GOLD PRICE NEWS - The gold price heads into August having declined for six straight weeks, a phenomenon that has not occurred since 2001 - the inception of the bull market in the price of gold. Gold prices had risen for three straight months before last month’s 4.9% drop. Despite its recent correction, the gold price remains higher by 7.9% in 2010. The slide in the price of gold has come amid a renewed appetite for risk in the global marketplace. The Dow Jones Industrial Average (DJIA) posted its best month in a year, rising 7.1% in July. Stock markets rallied across the globe as worries over the sovereign debt crisis ebbed on the back of successful “stress tests” on European banking institutions. Stock prices rallied, benefitting cyclical commodities such as copper, while gold and investments tied to the gold price were shed. Gold bullion-backed exchange-traded funds suffered heavy outflows in July, evidenced by liquidation in the SPDR Gold Trust (GLD). Last Wednesday, the GLD had redemptions that totaled $700 million, the largest single-day outflow of gold since April 2008 - and the third largest outflow since the GLD launched in 2004. The GLD shed 34.2 metric tons of gold in July, equivalent to $1.4 billion. However, despite the heavy redemptions last month, GLD holds 41.2 million ounces of gold with a market value of $48.2 billion at the current spot gold price. Gold stocks fell in tandem with the gold price as the Market Vectors Gold Miners ETF (GDX) dropped 7.2% in July, led by a 9.5% decline in Newmont Mining (NEM). The GDX is higher by 4.3% thus far in 2010, beating the 0.4% rise in DJIA, but trailing the year-to-date gains in the gold price. The world’s largest gold producers released second quarter earnings last week and the results were largely positive. While Newmont Mining came in light due to higher than expected costs, the gold mining sector’s earnings were generally strong. Companies such as Barrick Gold (ABX), Goldcorp (GG), Eldorado Gold (EGO), and Agnico-Eagle Mines (AEM) demonstrated leverage to the gold price, reporting record earnings on strong operating cash flows. Despite strong earnings, the share prices of gold producers continue to underperform the price of gold. Valuation multiples have shrunk in the gold sector as the sustainability of the gold price near $1,200 has been called into question. Sentiment toward the gold sector remains tepid, evidenced by Market Vane’s bullish consensus on the gold price, which stands at 63% as of Friday’s close. By comparison, the reading was over 90% in December of 2009 when the gold price was $1,220 - a mere 5% higher. While July was unkind to gold and gold stocks, Friday brought a glimmer of hope that the recent slide may be ending. On the back of comments by Federal Reserve Bank of St. Louis President James Bullard, who warned that the U.S. economy may be headed into a Japanese-style deflation, the gold price rallied $12.20, or 1%. Bullard highlighted the importance of fighting deflation and called for the Federal Reserve to engage in a new round of quantitative easing (QE), or money-printing, should the economic recovery continue to soften. QE 2.0 presents the best hope for a breakout in the gold price above its recent $1,265 per ounce high - just the mere mention of it could lead to a run at the all-time high.

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