Gold, We Have Lift-Off!

 By Mike Fuljenz

Gold’s fall rally got an early launch when minutes from the July Fed meeting showed a strong indication that QE3 will come sooner than later.  “Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,” the minutes said.  Fed-watchers expect more clues as to the timing and magnitude of a new stimulus after Fedhead Ben Bernanke speaks at Jackson Hole, Wyoming.

Gold, which has struggled to recover from its steady slide since last September’s record high, leapt above $1,650/oz. on news that the Fed is getting antsy about the doddering U.S. economy.  The markets expect that a new stimulus could spur a surge in inflation, which is good for gold.

Traditionally, the annual gold rally kicks off in September and climbs through December.
World Gold Council Sees Gold Rising

The World Gold Council (WGC) reports that gold demand fell in the second quarter of this year but that its appeal as an inflation hedge along with global economic turbulence is likely to push the yellow metal to another bull market year.  “If you look at the price behavior this year, our view is that it’s likely we will see a 12th straight year of the bull market,” said Marcus Grubb, the group’s managing director for investment.

WGC’s quarterly report showed a 7% slip in gold demand for the second quarter, driven by flat interest in gold ETFs and a 38% plunge in demand from India, the world’s biggest gold consumer.  Jewelry demand slipped 15%, and investment demand fell 23% year on year.

However, these declines in demand were offset in large measure by active central bank buying at levels not seen since the 1960s.

“When we look forward into the second half of this year, there are a great many unanswered questions that could potentially be positive for the gold market in terms of the future of the euro zone and also, I think, in North America,” Grubb said, adding that “our view is you could have two things that come together in the second half, a seasonally stronger period for gold as usual, and then these big macro factors that are just starting to percolate under the surface now, which is why gold is breaking up through $1,600 per ounce again,” Mr. Grubb said.

He noted that demand for gold ETFs surged to an all-time high in August.  “So something is starting to move, and therefore we are in the camp that says gold is going to have a much stronger second half this year,” said Grubb.

Royal Bank of Scotland and Others See Gold Bull Run Continuing

Whether or not the U.S. Federal Reserve turns on the money spigot, the gold bull rally has legs, says Coutts & Co., the private-banking division of Royal Bank of Scotland. “The reason we’re positive on gold is that major currencies around the world lack credibility,” said Gary Dugan, chief investment officer for Asia and the Middle East. “The natural buyers of today are emerging-market central banks, and over and above that, it’s going to be further investment demand,” said Dugan. “People continue to naturally gravitate to gold.”

Chris Ratcliffe reported in Bloomberg: “Investment holdings expanded to an all-time high this week amid concern that fresh stimulus from central banks including the U.S. Federal Reserve will weaken currencies and may reignite inflation. Billionaire investors George Soros and John Paulson increased their stakes in the SPDR Gold Trust, the biggest gold- backed exchange-traded product, in the second quarter.

Central banks are on track to buy nearly 500 tons of gold this year, continuing the trend to be net buyers of gold that began in 2009, according to the World Gold Council.  In the first half of the year, central banks bought 254.2 tons, led by countries like Russia and South Korea adding to their reserves.

The Central Bank of the Russian Federation bought 600,000 ounces of gold in July, bringing its total gold reserves to 30.1 million ounces, according to figures posted on its website.  Russia has been aggressively accumulating gold since 2007.

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10 years ago

How do you account for the fact that gold is selling at 100% above its historical mean price?

Kirk W
10 years ago

The last paragraph got my attention more than any other part of the article: e.g. “Russia has been aggressively accumulating gold since 2007.” I definitely would make a great follow-on article!

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