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The Gold Stock Strategist analyzes leading junior gold producers and major gold mining companies.

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Wednesday, September 16, 2009

Gold Breaks Out: Expected to Challenge All-Time High

The price of gold is breaking out to an 18-month record, rising as high as $1023 this morning amid renewed inflationary expectations and a weak dollar. Improved confidence in the global economy remains high after reports suggest the recession is over. Positive economic data and a falling U.S. dollar are sparking a rally in global equity markets. As a result of growing expectations for a stronger economy, investors are moving into gold as a hedge against inflation.

Positive economic data include strong retail sales in August rising 2.7% from the prior month, a higher-than-expected U.S. producer price index rising +1.7% month over month in August. Core consumer price inflation is still constrained as this morning’s August report showed that core consumer price index (CPI) remains steady with a 0.1 percent gain, meeting the consensus forecast. The headline CPI surged 0.4 percent on higher energy costs in August — also matching economist’s expectations.

Though the core CPI remaining low at an annual pace of 1.3%, inflation remains a concern for investors. Even despite reassurances by central bankers from major economies that inflationary pressures remain tame, investors are concerned policymakers would have difficulty in making an efficient exit from the extraordinary stimulus measures adopted last year. If the exit strategies are not timed well, the global economy is at risk of falling into extraordinary inflation.

Just last week, former Federal Reserve Chairman Alan Greenspan stated, “Gold prices that jumped above $1,000 an ounce this week are signaling that investors are buying metals to hedge against declines in currencies.” Greenspan indicated that gold’s gains are “strictly a monetary phenomenon … an indication of a very early stage of an endeavor to move away from paper currencies.” Mr. Greenspan concluded, “What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment.

Gold is expected by many analysts to challenge its all-time high of $1,035 based on investor concern for higher inflation. Many fund managers and self directed investors have been gaining exposure to gold through ETF Gold Shares (GLD) or through the gold miners using indexes like the Market Vectors Gold Miners ETF (GDX) and the Gold Bugs Index (HUI). Companies included in the indices include Barrick Gold (ABX), Newmont Mining (NEM), Goldcorp (GG), Yamana Gold (AUY), Agnico-Eagle (AEM), and Kinross Gold (KGC).

Spot gold is trading at $1,017 an ounce at 11:05am this morning, up almost $10 an ounce for the day.

Disclosure: No Positions


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