Overnight gold buying was a bit more robust this time around, as overseas players were encouraged by the metal's ability to return to the above-$900 level on Wednesday. Resistance now looms at the range from $920 to $950 and
at least the first barrier could be assaulted later in the session. Pre-weekend book-squaring could come into the picture by the afternoon, and into tomorrow. Sporadic long liquidation remains a possibility, as is an eventual dip to the mid-$800s before a fresh march towards the four figure milepost is attempted once again.
New York spot bullion opened with a gain of $7.30 this morning, and was quoted at $915.00 per ounce. Players are eyeing a lower opening in stocks, and tallies of overseas troubles continue. The US dollar edged back towards 88 on the index, and crude recovered some of yesterday's large losses, rising to $43.20 per barrel. Volatility could be on the rise as we approach the weekend hiatus. Maintenance of the $900 continues to be a desirable goal for today as well.
Silver climbed a nickel at the open, quoted at $12.82 per ounce. Platinum dropped $2 to $1049 and palladium remained as static as the new cars in your average dealership's showroom. While Ford's maneuvering and cash/credit situation gave rise to some hopes yesterday, BMW's run into a brick wall on news it lost nearly $1 billion in Q4 dashed hopes of an imminent automotive sector rebound.
European (and Asia) equities fell following news that German industrial production plunged, Spanish inflation turned into major disinflation, and Japan's economy contracted at the highest rate since 1974. If there were a market in courtroom stocks and litigation futures, it would be doing very well indeed. Mr. Madoff is packing them in Manhattan while refusing to admit to conspiracy and thus drag his aides into the Big House, Sir (!) Allen Stanford invokes the Fifth - in essence saying Good Luck to investigators, and someone at Merrill will need to drink a fifth, now that the firm's misleading the US Congress on bonuses has come to light. Ah, to be an attorney today!
Now that practically every publication has been featuring shiny gold bars on the cover, a few words of advice from Interactive Investor International's Ceri Jones , over in the UK:
The price of gold broke through the magic $1,000 an ounce barrier at the end of February, and although it fell back this week to $890 after investors took profits, the world and his dog are advocating that gold prices will continue to rise over the long-term.
One big driver of demand is gold's perceived value as a hedge against inflation at a time when money supply in the western world is soaring and threatens to shrink the value of currencies in circulation. Last week's move by the Bank of England will amount to Â£75 billion of easing in the next few months, part of Â£150 billion sanctioned by the Chancellor, which is equal to some 10% of UK GDP. The US has doubled its money supply in the last seven years, and in Europe it is at a 30-year high.
The other big driver is that new sources of gold are genuinely scarce. The leading gold mining nation, South Africa, has halved its annual output since 1998. The days of finding marble-sized nuggets in California are long gone, with most of the world's remaining gold existing only as traces in difficult regions.
Gold bulls therefore have a lot to support their argument that metal's price will continue to rise - as well as circumstantial evidence such as record withdrawals from banks, runs on supplies of gold coins, record volumes of trade in exchange traded funds and the sheer tangibility of the metal at a time when banking products can seem opaque.
There are two huge flaws in the bull arguments, however. The first is the contention that growth in demand will continue to come from jewellery sales in emerging markets.
Jewellery still accounts for two thirds of all gold demand, with India the world's largest consumer, devouring about one fifth of the world's supply, twice as much as China and the US. It is central to the 10 million weddings that take place in India every year, mostly in April and May, as part of the transactions that take place between families, and this accounts for the regular, annual pattern of price rises early in the year before falling back later in the summer.
This year, however, Indian imports have ground to a standstill. Figures from the Bombay Bullion Association figures reveal that gold imports to India dropped to 1.8 tons in January 2009 against the 18 tons in the same period last year, and fell back to almost zilch in February. Overall, demand for jewellery plummeted by 17% between the third and fourth quarters of 2008, according to the World Gold Council, and this trend will likely intensify in the coming months as the recession deepens.
The reality is that the combination of high prices and the effects of the credit crunch encourages people to sell precious items they already own, and in many cultures have put aside explicitly as a store of wealth. Less significantly, there are also the beginnings of a trend for Asian upper classes and younger people to switch to diamonds and platinum.
The second flaw in the bull argument is that demand will continue to be driven by investors seeking a safe haven asset. This is not the all-important factor commonly thought, as ten times more of the gold mined is used for jewellery than is hoarded in bars or exchange traded funds.
Demand for gold as an alternative safe investment has anyway probably passed its peak. Fear that the US Government will nationalise some of its largest banks is now receding, and this has manifest itself for example in a slowdown into gold exchange traded funds. The big New York-listed SPDR Gold Trust (GLD) remained static for a fifth consecutive session last week.
The predicament of rival safe havens, notably the Swiss franc and the yen, also conspired to push gold up recently. These currencies traditionally benefit from low interest rates, but as rates have been slashed around the globe, they compare less well with the precious metal.
Aggressive interest rate cuts around the world have weighed on these currencies, and cut the opportunity cost of purchasing and holding gold, says Fredrik Nerbrand, Head of Global Strategy at HSBC Private Bank. Also, as Japan and Switzerland have economies that rely heavily on their banking systems, it seems that their defensive qualities appear diminished during this financial crisis where banks have come under pressure, as opposed to an international political crisis, for example.
One of the oddities of the lust for gold is the mistaken belief that it is relatively stable. In fact, it has a similar level of volatility as equities - a 30-day volatility of 20.6% compared with 30% for equities, according to Nerbrand's analysis of the MSCI World Index.
By and large, investors have been waiting for President Obama's financial reforms to deal with the crippled economy, parking money in gold simply until they direct it back into equity markets. The super-wealthy sheikhs and hedge funds will be first to identify better ways of using their cash. The price could then drop dramatically, just as last year oil collapsed from $147 a barrel in July to $40 in November.
Arguably, too, while the fiscal stimuli may be prompting fears of inflation, concern should be focused on deflation, which will drag gold down. Workers everywhere are accepting reduced working hours and even reduced wages to make firms competitive and ward off redundancies as unemployment rises. Several forward swap markets show expectations of deflation, while Fed Chairman Ben Bernanke last week told the Senate that a fall in consumer and producer prices is expected to last a few years.
All this, of course, assumes that the markets and the financial system will recover in the next few years. If that takes decades, then the price may fall back this year, only to resume a long-term upward trend.
Meanwhile, the next few weeks will be well worth watching. The Hindu festival of Akshaya Tritiya is considered the most auspicious day to buy gold in the Hindu calendar. Anticipation of this day usually nudges up the price, and this year the festival falls on 27 April.
To the above, we would add the emerging trend towards the end of de-hedging (a phenomenon which has helped gold notch large gains in recent years). While the current year might not witness much fresh net hedging, the risk of mining firms switching trains and going in the opposite direction is larger than before and could be but a matter of time. Not far behind, the idea that gold mining shares might just end up doing better than the metal itself in 2009. Now there is something novel for mining co. executives to be touting, the next time they get in front of a mike. Their own shares!
That said, there is more reason than in three decades for astute individuals who have not yet done so, to purchase the financial insurance policy that gold can constitute. Forget where prices have been, where they are, or where they might go. Do the math and ensure that your ten percent solution for the health of your financial life is in place. Do not hope for cashing in on life insurance - it is usually an undesirable payout for the insured. Now, go out and enjoy the imminent arrival of spring. Who knows what might bloom?