GOLD PRICE NEWS - The gold price dropped $5.70 to $1,205 per ounce Monday morning as the U.S. dollar strengthened. The price of gold continues to hover near the $1,200 level as gold price bulls and bears battle over whether the breakout will be to the upside or the downside. After falling $80 off its $1,265 record high, the gold price regained its footing and consolidated in a tight trading range over the last seven trading days.
As the gold price stabilized, risk appetites rebounded last week - leading to a broad-based rally in stocks and commodities. The prospect of the upcoming battery of stress tests for European banks served to bolster confidence overseas. London’s FTSE 100 climbed 6.1% while both the Eurofirst 300 and the S&P 500 both rose 5.4% last week. Basic materials were the strongest sector, as the Dow Jones Basic Materials index gained 8.8%.
Both the European Central Bank (ECB) and the Bank of England (BOE) announced no changes in interest rate policy, keeping monetary policy accommodative. With the U.S. Federal Reserve downgrading its outlook for economic growth at the most recent Federal Open Market Committee and committing to keep the fed funds rate near zero “for an extended period of time,” easy money is likely to the status quo for the balance of 2010. Until this fact changes, the fundamental backdrop for the gold price will be firmly positive. Deflation-fighting is the top priority as a weak labor market and tepid housing recovery continue to act as headwinds to a stronger economy recovery.
After a multi-week period of outperformance, the gold producers lagged last week. The Philadelphia Gold and Silver Index (XAU) closed the week up 3.1%. The week-end Financial Times discussed the “rush” of hedge funds into gold and investments tied to the gold price. The piece referenced the fact that gold is the single largest position of Paulson and Co., the investment firm led by one of the most successful investors in the industry, John Paulson.
While some might argue that the influx of hedge funds into the gold sector is a sign of an impending top, it is noteworthy that Paulson has only been able to raise roughly $500 million for his dedicated gold fund. With a capacity of $5 billion, and as much as half the assets in Paulson’s gold fund coming from his own personal wealth, the inability of the most successful investor of the new millennia to raise money demonstrates the skepticism of the current $1,200 gold price.
The recent uptick in gold price volatility could be expected to continue this week due to the busy economic calendar. On Wednesday, the Fed minutes are released along with June retail sales figures, while Thursday brings the release of the June Producer Price Index, expected to show a month-over-month drop of 0.1%. On Friday, the Consumer Price Index is similarly expected to show a drop of 0.1% versus May. Negative headline figures on the price inflation front will likely keep the market focused on deflation worries. Notwithstanding corrections, such as the current one, the gold price should remain in an uptrend as long as deflation is the chief enemy of central bankers.
