Gold Flat as Coffee Surges 20% in 6 Days and Oats Surge 40% in Week

Gold

Gold and silver fell marginally yesterday in lacklustre trade on thin volumes. Gold appears to be consolidating above $1,200/oz and support can be seen at $1,177/oz and $1,145/oz (see chart below). As ever in the short term anything could happen but given the continuing degree of sovereign risk, gold is more likely to move higher than lower in the medium term and $1,300/oz remains possible over the summer despite the traditionally negative season. Gold is currently trading at $1,234/oz and in euro, GBP, CHF, and JPY terms, at €998/oz, £834/oz, CHF 1,374/oz, JPY 112,664/oz respectively.

Gold in USD – 1 Year (Daily). Click on image to view full size

Many banks and bullion dealers have recently been revising up their gold forecasts (the majority of which were again bearish on gold this year). Our year end price target of $1,350/oz to $1,400/oz remains viable and indeed there is the possibility of a spike to higher levels.

While Wall Street was flat overnight and Asian markets mixed, European equities have risen so far this morning showing risk appetite continues and for now markets are ignoring continuing significant financial, economic and monetary risks.

Cross Currency Table – 1030 GMT. Click on image to view full size

The Swiss franc, the euro, the pound and gold are stronger this morning with the US dollar and commodity currencies coming under pressure (see Cross Currency Table above). Coffee has surged 20% in a 6 day surge and oats have surged 40% in a week. The Reuters CRB remain below its highest levels of earlier this year and whether this is the start of a trend for higher commodity prices remains to be seen.

Gold remains sanguine with gradual movements up and down and rarely has seen movements of more than 2% in a day. Inter day volatility has jumped recently by gold’s move up in recent months has been gradual and gold is only marginally above the price it was trading at in early December 2009. The six month period of consolidation and gradual rise would suggest that the (nominal) price highs seen recently are sustainable and not a bubble as proclaimed by some. The sharp movements seen in the coffee and oats markets are the type of price action that one would expect to see in the gold pits when we reach a gold mania or ‘gold rush’ or a bubble on a par with the 1970s when gold rose 25 times in 9 years and over 100% in one year – 1979. In 1979, gold rose 140.27 percent – from $US 234.40/oz to $US 563.20/oz.

The recent calm in debt markets has ended as Greek, Portuguese and Spanish bonds fell sharply and the Spanish German bond spread rose to its highest since the inception of the euro yesterday. Investors bought Spanish debt at a government auction today, assuaging concern that the nation will struggle to meet forthcoming redemptions for the moment. The sales were likely only possible after the sharp falls in price and rising yield seen in recent days. Spanish government bonds lost investors 4.3 percent this year, compared with returns of 6.5 percent for German bonds and a 15 percent loss for Greek debt, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Inflation pressures remain internationally as seen in Britain where the CPI for May was at 3.4% and remains more than twice the rate in the eurozone and has been significantly above target since December. Many economists and the Bank of England maintain that this is a short term blip higher and is "temporary" and appear to underestimating the risk of inflation and stagflation. Especially, as VAT is likely to rise in next week’s emergency budget. Given the UK’s poor fiscal position, sterling’s underperformance versus gold is likely to continue.

G10 Currencies and Precious Metals Performance – Quarter to Date. Click on image to view full size

Silver

Silver is currently trading at $18.47/oz, €14.92/oz and £12.49/oz.

Platinum Group Metals

Platinum is trading at $1,576/oz and palladium is currently trading at $474/oz. Rhodium is at $2,425/oz.

News

* Gold prices may reach between $1,450 and $1,470 an ounce by the end of the year as investors look to bullion as a safer investment than currency trading, David Baker, a managing partner of Baker Steel Capital Managers, said in a Bloomberg Television interview (Bloomberg).

* KABUL – An Afghan mining official says the untapped minerals in the war-torn country are worth at least $3 trillion – triple a U.S. estimate.

Minister of Mines Wahidullah Shahrani said Thursday he’s going to Britian next week to discuss how to attract foreign investors to mine one of the world’s largest iron ore deposits in Bamiyan province. The relatively safe area is in the heart of the war-torn nation.

The U.S. Department of Defence earlier said Afghanistan’s reserves of iron, copper, cobalt, gold and other prized minerals could be worth $1 trillion. Shahrani says that’s conservative.

The ministry has been working with international partners to assess Afghanistan’s mineral reserves and improve the expertise of Afghan geologists (AP).

* European debt markets remain under high stress on persistent reports that Spain is in secret talks with EU officials and the International Monetary Fund for a support package of up to 250bn (£208bn), the largest rescue in history. The spreads on 10-year Spanish bonds jumped to a post-EMU high of 224 basis points above German Bunds as traders brace for a crucial auction by Madrid on Thursday. The relentless rise in bond yields replicates the pattern seen in Greece at the onset of crisis. Spain must raise 25bn of debt in a cluster of auctions in July. "We’re in a dangerous and stressful situation," said Gary Jenkins, a credit expert at Evolution Securities. "Spain is a big enough borrower to wipe out the EU’s rescue fund" (Daily Telegraph).

Mark OByrne

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