Gold Stages Thanksgiving Week Rally Despite Stronger U.S. Dollar Due To Sinking Euro, Spreading Debt Crisis And Renewed Concerns Over North Korean Hostilities
Gold recovered strongly before Thanksgiving, up to $1377 on the mid-week London price fixings, but then gold slipped back down to $1365 on Friday, while closing up $10 for the week, despite a strong U.S. dollar, due mostly to the European debt crisis and a new explosion of hostilities in Korea. By contrast, silver and platinum declined slightly last week, as did U.S. stocks. The euro fell from $1.37 last Monday to $1.30 this morning, down about 5%. This means gold rose by 6% in euro terms, from about 985 euros to 1045 euros, mostly due to the Irish debt contagion spreading down to Spain and Portugal last week.
Gold 52 weeks ago (November 30, 2009): $1175.75
Gold's average price during 2010: $1209.55
Gold's London low for 2010: $1058 on February 5
Gold's London high for 2010: $1421 on November 9
The Bottom Line: Gold rose $10 per ounce last week, even while the dollar also rose. Silver, platinum and stocks fell slightly.
Gold Keeps Rising - Despite a Strong U.S. Dollar Surge
Usually, gold and the dollar travel in opposite directions, but this was not the case over the last week, and so far this week. On Monday, November 29, the euro fell another 1.2% to the dollar, reaching $1.30, but gold still managed to trade above where it was a week previously, when the euro was $1.37. This dual-rise is part of a "flight to safety" on two continents: (1) Europeans are fleeing their paper currency for gold, while (2) Asians and other currency hoarders are opting for both gold and the U.S. dollar for safety.
This latest dollar/gold surge started last Tuesday, when the Korean crisis exploded on the world scene, pushing investors into both gold and the dollar for perceived safety. This pushed gold up to $1377, even while the dollar was surging. The dollar reached a two-month high to the Japanese yen as well as the euro. Then came the latest chapter in the Irish sovereign debt crisis, which pushed more investors into the dollar and out of the euro. Over the weekend, European powers approved a bailout package worth over $100 billion, while Ireland pledged to cut expenses and raise taxes over the next four years. Ireland's Prime Minister Brian Cowan laid off 24,750 government jobs and cut the pay for the rest by 10%, which will not make him politically popular and could spell an end to his fragile coalition government there.
The Irish "contagion" then spread to other parts of the euro-zone, most notably Spain and Portugal. As a result, the euro kept falling and Spanish and Portuguese sovereign bonds had to offer more money (higher interest rates) to lure new investors to take the added risk. It all sounds like the Greek crisis of last May, repeated in Ireland. Any new government austerity is resisted tooth and nail by public workers' unions. Last Spring, this caused gold to go up, even while the dollar rallied, and we may see that happen again.Global Hot Spots Will Likely Push More Investors into Gold
This month marks the 60th anniversary of the Communists' high-water point in the first Korean War, back in November 1950, when waves of Chinese soldiers joined North Korea in pushing Douglas MacArthur's ragged and untrained troops south into the narrow Pusan perimeter in southeast Korea. Maybe those 1950 dates mean something to the North Koreans, since the North staged a surprise attack on Yeonpyeong Island last Tuesday, firing approximately 200 large-caliber artillery rounds. South Korea prudently did not escalate the conflict, but South Korea's defense minister had to resign on Thursday while President Lee Myung-bak ordered a full-scale review of the country's lackluster defense shield. The U.S. deployed the aircraft carrier USS George Washington, which carries 75 fighter jets, to conduct joint exercises with the South Korean Navy in an obvious show of force, despite objections from China and North Korea.
This is the second major attack by North Korea on the South this year. Earlier, they sank one of South Korea's warships, the Cheonan, costing 46 lives. Last Tuesday, the stock market lost 150 points on this news, while gold surged up $20 per ounce to $1377. When South Korea failed to retaliate, that helped the stock market recover, and gold fell back to its previous levels around $1360. Like the first Korean crisis, this latest Korean explosion is likely a loud call for more foreign aid to starving North Koreans (they have a funny way of asking for help), but it will likely not escalate much further - hence gold's recent retreat.
