GOLD PRICE NEWS - The gold price opened Monday morning down $6.50 to $1,187.60 per ounce. After sliding 1.5% last week and 6% over the past three weeks, the gold price remains in the midst of a lengthy consolidation. While the price of gold is $78 off its record high of $1,265 posted one month ago, the yellow metal is still higher by 8.5% thus far in 2010. Despite the recent correction in the gold price, it remains one of the few asset classes outside of U.S. Treasury bonds to post gains over the course of this tumultuous year.
Gold producers were set to move lower Monday morning in tandem with weaker gold prices. Gold mining companies have woefully underperformed the gold price this year, evidenced by the performance of the Philadelphia Gold and Silver Index (XAU), which is off 0.51% in 2010. With a second quarter gold price that averaged $1,200 per ounce, the gold miners should post stellar second quarter earnings, which are set to be released over the next few weeks.
Contributing to pressure on the gold price, as well as the shares of gold producers, were rumors last week swirling around the magnitude of redemption requests facing hedge fund magnate John Paulson’s investment vehicles. Paulson and Co. owns 31.5 million shares of the SPDR Gold Trust (GLD), valued at $3.67 billion. In addition to his holdings in GLD, which acts as proxy for the gold price, Paulson holds a number of gold mining companies, including Anglogold (AU), Kinross Gold (KGC), and Novagold (NG). There is speculation that up to one-third of Paulson’s roughly $30 billion in assets are invested in gold-related investments.
The gold price has declined four straight weeks, falling as worries over deflation sweep through the global markets. Nowhere is this deflation scare more evident than the yield on two-year Treasury notes, which has fallen to an all-time record low of 0.57%. The Consumer Price index (CPI), released last week, has declined for three consecutive months. The CPI has not dropped four straight months since the Great Depression era of the 1930s. Unemployment remains stubbornly high, retail sales fell once again in June, and consumer confidence is near its nadir. Many investors and traders have used these deflationary headwinds as an excuse to liquidate both gold and investments tied to the gold price.
It is against this backdrop that Chairman Bernanke will report to Congress his semi-annual update on the economy - formerly known as the Humphrey-Hawkins testimony. At the most recent Federal Open Market Committee, the Fed downgraded its assessment of the economy and reiterated its commitment to keep interest rates at “exceptionally low levels for an extended period of time.”
The deflation threat may become more intense, potentially leading to further pressure on stocks, commodities, and the gold price. However, the resolve is strong of policy makers to fight the beast that ravaged the U.S. in the 1930s and Japan for the last two decades. Jim Grant, editor of Grant’s Interest Rate Observer, told Bloomberg TV last week, “I think the first order of business will be to try once more to print enough dollars to make something happen in the U.S. economy.” The macro-economic backdrop currently in place will lead to more aggressive monetary policy initiatives from central bankers, actions that will likely further degrade the U.S. dollar and ultimately lead to new record highs in the gold price.
