GOLD PRICE NEWS - The gold price slumped Wednesday morning, falling $4.10 to $1,206.60 per ounce. Over the past two weeks, the gold price has closed every day in the narrow band of $1,190 to $1,215. Traders and investors are looking for clues as to whether the price of gold is set to break out to the upside or downside. The flurry of price inflation data set to be released over the next couple of days could be the catalyst for a breakout in the gold price.
Tomorrow the Producer Price Index (PPI) will be released, followed by the Consumer Price Index (CPI) on Friday. These widely-followed measures of price inflation will be scrutinized for evidence that deflation is taking hold. Both indices are expected to show month-over-month price declines. The CPI is set to decline for the third consecutive month, a fact that has the potential to intensify deflation fears. The Consumer Price Index has not declined four consecutive months since the Great Depression era of the 1930s. Contrary to conventional wisdom, the gold price has remained in an uptrend while a number of strong deflationary headwinds have emerged over the past 18 months.
The gold price has been driven higher by potent investment demand, which is evident in both sales of physical gold and inflows into gold bullion ETFs. The SPDR Gold Trust (GLD) now holds 42.2 million ounces of gold, valued at over $51 billion using the current spot gold price. Gold has begun to re-emerge as a monetary alternative amidst the deteriorating balance sheets of most of the developed world.
Dagong Global Credit Rating Company, China’s leading credit rating agency, just yesterday stripped several Western nations of their AAA ratings - including the United States, Britain, Germany, and France. Dagong’s rating places more emphasis on “wealth creating capacity” and foreign reserves than do American-based rating agencies Moody’s, Standard & Poor’s, and Fitch’s. Britain and France were lowered to AA- ratings while the United States was downgraded to AA. Belgium, Italy, Malaysia all received A- ratings. China’s rating was raised to AA+ as were Germany, Canada, and the Netherlands.
Rating changes on sovereign debt have proven to be a catalyst for the gold price in recent months, as waning confidence in the ability of much of the developed world to deal with their deteriorating fiscal situations has driven investment funds into gold and investments tied to the gold price. According to Dagong, the rationale for China receiving a higher rating than the U.S. is due to America’s perceived inability to pay back debt.
Dagong’s chairman, Guan Jianzhong said, “The reason for the global financial crisis and the debt crisis in Europe is that the current international credit rating system does not correctly reveal the debtor’s repayment ability.” The gold price has risen to record highs in terms of nearly all currencies that face the perception - and reality - of a debt problem. In terms of U.S. dollars, euros, and pounds, the gold price has risen 43.7%, 30.9%, and 40.8% over the past year.
Earnings season is underway and the large gold mining producers will be releasing their second quarter earnings over the next few weeks. Newmont Mining (NEM) will release its operating results on July 28, while the world’s largest gold miner, Barrick Gold (ABX), is set to announce its earnings on July 29. Both will be expected to demonstrate that, unlike in the past, they have begun to deliver leverage to the gold price. Investors’ tolerance for poor earnings in the era of a $1,200 gold price will be minimal.
