Gold set a fresh record high, trading to $1,217 per ounce early today. The gold price, gold mining stocks, and nearly every other asset class rose materially on the back of a weak U.S. dollar, which is trading near a 15-month low against a basket of foreign currencies. Vice-governor at the People’s Bank of China Hu Xiaolian told reporters in Taipei that the gold price is elevated and the markets should be wary of the possibility that a bubble is forming in the gold market. As measured by COMEX gold futures, if the price of gold holds its gains today, then it will have been up 20 of the past 22 trading days, an unprecedented winning streak.
“Gold prices are currently high and commodities markets should be careful of a potential asset bubble forming. We must keep in mind the long-term effects when considering what to use as our reserves,” stated vice-governor Xiaolian. China is the fifth largest holder of gold reserves in the world and officials have publicly expressed their intention to diversify away from U.S. dollars, in part by expanding their gold holdings. The statements by Xiaolian may represent frustration that the gold price has accelerated higher without the Chinese being able to accumulate their desired position – including possibly purchasing the balance of the gold currently for sale by the International Monetary Fund.
The rise in the gold price has received a tailwind from the general decline in risk aversion across the globe. Following the brief sell-off stemming from Dubai World’s debt “standstill,” risk appetites have been reinvigorated and the dollar carry trade re-energized – buoying stocks, oil, copper, and a host of other commodities. Markets rallied yesterday as Dubai announced it was in talks to restructure a substantial portion of its debt and U.S. manufacturing was reported up for the fourth consecutive month in November. The S&P 500 closed yesterday up 13.23 to 1,108.86, oil rose 2.3% to $79.04 per barrel, and copper climbed 1.5% to $3.22 per pound. The yield on the 10-year note increased 5 basis points to 3.24%, the first increase in 5 sessions as investors drew confidence from the positive news.
While bullish sentiment currently dominates the investment landscape, there were a couple cues that may signal a rocky road for the markets in the near-term. In a statement yesterday, Philadelphia Federal Reserve Bank President Charles Plosser called for higher interest rates in the current cycle, saying the Fed must take “appropriate steps to withdraw or restrict the massive amount of liquidity that we have made available to the economy,” to convince markets that the Fed is serious about fighting inflation. The market, for the time being, has shrugged off his remarks, perhaps in light of today’s release of last month’s Fed meeting minutes which disclosed the unanimous decision of all twelve Fed directors to continue the zero-rate policy.
Whether Plosser is telegraphing a nascent shift in central bank’s stance will have Fed-watchers dissecting any statements made by Fed officials for corroboration in the coming weeks. The hint of additional hawkish remarks on inflation could result in a reversal in the dollar’s decline as the crowded dollar carry trade is unwound. The impact would affect all asset classes and could be fierce for the gold price and gold mining equities.
In spite of potential future headwinds, gold bulls remain in firm control and the industry received a jolt after yesterday’s announcement from Barrick Gold (ABX), the world’s largest gold miner, that the company had completed the unwinding of its forward gold hedges. The move to unwind approximately 3 million ounces of forward hedges, announced this summer by the company, had been expected to take up to a year to accomplish. To what extent the acceleration of this unwind program drove the gold price over the past few months – and what effect the absence of a major buyer that had been driving demand will now have on the gold price – is now the topic of much debate and speculation.
Clearly the macro-economic drivers of gold have and will continue to impel the price action over the long-term, and so long as central banks continue to promote crisis-driven monetary policy the gold price appears set to continue its bullish uptrend. But the short-term price action picture is more muddled as potential headwinds are emerging. The possibility is growing that the Fed will look to more aggressively reassure the market of its plans to prevent the creation of future asset bubbles, particularly as the Chinese are increasingly expressing concern on this topic. This represents the biggest risk to the gold market – and bears close attention in the coming weeks.
Gold Price News provided by GoldAlert.