive price gains in bullion. According to Martin Murenbeeld of Dundee Weath Economics, historically the shortest bull market in gold was just at ten years during the 1970 to 1980 decade. Historically, gold bull and bear market averages typically run about 20 years in duration.
- Although there were some remarkable compromises in the lame duck Congress to address all-time lows in popularity rankings, none of the hard choices on spending have been addressed. These budget issues are visible, but unfortunately appear to be incomprehensible to the vast majority.
Weaknesses
- Anti-wealth creation groups were busy putting out reports linking high gold prices as the direct cause of human death and suffering in both Tanzania and Nigeria this week.
- These NGO groups rarely address issues of government greed and corruption in fair dealing with taxes and royalties received from mining projects.
- Critics of gold mining rarely acknowledge that these low-technology artisanal miners are operating outside of a regulated structure when they exploit near-surface gold deposits, and thus their local governments do not provide much protection. The bottom line is they need to be able to earn money to buy food and a lower gold price does not put more food on the table.
Opportunities
- The International Monetary Fund (IMF) announced that it concluded its planned sale of about 400 metric tonnes of gold this week. In an era where central banks or other official channels have historically provided the supply balance to shore up the demand equation for gold, next year could turn out to really interesting in light of so many central banks becoming net buyers of gold.
- Transparency in government policy has been fully embraced by the Fed as Chairman Ben Bernanke has gone to great lengths to make sure the markets understand his intentions. Transparency on how the government does its business is a different question to consider. Following the reality of WikiLeaks, there is not quite the same enthusiasm towards government openness as compared to the popular election promises a couple of years ago.
- Openness to the gold market may still be coming when the new Congress begins its work next year and Rand Paul pries into auditing the U.S. government’s gold reserves, which were incidentally reclassified as “Custodial Gold” from “Gold Reserves” in recent years.
Threats
- Ironically, deflation is still the mantra as there has been little evidence of increasing prices in U.S. inflation measures. Unfortunately, oil prices are above $90 per barrel and we have seen basic material prices on the rise in steel, copper and other raw materials. This may result in increased cost pressures for mining companies in the current quarter and New Year.
- Complacency is another problem to be aware of in 2011. Almost every market strategist has the S&P 500 forecasted to achieve very attractive gains next year and the CBOE Volatility Index is approaching the lows before the shocking realization in 2008 that there was a problem in the debt markets. Again, this problem is visible, but unfortunately incomprehensible to our policy makers.
