Gold Market Cheat Sheet (January 3, 2011)
For the week, spot gold closed at $1,420.78 per ounce, up $40.68, or 2.95 percent since the pre-Christmas close. Gold equities, as measured by the Philadelphia Gold & Silver Index, gained 2.40 percent. The U.S. Trade-Weighted Dollar Index has tumbled 1.82 percent since the pre-Christmas close.
Strengths
- Gold price closed the year at $1,420.78 per ounce, a 29.52 percent gain for the year. This is the biggest rise in three years and a record tenth consecutive annual gain, based on uncertainty about economic recovery and currencies. This year, bullion has benefited from safe-haven buying on lingering worries about a euro zone debt crisis, a $600 billion U.S. bond buyback program and renewed demand from global central banks, which are expected to become net buyers for the first time in decades.
- The China interest rate hike came after central bank governor Zhou Xiaochuan's recent warning and hopefulness that would help remove the overhang in the near term. Apparently, the real interest rate is getting increasingly negative, from -1.9% previously to -2.35 percent now, which should be conducive for gold.
- Indonesia is expected to sign new regulations allowing underground mining in its protected forests. President Susilo Bambang Yudhoyono is expected to sign the new regulation within weeks, said forestry minister Zulkifli Hasan. This is likely to kick start projects that have stalled because of tight forestry policy.
Weaknesses
- Production of Peru's main base and precious metals declined in November, the government said Tuesday. The Ministry of Mines and Energy said that output of gold was down 12 percent, silver fell 13 percent, copper decreased 4 percent, zinc declined 21 percent and lead was down 24 percent, compared to the same month a year earlier.
- A Canadian gold mining junior in the process of ramping up production in Brazil has suffered an armed robbery with some $2 million worth of gold stolen.
- Ghanaian cities have raised concern about the upsurge in illegal mining in the area. This illegal mining has caused many environmental problems and insecurity, as vegetated lands and citizens are perishing as artisanal miners disregard safety rules.
Opportunities
- A theme reiterated by many analysts is that initial public offerings (IPOs) for mining and basic materials companies could hit a record in 2011 as China and India drive demand for metals and attract more investors.
- Tom Kendall, vice president for Commodities Research at Credit Suisse, predicted that gold will reach $1,630 per ounce in 2011. Kendall commented that "We're still in an era of unusual financial market instability and stress. We're going to stay with very low to negative interest rates in real terms and that's also very supportive for gold." He also pointed to China, where "there's increasing imports of gold and a real boom in retail investment in physical gold there," and where "inflation is definitely playing into the market."
- Gold will rise by 23 percent to $1,700 per ounce and silver will rise by 37 percent to $40 per ounce in 2011, according to a Bloomberg survey of more than 100 investors, traders, and analysts.
Threats
- A monthly poll of economists by Blue Chip Financial forecast that the Federal Reserve will not expand the size of its $600 billion quantitative easing program, according to 85 percent of the respondents.
- Edward Meir, senior commodity analyst at MF Global, says he would not be surprised if there is a price pullback within the next two weeks for gold as governments are trying to rein in inflation, especially in emerging markets such as Asia.
- European debt markets are becoming increasingly concerned over loaning money to Spain while risk levels, as characterized by the VIX Index, point to increasing complacency in U.S. equity markets. If the euro goes into to crisis stage due to the German public balking at the notion of a transfer society, the dollar could see significant strength. Over the past couple of years gold has seen some quick downdrafts from spikes in volatility but has ultimately trended higher.
