Gold once again hit a new all-time nominal high, fixing in London on 18 June at $1,256/oz, beating its previous peak of $1,248/oz on 8 June. On that day it went even higher, hitting a nominal record high in intra-day trading, of $1,251.20/oz, but by 18 June it clocked $1,261.90/oz and looks set to move even higher.

As has been the pattern recently, gold made these gains despite a much stronger US currency. Measured by its index against other currencies, the dollar rose from 82.27 on 3 May to 88.40 on 7 June, its highest since 10 March 2009. Back then gold was trading at $901.50/oz. The dollar index has since declined to 86.08 (16 June), with the gold price retreating in tandem.

Gold’s gains have been made while some other commodities have dropped. 3 May-16 June gold gained 4.7% (despite a dollar rise of 4.6%), while silver lost 0.6%, platinum 10.0%, palladium 14.74% and the LME Index (a basket of LME metals, primarily copper and aluminium) 12.9%.

Why is this? Macroeconomic fears have been the order of the day and gold’s status as a hedge against risk has seen it move in parallel with the US dollar and outperform equities and industrial metals. This is a similar picture to that seen earlier this year, while at the height of the financial collapse in major markets gold fell only slightly along with these other items (besides the US dollar) because it was readily available to sell and boost much needed cash reserves.

That investors are flocking to gold can be seen from the surging demand in sales of gold coins. US American Eagle gold bullion 1oz coin sales hit a record 190,000 oz in May, while sales of the Austrian Mint’s Vienna Philharmonic gold coin in May were up six-fold year-on-year, to 238,000 oz.

ETF demand is also strong. ETF gold holdings stood at more than 65 Moz on 15 June, up 14.6% from the start of the year and 12.5% up from the end of April. The SPDR ETF has added 5.1 Moz since the end of April and the UK ETF 0.8 Moz. This is the sharpest climb in total holdings since the period from February to April 2009, when the gold price rallied from lows of ~$830/oz to ~$950/oz, and is clearly price supportive.

The International Monetary Fund (IMF) continues to sell gold, albeit at a slightly slower pace. In April it sold 14.4t, down from 18.5t in March. One explanation for the slowdown in sales of gold bullion might be due to the fact that there were fewer working days due to the Easter holiday break (in the UK there were 20 working days compared with 23 in March). If we calculate sales per working day, we get 800,000oz/day in March and a slower, 720,000oz/day in April. From May to December there are 170 working days; if the IMF sold 760,000oz/day over that period it would mean another 129t sold by the end of 2010. Added to the 38.5t sold so far, that would mean it had 23.8t more to sell, and thus would complete sales in mid-February 2011.

Short term outlook on gold

Gold has again come into its own as the safe haven par excellence – at least, that’s what Western world investors are saying, if we judge by their continued strong move towards bullion. While sentiment remains transfixed by debt issues in the euro zone and the extremely sluggish nature of global economic recovery, the gold price has no obvious reason to weaken – in fact the reverse. Market sentiment has been caught out too often so far this year, with rising hopes that yes; things are getting better, only being dashed by the release of fresh news casting doubt over that optimism.

There is therefore not just a mood of doubt and gloom now set in about the pace of economic recovery in the West – but, what is worse, an established scepticism that recovery will be swift, sure and pain-free. In the short-term the gold price may be in for some consolidation – but rather like a long-distance runner who has been sitting in an armchair for years, the gold price needs to pause for breath before the next small rally higher. Given the summer slowdown in industrial demand and the increasing likelihood that US interest rates may remain very low for all next year, gold remains well placed to do even better in the mid-term. Short-term London fix: $1,200/oz-$1,300/oz.

VM Group research for Fortis Bank Nederland - Metals Monthly June 2010 - Fortis/VM Group