GOLD PRICE NEWS - The gold price advanced, oscillating near $1,260 per ounce, as news over the weekend that the People’s Bank of China will allow its currency to strengthen sparked a broad-based move higher in stocks and commodities. The price of gold set another all-time high, hitting $1,265 per ounce in early morning trading before settling back under $1,260.
Gold and commodities such as oil and copper are denominated in U.S. dollars, hence a weaker dollar makes it cheaper for foreigners to purchase gold - lending support to higher gold prices. The massive Chinese consumer market, which is still being developed, represents a huge potential source of investment demand for the gold market. An additional catalyst for higher gold prices Monday morning was a report from the World Gold Council that Saudi Arabia increased its gold holdings by 125% to 322.9 tons over the past two years. As central banks have turned from sellers to buyers, the gold price has gone on to set new record highs.
In what is being viewed as a vote of confidence in the global economy, The People’s Bank of China signaled its currency peg will end. The yuan advanced 0.43% to 6.8 against the U.S. dollar, the largest gain since 2005. U.S. politicians have been increasingly vocal in their criticism of China’s weak yuan policy, particularly congressmen from manufacturing states that rely on exports. A stronger yuan should help contain inflationary pressures and is a signal to the world that Chinese policy makers are confident in the growth of their domestic economy.
Stock markets across the globe surged Monday morning and risk appetites expanded as investors’ worries that a trade war with China was imminent were allayed. Emerging market stocks soared on the news, rising for the tenth consecutive day as measured by the MSCI Emerging Markets Index. In addition to the appreciating gold price, copper and crude oil both gained, rising 4.7% and 2.0%, respectively. The currencies of the leading commodity producers, such as Australia, appreciated while the U.S. dollar traded relatively flat versus the euro.
In light of the news emanating out of China, Jefferies metals and mining analyst Michael Dudas, reiterated the firm’s $1,300 2010 price target on the gold price and a $20 price target on the silver price. The veteran analyst, in a note to clients, commented that “We would expect gold and silver prices will continue to reflect prospects for additional investment from developing nation economies, like China, as well as their central banks.” The report went on to state that “We would expect support for dollar-based commodities such as gold, silver and base metals“ and “We would continue to add to positions in our recommended names -ABX, AEM, CDE, HL, and NEM.”
Gold mining stocks posted a strong performance last week, rising 6.4% as measured by the Market Vectors Gold Miners ETF (GDX). Newmont Mining (NEM) surged to a new 52-week high amid analyst expectations for greater margin expansion due to the outperformance of the gold price relative to the rest of the input costs into mining. Investors have preferred the direct exposure to the gold price via gold bullion ETfs, evident by the decline in gold stocks’ valuations relative to the gold price. The SPDR Gold Trust (GLD) now holds over 42 million ounces of gold, valued at $52.8 billion using the current spot price.
There remains a healthy degree of skepticism toward the rally in the gold price and particularly toward the prospects for the gold mining producers. The GDX has still not traded to a new 52-week high despite the breakout in the gold price, and put buyers continue to surface - betting on lower gold stock prices. On Friday, an investor bought 10,000 September 44 GDX puts for $0.87. Sentiment surveys on the gold price are subdued, with the Market Vane bullish consensus on the gold price sitting at 74% - well below the near 90% readings that sparked severe corrections in the past. Mark Hulbert’s, Hulbert Gold Newsletter Sentiment Index, which measured recommended market exposure by gold timers currently stands at 30.6% - versus a 60.9% reading in January of this year.
