Gold Investors Weekly Review – October 31st

In his weekly market review, Frank Holmes of the USFunds.com summarizes this week’s strengths, weaknesses, opportunities and threats in the gold market for gold investors. Gold closed the week at $1,171.09 down $59.81 per ounce (-4.86%). Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 14.67%. The U.S. Trade-Weighted Dollar Index rebounded 1.31% for the week.

Gold Market Strengths

Although gold premiums had fallen to below $10 per ounce earlier this week in India, they rallied on Wednesday to reach roughly $15 per ounce. The initial decline was due to the winding down of the Diwali holiday. However, the premium spiked up after rumors emerged that the Reserve Bank of India or the Ministry of Finance might impose more restrictions on gold imports.

Despite declining gold prices, demand for the precious metal remains strong. In September, Chinese gold imports from Hong Kong rose to the highest level in five months as retailers increased purchases before the holiday season. In the United States, gold coin sales are heading for their first back-to-back monthly increase since January. Volume rose to 58,000 ounces as we entered the last week of the month, compared to 50,000 ounces in September.

A number of gold companies reported misses on production this week.

Gold Market Weaknesses

Investors should remember that U.S. elections are next week and the current administration is putting the best face possible on what has been an anemic recovery.  Even Alan Greenspan noted this week that QE has failed to right the economy, but did lift asset prices.   For example, while the Fed desperately sought to stimulate the housing sector, the homeownership rate in the third quarter came in at 64.4 percent, the lowest level since 1995.  Furthermore, while QE has been halted, the Fed will continue to reinvest the principal payments from mortgage-backed bonds and roll over any maturing Treasury securities from its $4.5 trillion portfolio. We are living in a world of unrepayable debt, money printing, and governments buying equities to create a wealth effect – yet life goes on without a worry.

This week we saw gold markets wildly affected by central bank policy makers across the world. In the United States, a more hawkish tone from the Federal Reserve, combined with the official announcement of the end of Quantitative Easing (QE), pushed gold prices down. On Friday, the Bank of Japan surprised investors with a substantial expansion in its asset purchases and a commitment to double its purchases of equities, making the central bank the single biggest holder of Japanese equities.  These two events, combined with stronger-than-expected, third-quarter GDP data from the U.S., caused a selloff in gold and gold stocks this week.

As a consequence of this week’s announcement from the Federal Reserve, gold traders turned bearish for the first time in six weeks. A Bloomberg survey revealed nine bearish forecasts from analysts, compared to only five bullish.

XAU_Gold_Miners_1987_2014

 

Gold Market Opportunities

Civilian wages and salaries appear to be on the rise, which is a powerful source of inflation. Higher wages, which lead to higher incomes, fuel higher demand and pull up prices. The long-awaited arrival of strong inflationary pressures in the United States appears to be on the horizon.

Wages_US_1986_2014

Related to the above point on U.S. GDP growth, the third quarter yielded stronger-than-expected results due to a substantial increase in government spending. As it turns out, 0.83 percent of the GDP gain was attributed to government spending, primarily defense spending. JP Morgan, in response to this data, reduced its forecast for fourth-quarter GDP growth from 3.0 percent to 2.5 percent, explaining that this type of increase is usually associated with payback the following quarter.

Alan Greenspan has come out with interesting points on the current global economic environment. The former Federal Reserve Chairman referred to QE as a pile of tinder that hasn’t been lit. Furthermore, due to the global turmoil, Greenspan stated that gold is a good place to invest money due to its value as a currency outside of government policy. In fact, he argues that gold is the premier currency, more so than the dollar.

 

Gold Market Threats

Depressed oil prices are contributing to the deflationary environment. Without any catalyst to boost oil prices, gold will continue to face the headwinds from global deflation.

 

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