The following lightly edited and expanded note from gold specialist Jeff Nichols was first sent to clients of Rosland Capital, for which he is Senior Economic Advisor. Author: Jeff Nichols Posted: Wednesday , 25 Nov 2009
NEW YORK -
Gold ended last week in New York on a powerful note - rising even in the face of a stronger U.S. dollar. Continuing its upward tear Monday, gold registered yet another historic high near $1,175 ( and has continued to rise since then). So far this year, the yellow metal is up over 32 percent.
Looking back over the past few weeks, it is apparent that the tipping point for gold was news that India's central bank had acquired 200 tonnes of IMF gold. Subsequent announcements from two small central banks (Sri Lanka and Mauritius), from a several well-respected hedge fund managers, and news from Russia's central bank (of its latest official purchases) has reinforced bullish sentiment and attracted growing private-sector interest. Today further strength was seen on speculation that India may be bidding for the remainder of the IMF gold on offer.
Here are more details and other timely Talking Points:
Importantly to chartists, gold moved higher on Friday and Monday morning, defying a rebound in the U.S. dollar - and registering gains against the euro, British pound, Japanese yen, Chinese yuan and many other currencies. When gold moves up, not just against the dollar, but also vis-a-vis other currencies, it is often viewed as an important technical signal, confirming the bullish trend and encouraging traders and speculators to increase their long positions.
Not surprisingly, but still very important in understanding the latest gold-price action and likely direction in the month's ahead, Russia's central bank has revealed gold purchases of 15.6 tonnes (about half a million ounces) in October. This brings its total official central bank gold holdings to 606.5 tonnes - about 4.7 percent of total reserves. In the past, Russian officials have said the central bank should hold 10 percent of its official reserves in gold - so we will likely see continued buying by their central bank.
The IMF still has some 200 tonnes on offer - and this is likely to be taken up by central banks - see note on India above. New announcements of official gold purchases by one or another central bank in the weeks and months ahead are therefore quite likely. Any such announcement will promote additional private-sector gold demand and add support to the continuing rise in the metal's price.
Rising geopolitical tensions triggered by Iran's nuclear ambitions and this past week's Iranian military maneuvers are also lending support to gold. Thirty years ago, the Iranian hostage crisis contributed to gold's historic run-up to $875 an ounce in January 1980 - and some traders think the worsening crisis in Iranian relations with the West could trigger another surge in safe-haven demand for the metal.
This weekend's statements from St. Louis Fed president James Bullard (that he favored continuing Fed purchases of mortgaged-back securities beyond its current March expiration date) and Chicago Fed President Charles Evans (that the Fed funds interest rate could remain near zero until late 2010 because the job market is so weak) were just the latest indicators from the Fed that extraordinary monetary stimulus and low interest rates will remain unchanged for some time to come. News of this sort simply heightens long-term inflation fears among some investors and provides continuing support for gold as a hedge against inflation and currency depreciation.
U.S. domestic political discord is also becoming increasingly favorable toward gold. This past week, some leading members of the House and Senate called for the resignations of Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner. Whatever one may think of their policies, an increasing politicization of U.S. monetary and fiscal policy would tilt the bias even further toward easy money, bigger Federal deficits, more price inflation and a weaker U.S. currency down the road.
• There's been a lot of talk lately about "asset bubbles" and the "carry trade." Professional traders and fund managers are borrowing U.S. dollars at very low interest rates in order to invest in what they expect to be higher yielding equity, real estate, and commodity markets around the world. This inflation in some asset markets so far above their fundamental values is complicating economic policy in many countries around the world. History suggests that buying mania - whether Dutch tulips, U.S. equities, or Hong Kong real estate - inevitably ends, leaving much economic carnage in its wake.
Although this "carry trade" is surely benefitting precious metals along with other markets, the surging gold price is anything but a bubble. It's built on the same fundamental factors that have supported a rising gold price in the past - easy money, low real interest rates, unbridled growth in Federal debt, diminishing faith in the U.S. dollar, rising geopolitical tensions, and global economic policy discord. And, ultimately, when the bubbles do burst, gold will benefit still more as investors seek a safe haven from turmoil in other markets.
Jeffrey Nichols is Senior Economic Advisor to Rosland Capital and Managing Director of American Precious Metals Advisors
TAM Price at posting:
5.2¢ Sentiment: Hold Disclosure: Held
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