February 9th, 2010.
Gold Price ((( Surges ))) ....... to $1,075
The gold price rallied $14.00 to $1,077.50 as traders and investors increased exposure to the price of gold amidst short covering in euro positions.
The precipitous decline in the euro versus the U.S. dollar has led a dramatic liquidation over the past ten weeks in securities tied to the gold price - including gold futures, gold ETFs, and gold stocks. Adding to the selling pressure has been speculation that the reflation trade will cease to be profitable going forward and the nine-year gold bull market is over.
At the World Economic Forum two weeks ago, George Soros dubbed gold “the ultimate asset bubble.” Some commentators insist that the most recent rise in the gold price, beginning in late 2008, has been driven primarily by the single factor that has caused nearly all other assets to rise during this time: the weakening U.S. dollar. Indeed, the dollar’s renewed strength over the last 60 days has coincided with the decline in the gold price from its all-time high of $1,226.50 per ounce in early December to $1,062.54 yesterday.
This camp sees the gold price falling back below the psychologically important $1,000 level - where it resided prior to the September 2008 crisis. Gold bears argue that the dollar-carry trade has kept all assets afloat and as this burns out, the gold price will suffer alongside other investment classes. Robert Prechter is the most notable proponent of this thesis and the Elliot Wave theorist projects the resumption of the equity bear market and a severe decline in the gold price in coming quarters.
As reported yesterday in TheStreet.com, Citigroup analyst Alan Heap sees the gold price falling as low as $820 per ounce by 2014, and down to $700 longer-term. Heap bases his call on the threat to the gold price posed by the looming unwinding of long positions in paper markets. “Positions held by money managers and broader non-commercial positions have fallen since November 2009 when the USD strengthened. Non-commercial net long positions are at 5x the average levels seen over the last 17 years.” The report also notes that pent-up demand from China in the form of central bank reserve purchases and consumer demand drove the gold price in 2009, two sources of demand that Heap assumes will not be recurring going forward.
GoldeAlert has repeatedly discussed the pitfalls of applying standard supply and demand theory to the gold price in these pages - suffice it to say that the gold price depends on the investment demand for the yellow metal, and not the commercial demand for it. As for China’s reserve purchases in 2009, the country’s doubling of its gold holdings took place over a number of years, hence was not a key driver of gold prices. Furthermore, China, as well as other emerging economies, will likely to continue to be an incremental buyer of gold in order to diversify its massive U.S. dollar holdings.
Last week, the World Gold Council released a statement which frames an opposite view of that held by Heap. A structural shift in central bank reserve management by both eastern and western central banks, and an increase and geographic diversification in investment demand “continue to provide support to the gold price.”
Though continued non-commercial position liquidation may further drive the gold price down, the macroeconomic factors which have given rise to the gold price bull market continue to coalesce and emerge. While some analysts have confined their commentary to the gold price surge of the past 15 months, they dismiss the fundamentals that have underpinned the gold bull market that has been underway since 2001. Enormous deficits and easy credit are not recent phenomena, although both have been elevated to gargantuan proportions in the past year. Rather it is in the context of a decade of rising deficits and easy monetary policy that the gold price bull market must be evaluated.
The gold price could rise to $US1,350 per ounce this year, Newmont Mining Corporation President Richard O'Brien says.
"We will see continued support for the gold price," Mr O'Brien told media at the official opening of the company's huge Boddington gold mine, 130 kilometres south-east of Perth.
"Gold is a safe currency.
"No country can dilute the value of gold."
The $3 billion Boddington gold mine is set to surpass Kalgoorlie's famous Super Pit as the nation's largest gold mine.
The gold price in Sydney on Tuesday closed at $US1102.85 per fine ounce.
© 2010 AAP