Gold Up-Date - January 17, 2011

It is my belief that a full-out military confrontation with Iran will be another catalyst to push the price of gold to a new record high. But, even if a military invasion of Iran is avoided, there are other catalysts in the market that could easily propel the price of gold to new record highs, in particular the Eurozone debt crisis and the escalating demand for physical gold from China.  
On Friday, January 13, Standard & Poor’s downgraded the credit ratings of nine euro zone countries. S&P lowered its long-term rating on Cyprus, Italy, Portugal and Spain by two notches, and cut its rating on Austria, France, Malta, Slovakia and Slovenia by one notch.
The move puts highly indebted Italy on the same BBB+ level as Kazakhstan and pushes Portugal into junk status.
The credit-rating agency put all 14 Eurozone nations — Austria, Belgium, Cyprus, Estonia, Finland, France, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovenia, and Spain — on “negative” outlook for a possible further downgrade.
Germany was the only country to emerge totally unscathed with its triple-A rating and a stable outlook.
“Today’s ratings actions are primarily driven by our assessment that the policy initiatives that have been taken by European policy makers in recent weeks may be insufficient to fully address on-going systemic stresses in the euro zone,” S&P said in a press release announcing the downgrade.
While banks and financial institutions bail out of the euro and plough back into the US dollar, prudent investors will turn to gold instead. So, while the euro weakens against the dollar, gold may be seeing some short-term pressure, but this will not last long as investors lose more confidence in the major fiat currencies.
As we have seen over the last few years, not only are central bankers especially those of Western countries attempting to suppress the price of gold they are also intervening in the currency, bond, equity and commodity markets. While they attempt to keep the price of gold low, the Chinese and Indians are using this opportunity to accumulate more of the physical metal.

Chinese gold imports from Hong Kong — which in past years have accounted for about half of the country’s total imports — have soared to unprecedented levels.

China’s imports from Hong Kong surged to 102. 8 tons in October. This is a 20% increase and a 483% increase year-on-year. In October and November, China imported 189 tons of the precious metal from Hong Kong. Add to that China’s domestic production, which runs at a rate of about 90 tons a quarter, and even without including any buying in December or any imports from sources other than Hong Kong, Chinese demand in Q4 would stand at a minimum of 279 tons. Total imports for the whole of 2009 were only 45 tons.

As of June 30, 2009 the Chinese central bank holdings of gold stood at 1054 tons. While they have not announced an increase to these holdings I am sure that the current holdings are lot more than this.

As I have stated in many of my reports, the only solution for the Eurozone crisis will be for the ECB to print huge amounts of money, or for a complete new restructuring of the membership participation which will exclude the more troubled nations that will ultimately have to default. But, no matter what the financial leaders and their political counterparts conjure up, their policies of expanding bank credit and low interest rates will simply cause more instability in the financial markets, a preview of which we have seen in the last year. Daily swings of several hundred pips will become more frequent with the majors and thus we can expect to see this play out in the gold market in the form of more volatile and larger price swings on a more frequent basis.
So with a potential war with Iran looming, a worsening of the Eurozone debt crisis and an escalation for physical gold, I simply cannot see lower prices for the yellow metal.
TECHNICAL ANALYSIS
Analysts, as well as traders are keeping a close eye on the break through the 200 day MA. If gold continues to trade above this line traders’ sentiment will become more bullish. I believe we will soon see a test of a level of resistance set at around $1680 per ounce.

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.