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Gold Update - August 16 2010

By David Levenstein      Printer Friendly Version Bookmark and Share
Aug 16 2010 11:30AM

Gold remains firm while the major global currencies continue to be volatile

During last week the US dollar staged a strong rebound following the FOMC monetary policy meeting statement in which it did say the U.S. economy's growth track will be more modest than the Fed had expected in recent months. “The pace of economic recovery is likely to be more modest in the near term than had been anticipated,? the Federal Open Market Committee said in a statement after meeting today in Washington. “To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level.? The Fed retained a commitment to keep its benchmark interest rate close to zero for an “extended period.?

The sell off in US equities intensified following a string of disappointing data and the DJI fell 3.3% by the end of the week. After hitting a major support level of 80, the US Dollar Index rallied strongly, possibly due to short covering initiated at this level. Even though the US dollar rose almost 3% on the week, gold prices remained firm. The Japanese yen hit a 15 year high against dollar, following the sharp dive in treasury yields. However, the yen then weakened sharply on intervention talk which triggered yen long positions squaring.

In spite of exceptionally strong GDP data from Germany, the euro lost ground against the US dollar and was weakest currency last week. German Q2 GDP showed spectacular 2.2% growth, way above expectation of 1.3%. This was the strongest number since the reunification two decades ago. However, overall Eurozone Q2 GDP growth was much lower at 1.0%. Greece is still in recession with a -1.5% contraction, while the 0.2% growth in Spain and 0.4% in Italy were only modest. The gap between the fastest and slowest economies’ performance was much larger in the second quarter than in the previous periods. Germany, France, Italy and Spain were all within 0.4% of growth in the first quarter. There were fresh concerns that these imbalances will only intensify on austerity measures in peripheral Eurozone countries.

According to a report by Lloyds Bank, precious metals such as gold were the best performing asset class of the first half of the year  Of the nine asset classes analysed, five – precious metals, UK commercial property, UK bonds, international bonds and cash – delivered a positive return for investors. They rose in value by an average of 9.7%, with gold turning in the best performance thanks to a rise of 13.5%. Four lost money: UK residential property, commodities, UK equities and international equities. International equities were the worst assets to hold over the period, falling by 6.8%.

As I have alluded to several times in the past, the northern hemisphere summer doldrums are normally a weak time for gold, and if history is any guide, we can expect to see higher prices over the next few months. Historically, the gold price has risen in September. This is the time of the year when gold jewelers usually have their best months as they stock up ahead of some major holidays and festivals including Ramadan, India’s wedding season and Diwali one of India’s most important festivals. Then, jewellers stock up in advance of the Christmas shopping season.

In addition to an increase in demand from the jewellery sector, I believe that as the price of gold increases over the coming months, more investors will add gold to their portfolios. But, gold still remains a very small percentage of global financial assets. According to hedge fund Paulson & Co, if you added up all the money invested in gold ETFs, it would total $78.3 billion (at $1,200 gold). The amount of money currently sitting in U.S. money market funds, on the other hand, comes to $2.849 trillion. In other words, all the money invested in gold ETFs represents just 2.7% of what is sitting in cash. There is no need for me to tell you what would happen to the price of the yellow metal if just a small percentage of this money moved into gold.

During the past ten years investment demand for gold has increased 250% and sales of the American Gold Eagle have increased more than 600% since 2007. And, in China, sales of gold bars and coins increased by 40 % in the past six months according to the China National Gold Group Corp., the country's largest state-owned gold producer. And, with the introduction of the new liberalized trading rules recently introduced in China, eventually hundreds of millions of Chinese citizens will have access to gold-linked investment products. China is the world's largest gold producer. The country is expected to increase mine production by 5% this year to 330 tons, again solidifying the nation's position as the world's number one producer.


Gold has now rebounded $60 since its recent low made towards the end of July. In the last week the price consolidated above $1200/oz (red circle), and it looks set to break above the 50 day MA. I believe that the prices will soon test the $1220/oz level.

David Levenstein



David Levenstein is a leading expert on investing in precious metals, with more than 30 years experience.

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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.