Gold Market Gold Market
For the week, spot gold closed at $800.40 per ounce up $58.30 or 7.86 percent. Gold equities, as measured by the XAU Gold & Silver Index (11) rose 10.72 percent for the week. The U.S. Trade-Weighted Dollar Index (12) was also strong, gaining 2.11 percent.
Strength
- Gold prices surged on Friday as Don Coxe, a highly respected portfolio strategist at BMO Financial Group, noted when Roosevelt came into office during the Great Depression, he upped the value of gold from $20 an ounce to $35 an ounce. Mr. Coxe suggested that President-elect Obama should consider such a policy action. Gold, which is currently valued on the government’s balance sheet at $40 an ounce, could be marked up to $1,000 an ounce. This would put about a $250 billion on the government’s stressed balance sheet.
- Gold demand rebounded sharply in the third quarter. According to the World Gold Council, gold demand totaled 1133.4 metric tonnes during the quarter, up 170.1 metric tonnes or 18 percent from a year earlier. Additionally consumers spent $6.5 billion on 232 metric tonnes of gold coins and bars in the third quarter, an increase of 121 percent over the same time last year. Net retail investments of gold bars and coins hit 444 metric tonnes in the first nine months of the year, already ten percent higher than demand for all of 2007.
- Reduction in central bank selling of gold was the largest contributor to a ten percent decline in world gold supply from a year earlier. Official sector sales were at their lowest levels since 1999.
Weakness
- Despite strong retail demand for gold bars and coins, institutional sales offset their increase. Institutional outflows totaled 300 metric tonnes in the third quarter amid a scramble for cash.
- Third quarter hedge fund sales for funds with holdings up to $10 billion showed “fund after fund” all but eliminated equity positions in gold by 90 percent of more. It has been this forced liquidation fueling the dollar and hammering commodity stocks.
- We had several highly respected gold mining companies tap the equity market this week for combined proceeds of roughly $310 million. Our worry is that there will be a wall of equity issuers coming to the market to raise money.
Opportunity
- BCA Research notes in their latest report that gold is a “liquidity play, not a safe haven.” They cite the long-term outlook for liquidity, investor demand, light selling by central banks, higher emerging market income and slow mining response to gold’s uptrend as reasons gold will hit new highs in 2009.
- China’s central bank is now considering last week’s recommendation by the China Gold Association to increase its gold reserve. The bank may seek to boost its holdings by 4,000 metric tonnes from its current 600 metric tonne position.
- Wall Street analysts say that mining supply will be “tighter than ever” as a result of the financial crisis. Mining companies are expected to either delay or cancel up to $50 billion in development projects next year as access to capital is limited and metal prices fall.
Threat
- Despite BCA’s long-term bullish view of gold, they anticipate gold to test a range of $600-to-$650 per ounce in the next two or three months.
- They note that gold is stronger than anticipated based on global currency exchange rates and it is still outperforming other commodities.
- The Italian parliament is considering a plan to boost its economy through the sale of some of its gold reserves. It currently holds about 44 billion euro worth of gold.