Despite all the economic woes that continue to plague the world’s economies, the price of gold has skyrocketed over the past several weeks. Heading into the December 2 trading session, the spot price of gold for December delivery stood at $1,217 an ounce. The recent surge in price can be somewhat attributed to the continual weakness in the value of the U.S. Dollar.
As of the close of the December 1 trading session, the Dollar Index stood at 74.50, the same point in which the market bottomed over the past few trading sessions. With the equity markets posting solid gains over the past three days, it appears inevitable that the index could slip even further, testing support levels at 74.00 and possibly breaking through.
The affects of a falling Dollar makes the Dollar-dominate gold much cheaper for investors that are holding stronger currencies, such as the Euro, the Sterling and the Yen. Not only is the price of gold reaching record high in terms of the Dollar, but gold has also reached highs valued in other currencies, such as 733.02 pounds and 805.71 Euros per ounce.
As the greenback falls, demand for the precious metal increases as does its price. Gold’s record setting pace can also be attributed to inflationary fears as well as actions taken by the world’s central banks to begin to diversify away from the struggling Dollar.
Having increased by more than 55% over the past year, gold is primarily used in two very distinct segments, the first use being for jewelry, while the other is used for investment purposes. Being used in investments, gold has always been perceived as a safe-haven investment.
Over the past year, gold futures have risen by 37%, while the Dollar has slipped nearly 9% against a basket of six world currencies. In recent trade, gold futures for February delivery on the Comex division of the New York Mercantile Exchange advanced as much as $18.20, or 1.5%, to $1,218.40 an ounce before retreating marginally. The previous high for gold was $1,201.40 an ounce, reached on December 1.
VTB Capital commodities analyst Andrey Kryuchenkov commented on gold’s recent surge, “The market is staring into the unknown. There is little doubt that the market remains bullish and even though we expect trading to subside later this month, the downside is still limited.”
Kryuchenkov later added, “At the moment we favor little profit taking. Resistance could yet prove to be very strong and we are looking for a sustained push above it to signal gains to 1,230 -1,250 dollars.”
In reaction to the record setting price of gold, Canada’s largest mining company, Barrick Gold Corp. (ABX) recently announced that the company was eliminating all of its gold hedges in an effort to capitalize on the rising price of gold. Barrick, the world’s number one gold producer, has done away with the contracts that were used to sell gold at a set price prior to the recent surge.
Because the price has risen so rapidly, Barrick was obligated to sell its gold at a lower price, which reduced their profit margins. The alternative to selling at a lower price was to purchase gold in the open market at higher prices to meet contractual obligations. The practice of hedging is used to protect companies from fluctuations in market price, as well as providing a degree of financial stability within the company’s operations.
Under Barrick’s hedging practices, the company was losing potential revenues each time the price of gold ticked higher. The overall revenue losses could have reached the billions as the price of gold has increased nearly 5-fold since 2001.
Aaron Regent, Barrick’s President and CEO remarked, “Our positive view on the gold price led us to accelerate the elimination of these contracts ahead of the schedule we had established. As of today, we are a fully unhedged gold producer,”
In order for Barrick to purge all existing contractual responsibilities, the company issued equity and debt vehicles worth $5 billion to fund its gold hedges. The company also took a $5.7 billion charge in the 3Q to get the hedging losses off their books, and could take an additional charge of $300 million in the upcoming 4Q, as the company was forced to purchase gold in the open market at an average price of $1,070 an ounce.
Gold’s increase in price has also pushed other precious metal prices higher. Silver for March delivery advanced as much as 1% to $19.395 an ounce, its highest price since July 2008. Additionally, the price of Platinum for January delivery jumped as much as 0.9% to a 15-month high of $1,499.90 an ounce. Palladium for March delivery gained 1.6% to $390 an ounce after reaching its highest price of $392 an ounce in July of last year.
Many analysts believe that the gold market will remain bullish for the near future. Nevertheless, there are some that think the overall trading volume will subside by the end of the month. The downside prognosticators of the market, however, appear to be limited.
Barrick’s announcement to purge all existing hedges could be viewed as an indication to other precious metal producers that companies are confident that gold prices should continue on its upward trend. This trend could lead to potentially sharper price gains in the near term.
