Capital Gold Group Report: Commentary: A Perfect Storm for Gold

Sep 15 2009 3:29PM

Gold cracked the $1,000-an-ounce barrier for a second time last week, and the New York spot price is now hovering right around that four-digit mark. The first time this happened, in March 2008, the price plummeted to the low $900s within a couple of days.

No one knows what gold will do this time around, but there are some plausible reasons why the price could stay higher longer.

The first reason is one that we’ve discussed before—we are now in what has historically been gold’s strongest season of the year. September is gold’s best month of the year in terms of month-over-month price appreciation, the key driver being jewelry makers stocking up for holiday buying in Asia, the Middle East and North America. This strength historically lasts until February.

A second reason relates to the weak dollar due to prolonged rock-bottom interest rates and massive deficits being piled up in the U.S. Gold and the dollar typically move in opposite directions, so a weak dollar tends to be good for gold. That inverse relationship is intact so far in September—the DXY dollar index had lost 2 percent of its value through Friday, hitting a 12-month low, and over the same period spot gold has risen about 6 percent.

A third reason is rebounding interest in commodities overall. Prices for copper, zinc and other metals have seen strength recently. This isn’t surprising, given the growing signs of economic recovery and the dollar weakness.

In addition to these factors, Barrick Gold has reportedly purchased more than 2 million ounces of gold and is expected to buy another 3 million ounces to cut its hedge position by more than half.

Many are afraid that a global economic recovery will unleash inflation. Stimulus spending by the Federal Reserve and central banks around the world has added several trillion dollars to the global money supply. This will eventually erode the value of the dollar and other currencies.

There is an opposing fear that all of the stimulus spending won’t be enough to get the global economy out of its sickbed. What happens then? The Fed and others have made it clear that their medicine will be more stimulus spending, which will further devalue paper currencies.

Either way, gold has appeal.

As long as the global economy is transmitting mixed signals, gold stands to benefit as an uncertainty hedge and a store of value. How long the price is in the $1,000 range or higher remains to be seen, but this unusual convergence of factors creates favorable conditions for gold investors.

 

by Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors, Inc.

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