What's Shaping Gold Price

There were those last week who mentioned a word of caution. A caution about a gold price bubble. If gold were a person he’d start to feel dizzy by his extraordinary growth. In fact he’d have felt dizzy since 2001, when this bull market started. But we can’t help but think that many analysts and economists all missed the credit crunch. What’s to stop us all from misinterpreting this bull market in gold? Could this be a bubble?

We all know of the movements of the central banks to firm up their reserves, of China and other emerging markets' reluctance to keep piling up reserves of the US dollar, and we’re all familiar with governments across the world pumping cash into the market (which must some day come home to roost). These are all the causes that are pushing the gold price to new highs today. But then why aren’t we saying, ‘to hell with it’ and placing all our money into gold and gold related shares?

Because we’ve seen the credit crunch happen and despite us seeing the rise of the price of gold we’re all now much more wary investors. As it happens the gold price is climbing still. Over the past week the gold price broke out into new all time highs reaching 1,095.80 dollars per ounce on Wednesday.

Gold has traditionally seen periods of trading sideways intercepted by sharp price rises. We expect the gold price to trade sideways for a while before something decides its fate. ‘Events, dear boy, events!’ was Harold Macmillan’s answer to a journalist’s question about what can most easily steer a government off course. And this is the same for the price of gold.

So it is events we turn to today that will show us what the price of gold will be like tomorrow. This past week in the US the Federal Reserve assured traders that it was sticking to its near zero rate policy to foster economic growth. Here in the UK The Bank of England has voted to hold the base rate at 0.5% and pump an additional £25 billion into the economy.

It’s like a nervous parent trying to offer sweets to an unruly child. There must be some repercussions for what we are doing. Second guessing that we still think inflation is a big possibility and the greater that possibility comes, the higher the price of gold will rise.

The IMF successfully sells its gold to India's central bank

Earlier in the week we saw the International Monetary Fund announce they’ve sold 200 tonnes of gold to The Reserve Bank of India at a cost of $6.8 billion.

Whereas in the past sales of gold in such large quantities have cheapened the value of the yellow metal, in this case it has had the opposite affect. In part you have to hand it to the IMF for keeping this undercover. Following the announcement, Indian gold futures climbed to a record high on Tuesday.

By selling a large quantity, such as is in this case directly to one of the central banks, the IMF has steered away from offering it to the market and increasing the general supply.

For years the GATA organization has been trying to convince us of central banks and gold mining majors influencing the price of gold. Now it seems central bank sales have dried up and gold mining companies such as Barrick Gold (ABX) are clearing their hedges. There is no longer a means to bring a large supply to the market which has in the past lowered the value of gold. The means to suppress the price of gold are slowly being ebbed away.

If you want to retain value opt for gold, if you want to grow your value opt for gold mining stocks. Gold mining stocks can use their leverages to grow with the rise of the gold price. When the price of gold rises, as it did back in the 1970s, we see gold mining companies grow through acquisition, organically or by other means. At times like today mining companies prosper.

This past week it was announced Russian gold production rose 14.6 percent year-on-year in the first nine months of 2009. On Wednesday Canada’s main stock market said that equity financings by mining companies so far in 2009 have already topped full-year records due to resurgent demand for gold assets. Mining companies on the senior Toronto Stock Exchange had raised C$17 billion through 264 financings as of September 30th.

It’s obvious that mining companies should want to benefit in these times. Keep a watch on what happens to penny share mining companies / junior mining companies. If they follow what happened to some in the 70s, they could grow rapidly in this situation.

But just as events affect the price of gold they also affect the mining companies.

This past week South African miners were hit with an appreciating RAND and potentially crippling price rises in energy. The state-run power utility Eskom Holdings Ltd. is attempting to triple tariffs in the next three years.

Wages in AngloGold Ashanti Ltd (NYSE:AU) have risen about 10 percent this year and electricity charges increased by an average 31 percent in South Africa. AngloGold produces about 40 percent of its output in the country.

Harmony Gold Mining (NYSE:HMY) CEO, Graham Briggs, explained the true cost:

It’s a difficult problem because you have to understand it’s not only the direct electricity cost. It’s actually the cost of your consumables, the steel that you use, and it will impact on salaries, wages and all that sort of stuff. So it’s a difficult issue.

Events around the world are shaping gold’s price and the mining companies that depend on it. That’s why today’s instability in markets means we have to keep up to date and reflect on what’s happening.

