Is the Real Identity Crisis for Gold, Currency or High Debt Nations?
The attraction & conviction regarding Gold Investment by Fund managers seems to be cooling as the threat of a catastrophic event in the world economy recedes and expectations of a gradual economic recovery grow, fueling demand for other riskier assets- Though this line of thought may seem atrocious to the logical & Economically Intellectual (explained below in the last paragraph of this article). Gold Prices have traded in a broad sideways channel between $1,525 and $1,800 an ounce since falling back from a record $1,920.30 in September 2011, and have repeatedly failed to break back above $1,800 last year or above $1,700 this year, until now. A number of leading portfolio managers have reduced their exposure to Gold Bullion over the past year or plan cuts this year in response to the receding threat of a Eurozone collapse or US debt default – which again seems to be ridiculous to me. Economic data has improved recently in both the United States and the Eurozone. Although a Reuters poll this month still pointed to soft growth on both sides of the Atlantic in 2013, the world economy is expected to perform better this year. That optimism (Based on this Illusion) is rejuvenating interest in other risk assets, such as equities. According to Lipper, net flows to US-based equity funds in the first two weeks of 2013 were, at $11.3 billion, the biggest fortnightly inflow since April 2000. Commodity fund managers said this month that they currently favor industrial metals such as Copper and Iron ore, as well as Platinum and Palladium, over Gold Bullion – which has been the flavor of the past 12 years. Those who look through a rose colored glass of mixed economic data see a recovering global economy and this perspective and supply issues may have helped propel Palladium and Platinum to outperform Gold and Silver so far this year. Platinum futures rose to their highest point in nearly 17 weeks as output contracted at Anglo American Platinum Ltd., the world’s biggest producer. Anglo American, said that production fell just over 8%. “Supply challenges” will continue this year, the company noted. Global Platinum output fell 10% in 2012, according to estimates by Johnson Matthey. Combined futures and options open interest in the Platinum group metals has now hit a record high for the fifth day in a row, says CME Group. Open interest refers to the number of open positions at the end of the business day. As of Friday, Platinum open interest stood at 101,023 for futures and options. The tally climbed steadily from a record that had stood at 96,967 as of Jan. 28. Meanwhile, open interest for Palladium futures and options combined stood at 55,239 as of Friday. This had hit a record of 50,359 contracts as of Jan. 28 and then continued to climb for each day for the rest of last week. Open interest for CME Group Copper futures and options combined hit a record high for the third day in a row & as of Friday stands at 182,662 contracts.
There are enough of potential headwinds for the global economy which justifies a reasonable allocation to Gold Investment, but due to the change in scenario globally, I would make & also advise more handsome allocation towards Silver Investment in my portfolio. Gold and Silver would be a good hedge against the destruction of the purchasing power of most of the currencies as the new & massively impacting “Currency Wars” begin to gain momentum. The US & the Eurozone are pretty far off from getting out of the woods yet. The US debt to GDP ratio is now above 100%. Data last week showed that the US Economy shrank unexpectedly in the fourth quarter of last year and European Central Bank President Mario Draghi said that the “positive contagion” on financial markets is not yet feeding into the economy at large.
Gold Prices & the QE Impact:
Gold Prices were driven sharply higher as Central Banks around the world fought to stave off the worst effects of the financial crisis by dropping interest rates and flooding their economies with cheap money – Quantitative Easing. That benefited Gold Prices by boosting its appeal as a safe have or a store of value and a hedge against Inflation, which is a by-product of massive & mindless Money Printing. Gold’s positive reaction to Quantitative Easing –QE, essentially the injection of more cash into a country’s economy by its central bank – has become shorter and shallower with each round. During the United States’ first round of QE, from November 2008 to March 2010, Gold Prices rose more than 30%. Since the US Federal Reserve unveiled its third round of QE in September, an open-ended scheme to buy $45 billion a month in MBS – Mortgage-Backed Securities, Gold Prices have fallen nearly 4%. Expectations are also starting to emerge that the Fed’s QE may be drawing to a close. There is a greater chance today than there was last year that we might start to see QE being less prevalent. But the great concern for the US Economy is not to do it too soon. One of the reasons why QE is considered good for Gold is that it stokes fears of inflation.
China’s Gold Imports from Hong Kong Double To New Record In 2012:
Gold imports into mainland China from Hong Kong almost doubled to new high in 2012 as Chinese people continue to play catch up in terms of Gold ownership. The Chinese were forbidden from owning Gold for over 50 years. Rising incomes, economic jitters and concerns about currency debasement and inflation in the world’s second largest economy led to increased demand in China which contributed to Gold seeing another year of gains. The very poor performance of the Chinese stock market in the last 10 years and concerns about property bubbles are also leading Chinese investors and savers to diversify into Gold. Mainland China imported a whopping 834,502 kilograms or 834.5 metric tons of gold, including scrap and Gold Coins in 2012. This compared with about 431,215 kilograms or 431.2 metric tons in 2011, according to Bloomberg calculations based on data from the Census and Statistics Department of the Hong Kong government. Imports in December 2012 rose to a monthly record of 114,405 kilograms, according to data from the department today, reported Goldcore. The unrealized important fact is that the people of China were banned from owning gold bullion by Chairman Mao in 1950. This prohibition continued until 2003 and it means that the per capita consumption of over 1.3 billion people is rising from a very small base. Since the market in China was liberalized, gold in Yuan terms has risen by 259% while the stock market has performed poorly. Even after the significant increase in demand seen in recent years – Chinese per capita Gold ownership remains well below that of the levels seen in India.
