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Gold Fundamentals Still Look Goodby Peter A. Grant
Feb 22, AM 
Gold appears poised to notch a second consecutive lower weekly close. While the yellow metal fell to seven-month lows this week, the range that has dominated since late-2011 remains intact.The bottom end of the range is marked by the 1522.40 low from December of 2011. This support level is bolstered by the unsuccessful challenge in May of last year, when gold traded as low as 1526.93. Despite the hawkish interpretations of recent FOMC statements, the Fed continues to buy $85 bln in assets each and every month. With the Fed's balance sheet now in excess of $3 trillion, I'd be more worried if some members of the FOMC weren't expressing concerns about the costs and risks of QE, especially when the results are considered. Since the great recession reportedly ended in 2009, the best GDP print we've seen was in 2010 at +2.4%. Since then, GDP was a moribund +1.8% in 2011 and +2.2% in 2012. The most recent quarterly data showed a 0.1% contraction in Q4-12. Beyond the massive balance sheet expansion by the Fed, our federal government has also been deficit spending with abandon. The budget deficits for each of the past three years have been in excess of $1 trillion. The total is in fact, $3.68 trillion, which has pushed our national debt to more than $16.5 trillion, prompting the recent suspension of the statutory debt ceiling. Add it all up and you're talking some serious money; and yet economic activity remains tepid at best. I'd call that a pretty poor return on more than $6 trillion. The notion that gold is under pressure because our economic future is looking brighter and investors are rotating out of haven assets and back into stocks is a little lost on me. As a cautionary tale, I remind you of the "green shoots" Spring of 2009 and the "recovery summer" of 2010. The U.S. is certainly not alone in employing extraordinary (and largely unsuccessful) efforts to reinvigorate their economy. Early this week, Felix Zulauf of Zulauf Asset Management counted 38 countries that are pursuing zero interest rate policies. We've delved at great length into Japan's policies aimed at devaluing the yen, to get that country out of recession. The ECB's Mario Draghi famously pledged "whatever it takes" to preserve the euro. One might expect that "whatever it takes" wouldn't get you another recession, yet that's the reality in Europe. Forecasts by the European Commission that came out today project that the eurozone economy will shrink by 0.3% in 2013. While the contraction continues to be driven largely by the periphery countries, even core countries will barely grow this year. French GDP is expected to be just +0.1%, with Germany faring only slightly better at +0.5%. With Japan and Europe already back in recession, the UK on the verge of a triple-dip recession and the U.S. bumping along at stall speed, it strikes me that the removal of accommodations by the world's major central banks is a bit of a pipe dream. The British pound and yen have been getting hammered lately and so gold doesn't look nearly as vulnerable against these two currencies. Meanwhile central bank gold demand surged to a 48-year high of 534 tons in 2012. While investment demand fell by 10% as the market consolidated throughout 2012, demand for bars and coins was back on the rise into year end. Bar and coin demand was lower than in 2011, but was in fact 31% above the 5-year average. Similarly, jewelry demand was down scant 3% in volume terms, but rose 3% in dollar terms. Q4 demand specifically was very robust as economic conditions in India and China improved. Meanwhile, supply remains fairly static. Gold supply fell 1.2% in 2012 and has been pretty consistently between 1000 and 1200 tonnes over the past several years. Bottom line: A true global recovery that would warrant more normalized monetary policy still seems a distant possibility. And given the supply and demand fundamentals, I think the long term uptrend in gold remains secure. NEWSLETTER SIGN-UP Opinions expressed in commentary on the USAGOLD.com website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. USAGOLD, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD does not warrant or guarantee the accuracy, timeliness or completeness of the information found here. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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