Stay tuned for next week.

Disclosure: No positions

Comments

[Genesis:]

I don't think anyone knows enough to make this claim. For instance, if many people sold their GLD ETF shares, that would suddenly dump a lot of gold onto the market.

"There is no longer a means to bring a large supply to the market..."

Nov 08 10:07 PM

[chux08:]

"For instance, if many people sold their GLD ETF shares, that would suddenly dump a lot of gold onto the market."

Would that be the gold they say they have or would that be the gold that they're supposed to have?? It's long past time to be using (GTU) instead of (GLD) and doing the same thing with (CEF) and dump your (SLV). Retail buyers (or anyone else, really) can't buy in
"large quantities" but the price of gold rises and GLD supposedly has no problem securing a couple of million ounces or so to....balance it's books?? Hmmm.....O.K. sure. If they say so. Do I know for sure? No more than the next guy. But with....doubts like that, do I really need to??
GLD & SLV = paper gold & paper silver. That I do know....

Nov 09 04:14 AM

[rick12345:]

Can you spell "bubble"....
The IMF needed some money so it sold a little gold at a time when the price was high. Simple as that. The result is a squeeze on India's cash reserves and hopefully the prevention of a future liquidity bubble.
Nobody can say for certain what will happen in the future, but one thing is clear - the current trend in gold etf's has definitely driven the price of gold higher.

Nov 09 04:24 AM

[GoldCoins:]

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Nov 09 06:11 AM

[LaChic:]

There is no bubble in gold......

Nov 09 08:09 AM

[LaChic:]

Gold is higher for one important reason inflation, and while others are covering their ears with their hands and saying no, no, no, no, there are not signs of inflation, I absolutely disagree with them. We are seeing inflation. An easy way to find out is by taking a walk in the supermarkets and checking out the products companies are selling, they are already feeling the punch of higher commodity prices, they are shrinking their boxes and cans but prices for such items remain the same, go out to eat, a 8 oz steak meal that cost last year 14.99 is now a 6 oz steak meal for the same price of 14.99...a can of folgers coffee 11.5 oz was 1.99 on sale last year, it is now 11.3 oz for the same price, cereal boxes are also shrinking.
Inflation is creeping up slowly, that is how it starts, and if it is not nip in the butt right away it can get out of control.


What is going to send the market lower? I mean whe had the horrible unemployment report and nada? what kind of news? seems to me all the bad economic news are outthere already, earnings are done.......the stimulus will continue, the spending will continue, the printing will continue, all good for stocks until all the liquidity is drain out of the market. I have the uup on my radar, but I believe any strenghting in the dollar will be only temporary, this adm and the fed are basically keeping this market moving higher with their inflated economic numbers and positive comments, so as long as this market has fuel, it will continue to move higher, until there is no more fuel and reality bites once again. Then the rubber band will snap and the W will be formed. Just make sure when that does happens you are not left holding the bag.

Nov 09 08:18 AM

[Doc 224899:]

Events that shape the price of gold? Like an attack on military and civilian personnel at Fort Hood by an Islamist physician holding the rank of Major in our army, shouting "Allahu akbar" before he opens fire? Like the fact that the army cannot discuss Nidal Malik Hasan’s active shooter event as an act of jihad by a self-appointed “shaheed” because political correctness prevents the generals from using the words “Islamist” or “jihad” or “shaheed” in a sentence that could be interpreted as critical of Islam, as evidence that pro-Muslim political correctness has a greater influence on army policy than the mandate of protecting our constitution or our nation?

Nov 09 08:18 AM

[Equilibrium:]

You´re right... Gold is in a long bull market and still have a long way to go.


On Nov 09 08:09 AM LaChic wrote:

> There is no bubble in gold......

Nov 09 10:45 AM

[jarco:]

Last I looked, gold is consumed/saved as follows:

60% - Jewelry
30% - Industrial/Dental
10% - Invest/hoarding

For 2008, Jewelry dropped significantly while investing and industrial increased in proportion. With all three on the rise with an improving albeit slow economy, it difficult not to conclude gold mining and ETF stock are the place to be for up to 10% of ones portfolio.

Nov 09 11:26 AM

[MattGigEm:]

"For instance, if many people sold their GLD ETF shares, that would suddenly dump a lot of gold onto the market.'

No. That leased gold would then only show up on the books once . . . in the governments vault rather than showing up twice once on paper in an ETF and again in the governments vault.

Nov 09 01:30 PM