Culturally, India is known to have the greatest affinity for Gold in the world. China had a similar cultural affinity prior to the “cultural revolution” and in time its levels of gold ownership will likely rival those seen in India,Vietnam and other Asian countries. Chinese people experienced hyperinflation in 1949, within the lifetime of many Chinese people living today. Therefore, like in Germany, there is a greater awareness of what can befall a nation and a people when a paper currency is debased. Many market participants and non Gold and Silver experts tend to focus on the daily fluctuations and “noise” of the market and not see the “big picture” or major change in the fundamental supply and demand situation in the Gold and Silver Bullion markets. This is particularly due to investment, store of wealth and central bank demand from China and the rest of an increasingly wealthy Asia. The doubling in demand in 2012 is solely private demand and does not take into account official Chinese buying. It is worth noting that the People’s Bank of China’s Gold Reserves are very small when compared to those of the U.S. and indebted European nations. They are minuscule when compared with China’s massive foreign exchange reserves of more than $3 trillion. The People’s Bank of China is almost certainly continuing to quietly accumulate gold bullion reserves. As was the case previously, they will not announce their gold bullion purchases to the market in order to ensure they accumulate sizeable reserves at more competitive prices. They also do not wish to create a run on the dollar – thereby devaluing their sizable Gold Reserves. Expect an announcement from the PBOC, sometime in 2013 or 2104, that they have doubled or even trebled their Gold Reserves to over 2,000 or 3,000 tons.
BullionVault, an online service for investors to buy and sell physical Gold and Silver, said its Gold Investor Index showed client purchases slowed in January from a 12-month high. The gauge fell to 54.9 from 58.3 in December, the London- based company said today. A reading above 50 means more buyers than sellers. Prices gained for a 12th successive year in 2012, the longest winning streak in at least nine decades, as central banks from the U.S. to China & Japan pledged more steps to boost economic growth. Global equities reached a 20-month high in January on mounting confidence a recovery is accelerating. Investors own a near-record 2,614.8 metric tons of Gold Bullion through exchange-traded products, data compiled by Bloomberg show. Independent investors are giving only half a cheer to the flood of conflicting economic data. But the need for long-term crisis insurance remains clear and present.
More Debt cannot be the solution to Debt:
Just imagine – You have absolutely no money in your pocket & too little in your Bank. You borrow a ton of money & start feeling warm due to the Buying power you have just got. You start buying whatever you want. Remember- You have created Demand which leads to Inflation. When the repayment time comes around, you have again no money because you spend more than you earn & have spent all the borrowed money on trivial objects of desire. Now what do you do? Idea! You again borrow more than the previous time as the borrowed amount that needs to be repaid has swollen due to the additional interest on it. That is your first step toward spiraling Debt. Go ahead & have fun – Will you? You would – If your name is Japan, US or Europe or even China. China had announced the mother-of-all QE when the debt crisis began, but we know less of China’s Economic state because it also has the mother-of-all cover up facilities. The real data on China is rarely known.
Coming to my point on current scene on Global Debt Crisis: Got to raise welfare payments for your upcoming election? Borrow some money! Want to spend money on some air force jets? Issue some bonds! Got sub-par economic growth? Issue some bonds to pay for infrastructure spending! Got to bail out a bank? Issue some bonds…to the banks! What nobody seems to realize is that debt has to be repaid sooner or later – With Interest which will keep ballooning as you kick the can further. For the moment, it’s in Fashion to pay that Debt and interest with more Debt. But if More Debt was the answer to Debt, then friends – Debt wouldn’t be a problem in the first place! Does anyone realize this before asking or announcing more QE? Do they at least give it a small thought?
Japan currently spends around 25% of its tax revenue on interest payments. And that’s with interest rates near 0. If interest rates rise, the proportion of tax going to interest will skyrocket, leaving Japan with an interest bill bigger than its tax revenue. And that may happen soon, now that the government has announced inflationary policies. With higher liquidity influx / national debt comes higher Inflation & with higher Inflation arrive the higher interest rates. Then – Boom! Ironically, Japan has announced it will buy Europe’s bailout fund bonds. Just to be clear about what that means; Europe set up a bailout fund, financed by debt, to bailout countries with too much debt. But the money for the bailout fund is coming from the country with the highest debt to GDP ratio in the world!
The US is self sufficient & performs this incredibly stupid feat without any sort of international help. Here’s how it works. There’s so much debt that more must be borrowed not just for spending, but to pay off old debt. In 2010 the US government only borrowed about $1 trillion to finance new spending. But, according to Zhang Monan, researcher at the China Macroeconomic Research Platform, America borrowed $4 trillion in total, reported dailyreckoning. The difference was $3 trillion in borrowings to repay old debt. Put the two back together and government debt churning is almost one-quarter of US GDP. When & what will make this mindless money printing stop? What will it take to fill up this seemingly bottomless pit of accrued Debts & interest? Who will pay for it & how? – You & me dears – the Taxpayers! But how? Keep invested in some Gold and Silver. That’s how.
Interesting: The United States of Debt Addiction
Fred Hickey on Gold and Apple
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