Many investors rushed to the dollar (as well as gold) during this Korean crisis, but there were two notable exceptions. Last Tuesday, both China and Russia said that they would renounce the use of U.S. dollar in all their bilateral trade. They said they would only use their own currencies, the Russian Ruble and the Chinese renminbi (yuan), when trading with each other. Furthermore, Russia said last Wednesday that their central bank would add the Canadian dollar and Australian dollar to their basket of international foreign currencies.Meanwhile, the Fed Keeps Diminishing the U.S. Dollar's Intrinsic Value
Last week, the Federal Reserve Board came out with the detailed minutes of its November Open Market Committee (FOMC) meeting, in which the Fed Governors sought to justify their "quantitative easing" plans by showing how weak the economy is, and how deflation is a greater risk than inflation.
The Fed's minutes also revealed that their $600 billion QE-2 plan was stretched out to eight months, at $75 billion per month, since the Fed did not want to shock the world and depress bonds by making their bond purchases all at once, as they did in late 2008, in QE-1.Latest Views on Gold
At the New Orleans Investment Conference precious metals panel, the technically-oriented Aden Sisters from Costa Rica had some encouraging new insights into the gold market. First, Mary Anne Aden said that this is a "mega-bull market with a long, long way to run," adding, "We're not yet even halfway to where we expect gold to peak in this cycle." Pamela Aden added that overall investor demand is "rip roaring," but "the general public has not yet joined in." Mary Anne reminded attendees that new gold must be mined deeper and it comes out in lower grades, since "the easy gold has been found."
On the supply side, billions of Asians are moving into the middle class, sopping up any new gains in scrap supply. Pamela added that many gold mines went out of business in the 1990s when the gold price was so low. Once gold started rising in 2001, it took several years for these (and other) mining ventures to get back into production. She also said that jewelry demand is more important in foreign nations, where gold is symbolic of a man's love for a woman. For that reason, Asian women tend to "wear their wealth" more than most Americans, who think of money as a roll of dollar bills, not a nugget or bracelet made of gold. Due to rising demand and flat new supplies, the sisters said that gold "could reach a range of $2,000 to $2,500" next year. While that may sound high, it's "not a big deal," since $2,500 would be equivalent to the inflation-adjusted peak of 1980. Since there is so much more debt and uncertainty now than we saw in 1980, "it would not be a stretch of the imagination to see a new inflation-adjusted high for gold."
The Aden sisters recommend a steep (50%) position in metals-related investments. Within that 50%, they recommend an array of physical gold and silver coins or bars, precious metals ETFs and mining shares.Gold In 2011
European banking giant Societe Generale says gold, silver, and palladium will extend their rallies into 2011, and investors should be overweight in precious metals, which they say will likely outperform agricultural commodities like sugar. Frederic Lasserre, head of commodities research at Societe Generale, expects gold may gain 11% within a year from a flood of central bank stimulus packages and anticipated dollar weakness.
Other banks echo the Societe Generale outlook for precious metals. Goldman Sachs says precious metals will produce the best commodity returns for 2011 and has set a price target of $1,650 an ounce for gold. Michael Lewis, head of Deutsche Bank AG Global Commodities Research says that precious metals are some of the "safest long positions" to have.
Billionaire George Soros, who has been widely quoted this year as saying gold is in the "ultimate bubble," now admits that conditions are ideal for gold to climb even higher. Soros says the actual deflationary pressures in tandem with investor fears of inflation provide potent fuel to propel gold to new highs. Yet he cautions, "This is a period of great uncertainty so nothing is very safe," Soros said.
The global gold hedge book, long considered by gold bugs to have been an artificial drag on gold prices in its heyday, continues to shrivel up as gold prices climb and producers no longer want to lock in prices that are likely to be lower than the market at delivery time. In a just-released report by VM Group and Halliburton Services conducted for ABN Avro Bank, global hedging fell by 2.0 million ounces quarter-on-quarter, the largest drop for three quarters.Gold Bullion and Rare Gold Coins in the News
In 2010, Gold bullion and rare coins have been in the news more often than in most years. For example, Michael Fuljenz has been quoted in financial segments in the Beaumont Business Journal, Houston Business Journal, Los Angeles Times, Fox Business News, and CBS's Money Watch. Mr. Fuljenz has never been interviewed by any of these media outlets before. This increased gold awareness is bringing many new collectors and investors into the market.
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