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Old 12-23-2009, 06:11 AM   Nav to Top  #1
jacovsamuel
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Default Gold Price Breaks Below $1,090 – Gold Higher in 2010?

Gold Price Breaks Below $1,090 – Gold Higher in 2010?

The gold price traded down again today, declining $5.81 to $1,085.94 per ounce after its $20.25 drop yesterday. The price of gold and companies that produce and explore for gold have been under pressure over the past three weeks chiefly due to the headwind created by an appreciating U.S.

dollar. Investors have covered short dollar positions and have begun to establish long dollar positions on the expectation that economic growth will be robust enough in 2010 that the Federal Reserve will begin the process of normalizing monetary policy. The U.S. 10-year bond yield, at 3.7%, has risen to its highest level in four months. Stock markets across the globe have been strong with the S&P 500 index trading up to its 52-week high early in today’s trading session.

Every piece of economic data will continue to be scrutinized for clues as to whether the private sector is strong enough to cope without the support of the public sector. Third quarter GDP was released this morning showing that the economy expanded at a 2.2% pace versus the 2.8% gain previously reported by the U.S. Commerce Department. In addition to higher bond yields, increased inflation expectations are evident in the widening spread between the 10-year yield and the 10-year Treasury Inflation Protected Securities (TIPS) yield. Confidence is high that Chairman Bernanke and the Federal Reserve will be able to drain the excess reserves from the system and shrink the Fed’s $2.2 trillion balance sheet when the time is right. This growing confidence in the Fed, as well as in the sustainability of the current recovery, has led to the rise in the U.S. dollar and the corresponding decline in the gold price and gold mining stocks. The SPDR Gold Trust (GLD) is hovering at $106.50 after hitting a high print of $119.54 on December 3, while the Market Vectors Gold Mining ETF (GDX) has slid to $45.44 from its $55.40 print earlier this month losses of 10.9% and 17.9%, respectively.

This confidence in the Fed, as well as the growing consensus that the private sector will be strong enough to withstand the removal of public sector support, is crucial to a continuation of the rally in the dollar and the decline in the gold price. Should either of these pillars erode and the market perceives that further government funds and support are necessary to prevent a double-dip recession, then investors will likely return to gold-related investments as a store of value in a world of depreciating currencies.

With the finances of governments across the globe increasingly stretched due to expanding deficits and debts, the credit quality of sovereign debt is deteriorating. This is evident in the recent debt downgrades of Spain and Greece - and represents a dangerous trend heading into the New Year. Confidence in fiat currencies is inversely correlated to the gold price and should worries intensify over the credit quality of sovereign debt, then gold-related investments would stand to benefit.

Even after its 7.4% decline in the month of December, the gold price is still higher by 23.4% in 2009 - and is set to rise for the ninth consecutive year, making it one of the best performing asset classes of the decade. Whether 2010 will make it ten straight years of price gains is open for debate, however, with gold bears becoming more vocal in recent weeks it appears the wall of worry in gold’s bull market remains in place.
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