Gold Market Cheat Sheet (January 10, 2011)

Gold Market Cheat Sheet (January 10, 2011)

For the week, spot gold closed at $1,369.57 per ounce, down $51.21, or 3.60 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, fell 6.74 percent. The U.S. Trade-Weighted Dollar Index has surged 2.66 percent for the week.

Strengths

• Chinese 2010 gold output is estimated by government sources at around 340 tons, suggesting the country’s total consumption may have reached close to 600 tons. The new record of 340 tons is more than an 8 percent increase over the 2009 figure. This is now the sixth-consecutive year in which the country has raised its gold output.
• Saudi Arabia, one of the world’s largest gold consumers, said it is has began constructing the world’s largest gold factory. Saudi Arabia continues to be an important gold market in the Middle East region, as the country represents a third of the total gold demand in the Middle East.
• The Reserve Bank of India is allowing seven more banks to import gold and silver into the country. The move is set to fulfill the demand of the country’s citizens. While 23 banks already have the central bank's permission to import gold and silver into the country, the recent approval has brought the count to 30.

Weaknesses

• Gold, which capped the biggest two-day drop in 11 months yesterday, may extend declines to the lowest price since September on speculation that an economic recovery will curb demand for the metal as a safe haven. “You’re seeing a reallocation of funds to higher-risk assets like equities. The big funds are absent from the gold market,” said Matthew Zeman, a trader at LaSalle Futures Group.
• The recent selling of gold by index funds may have finally run its course, according to John Howlett, division vice president of Mitsubishi International Corp. “The index funds that were giving away gold and silver like government cheese for these last two days seem to have finally run out of steam,” Howlett said.
• On a positive note, physical buying of gold in Asia is very strong. A Hong Kong-based dealer noted that buying was very brisk as long as gold remained below $1,400.

Opportunities

• According to BCA research, “Gold is a potential mania candidate” and “the gold bull market will continue in 2011.” The gold bull market, BCA Research argues, “has been driven by the potential inflationary implications of current large fiscal deficits and central banks that are prepared to stop at nothing to prevent deflation. It may be several years before developed-world real interest rates return to the norms of earlier decades, especially in the U.S. In this environment, gold will continue to be an excellent insurance policy and should continue to fare well when measured against the major currencies.”
• Mergers and acquisition activity in the North American mining sector will continue to be strong this year and could exceed the levels seen in 2010, industry experts said. In a mid-September survey of mining executives conducted by KPMG, 70 percent of respondents said that their companies were likely to pursue M&A activity in 2011. In addition, more than half of the respondents (54 percent) cited the need to increase reserves as the main driver for deals.
• “While gold has been trading near its nominal high above $1,400, we see plenty of room for continued long-term moves up, especially in the current global economic climate,” said Donald W. Doyle, Jr., Chairman and CEO of Blanchard and Company. Doyle said there are numerous factors that he believes will propel gold’s price in 2011 including: Currency instability, geopolitical conflicts, increased consumer prices and the raising of the U.S. debt ceiling.

Threats

• Jan Hatzius, chief U.S. economist at Goldman Sachs, predicted that the strength of the ongoing economic recovery will keep the Federal Reserve from having to implement a third round of quantitative easing (QE3). Furthermore, Hatzius forecasted that the Fed will not begin raising the federal funds rate until 2013, as deflation, rather than inflation, remains a far more significant threat to the U.S. economy.
• Barclay’s Capital expressed some caution on gold’s ability to outperform other industrial metals, such as copper. They noted with essentially all the major gold companies closing out their forward sales in 2010, gold investment demand will need to rise even more in 2011 to keep the market balanced at current prices.
• Eskom, the South African government-run power company, indicated this week that the country could be short 6 terawatts in the 2011-2012 financial year. A terawatt is 1 million megawatts or 1 trillion watts. In 2012-2013, the shortfall could be 9 terawatts. Eskom is talking to the largest 500 users of power to get them to decrease their consumption. This impacts the miners, particularly the deep level mines. Open pit mines use heavy fuel oils and diesel to generate production. Smelters and refineries are also impacted by this shortage.