Gold Price Today's  Instablog

Here in Britain we’re use to bad weather, it’s been frosty and raining here all week. It gives us our sense of humour we tell ourselves as we step out the door and open the umbrella. But there are times when you get caught out. Times when everything looks rosey outside but then suddenly the clouds form and the skies open up and the rain poors down.

Last week something similar happened in the markets. Everything looked normal. Gold reached another top, the dollar continued to slip to it’s lowest in 15 months and equities were on the rise. And then….

On a quiet Wednesday afternoon Dubai World released news that they needed more time to pay the debts they’d racked up. This sent the markets into overdrive. The news came just before the religious festival, Eid. Which meant many of the company’s senior officials were not available to comment. This stoked the fire of confusion, doubt and fear. And, as we all know, fear is a powerful mover in the markets and it once again changed the direction of trade.

On Thursday the FTSE fell 3.2 %, the biggest daily fall on the market since March.
On Friday the VIX index of equity volatility, a key measurement of risk aversion, jumped 21 per cent. Earlier in the week it had set a 2009 record low.

The news hit everything… but not all in the same way. 

Following the news the people fled in their droves to the safe haven of the dollar. Now this may seem surprising given that the dollar has received a lot of press recently about its decline and lack of stability. But, in this scenario, people could see that the problem was a lack of liquidity... a lack of cash. And they flocked to it like a moth to a hot lamp.

The dollar rallied, and the gold price fell.

The pound takes a pounding

Just a few days later and the story begins to unfold. European banks are thought to be exposed to half of the $80bn debt. Dubai World also seems to have been investing heavily in UK commercial property.

Both are bad news for our rainy country and its currency. If Dubai World are pressured into selling some of their assets, which looks likely, support for the pound from foreign capital could wither.

The bigger picture

Now investors are left with a much more fragile footing. The Dubai episode has reminded investors how uncertain creditor rights can be.

It brings into question how safe sovereign debt is... in particular investors are starting to look around at who could be next... maybe Ireland? Maybe Greece?

The risks have just got higher.

But what does this mean for the price of gold today?

Well if you take a look at what’s happened since last Wednesday, when the Dubai World news hit, the markets have pretty much realigned with the path they were heading in before. Gold is reaching new highs again, breaching the $1200 mark, and the dollar is back down again.

The fear is being massaged away and blind panic is being edged out. The aftermath of the Dubai World debacle is a market that looks identical to what it was before, only now investors are watching closer for news, they’re paying closer attention at world events and they’re reassessing risk.

Gold is for the risk averse.

Two weeks ago the World Gold Council showed how demand for gold from jewellers was waning in most countries [We reported this in Gold’s evolving supply and demand]. It highlighted the demand for gold was coming from investors, as it has been for many years now. The problem with demand coming from investors is that they derive their value from comparing what else is going on, where else they can be making money. Consequently if they see a chance to make more money from something else then they will sell gold to put that value elsewhere. In doing so the gold price today becomes much more vulnerable to what else is happening in the markets today.

At the moment we are in a risky environment and this is feeding the price of gold. Together with what looks like a revaluing of the dollar, risk is pushing the gold price higher and higher. $1500 will be the next milestone.

We leave you with a quote from one of favourite writers, Bill Bonner...

“Gold’s best part is still ahead. And this is not just a bull market; this is a fortune maker. Gold still hasn’t entered the bubble phase. It is just a very strong bull market. Eventually, it will soar... adding $100 in a single day. It will take our breath away. You want to be in it when that happens.”

Until next week,

Digger
Gold Price Today


Disclosure: No positions

Gold soars ahead with news from politicians that governments will continue to poke and prod our economies in order to stimulate them. Well what happens when you poke and prod a dog? It bites back.

Gold reached a new UK record on Tuesday climbing to £709.1 per ounce. Fantastic news for all the gold bugs out there, its been some time in the making (March 09) since it last peaked against the pound.

And this morning the gold price also climbed to a new high in dollars, reaching  $1,195 per ounce.

How are Governments stimulating the price of gold?

On Tuesday the chief honcho of the IMF (international Monetary fund), Dominique Strauss-Khan, voiced his opinion on government stimulus and when it should be stopped,

“A premature exit is the main danger,”

“We have to be sure that the recovery is final, that domestic demand is self-sustaining and the peak in unemployment is on the foreseeable horizon.”

