Short Term Gold Market Outlook

Long-term trends point to gold prices over $1,000. . . $2,000. . . maybe even over $5,000.

But in the short-term, investors may need continued patience.

Over the past few weeks, the price of gold has been bouncing between $900 and $950 an ounce. And, following a brief visit to the higher end of that range, gold could once again slip below the $900 level. Here’s why. . .

The demand for physical gold from the jewelry, industrial, and dental sectors has significantly fallen.

Official figures from GFMS, the world’s top authority on gold supply and demand, showed a 24% drop in gold demand from the jewelry sector during the first quarter, compared to the same period of last year. GFMS data also showed a 31% drop in gold demand from the industrial and dental sector for the same period, compared to the previous year. Global gold demand figures for the second quarter of 2009 will be reported around this time next month.

Gold demand from the jewelry, industrial, and dental sectors will likely remain weak in the short-term, considering the relatively high price of gold, a weak global economy, high volatility in the market, and the seasonal lull, which is typically experienced in the summer months.

Meanwhile, there is a fairly large long position on the Comex gold futures market, which may be significantly reduced in size over the next few weeks, as speculators continue to move back into equities. U.S. stocks rallied yesterday, sending the Dow Jones, NASDAQ, and S&P 500 to their highest levels of the year.

I’m not convinced, however, that there is much hope for a real recovery in the economy. Sure there’s plenty of spin in the mainstream financial media, whose job it is to support their advertisers. But the real situation remains pretty dire.

The U.S. government is projecting a $1.84 trillion deficit for this fiscal year that ends September 30. Meanwhile, national public debt just crossed $11.6 trillion — and is growing by almost $4 billion per day.

Where will the government get the money to pay back this enormous debt and balance the budget?

Nobody knows.

The U.S. federal government claims to hold 8,133 tonnes of gold in reserves. At current prices of about $950 an ounce, this gold reserve is worth $272.5 billion. That’s only about 2% of the national public debt, which doesn’t factor in other finacial obligations like Social Security and government-sponsored healthcare, and is estimated to cost up to an additional $60-$65 trillion in the future.

If the government wanted to pay off the national public debt with the gold reserves that the Fed claims they have, it would have to sell each ounce for $40,580.

Government insiders knows just how dire the situation is, even if their voice is suppressed by the mainstream media. Director of the US Congressional Budget Office Douglas Elmendorf recently wrote in his blog:

Under current law, the federal budget is on an unsustainable path, because federal debt will continue to grow much faster than the economy over the long run. Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the population will cause federal spending to increase rapidly under any plausible scenario for current law. Unless revenues increase just as rapidly, the rise in spending will produce growing budget deficits. Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress economic growth in the United States. Over time, accumulating debt would cause substantial harm to the economy…. …The current recession and policy responses have little effect on long-term projections of noninterest spending and revenues. But CBO estimates that in fiscal years 2009 and 2010, the federal government will record its largest budget deficits as a share of GDP since shortly after World War II. As a result of those deficits, federal debt held by the public will soar from 41 percent of GDP at the end of fiscal year 2008 to 60 percent at the end of fiscal year 2010. This higher debt results in permanently higher spending to pay interest on that debt. Federal interest payments already amount to more than 1 percent of GDP; unless current law changes, that share would rise to 2.5 percent by 2020.

So for now, we’ll probably see gold move lower in the short-term. However, it’s important not to lose sight of the big picture, which continues to be very bullish for gold.

The gold market is becoming increasingly dependent on investment demand. This is something that we’ve been expecting for quite some time.

As we’ve discussed before, the lives of gold bull markets play out in three main stages, which generally overlap:

Stage One: Currency Devaluation
Stage Two: Growing Investment Demand
Stage Three: Speculative Mania Buying

So far in today’s gold bull market, we’ve seen strong evidence of the first two stages.

A dramatic drop in the value of the U.S. dollar against other world currencies has lifted gold prices over the past eight years. This devaluation is evident in the 42% drop of the U.S. Dollar Index, a measure of the dollar’s value against six world currencies, between the summer of 2001 and spring 2008. The dollar rallied between the summer of 2008 and spring of this year, as foreign investors bought the greenback as an alternative to their own less stable currencies in the global recession. However, due to macroeconomic issues, such as the massive debt of the United States, the dollar seems destine for continued devaluation, which will continue to be positive for gold prices.

