Gold Extends 3-week Gain
Gold erased early losses to end the week of July 26 higher. This extends gold’s gain to 3-weeks. The appetite for gold and silver coins is at historically high levels. Some dealers call it a buying frenzy. The reason? There is a growing divergence between the paper (futures, etfs, etc.) gold market and the actual market for physical gold. Nevertheless, pundits abound as some of the major investment banks continue to label the rally short covering, basically calling it a fluke. They seem not to realize that every bull market undergoes periodic corrections. Corrections are healthy and occur when markets over extend themselves either to the upside or downside. It’s not a straight line. The bull bucks and weaves and tries to throw riders off so only the strongest hands stay in for the long haul. As I stated last week in the Gold Journal, I’m not a short term timer. Volatility is apparent at the onset of any bull run. Those continually trying to gauge just when a turn-around happens will face a bumpy ride with extended troughs.
Overall, it’s difficult to get carried away at the moment even with a 3-week run, but recovering $1,300 on the upside was a milestone. Prices posted a combined 9 percent rise over the last 3 weeks. In the prior two weeks, $1,300 was tested twice before swiftly and comfortably breaking through.
Contributing to the gain was a dollar under pressure. A weaker dollar makes dollar-priced gold less expensive for holders of other currencies. Rising unemployment in the EU and sub-par growth in both Great Britain and the EU means that borrowing costs will remain extraordinarily low as long as inflation is not a threat. Pending home sales in the US slipped in June causing concern that a main driver of the US economy is faltering. If US Gross Domestic Product and the non-farms payroll reports later this week indicate weakness, low interest rate could continue to sustain a rally in gold and even be the impetus for a movement away from equities into gold.
So why do so many analysts at Bank of Montreal, Citibank and Goldman Saks continue to have a sour outlook on gold? Three weeks ago there were projections of $1,200, $1,100 even $1,000 for an ounce of gold. They feel the European and U.S. problems will abate, and China will resume greater upward momentum in GDP. I think not. It is to be seen how China will navigate through its economic slowdown. In Europe, bank investors and depositors will take on greater responsibilities in the event of a bank failure before governments step in with taxpayer money. This could lead to a Cyprus style situation and depositors may want gold as a hedge against failure and as a store of value. The world financial system may be healing slowly but bad signs like the aforementioned abound so we’ll watch as the economic signs unfold for guidance this week. I think the global economies are weaker than government statistics reveal which will prolong stimulus and possibly herald inflation.
Regardless of the reasons, individuals, industry and central banks snapped up gold in June and July. Demand for gold and silver Eagle coins in the U.S. are at extraordinary levels. "Demand right now is unprecedented. We are buying all the coin (blanks) they can make," Richard Peterson, U.S. Mint's acting director, said in an interview inside the Mint's production facility in West Point, New York, referring to the Mint's suppliers. Central banks boosted their holdings in June, too. Gold buyers included Russia, Ukraine, and Greece. Continued central bank bargain hunting should help support prices after its steep fall, too.
Recently India, the world’s largest gold consumer and a huge potential driver of price, imposed an import tax of 8% on gold to defend the declining rupee, but that has only encouraged smuggling. “We have always maintained that there is a very innate demand for gold in India,” Said P.S. Somasunderam, managing director of the World Gold Council’s India office. “Trying to manage this demand, which is so diversified, by restricting supply will lead to undesirable consequences (smuggling.)”
Other factors which could contribute to rising gold values are decreasing stock values, towering debts of companies and governments and Japan’s easy money policies to stimulate both growth and inflation. On the fundamental side, as mentioned last week, large speculators and hedge funds increased their bets to the long side.
Whereas $1,300 was resistance a few weeks ago, now it is support and could be tested over the summer doldrums during August when many large players are on holiday. A successful test of $1,300 would put gold on track for still higher prices. I expect currency wars, declining stock markets and an assault on the dollar to heat up during the fall as the U.S. economy falters further, the European bank situation deteriorates and China tests measures to stimulate the economy.
Reference: www.kitco.com
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