St. LOUIS (ResourceInvestor.com) -- The price of gold tapped $600 an ounce this morning for the first time since January 1981. After news sources everywhere lit up the wire with their explanations, speculations and declarations, Resource Investor compiled some of the best opinions to create and all-encompassing look at what’s driving the gold market. Here’s what the experts have to say.
Geopolitical Concerns
“[It is] reasonable to conclude that [Secretary of State Condoleezza] Rice’s call for sanctions on Iran and the car bombing in Iraq are weighing on trader’s minds,” said Jon Nadler of Kitco.com. - quoted by MarketWatch.
Today, the U.N. Security Council said it could give Iran only two chances to curb its nuclear programs before imposing sanctions.
Ambassador John Bolton told reporters at a news conference that if Iran defies a U.N. statement, urging it to suspend its uranium enrichment activities by the end of this month, then the council likely would issue a stiffer warning demanding such compliance.
Also today, a car bomb exploded in the Shi'ite Muslim city of Najaf, killing at least 13 people and wounding 40 as Iraqi leaders remained deadlocked over forming a new government to avert sectarian civil war.
Police said the blast occurred near the Imam Ali shrine, one of the most sacred to Shi'ites around the world.
The ongoing nuclear standoff in Iran and the difficulties in Iraq have added to anxiety over a dwindling crude supply and a weakening dollar, thus leading many investors to buy into gold as a hedge against inflation.
Oil Market
“Rising oil prices and the political concerns are flowing into gold prices,” said Gerard Burg, a commodity economist at National Australia Bank Ltd. – quoted by Bloomberg.
Crude oil for May delivery rose 43 cents, or 0.6%, to $67.50 a barrel today on the New York Mercantile Exchange. Prices are up 21% from a year ago and within 5% of the record $70.85 set Aug. 30, after Hurricane Katrina.
According to analysts, crude oil rose on concern that U.S. refiners will fail to produce enough to meet gasoline demand when it peaks this summer.
The amount of U.S. fuel making capacity that is offline today is double a year ago, a sign refiners are struggling to catch up with maintenance work that was delayed by the hurricanes that struck the Gulf Coast last year. The nation's gasoline inventories fell last week and are down 6.2% over five weeks, according to the U.S. Energy Department.
Therefore, the gains in gold are being stoked by rising oil prices as investors seek a hedge against accelerating inflation.
U.S. Dollar
"This is all on the dollar's problems, rising energy prices, the situation with Iran ... and also the general public always becomes more interested in the metals when they are rising," said Scott Meyers, an analyst with Pioneer Futures. – quoted by Reuters.
Although the dollar was last trading up 0.5% vs. the euro and up 0.1% vs. the yen today, it may have just forestalled a slow and steady decline as the Federal Reserve nears the end of its interest rate-raising cycle, according to Reuters.
Whether the Fed lift rates just one more time to 5% or again to 5.50% or even higher, the U.S. central bank is indeed closer to the end than the beginning of its nearly two-year-long credit tightening campaign.
And to help draw a picture, the government deficit exceeded $8.2 trillion early this year, which equals roughly $27,000 per citizen, according to statistics.
Today, the average American household has $8,000 in credit card debt. And for every $19 Americans earn, they spend $20. For the first time in history, the savings rate of Americans has dipped into negative numbers.
As most of us know already, a weak dollar makes gold cheaper for holders of other currencies and boosts demand.
Fund Buying
“It's all fund buying. It’s money chasing money, just like it has been for week after week and month after month,” said Leonard Kaplan, president of Prospector Asset Management. – quoted by Dow Jones.
According to Barclays Capital, money in index-linked commodity funds will rise 38% this year to $140 billion. These funds are betting gold will keep outperforming other assets such as stocks and bonds.
The Standard & Poor's 500 Index of stocks has climbed 5% this year; ten-year U.S. Treasuries have lost 2.6%; gold has jumped 15%.
Investment funds have been the biggest buyers of gold this year, outpacing purchases by jewelers, who accounted for 73% of demand last year, the London-based World Gold Council said in a March 29 newsletter.
Conclusion
James Turk, founder of GoldMoney.com told Resource Investor today “gold is money - it is the only commodity produced for accumulation - so it is driven by monetary events.”
“Therefore, to correctly look at what is happening, it is not correct to say that gold is going up. Rather, it’s the dollar that is going down,” he said.
Turk noted that one ounce of gold purchases basically the same amount of crude oil it bought 50 years ago. One cannot of course say the same thing for the dollar, constantly declining because of inflation, he added.
“What's more: the government reported inflation numbers are bogus,” said Turk. “They are constructed in a way that masks the true day-to-day inflationary pressures we are facing as we buy food and gasoline.”
Gold’s purchasing power remains steady, and people are beginning to understand this reality, so they are moving into gold, commodities and other tangibles in order to protect their purchasing power, according to Turk.
Metal Price Activity
Gold for June delivery rose to $600 an ounce in regular trading on the New York Mercantile Exchange, having hit a high of $601.90 in electronic trading this morning. The contract closed at $599.70, up $7.20 for the session.
“I have been saying that gold is never going back below $500 - ever. I have also been saying that $850 is a reasonable target for this year,” concluded Turk.