In the second stage of a bull market, gold prices continue to grow, due to increasing investment demand. Attracted by the gains of the first stage, speculators begin to buy gold as an investment. . . which further snowballs the price of gold.

Figures from GFMS show that identifiable investment demand increased 229% between 2003 and 2008.

Continuing this trend, gold investment demand continued to boom in the first quarter of this year, reflecting a desire for a safe haven from the U.S. dollar and other paper assets. Gold investment demand reached a historic high of almost 600 tonnes during the first quarter of 2009 — a whopping 248% increase compared to the same period a year earlier. In dollar terms, this represented a net inflow of $17.4 billion, up from $5.1 billion (or 42%) a year earlier.

GFMS Executive Chairman Philip Klapwijk wrote in a recent report, “Looking at the second half of 2009, investment demand, and especially its western elements, which includes activity in ETFs, futures and the OTC market, is expected to remain the driving force behind gold price movements.”

The independent consultancy group predicts identifiable gold investment will exceed 1,500 tonnes by the end of this year. This estimate would represent a 36% increase over identifiable gold investment demand in 2008.

Investment demand will be the driving force that will push gold much higher over the next several months. As I mentioned, global gold demand figures for the second quarter of 2009 will be reported by GFMS around this time next month.

In the meantime, it’s important to keep our eye on the prize. Don’t get disheartened by another pullback in gold prices. Rather, use any pullbacks to add to or establish new gold positions. If gold does in fact slip below $900, we recommend buying every ounce you can afford.

Good Investing,

Luke Burgess
Managing Editor, Gold World
Investment Director, Secret Stock Files

P.S. The most powerful governments, central banks, and investment groups in the world are still holding their gold reserves in anticipation of a significant rally in prices. This puts a virtual lock on Greg McCoach’s latest gold investment recommendation. . . which yields two times the profits made by gold. In other words, every time gold goes up 1%, you’re paid 2%. . . every time gold goes up 10%, you’re paid 20%. To read more on how you can profit from Greg’s new investment vehicle, just click here.

Traders Selling Dollars in a Big Way

As the final trading week of July comes to a close the metals finished on a higher note. Silver went up 38 cents to $13.92. Gold tacked on $19.00 closing at $954.00. Palladium edged up $2.00 finishing the day at $262.00. Platinum gained $20.00 to $1201.00 per ounce. Trading volume was moderately heavy.

Once again our regular day to day barometers of Oil and Euro led the way. Today’s key event was a 1.76 cent surge in the Euro against our Dollar. While the Euro got some support from an additional $1.31 rise in the price of Oil, it was not the primary driving catalyst. According to sources in London, a powerful rumor started circulating throughout Europe regarding General Electric. The rumor indicated that GE’s financial arm GE Capital will announce the need for an additional $12-14 billion in bail out capital. (THIS IS A RUMOR ONLY) Even so, traders started to sell Dollars in a big way. Last on the Euro $1.4256.

Meanwhile Crude is trading at $68.25. Today’s economic data came in mixed with only the GDP worth mentioning. It clocked in with a smaller than expected decline of 1%. However;the prior quarter’s decline of 5.5% was revised lower to a 6.4% decline. Over in the stock market the Dow remained calm in the wake of the data and is apparently ignoring the GE rumor; at least so far. Last on the Dow 9180 up 26 points. When things get going next week traders will be focusing in the next Non Farm Payroll Report due out next Friday. On Monday the calendar contains a fresh look at Construction Spending, the ISM Manufacturing Index, and Auto Sales.  Have a great weekend.

Euro Trading Higher, Oil Market Quiet

This morning the Euro is trading higher by another 60/100ths of U.S cent despite a very quiet Oil market. Crude is trading 9 cents lower at $66.85 with traders digesting the recent roller coaster ride which saw Oil drop and then recover and almost $4.00 down draft. Last on the Euro $1.4140.

