Gold Market Cheat Sheet (January 24, 2011)

Gold Market Cheat Sheet (January 24, 2011)

For the week, spot gold closed at $1,359.03 per ounce, down $19.04, or 1.40 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, fell 2.72 percent. The U.S. Trade-Weighted Dollar Index has slid 1.28 percent for the week.

Strengths

• The investment landscape for gold has undergone a significant structural change that has made investing in gold the “go-to” safe haven. A trend that is here to stay, according to HSBC’s Commodities team.
• Gold is currently only 0.3 percent of total financial assets. If it should rise to 0.6 percent, still less than half its 1980s level, then the market would see a massive increase in demand. Many believe gold is on its way to becoming a permanently accepted financial asset for money managers around the world.
• Space International Limited announced that it has begun offering gold and silver to the world’s largest market for vending machines—Japan. These vending machines sell the precious metal in the form of coins and ingots right alongside other consumer products such as food and drinks. The gold will come in weights from one gram to one-quarter of an ounce

Weaknesses

• This week there was consistent pressure on the precious metal complex with gold, silver, platinum and palladium all moving downward.
• Scotia Capital believes much of the decline in prices is coming from the threat of higher interest rates in the U.S. and China based on recent economic numbers. However, gold has historically been a useful hedge against inflation. Therefore, Scotia expects the gold trade to be extremely volatile as expectations for rising rates become more mainstream.
• Chile Mining Minister Laurence Golborne said that all major private mining companies have agreed to a tax hike. Mining companies in Chile, the world's top copper producing country, currently pay a royalty of between 4 and 5 percent on operating profits. The new scheme initially sets the royalty at 4-9 percent on a sliding scale but raises to 5-14 percent starting in 2018. The percentage will depend a mining company pays will depends on that company’s margins.

Opportunities

• Despite its relatively lackluster performance so far this year Sprott Asset Management’s chief investment strategist John Embry believes the gold's price will continue its assault on new highs and hit at least $2,000 during 2010. Embry says strong physical demand and continued quantitative easing will drive prices. Embry noted, “this is now the third year in a row that gold has been leaned on at the beginning of the year and gold shares have done very poorly at the outset only to recover smartly as the year has gone on. I see exactly the same thing unfolding this year - the fundamentals are impeccable."
• BNP Paribas looks for gold to climb each quarter this year, with a forecast of $1,415 per ounce for the first quarter, $1,500 per ounce for the second, $1,515 for the third, and $1,565 per ounce for the fourth. BNP Paribas indicated sovereign risk in Europe should remain a central theme and low interest rates in developed economies should continue favoring zero-yielding assets such as gold.
• Jeff Nichols, a respected gold analyst, recently said “I expect the price will very likely rise to the $1,700 level by year-end 2011. This would be a modest gain of only 19 percent from last year's closing price. And, with the right confluence of events, gold could quite possibly rise to $1,850 or higher by next New Year's Eve. Indeed, I strongly believe gold will surpass $2,000 an ounce in the next few years . . . and I wouldn't be at all surprised to see gold reach $3,000 or higher at the next cyclical peak.”

Threats

• In their January 2011 edition of Metal Matters, ScotiaMocatta is concerned gold prices may be facing a headwind. ScotiaMocatta said “the market's focus is now better U.S. data and while this lasts, it may take the shine off gold.”
• ScotiaMocatta analysts also warned that China's commitment to help the European debt situation could become a bearish factor for gold in the short term.
• David Rosenberg, Chief Economist & Strategist at Gluskin Sheff, notes that policy makers are working behind the scenes to see that state and local governments begin to receive federal bankruptcy protection. How this would play out is not completely clear but for public sector unions and their workers that have massively unfunded pension liabilities, contribution rates and/or taxes could go up by a very significant amount.