Gold Market Cheat Sheet (February 7, 2011)

Gold Market Cheat Sheet (February 7, 2011)

For the week, spot gold closed at $1,348.35 per ounce, up $11.6 per ounce, or 0.78 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, gained 3.78 percent. The U.S. Trade-Weighted Dollar Index fell 0.11 percent for the week.

Strengths

• China, the world's largest gold producer, has retained the top position and further increased domestic gold production in 2010. Production rose 8.57 percent from the previous year's output.
• The U.S. Mint reported record sales of one-ounce American Eagle silver coins during January 2011, nearly 50 percent higher than any month in the Mint's 26 years of published sales. January 2011 sales were more than 300 percent higher than the 1,900,000 one-ounce silver coins sold during January 2010.
• "We are still in a zero interest rate environment, we still have major fiscal issues in Europe, America and Japan, we are still seeing a lack of confidence in fiat currencies," said Philip Klapwijk, chairman of metals consultancy GFMS. "I don't think we are at the beginning of a secular change in direction. The bull case for gold is still intact."

Weaknesses

• Despite the political uncertainty, the gold price has largely gone sideways over the past couple of weeks.
• Some perpetual gold bears are saying that investing in the yellow metal doesn't work since prices have fallen from their 2010 highs, yet inflation worries have increased.

Opportunities

• Martin Murenbeeld, chief economist at Dundee Wealth Economics, said his base forecast sees gold averaging $1,450 in 2011 and close to $1,600 in 2012. According to Murenbeeld, “gold is highly correlated with global liquidity and as central banks continue to print money so, the effect will be a rise in gold prices.”
• Pascal Lamy, the Director-General of the World Trade Organization (WTO) said economic recovery will make metals more expensive in 2011. Lamy said prices for most commodities will rise as growing global GDP bolsters demand. Lamy estimates more than 70 percent of the growth will come from commodity-intensive emerging markets.
• Kansas City Fed President Thomas Hoenig said that the Federal Reserve may consider extending its quantitative easing program beyond June 30, 2010. The Fed may consider extending the plan if expectations for economic recovery haven’t been met.

Threats

• South African gold production is down 7 percent over the last 10 years, but output of other resources isn't enough to fill the void left by declining gold production. Political, legal and power supply problems are all contributors to the shrinking popularity of South African mining.
• Despite the mounting unrest in Egypt, Indian traders are expecting gold prices to drop further due to the week-long New Year celebrations in China.
• A bullion executive at Mumbai's famed Tribhovandas Bhimji Zaveri and Sons said the violent protests in Egypt would “ensure that the geopolitical premium in crude oil prices would be maintained. This is not good for gold.'