Commodity Trade Mantra

Great Gold Rush at Central Banks amid Mirage of Growth

Gold Rush amid Mirage

Great Gold Rush at Central Banks amid Mirage of Growth

Gold and Silver markets may soon see larger & stronger movements from Monday, 26 Nov onward till the end of 2012 at least. Most financial markets will see choppy & large trade movements while the US Fiscal Cliff is debated in Congress. Lowered margins for Gold and Silver on the Comex division of the New York Mercantile Exchange have gone into effect, and this will surely encourage the opening of new positions & also enhance trading capacities. Gold and Silver bulls yesterday seemed unfazed & showed no reaction to news reports that Israel and Hamas had agreed to an Egyptian-brokered ceasefire & trades ended the day on a stronger note. The Gold and Silver Market saw lowered participation in a subdued, pre-holiday trading session ahead of the US Thanksgiving long weekend holidays. Silver Prices hit a fresh five-week high & also closed near the session’s high. The possibility of the US Fiscal Cliff being resolved seems to have triggered a mild rally in Copper & other Base Metals also. Also the new political regime in China could mean more capital investment, which is again positive for Base Metals. Base Metals may also benefit on fresh monetary easing if Shinzo Abe, head of Japan’s Liberal Democratic (opposition) Party, wins next month’s parliamentary election. Based on the huge Quantitative Easing programs initiated globally, the start to the next year seems to be on the upside showing a pseudo growth picture. The collapse would come a bit later as the impact of these programs trigger massive Inflation. And if I expect Inflation to rise, I surely expect prices of raw materials to zoom considerably. The Risk off against the metals pack is affecting the sector in general but once the US Dollar starts it’s southbound journey, these would seem as an attractive option left unattended for long.

Gold Mirage

The Great Gold Rush:

Brazil raised its Gold Reserves for a second month in October to the highest level in more than 11 years as emerging nations from Kazakhstan to Russia boosted holdings by more than 40 metric tons. Brazil’s holdings expanded 17.2 tons last month to 52.5 tons, the most since January 2001, according to data on the IMF – International Monetary Fund’s website. The country’s 1.7-ton purchase in September was the first since December 2008. Kazakhstan’s holdings increased 7.5 tons, Russia added 0.4 ton and Turkey’s reserves rose 17.5 tons, the data show. Germany, the second-biggest holder, after the U.S., cut Gold Holdings by 4.2 tons, the first reduction since June. Central banks across the globe purchased a whopping 373.9 tons of gold in the first nine months this year and expected to hit around 500 tons by the end of the year, according to World Gold Council. Last year, central banks around the world were net purchasers in the year, adding to their overall gold reserves by 440 tones, compared with 77 tones in 2010. WGC said diversification of reserve assets remains the driving force behind gold demand by central banks and purchases of a similar order of magnitude are expected for the fourth quarter,” the council said in a report released recently. Central banks buying of gold have been a major support to Gold Prices, which hit record highs a year ago and are still holding above $1,700 an ounce, more than double their level of five years ago. Gold accounts for about 0.5% of Brazil’s total reserves and 20% of Kazakhstan’s, according to the World Gold Council. That compares with more than 70% for the U.S. and Germany, the biggest bullion holders.

Indian Central Bank against local Gold Rush will dampen Sales:

In an attempt to cool the Indian Gold Demand the Reserve Bank of India directed banks not to give loans for purchase of gold in any form, including primary Gold, Gold Bullion and Gold Jewelry, to dissuade people from indulging in speculative activity. The RBI Notification: No advances should be granted by banks for purchase of gold in any form, including primary gold, gold bullion, gold jewelry, gold coins, units of Gold Exchange Traded Funds (Gold ETF) and units of gold mutual funds. However, it said banks can provide finance for genuine working capital requirements of jewelers. The decision was taken in view of significant rise in imports of gold in recent years putting pressure on current account deficit. In the 2011-12 fiscal, India’s gold imports stood at $60 billion and the quantum of import was 1,067 tones. In the April-June quarter of the current fiscal, however, gold imports had contracted by 18.4% year-on-year to Rs 71,912 crore ($ 13 billion). The RBI had earlier attempted cooling off India’s Gold Demand through doubling of the import duty on Gold Bars and Gold Coins to 4% and also through the introduction of a 1% excise tax to non-branded Gold Jewelry.

In March this year, the RBI – Reserve Bank of India, tightened lending norms for non-bank finance companies against gold jewelry; they can now lend only 60% against the value of gold offered as collateral. In the last budget, the government raised customs duties on gold. And now, in yet another move to deflect a gold-obsessed nation away from physically trying to possess the yellow metal, the ministry has called for the introduction of a Gold Accumulation Plan (GAP) based on the report of the committee for “Deepening India’s household financial savings,” as reported by BusinessLine.

Crude Oil downside remains Limited:

Crude Oil prices remain near their lowest levels since mid-summer in response to worries about the global macroeconomic backdrop and a well-supplied North American market. Any further escalation of tensions in the Middle East would trigger massive upside movements in Crude Oil prices also, if the tensions include other oil-producing countries. Reduced Iranian Crude Oil supplies also remain a cause of concern. Conflict by itself is not enough to support Crude Oil prices on an ongoing basis & so upsides could remain limited. Politicians in Europe, though hesitatingly, will not let Europe fall apart, at least not soon now. Bailout Aids being held now for one reason after another, will soon get disbursed. With the Republicans and Democrats expected to strike a compromise, the US too seems sure of avoiding a fall over the Fiscal Cliff. Moreover, the Fed’s QE3 is sure to continue printing money. All this will provide the necessary boost to market sentiments & as referred to earlier, the mirage of Global Growth Resuming may lead to optimism which in turn will help prices rise higher & finally trigger Inflation crazily.

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