Gold Trades Up on Weak Dollar, Poor Non-Farm Employment Data

Larger than expected drops in private sector nonfarm employment of over 290,000 (The ADP National Employment Report) for August 2009 continues to accelerate demand for precious metals such as Gold. The December delivery lately traded up $10.20, or 1%, at $966.70 an ounce in electronic trading.

Historically it has acted as a hedge against inflation - as inflation goes up, the price of gold goes up along with it. The five highest years of inflation in the U.S. from the end of World War II were 1946, 1974, 1975, 1979, and 1980. During those five years, the average real return on stocks, as measured by the Dow, was minus (-12.33%), while the average real return on gold was 130.4%.

Separately the U.S. Labor Department announced productivity was revised up to 6.6% growth in the second quarter, compared with the initial estimate of a 6.4% gain. However, the productivity result was the product of a 1.5% rate of decline in nonfarm output in the second quarter, which was outweighed by an even larger 7.6% plunge in nonfarm hours worked.

Why Own Gold?

There are primary reasons why some investors own gold:

• As a hedge against inflation.
• As a hedge against a declining dollar.
• As a safe haven in times of geopolitical and financial instability.
• As a commodity, based on gold’s supply and demand fundamentals.
• As a store of value.
• As a portfolio diversifier

China is now the world's largest producer of gold, seizing the top position from South Africa, which held it for a century. China's gold output is set to increase by about 12% on an annual basis over the next 10 years. A 2008 growth rate of 11% would result in a production volume of about 300 tons of gold for 2009.

Investment demand for gold remained solid in the Q2 of 2009, rising 46% on the year's earlier levels. Retail investment, which includes demand for physical gold in the form of bars and coins, had another healthy quarter. Net retail investment was up 23% relative to the previous quarter and 12% on the levels of Q2’08 as investors, specifically those in western countries, continued to seek out gold for its unique wealth preservation qualities. Flows into gold ETFs for Q2 2009 returned to a more moderate, but historically robust, level of 57 tons after an exceptional first quarter that saw net inflows total 465 tons.

However, this is setting up a repeat growth shift towards gold particularly given the U.S. administration’s revised estimates of the $9 Trillion debt plus trillions more in interest due and proposed public healthcare costs over $2 trillion for the next ten years.

The Eldorado Gold Corp. (EGO) bought Sino Gold Mining Ltd. (SIOGF.PK) for $1.8B becoming the largest international gold mining group in China. The deal is expected to be completed by early 2010 with shareholders owning about 75% of the merged company. If the deal is finalized it would represent a 21% premium to the closing price and a 32% to 30 (trading) day volume weighted average trading price of Sino Gold's shares on the ASX. This comes on the heels of Eldorado’s June 2009 acquisition of a 19.9% stake in Sino from Goldfields Ltd (GV) in a $282 million share exchange.

Although gold prices are on the rise, valuations are only fair due to the global economic crisis and because sector consolidation continues. Recently, the most notable gold sector M&A deals include:

• July 2009, African miners Randgold Resources Ltd. (GOLD) and AngloGOLD Ashanti Ltd. (AU) sought to bid for Moto Goldmines Ltd. (MTOGF.PK) valuing its significant deposits at $488 million. Slightly more than the $435 million bid from Canada's Red Back Mining Inc (RBIFF.PK), also an Africa focused mining company.
• August 6, 2009; Vancouver, British Columbia-based metals mining company Teck Resources Ltd. (TCK) said it will sell its majority interest in the Morelos gold project in Mexico for just over $150 million to Gleichen Resources Ltd. of Vancouver
• August 10, 2009; Anglo-Swiss mining company Xstrata plc (XSRAF.PK) confirmed that it's evaluating inquiries for its 70% stake in the El Morro copper gold project in Chile.
• Over the past 18 months, China has invested billions in Australia which holds vast resources and mineral wealth. In January 2009, Canada’s Barrick Gold (ABX), a top gold producer closed its Kainantu mine in Papua New Guinea. Instead, it purchased a mine from Australia listed Highlands Pacific for $141 million.
• Other recent deals include, Crescent Gold doubling its gold inventory and gold exploration acreage in the key Laverton province of Western Australia after signing an agreement to acquire assets of Barrick Gold and Carbon Energy for $8 million. The transactions will boost Crescent's gold inventory to over 2.1 million ounces.

If the Federal Reserve fails to keep foreign capital interested in financing its trillions in debt, the U.S. dollar could spiral further downward, providing strong support to commodity prices. The weaker dollar could then help gold break through to new record price levels upwards of $1200 per ounce within the next 12-months.

Disclosure: none

Comments

[Mad Hedge F...:]

ip. ) Just as it is prudent to top up your flood insurance ahead of the hurricane season, investors are loading up on gold ahead of the treacherous September-October stock trading period. Yesterday’s $22 move up shows that attempt number six to run the yellow metal up to a new high has begun. Silver happily tagged along for the ride, tacking on 70 cents to $15.49. Historically, September is the best month of the year to own the barbaric relic, showing an average 3.5% gain over the last 20 years. The onset of the Indian wedding season, Ramadan, and the run up to the Christmas and the Chinese New Year jewelry buying binge are all conspiring to give gold a boost. A tip off this was coming was the big put selling seen for the shares of the gold ETF (GLD), and Kinross (KGC). One good way to play gold at this late stage might be the shares of highly leveraged unhedged producers like Rangold resources (GOLD), Jaguar Mining (JAG), and royal Gold (RGLD). Confirmation that the markets are moving towards risk aversion can be found in the euroyen chart, which hit a one month low at 131, after double topping at 140.50. If gold does break, it could tack on 20% very quickly to $1,200. Keep those American gold eagles.

Sep 03 11:04 AM

[Diogenes of...:]

The US Dollar hasn't been weak the past two days, and poor employment numbers point to deflation. Try another rationalization.

Sep 03 04:46 PM

[wow-me:]

I agree,I think gold is getting hyped-inflation>what inflation? dept store honors competitors coupon and will match its price.
Labor day driving?More people decide to drive within 50 miles radius so gasoline price stays flat
US dollars weak,but not that weak!
Sure,Indian weddingc,Chinese New Year,it happens every year,Indians are losing their IT jobs and call center jobs and Chinese people lose their jobs and dont have money to buy gold,I dont know where this talk of Indian and Chinese come from,it used to be the Japanese and then the Arabs and now the Chinese and the Indians,who is next?
How about man from Mars,they need gold to protect themselves from earth radiation

Sep 04 09:15 PM