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Posts Tagged ‘Euro and gold’



   Posted by: Mr. Gold    in Uncategorized

What a mournful January it has been for gold bugs. The misery of this seasonally slow period has been compounded by the crass underperformance of XAUEUR. Gold in Euro terms has lost 11.36%. While the robust Euro, bolstered by hawkish ECB comments and record interest in bailout EFSF bonds registered record gains over high growth proxies (such as AUD), gold, which usually benefits from strong EURUSD performance, has languished, elbowed away from the pedestal by the ever more radical ETF redemptions.

Much of the real (as opposed to nominal) gold losses can be attributed to the newfound optimism concerning the interest rate trajectory and a possible reduction in liquidity injections in the West. But while the transatlantic hawk/dove rhetorical discrepancy has reached 1987 levels (by itself hardly a bullish signal for the raging stock markets), few gold market observers have paid attention to the travails of PBOC in Beijing. There, the regulator, frustrated by the ineffectiveness of lending quotas, slapped an initially yawn-inducing seventh increase in reserve requirement ratio.

This poorly timed, pre-holiday tightening has created liquidity havoc at a time where most Chinese withdraw cash in order to purchase gifts for the family and train tickets to head home for a week of bonding and home food feasting. Remarkably, after repo rates rocketed, the central bank had to conduct reverse repos and briefly disengage from open market bill selling. Instead of addressing the underlying problems of inflation, the actions rocked the money market. But why did PBOC act in such an untimely fashion?

The answer lies in the system’s deepening inability to deal with structural inflation. With minimum wage increases rising more than 20% in the main cities, China’s low marginal costs and its output gap are now unlikely to protect the country against price pressures. Nowhere is it more evident than in the food sector, where spare capacity has been the slimmest to start with. For several months now the system has exhibited two basic characteristics of overheating: rising overconfidence and booming credit.

China is experiencing a massive discrepancy between asset appreciation and hitherto suppressed inflation of goods and services and the resolution of this tension can only occur in a binary fashion. Either asset (including home prices) deflate or goods and services increase in price. Which path will China choose and what it will mean for gold?

In the US, where the focus of the monetary authorities is exclusively on core inflation, it was the asset price deflation that closed this gap, with huge costs. Although most banks survived, the country is now saddled with a broken housing market, structural unemployment and severe political polarization. In China – asset deflation would mean a significant loss of wealth for realtors and other clients of the communist party officialdom. High inflation could potentially mean social unrest.

Beijing will only act when all other options to kick the can down the road have been exhausted. In a normal world they should pick the former (i.e. asset deflation) and then offset a resulting NPL crisis by injecting capital (including from overseas – similar to the floating of Ag Bank last year). But the authorities have been vacillating to act on interest rates because too much personal wealth of decision makers has been tied up in property and because with higher interest rates the sterilization costs would make their foreign reserve management very costly. So instead, Beijing is resorting to raft of new ‘anti-inflationary’ measures: generous statistical inventiveness, soviet style price controls, ban on usage of corn for ethanol (in case feedstock prices affect negatively pork supply) and periodic release of commodities from “strategic” inventories. All this is being combined with an even stronger grip on dissent (the government spends $78bn on ‘weiwen’ stability maintenance, which is smaller only than the official military budget of $81bn). An almost perfect control of electronic media thus precludes a Tunisian-style scenario.

A serious asset price deflation would deliver a shock which would be deeply commodity-unfriendly. Although industrial metals and steel would suffer most, gold would not be spared in the sell-off. A clean-up would offer another gold buying opportunity as the impact of the burst bubble would most likely slow down the interest rate cycle in the developed economies dealing most of which have to grapple with their own refinancing woes in 2012-2014.

