Gold at a new record high

A two week rally pushed gold to a new record high. Last week, gold gained another 50$/oz to close the week at 1593$/oz. Silver performed even better by gaining almost 10% on the week, but despite coming close to the 40$/oz level, silver clearly remained far below the record high. During the first half of last week, both precious metals advanced strongly while the US dollar firmed against the major 5 currencies at the same time. However, during the second half of the week, the US dollar pared its gains, which was another positive factor for gold and silver. However, we still recommend to keep an eye on the US dollar as its influence on the price development of precious metals could strengthen again.

One of the major factors pushing gold and silver higher is the ongoing debt crisis in the eurozone. At the start of last week, European bond markets panicked. Italian government bonds got under massive selling pressure after the Italian PM Berlusconi made a comment about the saving package of his finance minister Tremonti, which the market understood that the finance minister would be at risk of being sacked. However, the Italian parliament passed the Tremonti austerity measures to balance the budget by 2014 in record time of only one week last Friday. Also an auction of Italian government bonds went well, which calmed the strained nerves of investors. Nevertheless, the market is still jittery. A debt crisis in Italy would certainly be beyond the means of the EMSF.

However, for the time being, the debt crisis in Europe is probably to stay a supporting factor for gold. The market is still waiting for an agreement of European finance ministers on a second bail-out of Greece. The major obstacle is again the German government. The Merkel cabinet is opposing smart solutions, which would not trigger a downgrade of Greek government bonds by the rating agencies, but insists on the demand that private investors should bear a major share of a restructuring of Greek debt. As long as the ideology of the German chancellor prevents a pragmatic solution, precious metals have further upside potential.

The market also waited for the results of the stress test of 91 major Banks in Europe. There were many reports about leaks from officials about the results of these tests as well as some unfounded rumors, which also gave the precious metals a push higher. However, the actual number of only 8 banks needing to increase their capital to satisfy the required capital ratios was far less than the whisper numbers indicated (up to 20). As the results of the stress tests were released after the markets were already closed in Europe, it might have an impact on the precious metals with the start of trading at the new week. Last year, the marked was relieved about the results of the stress tests. This might be the case again this year. However, it might easily be overshadowed by the pending solution of a second bail-out of Greece.

A second factor supporting the precious metals last week had been the semi-annual testimony of Fed chairman Bernanke at the Congress. Obviously, some investors and traders have difficulties to understand a sentence in the conditional form. A statement, the Fed could act with QE3 or other measures of expansionary monetary policy if needed, does not imply that the condition for embarking on QE3 is given. The written statement of Mr. Bernanke as well as the recent FOMC statement and the minutes made it quite clear that the majority of the FOMC does not regard a further monetary stimulus being necessary to prevent the US economy slipping into a double dip recession. Nevertheless, the market interpreted Bernanke’s testimony as a preparation for implementing the next round of quantitative easing. This has pushed gold to the new record high. However, the crucial question is now, can gold and silver defend the gains even without the support of a further monetary stimulus in the US?

After large speculators reduced their net long position in gold futures during the preceding two weeks from 203,227 to 157,775 contracts, they strongly increased the net long position by almost 40K contracts in the week ending July 12 to 197,597 contracts. Also in the silver market, large speculators increased their net long position since the start of July. At 20,503 contracts it is at the highest level since the May crash in commodities.

After a two week rally, gold is overbought. Thus, a correction can not be ruled out. However, the fundamentals are still positive. Furthermore, while still some weeks away, the best season for precious metals is approaching. Thus, we would use a correction in precious metals to increase positions as long as the debt crisis in Europe is not calming down.