Gold above 1,000

That’s the headline surrounding markets today.  The psychologically significant level of $1,000 a troy ounce has been reached today following important news heard the past few days including the lower than expected unemployment report released last Friday, a wave of M&A deals the past two weeks, and the continuous market rally that saw major markets rise 50% above March 9 lows.  Last seen 7 months ago, this development follows strong weakness in the dollar, which hit an 11-month low today with rumors of a steep correction happening soon just lurking around.

The meeting of G20 finance ministers over the weekend can be seen as another factor contributing to this, after the leaders have expressed continued support for global stimulus amid better economic indicators recently reported.  This massive infusion of money into the system have sparked strong inflationary fears, which have caused investors to flee to safer havens such as the dollar but even that strategy is proving to be insufficient.  The drop in the greenback has pushed investors to move to the safer inflation bet that is the yellow metal.

But as the Journal points out, this does not bode very well for the possible emergence of strong seasonal demand for the commodity, if at all.

First due are Hindu festivals in September and October. The end of the monsoon season, meanwhile, brings the Indian wedding season, and then Chinese buyers enter as coins and trinkets are released for sale ahead of the New Year.

Jewelry accounts for about 70% of gold demand, according to the World Gold Council, and India is the world’s largest jewelry market by volume. When gold hit an all-time high 18 months ago, the knock-on effect on prices was swift as consumers voted with their feet.

Without any significant increase in demand for gold, this rally to the thousand-dollar level could prove to be short-lived.

Jewellery demand for gold sank to a 5½-year low in the second quarter of 2009 due to global economic recession. High local prices in India, the world’s largest jewellery market, also weighed on demand, which fell 31 per cent to 88 tonnes in the second quarter, while demand in Turkey, another key market for gold jewellery, dropped 54 per cent to 19.2 tonnes.

John Reade, precious metal strategist at UBS in London, said he was unconvinced that all the ingredients were in place for a sustained surge higher in gold. “Over the past few years, most good buying opportunities in gold have been marked by strong jewellery demand that had followed a period of speculative long liquidation,” he said.

Read from the FT.

To the dollar’s weakness:

Analysts said the dollar was also suffering given the improvement in investor sentiment following a raft of recent data from across the world that suggested the global economy was recovering.

That optimism was boosted over the weekend after G20 finance ministers vowed to continue with policies aimed at supporting the global economy.

The UN also created buzz last week when it expressed its views on the dollar as the global reserve currency.  From Bloomberg:

UN countries should agree on the creation of a global reserve bank to issue the currency and to monitor the national exchange rates of its members, the Geneva-based UN Conference on Trade and Development said today in a report.

“There’s a much better chance of achieving a stable pattern of exchange rates in a multilaterally-agreed framework for exchange-rate management,” Heiner Flassbeck, co-author of the report and a UNCTAD director, said in an interview from Geneva. “An initiative equivalent to Bretton Woods or the European Monetary System is needed.”

Take note that this is not exactly the same as the special drawing rights type of currency that China and Russia have called for in the past.

Through an FT Alphaville citation from the UNCTAD report:

A viable solution to the exchange-rate problem, preferable to any “corner solution”, would be a system of managed flexible exchange rates which aims for a rate that is consistent with a sustainable current-account position. But since the exchange rate is a variable that involves more than one currency, there is a much better chance of achieving a stable pattern of exchange rates in a multilaterally agreed framework for exchange-rate management.

A step that would go much further than the introduction of a substitution account would be to enable a new “Global Reserve Bank” or a reformed IMF to issue an “artificial” reserve currency, such as the “bancor” suggested by Keynes in his Bretton Woods proposals for an International Clearing Union.

More here.

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