Weekly Investor Alert - Gold Market

Source:

"For the week, spot gold closed. . .down 1.78%. Gold equities. . .gained 4.60% for the week."

For the week, spot gold closed at $911.30 per ounce, down $16.55 or 1.78%. Gold equities, as measured by the XAU Gold & Silver Index (12) gained 4.60% for the week. The U.S. Trade-Weighted Dollar Index (13) decreased by 0.76%.

Strength
  • Analysts at Goldman Sachs are raising their three-month forecast on gold to $1,000 per troy ounce from a previous $700.
  • Gold has rallied this week due to surging demand for gold in many forms -- physical gold, exchange traded funds (ETFs), and futures contracts - as investors seek a “store of value” amid inflation and sovereign default risks.
  • The holdings of gold in the eight gold ETFs increased by a further 300koz in one day, according to positions on February 2. This represents a new all-time high.
  • The largest ETF backed by bullion increased its gold reserves by 9.4% to a record high as investors sought an alternative investment amid the global recession. Holdings increased by 73.14 tons from 780.23 tons.
  • The Central Bank of Lebanon increased its assets in January after gold and foreign currency reserves increased. Gold holdings rose 13% to 12.8 trillion Lebanese pounds.
  • RBC Capital analysts remain bullish on gold as it should perform well early in 2009 as seasonal demand and investment flows are expected to push the price back up to the mid $900 range. Gold continues to offer investors a safe haven as it moves inversely with the current environment of geopolitical and financial uncertainty.
Weakness
  • Scrap gold sales have increased from the 800 to 900 tonne range to the 1,000 to 1,100 tonne range due in part to the spike in bullion prices.
  • Jewelry demand in many emerging market countries has plunged because of the weakening of the domestic currency and declining tourist levels. For example, in India, which consumes about 22% of the world’s gold supply, gold is trading at an all-time high of 45,000 rupees.
Opportunity
  • Zimbabwe’s central bank will allow gold producers to sell their own bullion after output fell by almost 50% in 2008 due to rising production and energy costs.
  • As global money supply is surging higher, gold output has decreased due to the inability of junior mines to attain credit to fund projects. The shifting relative supply dynamic is contributing to a scarcity value in favor of gold over paper currency.
  • The IMF slashed its 2009 global growth forecast to only 0.5% from a prior forecast of 2.2% last November.
  • The Bank of England continued a campaign of aggressive rate cuts Thursday by cutting its key lending rate by 50 basis points to a record low of 1% as policy makers battle a potentially deep recession.
  • In an effort to neutralize falling demand, the World Gold Council is linking up with retailer Damas to give away 20kg of gold in a retail promotion during the Dubai Shopping Festival, which ends on February 15. Other jewelry shops are offering discounts of up to 50%.
Threat
  • Continued economic contraction in the emerging market economies may lead to a decline in demand for gold jewelry and may have a negative impact on gold prices in the future.

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