This is fabulous news for all the gold investors out there. It’s practically a green light, from one of the most respected global financial establishments, for governments to stimulate their economies.

How does that affect the gold price?

Well governments of late have been particularly fond of stimulating their economies by printing money, otherwise known as quantitative easing.  This in turn devalues their currency as there’s more of their currency in circulation.

When their currency has been devalued people look for ways to offset their depreciating money, a safe haven.  This is where gold steps in.

As an internationally accepted form of currency, it is the perfect option for governments and folk alike to invest in when their own currency is deflating. This is why we have seen it rocket in recent months from $850 in January to $1,179 an ounce today.

The Dollar’s Slippery Slope

The dollar index - a measure of how the dollar fairs in comparison to 6 other currencies, slid further down its slippery slope, hitting its lowest price in 15 months!

So for us gold enthusiasts its great news surely!! Well it would be if the economy wasn’t in such a dire way.

John Paulson’s new gold fund

John Paulson, the notorious hedge fund manager, has announced he intends to invest $250m (£149m) in a brand spanking new gold fund!

Yes the man famous for winning millions on betting on the collapse of the sub-prime mortgage catastrophe now has his eyes set on Diggers gold. In fact this is not the first time the American has teetered into the yellow metals domain. Of his vast treasure chest, standing at a cool $30 billion, Mr Paulson has invested 10 percent in gold related investments.

More Governments buying bullion

Our Neighbours, Russia, in the northern hemisphere look to be following the footsteps of China and India. The Russian Central bank increased its gold holdings by 2.6 percent last month.  Alexei Kudrin, finance minister at Gokhran, a state owned precious metal repository, claimed Gokhran intended to sell 30 tonnes of the yellow metal to the Russian Central Bank by the end of the year.

As the Gold Price continues its assent, we’ll show you what’s happening and why.

Until next week,

Digger
Gold Price today

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'Disclosure: No positions'

Since 2001 gold has been on a bull run. The gold price has had to factor in the results of the credit crunch for the past 2 years. That means for the previous 6 years gold has been rising independent of the worries of investors looking for safe havens. In that time demand has risen from investors, jewellers and industry.

Today we take ourselves away from all the hype, from all the news being fed to us and try and decide whether the price of gold is justified. To weigh the decision we look at the textbook factors - supply and demand.

Has production declined? Well yes according to Barrick Gold's president Aaron Regent... He told the the Telegraph recently that the global output had been dropping by 1 percent annually since the start of the decade and that there was "a strong case to be made that we are already at 'peak gold',".

‘Peak gold’ is the theory that we have reached the highest level, it’s peak, of production and over the following years production levels will drop lower and lower.

Backing up Aaron Regent’s claim the World Gold Council's production figures show global mine production increased in 2006, largely as a result of increases in supply from China and Indonesia, but subsequently decreased for the following years... In 2006 mining companies produced 2,485 metric tons. Since then it declined in 2007 to 2,478 metric tons and then to 2,415 metric tons in 2008.

But didn’t we say last week production was being ramped up by all of the mining companies? Well yes we did... and we also came to the conclusion, albeit an obvious one, that production is increasing because miners are realizing higher profit margins. The point is there is still a lot of gold in the ground which is yet to be discovered and finds are still being made. The Arabian shield is a good example of huge gold deposits that are yet to be mined and offer excellent potential, both Centamin Egypt (LSE:CEY) and Kefi Minerals (LSE:KEFI) can testify to that.

If the gold price continues to rise we'll see more companies with big finds coming through as countries follow Saudi Arabia's example and relax their laws to foreign investment and expertise.


‘Peak Gold’ is not as bad as it sounds

Gold isn't consumed (except for some industrial uses) so 'peak gold' is not as important a factor as 'peak oil'. Because gold isn't consumed most of the gold ever produced is still here. The consequence is that the annual production is a fraction of the total amount of gold circulating freely in the world. This means that the annual supply fundamentals shouldn't play as big a part in the overall demand as it does in oil.

Spinning this on its head this means that the supply of gold is steady. There is nothing that is inflating the supply of gold and subsequently this makes it attractive as an alternative to fiat, paper money that you can increase the supply of.

