Gold update – Good buy thanks to Dubai —
When the news about Dubai having to reschedule its debt hit the market, the Asian markets took a severe beating on concerns about Dubai's debt rescheduling. Japan fell 3.22%, Hong Kong 4.84%, China 2.96%, Taiwan 3.21%, Australia-2.90%, South Korea 4.76%, and India 1.32%. Obayashi Corp. tumbled 8.7% and Kajima Corp., Japan's biggest listed construction company, plunged 14% after Daiwa Securities Group said Japanese builders in Dubai may lose "tens of billions of yen" should they fail to receive revenue from their projects. Dubai had accumulated $80 billion of debt by expanding in banking, real estate and transportation. Then suddenly gold plummeted. And, in a few hours gold fell from US$1192 to US$1134. However, by the end of the day, the precious metal had recovered most of its losses and bounced back to US$1182. If anything, this panic sell presented traders with an opportunity to buy gold.
At one time, January crude oil prices were down around $4.00 a barrel at a 1-1/2 month low mainly due to the news about Dubai. The US weekly data showed a smaller-than-expected increase in weekly crude oil inventories which were up 1.02 million bbl versus expectations of 1.5 million bbl.
Now, the question many people are asking is, "Is this the high in gold?"
As far as I am concerned we have seen all this before, and no matter what, the fundamentals that are currently driving the price of gold higher have not changed. The two main factors that are influencing the yellow metal at the moment are the lack of confidence that investors have regarding the major currencies especially the US dollar, and the changing attitude of central banks. While we have seen the price of crude oil have an influence on the gold price, recently this relationship doesn't seem to be that important.
During the month of November, the Reserve Bank of India snapped up 200 tons of gold offered by the International Monetary Fund (IMF). Then there was speculation in the market that China would probably buy the remaining 203.3 tons. But, Sri Lanka and Mauritius quickly snatched a few tons on offer and now there is talk that India is negotiating to buy the balance. The Central Bank of Russia has added another 500,000 ounces (15.6 tons) to their reserves but they procured this from their own domestic production.
According to the World Gold Council (WCG), the global gold mine production is forecast to rise by 3.7 percent in 2009 to about 2,500 tons. However, it will only satisfy only two-thirds of demand, which soared this year amid the global financial crisis to 3,800 tons. Even if there is a sudden discovery of a new and economically viable gold deposit it takes from seven to 10 years to start production.
As the huge bailout packages and massive deficits are not going to disappear overnight, the value of the US dollar is likely to decline even further in the coming months. And, if the central banks continue to buy gold, the price of the yellow metal is poised to make new highs. While, it may encounter resistance at US$1200 and at US$1300, this will not be the end of this bull market.
In a few hours gold tumbled almost $60 but soon recovered back to $1180. This is a classic panic sell-off. However, the next few days are going to be interesting. The price of gold could run into some resistance at US$1200, but judging on the performance over the last few weeks, this level could be easily breached. Alternatively, we may see some consolidation over the next few sessions before gold resumes its next upward move.
About the author
David Levenstein is a leading expert on investing in precious metals .He brings over 29 years experience in futures, equities, forex and bullion. And, although he began trading silver through the LME in 1980, when it comes to gold, he has traded gold bullion, gold coins, gold shares, gold ETF, gold funds and gold futures for his personal account as well as for clients. Over the years, David has been published in dozens of publications and has appeared on CNBC and Summit TV (South Africa), and is a regular guest on JSE Direct, a premier radio business channel in Johannesburg, South Africa. He is also a regular commentator on www.kitco.com and www.mineweb.com David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.
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Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.