But contrary to a widely held opinion, possibly based on an optimistic reading of Engel’s Law, a rising inflation of goods and services does not bode well for gold, and particularly so in the emerging countries. Should inflation really accelerate, the economies particularly sensitive to food prices (like China) or energy prices (like India) may not yet be wealthy enough to offset cost increases if they advance faster than the growth in disposable incomes. Gold’s performance has benefited hugely from M2 explosion in the developed economies and more recently in China. An onset of liquidity revenge may not be its best friend.

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   Posted by: Mr. Gold    in Uncategorized

Yet another amazing week in the gold market and yet another all-time high record in Euro terms last Monday. Since then, the market has stabilized and pulled back. To determine how far this pullback goes requires some conjectures about who was at the forefront of buying – and selling – at the height of the currency panic that gripped the markets after ECB’s implicit capitulation to the requirements of Europe’s increasingly dysfunctional sovereign debt market.

We know some things with relative certainty. Comex speculative positions by non-reportable and non-commercial investors jumped last week to the near record of 32.4moz. Then, of course, we saw the gold ETFs jump to a new record of 62moz worldwide, with over half of the inflows registered in the SPDR Trust. For all the signs of panic in Europe, the London and Zurich ETFs trailed the inflows into the NYSE-listed competitor. Reports from Switzerland and Germany pointed instead to a sustained demand for coins and bars. Yet such a dispersed physical offtake is unlikely to be the driver for the new prices. Rather, it points to how solid the floor is under the current prices.

Other markets have sent a mixed signal. Akshaya Tritya festival in India has been a disappointment for gold bulls. Anecdotal evidence points to barely a third of purchase registered a year before. It did not help that the jump in the gold price coincided with the depreciation of the Indian currency, which has lost 4.3% to the dollar in barely two weeks. The combination of these two moves has conspired against gold sales as bullion in Rupee terms rocketed 430% in annualized terms during the period immediately preceding the festival. On Monday, front-dated gold hit an all-time high on India Commodity Exchange MCX. Such volatility is bound to destroy demand ahead of the weaker season in what remains the world’s largest gold market.

However, other Asian markets have reported different stories. Even though Singapore and Hong Kong premiums began to soften last Friday (and Tokyo discount deepened further, with electronics industry turning their backs en masse), there are signs that scrap availability may be less than in the record year of 2009. Locally, it leads to tight markets – as in Thailand, plagued by dramatic events these days, or in Vietnam, where headline inflation is again in double digits.

Traders in Asia tend to classify gold scrap as falling into three – albeit not perfectly distinct – categories. At the top of the secondary supply chain, one finds opportunistic investors. These large volume players buy and sell gold, turning profit from even small price movements in the local currencies. As investors, speculators and physical gold holders, their main objective is to realize specific price points. They provide high quality product, and are largely responsible for dampening the volatility of the gold prices globally.

The 2nd tier scrap market participants hold significant stock of jewelry products. The price they receive for their sizable volumes is better than in the retail market and the spreads are very tight – especially if compared to the vocal, yet still fledgling gold currency market in the United States (Sears, K-Mart, etc).

These 1st and 2nd tier players dominated the huge secondary market throughout most of 2009. However, in many markets it now seems that the supply from these sources is drying up. It is not entirely clear if the reversion of gold price correlation to the US dollar has thwarted any of the time-tested strategies.

To be sure, the secondary market is still lively, though increasingly dominated by the hitherto vaguely present “3rd tier” suppliers. These are small savers and retail consumers who punt their lifetime savings in buy-back centers around Asia’s periphery. Although the quality of their product is poor, it is welcomed by the wholesale market because it can sidestep the restrictions on cross-border trade, which still prevail in authoritarian regimes jealously guarding whatever source of hard currency (e.g. Vietnam, Burma, China).

If these trends prevail, in longer term we may experience even more volatility in the gold market. However, in the short term, inventory holders are now facing a risk unknown since last summer. In the last several days, Libor has responded to Europe’s interbank woes. Since May 7th, 3-month Libor jumped 11%. Should this move reveal some deeper malaise about international banking, gold lease rate could be pulled up in the wake. And this is (almost) never positive for spot prices.

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