Gold Investors Weekly Review – July 4th

In his weekly market review, Frank Holmes of the USFunds.com nicely summarizes for gold investors this week’s strengths, weaknesses, opportunities and threats in the gold market. Gold closed the week at  $1,319.56, up $3.38 per ounce (0.26%). Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 1.82%. This was the gold investors review of past week.

Gold Market Strengths

Bullion exchange-traded funds (ETFs) are gaining momentum as investors flock to take advantage of the metal’s appreciation. Assets in the largest bullion ETF rose 1.4 percent in two consecutive sessions this week, the biggest two-day gain since 2011. In addition, Australia’s Perth Mint gold sales reached their highest level in four months, while U.S. Mint sales rose to 48,500 ounces in June from 35,500 in May.

Gold had back-to-back gains over the last two quarters, a rally not witnessed since 2011. In addition, gold prices have climbed 10 percent this year as physical demand in Asia has remained strong and investment liquidation ceased, contrary to bearish forecasts coming out of Goldman Sachs. Nevertheless, Goldman’s outlook on gold remains negative, despite the fact that escalating violence in Iraq and tension between Ukraine and Russia has boosted demand for a geopolitical hedge.

Gold Market Weaknesses

Shipments into India, the world’s second-biggest gold consumer, dropped 77 percent in the first half of the year, testament to government-enacted restrictions to contain a record current-account deficit, which has both increased costs and deterred buyers. However, on a slightly positive note, the government has announced it is considering a cut to its import duty on gold to 8 percent from 10 percent. Although not as large a cut as expected or hoped for, the direction is certainly positive.

Gold weakened mildly toward the end of the week as positive employment data from government and private sources suggests the economy is gaining speed at a quicker pace than analysts forecasted. Nonfarm payrolls comfortably beat economists’ estimates, showing the economy created 63,000 more jobs that initially expected. In addition, investors sought to square positions ahead of the U.S. long weekend, which may have removed some of the existing support.

Gold Market Opportunities

HSBC Research suggests gold’s recent rise can be largely attributed to the combination of the covering of speculative short positions on the COMEX and an increase in bullion holdings in the ETFs. In its metals outlook, Deutsche Bank agrees that short covering has been a driver, but goes further to say that broad gains may be in the horizon for gold, with bullion climbing to $1,356 and $1,388 as short sellers start to run scared now that gold has found its footing.

As the chart below suggests, gold seasonality is about to pick up and drive a strong second half of the year. According to Raymond James’ analysts, conversations with money managers through the first half of the year suggested the metal will see a period of consolidation, with very few feeling the next leg was materially down, showing their comfort and confidence in holding gold investments. According to the analysts, investors should take increasing comfort that the metal is more or less behaving as forecast with gold’s volatility acting less irrationally. This, together with the strong seasonality expected seasonality, should bode well for a favorable second half of the year for both gold and gold stocks.

Gold-Price-Seasonality-Trends-2001-2013

There is new evidence to support the claim that inflation may be just around the corner, as wage increases have been mounting throughout the U.S. Companies like Gap and IKEA, which increased their minimum wages by 10 percent and 17 percent respectively, are contributing to a bump in rising prices. In addition, through the second quarter, consumer net worth is set to increase by 10.8 percent to $83.5 trillion. Economists argue that consumers do not have to spend much of that new income in order to significantly lift consumer spending. These events should culminate in an increase in inflation, which would put further downward pressure on real rates and keep yield searching investors’ eyes on gold.

Gold Market Threats

The bear case for gold in a nutshell is that strong economic data out of the U.S. in the past month could shorten the remaining time frame of low rates. Goldman Sachs argues that higher U.S. rates have traditionally been inversely correlated with gold as investors move toward interest bearing government securities. Globally, weak performance in emerging markets, combined with increasing current account deficits, could result in cuts to gold imports.

The State Bank of India (SBI) and the Bank of Baroda have suggested that gold in India be monetized. Despite the policy’s stemming from the government’s recognition of the need to make better use of gold in the country, as well as making it more liquid, the move would serve to increase the supply of gold.

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