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June 2008
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Myths on gold as a safe haven
Investors seeking safety are generally viewed as the main driver having pushed gold prices above $ 1,000 in March of this year. However, the strong decline in jewellery and retail investment demand, particularly since the fourth quarter of 2007 and amounting to 23% in the first quarter of 2008, is in conflict with this view.
Consequently, it is speculative demand which has drawn the gold price to new highs.
Activities in gold futures on the New York based Comex-exchange skyrocketed in 2007 from the levels recorded in 2006. Total volume in 2007 rose above 25 million contracts equivalent to nominal 77,947 tonnes (2006: 49,509 tonnes).
Net positions in Comex futures ended the year at a net long of 238,412 contracts, up by 135,344 contracts, equivalent to 421 tonnes nominal on the end-2006 level, significant higher than the impact of bet retail investment.
Like in 2006 when the gold price increased from a 2005 year-end level of $ 513 to an interim high of $ 725.25 on May 12, 2006, followed by a 23% decline to an interim low of $ 560.75 on October 6, 2006, the gold market is looking for a new balance in demand and supply, from where particularly Asian jewellery demand would pick up again.
In this respect, it should be noted that jewellery demand accounts for more than 60% of total demand compared with net retail investment representing less than 20%. This clearly demonstrates that the impact of retail investment on total gold demand is limited and gets overexposure from gold research institutes.
Looking at today's bull market, with the gold price having topped at $ 1,023.50 on March 17 th , it did not come as a surprise to me that, like in 2006, the gold market has shown already a correction of 17% to an interim low of $ 853 on May 1 st .
Different from 2006 is the impact of the US sub prime mortgage crisis on the course of the gold price, particularly since of the Fed's response to lower their funds rate from 5.25% in September 2007 to 2% in April 2008. With the European central bank having maintained their official rate at 4% (since June 2007), the dollar weakened against the Euro, from a low of $ 1.30 to $ 1.60 in March, which had a positive impact on the gold price.
However, the influence of skyrocketing oil prices on gold is much bigger, despite a lack of comparable fundamentals. There is a growing shortage in oil supply and no shortage in gold supply, with gold reserves of major producers representing an average of seventeen years of annual production.
Marino G. Pieterse, editor Goldletter International
January 2008
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Gold price dictated by interest rates and globalization
After a dull gold market in the first half of 2007, with a price increase of only 2.4% to $ 650.50 at the end of June compared with $ 635.70 at year-end 2006, the gold price exploded by 28.6% to $ 836.50 in the second half of the year, for a gain of 31.6% over the full year, and continued its speculative rise to a new historic high of $ 913 at January 15, 2008.
The average gold price in 2007 increased 15.2% to $ 695.38 compared with $ 603.77 in 2006.
The general consensus on the strong gold price increase is the anxiety over the economic outlook in the United States as a result of the sub prime mortgage crisis. Fearing a negative impact on economic growth and consumer sentiment, it made the Fed lowering the federal funds rate three times with an aggregate 0.75% to 4.25% from 5.25%.
Because the ECB maintained its discount rate at 3.50%, short term (3 months) and long term interest rates (10 years) turned from higher into lower rates in the United States compared with the Eurozone.
Consequently, fixed rate dollar investments became less attractive, resulting in the decline of the dollar accelerating from $ 1.39 at the time of the first cut in the federal funds rate on September 18, 2007 , to a low of $ 1.49 on November 27 (currently $ 1.47).
The course of the dollar against the euro in the second half of 2007 demonstrates the direct correlation of the weaker dollar to the development of interest rates in the United States and the Eurozone and indirectly the impact on economic growth.
The Fed and the ECB follow a different interest strategy, with the ECB specifically focusing on controlling inflation and Fed caring more about the growth status of the US economy.
With inflation rising from a level of 2% (target ECB) to a current level of around 3%, both in the Eurozone and the US, the Fed has come under pressure to lower the prime rate further, despite inflation increasing, while in contrast the ECB is inclined to increase its discount rate, but also fears a decline in economic growth later in 2008.
The current economic situation has all the elements of stagflation, for which I already warned a year ago.
It strikes me that irresponsible speculation by big banks and investment houses has resulted in mortgage-related losses, now topping $ 100 billion in Wall Street, with probably additional losses of up to $ 100 billion to follow. However, putting these losses in context with $ 170 billion losses from the savings- and loan crisis in the late 1980s and early 1990s, these remain controllable and can not be translated in an overall financial crisis as a Western world tunnel vision wants to believe.
As a result of the shift of economic growth from the Western world to Asia and OPEC-countries, the phenomenon of Sovereign Funds made their debut on the international financial markets. They are bailing out US banks which are suffering most from the sub prime crisis, particularly Citigroup and Merrill Lynch , giving them access to $ 21.1 billion in fresh capital from mostly Asian investors.
Marino G. Pieterse, editor Goldletter International