Gold demand

Yesterdays the World Gold Council released their third quarter report and revealed gold jewellery demand is down everywhere but China.

'Jewellery demand in Q3 2009 was 30% below year-earlier levels. Most countries recorded a decline, the most severe being India, Russia and Turkey (-42%, -52% and -55% respectively).'

This isn't surprising because the precious metal has been priced out of jewellers budgets. This is a big problem. It means that the businesses that depend on gold to make a living will see their profit margins squeezed. It means we're less likely to see gold in jewellery unless for the very wealthy.

A few years ago I had a discussion with a commodities trader who was telling me why he thought gold will reverse its trend and drop to 300 dollars. His reason was that the metal is not used for a wide variety of things. It's a metal that has no value to the common man.

Today, only a couple of years on we are shown the intrinsic value of gold... as an alternative to fiat currencies. And it's not the value to the common man that is driving the demand, it's the value to a wealthier tier of people. People who need to safe guard investments.


The effect of the recent supply of money

When we wrote last weeks article a reader responded that it is obvious there is an increase in production the true question is whether this will outstrip demand. But demand is a funny thing, especially with gold. Gold is an investment vehicle, somewhere to store your money at a comparative rate to others. As such it needs to be compared to other investments.

John Stepek, the editor for MoneyWeek noted...

'Cheap money policies are inflating asset prices around the world. This seems self-evident. For one thing, everything is going up. Stocks, bonds, gold, oil, base metals – it doesn't matter. Assets that shouldn't really be correlated are all heading up together.'

And this brings us to the point. There is an excess of money in the financial markets that is floating around. It must park somewhere. And so it finds itself being drawn into many different channels.


The Feds low interest rate is inspiring a new wave of investing

A few years ago the difference in interest rates amongst currencies inspired carry trades. This is the practice of borrowing currency with a low interest rate and using it to buy into a currency with a high interest rate. It has been a very profitable trade of the past decades but in todays world it faces bigger problems. It is very difficult to predict currencies in the current climate. The unpredictable nature of the currencies means large investors are unwlling to invest in them. So today we have low interest rates in the US and the UK but we also have an unpredictable currency market.

The result is that banks can borrow at very low rates and put their money into stocks, bonds, assets, and anything else which will have a higher yield.

This is the new carry trade. The low interest rates are inspiring banks to borrow money and invest it in the markets. This together with the monetary policies injecting cash into the financial system is the reason why everything seems to be heading up. The problem comes when the interest rates rise. But as Ben Bernanke signalled the other week, that's not going to happen for a while yet. Which brings us to our final point...

Many economists and journalists are now expecting a double dip recession. They anticipate a reduction in the stock market before a true recovery can begin. It certainly looks as though there is much that is still not sorted out... you need only look to the fact the UK government is still propping up the economy with a recent cash injection of 25 billion pounds. we've lost count of all the 0s floating around, but then maybe the government has too.

If the UK and the US were to have a further stock market crash, and today is just another bear market rally then what does this mean for gold?

If we look back across recessions gold stocks usually perform well. On October 28th 1929 the Dow Jones Industrial Average dropped 12.8%. The day after it lost 11.7%. Undoubtedly you've heard of The Great Depression for the proceeding years. The result was a lift in the price of gold mining companies.

Homestake Mining Company, one of the largest gold producers in the early 20th century experienced an enormous share price increase of 450% over those four years, from 1929 - 1933. Homestake was one of many mining companies that prospered during The Great Depression. This was a time of deflation. And this was at a time when the price of gold was fixed.

Fast forward to almost a century later and we are in the middle of another recession that verged on becoming a depression, and once again gold mining stocks have been the main drivers in the market to date. Consistently we're seeing mining stocks balancing the markets.

The problems haven't gone away. The markets are not repaired yet. We hold our breath waiting for another crash/drop in the markets before a true recovery can take hold. In our opinion, and this should not be taken as advice, there is still a period of depressed stock markets to come... and this means that the gold mining stocks have further to gain when this takes hold.

We watch for further events that will indicate what is going to happen next. So stay with us as we look at what news will bring us this week, and what will affect the price of gold.

Until next week,

Digger
Gold Price Today

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