With governments lacking courage for fiscal discipline, I expect that interest rates will remain in negative territory for a long time. Central bankers will continue to keep the printing presses warm as policies aren’t expected to change. I believe this will keep the Fear Trade buying gold throughout 2013.
In addition, emerging market central banks have been diversifying into gold. Net official sector purchases of 425 tons year-to-date is a drastic difference compared to only a few years ago when central banks were net sellers of the precious metal. Only recently, UBS reported that in November, Russia purchased nearly 3 tons of gold and Brazil bought almost 15 tons. Iraq – a notable new buyer – bought 25 tons from August through October. Given that this is the country’s first increase since the early 2000s, “having a new buyer in the central bank space and especially from a new region is an important development,” says UBS.
While the Love Trade has been subdued this year, we see light at the end of the tunnel, not a train. One recent development is the increase in mutual fund flows of $32 billion into emerging markets since the announcement of the third round of quantitative easing (QE) in the US. This appears to be a powerful precursor for a stronger 2013, which would reignite the Love Trade in China and India.
As we head into the final days of the year, I’d like to take this opportunity to thank our faithful readers for following, reading and sharing our thoughts on the markets. We appreciate your confidence and trust and look forward to a prosperous new year.
Here’s wishing you and your loved ones a very safe and joyful holiday season!