The gold market got a jolt last week, like most markets, from
a surge of investor hope for the eurozone climaxing in
European Central Bank chairman Mario Draghi's July 26
pronouncement the ECB will "do whatever it takes" to keep the
common currency intact.
The value of our ETFS Gold Trust (
SGOL
,
quote
) rose 2.5% over the past five trading days after going in
circles the previous two months. The increased interest in gold
seems to be underlining what other precious metals investors have
long thought. Eyes will turn back to the Federal Reserve this
week to see if the small greed outbreak continues.
For the last six months at least, gold has been trading as a
"risk-on" asset, waxing and waning in a high correlation with
equities and the troubled euro. To break out of this box, the
gold market needs to return to its historic role as the ultimate
risk-off play, a literally solid alternative for investors and
savers worried about the value of paper currency.
Draghi's reassurance notwithstanding, there is no lack of
worry out there about the euro. The continental currency could be
headed for a new round of dilution if Draghi sticks by his pledge
to do anything to keep its 17 members in the fold.
But the paper money that really counts for the gold market is
the dollar, and this could be a big week for its short-term
future.
The Federal Open Markets Committee, central banking's
equivalent of the politburo,
meets on Wednesday,
putting the financial world through its eight-times-a-year
exercise in Delphic interpretation. On Friday the U.S. government
releases July's job growth statistics, the famous non-farm
payrolls.
Both events will be dissected with great fervor for
indications of whether the Fed is inching closer to a new round
of "quantitative easing", or printing money in plainer English,
that would further debase the dollar and add to
gold's luster. The weaker the jobs numbers, the more likely
the Fed will reach for fresh stimulant. At least that is the
common assumption.
While guessing at the timing of QE3 has been an avid financial
sport since markets turned down this spring, anticipation has
risen to the point that another effective no-comment from the Fed
on August 1 would seem disappointing. If the ECB, which meets the
next day, also fails to follow Draghi's rhetoric with concrete
monetary stimulus, gold and other markets would likely return to
a state of malaise.
Which outcome is more likely? Continuing the recent pattern,
long-term investors in exchange traded products are
displaying faith in the gold market.
Holdings of gold ETPs are within 1% of their all-time high.
Fast-moving speculators in futures are much more cautious. Net
buy positions fell to a four-year low in the week ending July 20,
though they likely rebounded a bit last week on Draghi's
announcement.
Our ability to second guess Fed chairman Ben Bernanke and his
colleagues is no better than anyone else's. The only thing for
certain is that investors in the gold market should watch this
week's events carefully.