The metals are slightly higher in overnight trading as Asia and Europe caught up and adjusted their portfolios to reflect yesterday’s New York final $3.59 jump in the price of Oil. Silver gained another 4 cents to $13.58. Gold picked up $1.00 to $936.00. Palladium is $262.00 up $2.00. Platinum is $9.00 higher and changing hands at $1190.00.

In the stock market the Dow ended yesterday with an 83 point gain and appears to be headed for a 45 point higher open today with traders hoping to see improved U.S economic data before the open.

As for today’s data; we start the day with the advance look at our 2nd quarter Gross Domestic Product (GDP). Wall Street expects to see a 1.5% decline in economic growth compared with the first quarter’s decline of 5.5%. Bad but quite a bit better.Next comes the 2nd Quarter reading of Core Personal Consumption/Expenditure Inflation which the Fed watches very closely. The estimate calls for inflation at 2.4% versus the first quarter’s rise of 1.6%.

Later this morning we get our final piece of data with the July Purchasing Managers index of Manufacturing (PMI). The Street expects to see further improvement in manufacturing with a reading of 43 compared to June’s 39.9.

In world matters Iranians refuse to let the bloody aftermath of their elections be ignored as thousands gathered at Tehran’s main cemetery to commemorate the 40 day anniversary of those killed in anti-regime clashes. On the domestic front the health care reform bill debate rages on.

Crude Recovers its Losses, USD Remains Weak

The metals ended the New York trading day higher. Silver rose 22 cents closing at $13.54. Gold was up $7.00 to $935.00. Palladium finished the day at $260.00 up $5.00. Platinum ended the day $4.00 higher at $1178.00.

The key to the turnaround was today’s reversal in Oil which all but recovered yesterday’s losses. Oil is presently up $3.55 per barrel at $66.90. It’s amazing how quickly negative news is acted upon, and then tossed aside.

Not surprisingly, the Dollar remained weak in light of the surge in Oil. Last on the Euro $1.4080 up 60/100ths of U.S cent. Stocks soared today even with a small uptick in the Weekly Jobless Claims. Traders point to bullish comments by Goldman Sachs regarding industrial giant GE for part of the rally and some better than expected corporate earnings this morning (but where did the corporate earnings come from?). Last on the Dow 9239 up 168 points.

At the end of trading today investors will begin thinking about tomorrow’s final wave of U.S economic data. Friday begins with a look at our overall economic growth when the 2nd Quarter Advance GDP hits the tape. This will be followed by Core PCE Inflation along with the latest regional manufacturing report.

Crude Rebounds, Foreign Currencies React

As the NY trading day opens, it would appear that the recent panic in the Oil markets may have run it’s course. Crude Oil is trading 89 cents higher in the electronic market at $64.24. By the close of trading yesterday oil wound up losing $3.88 per barrel on trading restriction worries and a 5.1 million barrel surge in the Oil supplies. This morning’s Oil rebound is causing a corresponding bounce in the Euro as well as a number of other foreign currencies.

Last on the Euro $1.4072 up 52/100ths of cent against our Dollar. Accordingly, the metals are trading on a firmer note. Silver gained 13 cents to $13.45. Gold is $6.00 higher at $934.00. Palladium jumped $6.00 to $261.00. Platinum edged up by $2.00 and is currently changing hands at $1175.00.

Traders in all markets will be keeping a wary eye on Oil for the balance of the week for directional guidance. On the domestic front the economic calendar is light today with only the Initial Weekly Jobless claims for traders to contend with. The estimate calls for a slight improvement in the number in first time claims for unemployment compared to last week. Look for 560,000 versus 575,000. Which is again, bad but better.

As for the stock market the Dow ended Wednesday with it’s second straight day of losses. The averages slipped another 26 points. This morning the Dow is being called to open 63 points higher; more than erasing the prior two-day loss. Corporate earnings will continue to dominate the news.

The economic calendar ends the week tomorrow with a barrage of data that includes an advance look at our Gross Domestic Product (GDP), Core PCE Inflation, and the Chicago Purchasing Managers Index of Manufacturing (PMI Manufacturing).

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