January 2010

Spot gold closed the month of January at $1,080.85, a decrease of $16.10 or 1.47 percent. Equity markets, as measured by the S&P 500 Index, shed 3.59 percent. The U.S. trade-weighted dollar increased 2.06 percent.

• The China Gold Association said China’s gold output jumped 11.3 percent to a record of 314 metric tons in 2009, securing its position as the world’s largest gold producer for the third straight year.
• India started the year on a positive note by importing 35 to 40 metric tons of gold during the first 27 days of January, up from 9.8 metric tons in January 2009. Stable prices have given 2010 a good start to gold demand, the Bombay Bullion Association said.
• Gold Fields Mineral Services said in its latest gold survey that official central bank sales declined 90 percent in 2009 as they shifted onto the buy-side of the market during the second quarter and have remained there since. Central bank gold sales for the year were only 157 tonnes, significantly lower than the Central Bank Gold Agreement’s quota of 500 tonnes.
• World investment tonnage more than doubled last year, rising by 482 percent to 1,375 tonnes, as investors piled into bullion-backed exchange traded funds and other investment vehicles that track the price of gold. Investors bought 30 metric tons via exchange-traded funds in the fourth quarter of 2009, contributing to an overall total of 1,762 metric tons of ETF holdings for the year.

Weaknesses

• Commodities across the board were hit on the news that China’s tightening would lead to less demand for raw materials. China’s rapid expansion in the fourth quarter of 2009 led to a curb in retail lending as Chinese officials restricted overall credit growth to tame inflation because of an overheated economy.
• Risk averse investors sought the safety and liquidity of the U.S. dollar as sovereign credit risks in the eurozone continue to escalate. Greek credit default swaps widened by 33 bps to 348 bps.
• The U.S. dollar was also buoyed after Republican Scott Brown won a U.S. senate seat in Massachusetts and vowed to prevent healthcare reform in Congress, which eased concerns that the cost of the proposal would lead to higher debt levels.
• Peng Junming, an investment strategist of China’s sovereign wealth fund, said that the U.S. dollar has most likely bottomed as there will be very limited space for it to drop further and added that there is no urgent need for China to increase gold buying for now because of high prices.

• Research from Cormark Securities shows that global gold production peaked in 2001 at 2,600 metric tons. World output has been steadily declining since because of lower deposit grades and higher capital costs that are making it uneconomic for producers to bring new gold onto the market.
• A bullion analyst in Beijing said the high price of gold is not deterring Chinese investors from the yellow metal as it does in India and the Middle East. Global investors Jim Rogers and Marc Faber have said that falling Chinese equity markets present good gold-buying opportunities.
• Inflation expectations have risen sharply in the U.S. and Europe in the past three months against a background of economic growth. Demand for inflation-indexed government bonds continues to rise amid expectations that interest rates will rise this year to subdue rising prices.
• According to the Sovereign Wealth Fund Institute , there are a total of 55 sovereign wealth funds globally and half of them are linked to the United Arab Emirates (UAE). Western economies have expressed concern over UAE member Dubai’s credit woes and the $10 billion bailout package from neighboring emirate Abu Dhabi. The issue going forward is that sovereign wealth funds may withdraw from their overweight investment positions in the U.S. and Europe in order to raise cash for ailing businesses domestically, which may cause weakness in those currencies.
  

• Bank of America-Merrill Lynch analysts believe that policy risk and government intervention remain the largest two risks to the economic outlook in 2010.
• Economist Nouriel Roubini said he is pessimistic on the eurozone and that Spain poses a serious threat because of its fiscal imbalance. Spain is the region’s fourth-largest economy with an unemployment rate of 19 percent, double the EU average. Rising sovereign debt risk may cause a flight of capital into the refuge of the U.S. dollar.
• At the start of the year the consensus for most market strategists was for a strong first half in 2010 with some weakness expected in the second half of the year. The recent bout of profit taking may have to run its course and would impact all asset classes.
• The chairman of the Commodity Futures Trading Commission said that the agency’s planned meeting in early March to discuss possible position limits on metal futures and options contracts will focus on gold and silver contracts.

For the month of January, the Philadelphia Gold & Silver Index (XAU) decreased 12.08 percent. The S&P/TSX Global Gold Index fell by 10.07 percent. The FTSE/JSE African Gold Mining Index lost 8.37 percent. (Returns are quoted as price return in the home currencies of each index. For example, the S&P/TSX Canadian Global Gold Index is calculated using Canadian Dollars.)

Past performance does not guarantee future results.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar. The Philadelphia Stock Exchange Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver. The S&P/TSX Global Gold Index is an international benchmark tracking the world's leading gold companies with the intent to provide an investable representative index of publicly-traded international gold companies. The FTSE/JSE African Gold Mining Index is a market capitalization weighted index.