Mr. Thangaval also brings to our attention the shifting pubic attitude towards debt and the monetization thereof via inflation: a resounding “No!” is what it sounds like. We’ve heard it from the GOP, we’ve heard it from the Tea Party, and we’re hearing it from the Obama White House as well. Cutting spending where possible, raising taxes where applicable, and trimming deficits before they become lethal, these are all ‘in vogue’ attitudes in America lately and without party lines coming into the equation. It should be an interesting year-end, to be sure.
Finally, Mr. Thangaval opines that “emerging markets are much less able to buy gold than they once were. Consider for a moment that the average per capita income in China in 2010 was…$2,425. While India and China have valued gold as an investment for years as a cultural bias, the per capita incomes in these countries can simply no longer support robust gold purchases, especially if their currencies are outperformed by the U.S. dollar. This phenomenon was witnessed in India when gold purchases actually fell in Q4 2011 despite gold prices also having fallen during the period. The fall in demand was a result of high prices, accentuated by the rupee's fall against the U.S. dollar.
Conclusion? “While many gold investors would like to believe that emerging markets can keep prices rising indefinitely, they would be much better served by realizing that U.S. hedge funds and investors are ones necessary for them to see positive returns.” Author’s note: The aforementioned hedge funds – according to the CFTC – have now slashed their gold-bullish bets by the most since about August of 2008. Mom and pops however have not yet joined the exodus. In this context it is further worth noting that after having just recently hiked import tariffs on gold and silver by a substantial amount, according to sources at UBS AG, India, the world’s biggest buyer, may [once again] be considering higher gold import taxes because of budget deficits.
Actually, the problem that gold represents to India’s ballooning current account deficits is hard to ignore, despite recent "damage-control" propaganda that asserts that much of the imported bullion ends up being exported in finished form. In a country that imports some $58 billion in gold (estimated to be the total in 2012) it comes as no surprise that “even the recent Prime Minister’s Economic Advisory Council had blamed the sharp rise in gold prices for the current account deficit and stressed the need to limit its appetite in India.” There is talk of another 6-7% increase in the price of jewelry items in that country if (or, rather, when) new duties and excise surcharges come into existence.
The Economic Survey for 2011-2013 has concluded that, as far as India goes, “A trade deficit of more than eight per cent of GDP and CAD of more than three per cent is a sign of growing imbalance in the country’s balance of payments. There is scope therefore to discourage unproductive imports like gold and consumer goods to restore balance.” It appears that the “love gold” trade is not exactly that, when it comes to the attitudes of India’s economic stewards. Perhaps quite the opposite. Something to keep in mind as we go forward. Indian offtake has been a widely reliable and quite significant contributor to the rise in gold prices in recent years.
While on the topic of Asia, let’s take a quick look at the latest developments in China. With one year left in office, Premier Wen Jiabao told reporters in a lengthy press conference this week that his country must adopt the idea of political reform and succeed at it, lest China is prepared to possibly “losing what we’ve achieved.” Those comments were squarely aimed at Communist Party factions that do not share his views on reform and openness in Chinese society. Mr. Wen is also known for not wanting to loosen controls on soaring property prices, and for closer trade and investment ties with the USA.
On the other hand, Mr. Wen’s valuable advice might be coming perhaps a bit too late to avert that which JP Morgan Chase & Co. has now called a “hard landing in progress” in China’s economy. JP Morgan’s chief Asian and emerging market strategist, Adrian Mowat, stated that “If you look at the Chinese data, you should stop debating about a hard landing. China is in a hard landing. Car sales are down, cement production is down, steel production is down, and construction stocks are down. It’s not a debate anymore, it’s a fact.”
Like Mr. Thangaval above, Mr. Mowat does have some CV credentials and professional achievement weight to add to his observations. He was the runner-up in Asian equity strategy for 2011 according to Institutional Investor. At this point, much as is the case in the gold market, the camps that assert a hard landing in China versus the ones which continue to see China as sailing right along and remaining an insatiable consumer of commodities are becoming more sharply divided and dug-in, with each passing day.
Until Monday, we’re staying in the “camp” that simply wishes you a very pleasant weekend….