GOLD PRICE NEWS - The gold price bounced back after yesterday’s decline, as the price of gold moved back above $1,200 per ounce. Despite today’s $16.00 rise, the gold price remains lower by 2.2% in the month of July. Debate has heated up in recent weeks over whether the price of gold is on the verge of breaking down or merely consolidating before an assault on the $1,265 all-time high.
Gold price bears point to the re-emergence of a deflation threat as the rationale for why the current correction in the price of gold will ultimately lead to much lower prices. Gold price bulls make the argument that the more severe the deflation threat, the more aggressive policy makers will become on both on the fiscal and monetary front. In essence, say the gold bulls, the resulting policies will continue to lead to currency debasement and an accompanying higher gold price.
Similar to the gold price, the share prices of gold producers and explorers have been in the midst of a lengthy consolidation. The Market Vectors Gold Miners ETF (GDX) posted a record print of $55.40 in early December 2009 and today trades at $50.15 - 9.5% off its high.
Earnings season in the broader market kicked off yesterday with aluminum producer, Alcoa (AA) reporting second quarter earnings per share of $0.13 versus a consensus estimate of $0.12. Revenues also beat expectations, coming in at $5.2 billion versus an analyst consensus of $5.05 billion. Alcoa’s share price rose 3.2% in pre-market trading to $11.24 as the company raised its outlook for global aluminum consumption.
Gold miners will begin to report their second quarter earnings over the next few weeks, and given a record high gold price, profit margins will likely expand. Gold producers have done a woeful job of turning higher gold prices into stronger bottom line earnings. Costs have escalated in recent years, pressuring margins. However, a $1,200 gold price and a mild softening of input costs, such as diesel fuel, should help drive better earnings for the bulk of the gold sector.
The economic calendar is light today but picks up beginning tomorrow as a flurry of price inflation data is set be released. On Wednesday, the Import Price index is expected to show a month-over-month decline of 0.3%. Thursday, the Producer Price Index is expected to show a similar drop of -0.1%. Finally, on Friday, the Consumer Price Index is projected to fall 0.1% month-over month. Declining price inflation bolsters the short-term case of gold price bears, who argue that the deflation threat is picking up steam.
While continued deflationary pressures - stemming from a weak labor market and a meager housing recovery - are unlikely to dissipate in the short-term, why is the gold price a mere 4.3% off its all-time high? The answer is that the market, which on balance is forward-looking, is saying that the policy response will support record gold prices. Whether it is a new round of quantitative easing (printing money) or another stimulus package, central bankers and politicians have demonstrated their commitment to do whatever it takes to prevent a deeper recession from taking hold.
The result of these policies is reduced purchasing power of money, a phenomenon that has occurred over the past 18 months in terms of all of the leading developed currencies. A rising gold price is a symptom of the irresponsibility of policy makers and the massive deficits and debts are leading to waning confidence in the current international monetary order. Notwithstanding the current correction, the fundamentals that have driven the gold price higher over the past decade remain firmly in place.
