March 4th, 2010
As interest rates pertaining to the currencies of the world’s largest economic zones have reached almost zero, the status of gold as a refuge when the global economy is in turmoil is beginning to change in the mind of many investors. It is now seen by some as a more risky investment to be considered in the same category as other commodities. Nevertheless there is no broad consensus which is making future price moves harder to predict. Part of the reason is the investment shift away from buying physical gold vs the ever popular number of gold ETFs which are prone to the same level of panic selling that plagues the market seemingly every few weeks.
After breaking through the $1200 level towards the end of 2009 there has been a correction of sorts although the pattern of prices of this precious metal never falling for two consecutive months, that has held true over the last decade, has yet to be broken. Gold has recently bounced back from short term lows to above $1140 per ounce.
Some market fundamentals that are providing support for gold prices include unconfirmed and persistent rumors that the Chinese government is considering buying the remaining 191 tonnes of IMF gold reserves for sale. A large increase in the expected year on year February gold import figures for India also suggest that physical demand will remain strong in 2010. Countering these factors are pessimistic macro economic predictions from many analysts and the continuing strength of the US dollar.
Conflicting motives for buyers of gold only add to the confusion as to the future direction of the spot market. If the global economic outlook improves and the Euro stabilizes then there may be an unwinding of positions taken as a hedge against a possible further deterioration in the world economy as a whole. This downward pressure on the price of gold could be met with buying interest from those who see the gold bullion shortage as a reason for optimism but are staying on the sidelines until a clearer picture emerges regarding the outlook for the US economy and the EU’s possible moves to shore up the weaker countries in the Euro-zone.
As an investment against future inflation the picture is no clearer. If the US and UK governments continue to print money in an effort to stimulate their respective economies then inflation will be expected to rise as a result. However, recent figures from both countries have yet to suggest that this is happening. In fact, hints that China is already tightening its stimulus policies and the surprise hike in interest rates that banks pay for emergency loans in the US could be taken as a sign that inflation figures will remain flat for the foreseeable future. For the past few weeks gold has been trading in a $50 range with buying interest on dips and until a strong breakout occurs in one direction or the other, it is hard to predict a long term trend. The next test will be at $1200 which was tested in December of 2009. If Gold can break through that psychological mark, than a run to $1300 or $1400 has a high likelihood.
Popularity: 40% [?]
February 25th, 2010
Traditionally investors in gold have used this precious metal as a safe haven at times when risk aversion is at its highest and therefore, fears regarding inflation and the security of the US economy have historically driven its price up. Owing to this it has exhibited a strong inverse relationship with movements in the US dollar on foreign exchange markets until recently when, due to several factors, this longstanding relationship has started to turn on its head.
The main reason for this according to analysts is the bleak economic outlook in the EU. Worries concerning the stability of the Euro, as four or five countries in particular look to be in dire need of financial aid, have resulted in a decline in this currency’s value against both the greenback and gold. Greece is causing the most concern with no details of a concrete rescue plan yet to emerge although there had been some vague releases on a potential plan or guarantee of debt about a week ago.
These uncertainties, along with Dubai’s plans to restructure approximately $22 billion dollars of debt if it can reach agreement with its creditors have led to the dollar becoming a more appealing alternative in which to hold assets than other major currencies. At the same time money is still pouring into gold due to the sluggish recovery in the global economy in general. At the heart of the new trend are questions over the long term viability of the Euro itself. Since its inception the resulting Euro-zone bond market benefited the poorer members of the EU as it enabled them to borrow at roughly the same rates as the stronger nations such as Germany. However, since the worldwide financial meltdown intensified during the last quarter of 2008, investors began to demand a higher rate of return from those countries with unhealthy budget and trade deficits.
Instead of the intended convergence of interest rates in the Euro-zone under the umbrella of the Euro then, a situation has arisen where they have diverged by considerable margins as far as government borrowing is concerned. The difference in yields on bonds issued by Germany and those issued by Greece is wider now than it has been since the single European currency was first introduced, although it has narrowed slightly in the last few days as hopes of a bailout rose. This situation has resulted in the Euro losing ground to the tune of almost 5% against the dollar in 2010, whilst the continuing flight into gold has meant that this commodity has increased in value by over 4% in the same period, in Euro terms (as illustrated in the graphic below). The ongoing doubts as to whether or not the EU can put together a package to turn things around is likely to see the continuation of this new trend for the foreseeable future.
Popularity: 40% [?]
February 23rd, 2010
GLD ended last week around $109.50 and ended today just above $109 on light volume. Although the action the last two sessions have been slightly negative, the price action of gold definitely surprised a number of longs last week. Gold held up well to 2 huge and potentially negative news stories last week. The first was the Fed discount rate hike. The discount rate is the interest rate at which banks borrow on loans directly from the Fed. By itself, the incremental move – from .50 percent to .75 percent – is not significant, but it’s regarded as more of a symbolic sign that the Fed is nudging the economy back to business as usual. The knee jerk reaction of investors was that gold should be dumped as the dollar would see a short term rise as the Fed sees economic recovery on the horizon. After a turbulent morning session, gold was able to rebound and essentially remain unchanged. The second test of gold was around the news that the International Monetary Fund was going to unload 191.3 tons of gold to the open market. “In accordance with the priority of avoiding disruption of the gold market, the on-market sales will be conducted in a phased manner over time,” the IMF said last Wednesday in a statement. Gold futures prices dropped to $1,098.10 an ounce in afterhours trading following the release, But as the market digested the news, the metal has recouped losses during Thursday session.
This week has been relatively quiet on news and gold has traded sideways and slightly down through Monday. In looking at the GLD ETF chart above, there is support at the 50 day Moving Average at 108.58 as well as at the Bollinger Band Midpoint at 107.27. We expect that GLD will hold its ground this week and test the Upper Bollinger Band at just under $111.00 as it marches back towards its December 09 high.
Popularity: 12% [?]
