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

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Wednesday, November 4, 2009

Gold Approaches $1,100 on FOMC Statement

Gold hit a new record high above $1,095 an ounce for the second day in a row on Wednesday following the Federal Open Market Committee pledge to keep interest rates low for an extended period of time. The FOMC statement to retain "exceptionally low levels of the federal funds rate for an extended period" helped to spike an already surging gold price.

The FOMC news follows right on the heels of a perfect storm of events for higher gold prices. The nation remains awash in debt and extraordinary budget deficits as far as the eye can see.

Earlier today the Treasury Department announced they are working closely with Congress to pass legislation needed to lift the federal government’s $12.1 trillion debt ceiling next month to avoid a default on the nation’s debt obligations.

Yesterday, the White House budget director made comments in a speech that $1.4 trillion annual budget deficits are “serious and unsustainable.

The International Monetary Fund (IMF) said on Tuesday it had sold 200 metric tons of gold to the Reserve Bank of India for $6.7 billion. The 200 metric tons represent about 50 percent o the total proposed sale of 403.3 metric tons approved by the IMF Executive Board in September.

The IMF sale of gold increased the yellow metal's appeal as it became clear that nations are looking to diversify their foreign reserves away from U.S. dollars. Gold strategists were expecting China to be the first and largest buyer of the IMF's gold , but India bought the first tranche of IMF gold sales. Observers are speculating over the fate of the remaining 203 metric tons of gold for sale by the IMF. In addition to China, Russia is reported to be interested in buying some share of the remaining gold from the IMF.

Also on Tuesday, gold rallied along with the dollar, another bullish indicator for a higher gold price. Gold prices generally move in the opposite direction of the dollar. Strength in the greenback makes gold more expensive for holders in other currencies and reduces gold’s appeal.

Gold prices cut through key technical resistance levels like a hot knife through butter. Gold is now poised to make a run at the psychological $1,100 an ounce level. Spot gold struck a high of $1,095.40 an ounce on Wednesday, pulling back in the late evening to just under $1,090.

Higher gold prices on Wednesday pushed gold mining stocks higher as well on renewed fears that the Federal Reserve Bank will fuel another bubble in asset prices. Barrick Gold $ABX, Jaguar Mining $JAG, and Kinross Gold $KGC were all trading more than 2.5 percent higher today. Not all gold miners were up in share price though, as Goldcorp $GG dropped about 0.6 percent today despite a higher gold price.

The chart below shows that gold remains in the midst of a long-run bull market that started in 2001.

The price of gold is going higher and will likely be characterized by "higher highs" and "higher lows" due to unprecedented levels of U.S. public debt and little political will to rein in extraordinary budget deficits. Consequently, the greenback will continue to drift down providing additional time to get in on this gold bull market.

Quality gold mining stocks are still lagging the price of gold as investors weigh whether gold will drop back below $1,000 an ounce or surge to $1,100 an ounce and beyond. Gold producing companies with growing reserves in politically stable regions are the best way to play a rising price of gold. Pricing leverage provided by gold producers can create outsized returns in a rising price of gold environment.

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