GOLD PRICE NEWS - The gold price fell $12 to $1,102 as the stronger U.S. dollar pressured the price of gold. Today’s drop in the gold price has left the yellow metal lower by $16 on the week, but still higher by $20 for February. Although today marked the fourth consecutive trading session of declines for the gold price, the price of gold has remained above the $1,100 per ounce level - a price that has held for two weeks. The continued weakness in the euro currency against the dollar - which today fell 0.63% to 1.3507 - has contributed to the recent sluggishness in the gold price, as the correlation between the euro and the price of gold has remained strong.
In addition to strength in the dollar and broader liquidation on Wall St., a report from Natixis Commodity Markets provided a headwind for the gold price today. The report forecast that the price of gold could average $950 per ounce if the global economic recovery gains further traction, and noted that “Although there remains huge uncertainty concerning the economic and financial markets, we feel the balance of probabilities favors an eventual resolution of economic imbalances, such that investor interest in gold and silver will gradually begin to unwind.”
The Natixis report also projected that supply fundamentals are unlikely to support a gold price above $1,000 per ounce due to increasing gold mine production and the International Monetary Fund’s (IMF) decision to sell 191 metric tons of its gold reserves. Natixis analyst Nic Brown stated that “High prices have massively incentivized additional exploration, and there are a lot of new gold mines coming on stream. We see supply increasing substantially.” On the demand side of the equation, the report cited a weakening of jewelry demand because of the high price of gold.
While Mr. Brown’s report drew the attention of some market participants, he failed to address several key factors while misconstruing others affecting the gold price. With respect to the IMF gold sales, market commentator Steven Saville (speculative-investor.com) noted the minor impact which the remaining 191 metric tons of gold will have on the gold market:
The relative insignificance of the gold sale proposed last week immediately becomes apparent once it is realised that 191 tonnes is less than 0.2% (one fifth of one percent) of the total aboveground gold supply, and that an average of 675 tonnes of physical gold changes hands via the London Bullion Market Association (LBMA) every day. In other words, the total amount of the IMF’s currently-planned sale equates to only a few hours of LBMA trading. This is obviously not something we need to factor into our assessment of the gold market’s prospects, provided that we are concerned with meaningful trends rather than intra-day fluctuations.
Furthermore, as GoldAlert has discussed on several occasions, investment demand - not commercial demand - is the key driver of the gold price. There are approximately 2,500 metric tons of annual gold production relative to an above-ground stock of roughly 130,000 metric tons. As a result, cyclical changes in the commercial supply and demand for gold have a limited impact on the gold price. Instead, the gold price is set by investment demand - which is driven by macro-economic factors such as money supply growth rates, fiscal deficits, the level of real interest rates, and the overall confidence in the integrity of fiat currency.
While the gold price fell for the fourth straight trading day, the price of gold remains up 1.8% for the month in spite of the continued unwind of the U.S. dollar carry-trade. The recent resiliency in the gold price in the face of these headwinds - along with the continued favorable macroeconomic economic backdrop - suggests that the price of gold may be ready to resume its upward climb.
