GOLD PRICE NEWS - The gold price continues to attempt to break out decisively above $1,200 per ounce, hovering just under the psychologically-important level. The price of gold has risen for six consecutive trading sessions heading into today - climbing $42 from the $1,157 low posted last week. COMEX gold futures, per the December contract, traded at $1,201.60 Thursday morning, rising against a backdrop of increasing skepticism toward the gold price.
Yesterday evening two large-cap gold producers, Kinross Gold (KGC) and Yamana Gold (AUY), released earnings from a quarter that saw the gold price average close to $1,200 per ounce. Kinross reported second quarter earnings of $0.16 per share, in-line with analyst expectations. Yamana posted adjusted earnings of $85.8 million, or $0.12 per share, which was below analysts’ estimates of $0.15. In premarket activity, shares of KGC were indicated slightly higher, while AUY was set to open modestly lower.
The U.S. dollar weakened versus the euro following news initial jobless claims rose more than expectations. At 1.322, the dollar has dropped 11% against its European counterpart over the past eight weeks. Despite its historical inverse correlation with the U.S. dollar/euro currency cross, the gold price has recently moved to beat of its own drum.
The European Central Bank (ECB) left interest rates unchanged at its policy meeting in Frankfurt, Germany today. Its benchmark interest rate, at 1%, has held steady for sixteen consecutive months. As worries over the sovereign debt crisis have waned, the euro has rallied, the gold price has declined, and risk appetites have risen. European equities have risen in tandem with U.S. stocks as of late, with July being the best month for the stock market in over a year.
Despite the recent drop in risk aversion, deflation concerns remain a worry. Gary Shilling, president of A. Gary Shilling & Co., expects an annual rate of deflation in the 2% to 3% range over the next decade. The widely-followed stock market bear sees falling prices and a crushing debt load as the greatest challenge facing the economy. Shilling has advocated government bonds and cash, eschewing stocks, commodities, and gold.
According to Mohammed El-Erian, chief executive officer at Pacific Investment Management, the U.S. faces a 25% chance of deflation and a double-dip recession. While El-Erian noted that this was not “the baseline scenario,” it did represent a risk. The PIMCO strategist has repeatedly stressed his concerns over persistently high unemployment and its resultant deflationary effects. Contrary to conventional wisdom, the gold price has consistently risen amid a backdrop of declining price inflation. Chairman Ben Bernanke has remained focused on deflation risks, flooding the system with liquidity. His efforts have led a flight to gold and investments tied to the gold price as investors seek protection from a loss of purchasing power of their savings.
With consumer prices hitting a 44-year low in June as measured by the Labor Department, deflation is becoming an increasing concern among not only investment strategists such as Shilling and El-Erian, but also among central bankers. A widely-publicized paper was released last week by Fed Governor James Bullard warning of the risks associated with “Japanese-style deflation.” Bullard’s suggestion that the Fed engage in quantitative easing, specifically the purchase of Treasuries, gave a boost to the gold price.
As stated repeatedly in these pages, fighting deflation leads to a higher gold price, while fighting inflation generally results in a lower gold price. With policy makers firmly focused on extinguishing deflation, the macro-economic backdrop for the gold price remains decidedly positive.
