Gold Market Cheat Sheet (August 8, 2011)
According to Erste Research, “QB Asset Management calculates the so-called “Shadow Gold Price” (“SGP”). It divides the US Monetary Base by U.S. official gold holdings, the same formula actually used during the Bretton Woods regime to fix the exchange value of the dollar at USD 35.00/ounce. It would be the theoretical price of gold today, were the Fed to depreciate the USD to a level that would cover systemic bank liabilities. The current Shadow Gold Price would be just under USD 10,000.”
For the week, spot gold closed at $1663.80, up $35.92 per ounce, or 2.2 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, fell 4.74 percent. The U.S. Trade-Weighted Dollar Index rose 0.78 percent for the week.
Strengths
- In tumultuous week of price action, as evidenced by the S&P 500 Index falling 7.19 percent, gold faired pretty well with a 2.1 percent gain, but silver fell 4.3 percent.
- Both Royal Gold and Yamana Gold posted positive gains for the week. Royal Gold benefits from its first in line royalty structure of income generation; the company essentially gets paid via the revenue stream from gold sales on mines that other companies operate, while Yamana Gold has begun to regain market confidence in its ability to deliver consistently on company guidance.
- Year-to-date, emerging market central banks have bought nearly 180 tons of gold, more than double the roughly 73 tons purchased by central banks globally in the whole of 2010. This hits the central issue of the public’s recognition that government policy makers in Europe and the U.S. do not have the will to address spending cuts. The budget deal over the prior weekend only allowed for a $10 billion reduction in planned spending increases over the next two years while a couple of trillion dollars in cuts would allegedly take place after the presidential election.
Weaknesses
- It was a stark week of underperformance by the junior and mid-tier gold and silver stocks relative to their senior peers as evidenced by a weekly decline of 9.2 percent for the junior space versus the larger capitalization gold stocks which fell 2.6 percent.
- Underperformance in the junior space can largely be attributed to a loss in confidence in overall stock markets around the world to provide capital for what is turning out to be a period of low growth.
- On a risk-preference basis, investors have been more willing to add to their gold bullion exposure versus adding to equity market exposure, even in the realm of gold mining companies.
Opportunities
- Noted market historian Don Coxe believes that the gold rally “is primarily driven by fear-not greed.” He advised “gold is gradually becoming recognized as a necessary investment for those with wealth to conserve who do not assume that the political classes in the US and Europe will display sustained statesmanship.”
- Despite rising prices, precious metals demand in India, the world’s biggest consumer of bullion, continues to soar. Jewelry manufactures note that gold is likely to see further increased demand with the festival and wedding season around the corner.
- Entertainment specialist Jim Cramer recommended that gold should account for 20 percent of any portfolio. Just a small shift in investment portfolios allocations towards this weight would likely create an order of magnitude change in the gold price should investors follow his advice.
Threats
- Investor confidence going forward after the recent near panic in selling will be a headwind in the near term.
- Liabilities on quasi-government-backed debt relating to the housing bust on corporate balance sheets were bought back by the government over the last couple of years via the bailout package. Company balance sheets are relatively healthy, but this fact has been overshadowed by the central debt issue not being dealt with effectively and the continuing threat of tax increases to solve the spending problem of governments.
- While gold has performed very well as of late, investors must be cognizant that some leveraged market participants may get liquidated and be forced to sell their holdings in gold too.
