Gold Market Radar (September 10, 2012)
For the week, spot gold closed at $1735.65, up $43.64 per ounce, or 2.58 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 5.16 percent. The U.S. Trade-Weighted Dollar Index lost 1.29 percent for the week.
Strengths
- Gold surged on Friday to close at $1,735.65âup 2.58 percent for the weekâprimarily on the heels of a poor jobs report and the accompanying expectation of quantitative easing and the debasement of the U.S. dollar. Technically, gold extended its recent rally above the 200-day moving average, and is now within striking distance of its February highs. The dollar, on the other hand, plummeted below its 200-day moving average on Friday. If the price action is allowed to speak for itself, the question is not whether there will be QE, but when.
- Significantly, a number of analysts raised their year-end forecasts for gold prices. A quick survey: J.P.MorganChase called for gold to close the year at $1,800; Goldman Sachs said $1,840; Bank of America Merrill Lynch suggested $2,000 in the event of QE, and one Citigroup analyst called for gold to reach $2,500 by the end of the first quarter 2013, and even higher in the event of geopolitical conflict.
- The fall seasonality trade looks to be in full swing. This historically strong period of the year for gold prices is supported by a weakening dollar, a strengthening euro, and seasonally strong demand.
Weaknesses
- AuRico Gold decreased its production guidance substantially at its Ocampo project: 2012 guidance was essentially halved, 2013 guidance cut by 25 percent, and the stock finished down for the holiday-shortened week, off about 14 percent.
- Continued strikes in South Africa are problematic. While the unions were said to be close to a deal this week, sending troubled Lonmin up midweek, the deals fell through, and strikes are ongoing with very few workers returning to work.
Opportunities
- Global accommodative monetary policies remain very much in play. The Fed meeting next weekâon the heels of a poor jobs reportâoffers the possibility for further easing and may be an additional catalyst for gold prices.
- Gold, as priced in euros, is rapidly approaching its all-time highs.
- We mentioned last week that the dollarâs 200-day moving average might be defended from a technical standpoint. A decisive break below that average, as occurred on Friday, likely signals further weakness in the dollar to come and possible gains in gold.
Threats
- Indiaâthe worldâs largest importer of goldâmay raise the import duty on gold for the third time this year, potentially curtailing some Indian demand. Bloomberg reported that, âThe government may look at increasing the duty to 7.5 percent,â according to the president of the Bombay Bullion Association. The time frame on this potential policy change remains unclear at this point.
- There remains the risk that an inflation premium is cooked into the gold price, which, in the event of no quantitative easing, would cause prices to react negatively. The Fedâs next meeting is September 12-13.
- A rapid move upward in gold and gold equities which does not successfully trigger meaningful short-covering might invite resistance, or additional short positions. The ultimate identifiable catalyst for short-covering remains government policy a la quantitative easing in the near term.
