Political, economic announcements boost longer term gold outlook
Previously $1240/oz was a key level of resistance for gold, as it slowly becomes a new support level, the price of the yellow metal is likely to continue to trade higher
Posted: Monday , 06 Sep 2010
The US dollar was broadly lower last week. On Friday, the monthly non-farm payroll figures were released and showed a solid expansion of 67,000 jobs in the private job market even though the payrolls number showed a contraction of 54,000. Both figures were better than expectations. In addition, ISM manufacturing index showed unexpected improvement in August to 56.3. Pending home sales also posted strong rise by 5.2% month-on-month in July.
There were numerous important announcements during the week including the emergency meeting held on Monday by the Bank of Japan. The BoJ announced additional easing measures to boost Japan's economic recovery. Then, there was Thursday's announcement by ECB President Trichet to provide unlimited liquidity at least until mid-January 2011. And, of course there were Friday's non-farm payroll figures.
In the meantime, the price of gold remained firm for most of the week and closed up a few dollars as compared with the previous week.
It seems that people are still very skeptical about any market advance, which is not surprising considering the recent data that shows that the US economy is not growing as fast as predicted, and many fear a double dip recession. Even if the economy is able to grow, it might not translate into higher prices for stock index futures. The economy seems to be weaker now than earlier in the year and earnings could disappoint investors.
At the same time yields on government bonds are at record low levels, and we are still in the midst of a global currency crisis. While there are numerous skeptics out there talking about a potential gold bubble let me state once again and as I have in the past, the only bubble out there is going to be in bonds.
Even though only a small percentage of people around the world own gold, it is a global currency. It can be bought and sold 24/7 in almost every country around the world.
While gold demand in China is up 40% this year, gold demand in Vietnam is also set to increase. The government devalued its dong last week in order to boost exports and shore up the nation's trade deficit. Local gold prices jumped to a record 29.95 million dong per tael on Aug. 25, the Thanh Nien newspaper reported recently referring to the unit that is about 1.2 ounces.
"People will switch to gold as a shelter," said Le Xuan Nghia, vice chairman of the National Financial Supervision Commission, which advises Prime Minister Nguyen Tan Dung. "The current situation with the dong will spur people to increase their gold holdings."
"The dong's depreciation, which has been about 5 percent already this year, plus declines in stocks and uncertainty in the property market, will prompt investors to put their money in gold," said Dinh Nho Bang, chairman of Vietnam Gold Traders' Association, which has more than 100 members. "We've seen some economic growth, but it's still not certain enough."
As I have mentioned numerous times in the last few years, the debasement of currencies have been and will remain the main driving force behind the strong gold prices. But there are a slew of reasons why the gold price is poised to move higher over the coming months and years for that matter.
One other reason why the gold price is headed higher is the China story. According to a report published in the official newspaper the China Securities Journal, The Chinese Government holds the largest stockpile of currency reserves at $2.45 trillion, with 65% held in dollars, 26% in euros, 5% in pounds, and 3% in yen. Until now the allocation of China's foreign exchange reserves was considered a state secret. While China also remains the biggest single holder of US Government bonds, recent statements made by the Chinese authorities suggest that any further significant diversification away from dollar assets in the short-term was unlikely. While China cannot dump its holdings in US Treasuries as this will cause a huge drop in the value of their holdings, I believe that China will slowly diversify into other assets, and gold will be one of these. A vice governor of the People's Bank of China, Hu Xiaolian, warned that depreciation was a risk for the foreign exchange reserves held by developing countries.
"Once a reserve currency's value becomes unstable, there will be quite large depreciation risks for assets," she wrote in an article that appeared in the latest issue of China Finance, a central bank magazine. "The outbreak and spread of the global financial crisis has highlighted the inherent deficiencies and systemic risks in the current international currency system," she said. "A diversified international currency system will be more conducive to international economic and financial stability," she added, calling for greater cross-border use of the yuan.
Currently, China's gold holdings amount to only $37 billion, or only 1.5% of its $2.45 trillion foreign exchange reserves. And, as the world's second largest and fastest growing economy liberalizes gold ownership by individuals, the demand for gold from Chinese citizens can only increase.
Another reason why gold prices are going to move higher is investor demand, especially in the gold exchange traded funds (ETF's), bullion bars and bullion coins. Even though holdings in the main ETF (GLD) are down from their all time highs investor demand for gold bars in Europe and China increased substantially this year.
Then, we must also bear in mind that the major gold producers are no longer hedging their production. Barrick Gold, the world's largest producer of the metal, spent almost $5 billion last year to end its hedges against lower prices. This action will tend to take off some of the selling pressure of the gold prices. After all, it is in the interest of these mining companies to obtain the highest possible prices for their gold and the only reason why these companies are no longer hedging is that they believe that prices in the future are going to be higher.
As we have seen in Vietnam, currency devaluations are protected by the yellow metal.
For the last week or so, the price of gold has traded above $1240/oz which was previously a key level of resistance. As it slowly becomes a new support level, the price of the yellow metal will continue to trade higher and I believe that it will make a new historic high very soon.
About the author
David Levenstein is a leading expert on investing in precious metals .He brings over 30 years experience in futures, equities, forex and bullion.
For more information go to: www.lakeshoretrading.co.za
Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.