Gold Market Cheat Sheet (January 17, 2011)
For the week, spot gold closed at $1,361.72 per ounce, down $7.85, or 0.57 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, fell 2.64 percent. The U.S. Trade-Weighted Dollar Index declined 2.36 percent for the week.
Strengths
- China's Lion Fund Management, which last month launched the first gold fund that is to be invested in overseas exchange traded funds (ETFs) in the world's biggest producer of the metal, has met its goal of raising $500 million for the fund. The company states inflation worries and limited investment options have fuelled demand for gold from Chinese investors, especially as the precious metal staged a stellar record-breaking rally in 2010.
- Premiums for gold bars jumped to their highest in two years this week as worries about inflation drove investors in China. "I don't have any gold," said Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong. "Premiums are very high. Some say they have no stocks on hand." A dealer in Singapore also noted, "There's a sudden surge in demand. Demand from China is very good and they are paying very high premiums. Refiners can't meet the demand.”
- Gold imports by India, the biggest bullion consumer, likely reached a record last year driven by investment demand, according to the World Gold Council. Purchases were about 800 metric tons, compared with 557 tons in 2009.
Weaknesses
- The gold price fell dramatically at the end of this week as successful government bond auctions by Spain and Italy reduced euro zone sovereign debt fears, which had the effect of undercutting the safe haven demand for gold.
- Chile's mining minister Laurence Golborne said Wednesday nearly all of Chile's mining industry will adopt a new royalty scheme that will link tax payments to margins. Mining companies in Chile currently pay a royalty of between 4 and 5 percent on operating profits. The new scheme initially sets the royalty at 4 percent to 9 percent on a sliding scale, and raises this to 5 to 14 percent starting in 2018. The percentage will depend on margins.
- The Gold Anti-Trust Action Committee (GATA) announced Monday that it has "scored a small but perhaps auspicious victory" in its fight to force the Federal Reserve to open up what GATA believes are secret records that reveal the bank's "surreptitious market invention." The Fed claims its gold swap agreement records involve "trade secrets" exempt from disclosure under the U.S. Freedom of Information Act (FOIA). The judge ordered the Fed to produce the 20 gold-related documents the central bank has sought to keep secret by Friday for her own private review.
Opportunities
- Investments in the mining sector of the Philippines are expected to reach $17.3 billion by 2016, according to The Philippines Department of Environment and Natural Resources. The increased efforts of the government to streamline the permitting process for the industry and elevate the country as an investment area for minerals development are expected to bring in investment inflows.
- Robin Griffiths, a technical strategist at Cazenove Capital, told CNBC, "I think not owning gold is a form of insanity. It may even show unhealthy masochistic tendencies, which might need medical attention." Mr. Griffiths predicted that gold's 10-year bull-run would continue and even intensify. "Although it's been a top performer for each of the last 10 years, it's still in a linear trend," he said. "Eventually it will go exponential and make more in the last little bit than the whole of the 10-year trend."
- According to GFMS Mining and Exploration Consulting, the gold price strength is expected to be strong in the second quarter of this year, with an average price of $1,440 per ounce. GFMS sees prices breaking through $1,500 per ounce in 2011 and the potential for gold prices near $1,600 per ounce by year end or early 2012.
Threats
- Deutsche Bank forecasted that gold will rise in 2011, based on central-bank buying and investment in exchange-traded funds. Michael Lewis, head of commodities research at Deutsche Bank, wrote that gold will “perform strongly” due also to low real interest rates in the U.S., and that a gold bubble could ensue because gold is being viewed by many investors as a hedge against both inflation and deflation. Deutsche Bank stated in a report to clients that the yellow metal would have to reach at least $2,000 per ounce for one to develop.
- According to French Bank Natixis, such a scenario of de-synchronicity is likely to lead to greater volatility in commodity prices, as counteracting pressures for both higher and lower commodity prices vie for supremacy.
- Both China and Korea continued to fight inflation this week with a further hike in bank reserve requirements and an unexpected hike in interest rates, respectively.
