While political leaders debate the pros and cons of austerity, David Levenstein believes things are going to get worse before they get any better.
Author: David Levenstein
Posted: Wednesday , 09 May 2012
In a trading pattern that has become all too familiar, almost the minute the US session began on Comex Tuesday, the price of gold was sold down by almost $40 an ounce to trade at a five month low of around the $1600 an ounce. Yet the fundamentals for gold remain extremely bullish and there were two new major pieces of market news that investors would normally consider as rather bullish. And, this is in addition to the deteriorating crisis in the Eurozone that should have seen a flight out of capital into gold. And, contrary to what one may expect, the US dollar rallied-on the back of a faltering euro- and gold was sold off sharply. But, gold was not alone. Global equities and most commodities got hit in this broad-based sell-off.
One of the articles released Tuesday was about the Indian government's decision to rescind the doubling of duty on gold jewellery which was introduced on March 16 by the Finance Minister, Mr. Mukherjee, causing imports of gold to plunge.Imports in April had plunged to 30 tons to 35 tons from 90 tons a year earlier, according to the Bombay Bullion Association. While the new taxes were aimed at increasing the cost of gold purchases and curbing its consumption, they caused a country-wide strike by jewellers which lasted for around 6 weeks.
The removal of the excise duty is positive news for India's jewellery industry and will probably revive demand for gold in India, the world's largest gold consumer.
"Gold demand will likely improve. It's a good decision," Prithviraj Kothari, president of the Bombay Bullion Association, said of the scrapping of the excise tax.
The other piece of bullish news was about Chinese demand for gold. According to news article published by Bloomberg, China's gold imports from Hong Kong surged more than six-fold in the first quarter of this year. Imports from Hong Kong were 135,529 kilograms (135.53 metric tons) between January and March, from 19,729 kilograms in the year-earlier period, according to data from the Census and Statistics Department of the Hong Kong government. Shipments in March rose 59% from February.
Demand has climbed in the world's second-largest economy and China may overtake India this year to become the biggest user of gold, according to a forecast from the producer-funded World Gold Council. Last year, total Indian demand including for jewellery and investment was 933.4 tons compared to China's 769.8 tons.
To me, these two events are bullish for gold, and I also maintain that the problems in the Eurozone are extremely bullish for gold. Since this global financial crisis began in 2008, things have not improved, and today the risk of a collapse in the monetary system is looking more imminent. And, a loss of confidence in fiat currencies will lead to a massive flight to hard assets especially gold and silver.
While there are many who have confidence in our global leaders, I am one who does not. Therefore I continue to urge individuals to own some gold, and the price should not be the determining factor---possession should be.
It is obvious that current policies of EU leaders are flawed and are not doing anything to reverse the downward spiral of falling growth, rising unemployment and weakening banking systems. One thing that it has done though is that it has caused mounting social, economic and political turmoil
While these leaders debate the pros and cons of austerity and growth or whether sound finances will generate growth through structural reform, one thing I am sure of, is that things are going to get worse before they get any better.
Right now Greece is collapsing and moving rapidly into further political turmoil. For once I agree with well-known economist, Nouriel Roubini, who said. "Greek membership of the Euro zone is now at risk with serious contagion risks for the rest of the periphery." He also added that the "result of Greek elections is much more serious than the French one as the former leads to chaos while Hollande will turn out to be a moderate."
While Hollande has pledged to "finish with austerity," Merkel has cautioned against hopes that the austerity measures already agreed by European leaders could now be renegotiated. "We in Germany, and I personally, believe the fiscal pact is not up for negotiation," she said.
It seems that EU financial leaders are going to have to rethink their plans of austerity measures to control their spiraling debt and runaway government spending. But, if they are to spend more money, just how are European governments going to pay for it all? If the ECB dishes out more money to their banks so that they may buy more sovereign bonds, ultimately this will exacerbate the European banking and debt crisis.
Meanwhile, the latest employment figures released by the US Department of Labour on Friday showed that non-farm payrolls rose by only 115,000 in April, which was well below market expectations of plus 160,000. At the same the unemployment rate dropped to 8.1%, its lowest level in three years. Investors are now worried that a slower than expected recovery in the economy will impact negatively on hiring which in turn will curtail consumer spending which accounts for about 70% of the economy. This may be the catalyst to prompt the US Fed from another round of monetary easing which may be introduced under a new term instead of "quantitative easing."
The latest unemployment figures from the Eurozone were not all that encouraging either. In March the unemployment in the Eurozone jumped to a record 10.9%.
The figures coincided with a survey showing manufacturing in the 17-nation Eurozone stumbling to near three-year low levels as spending cuts and tax rises push the bloc towards recession. Almost 17.37 million men and women, 169,000 more than in February, were out of work in March, according to the Eurostat data agency. Even though the data showed that the southern Eurozone countries were worst affected -- with Spain's jobless rate 24.1% according to Eurostat -- there were signs of stronger states such as Germany coming under pressure too. Germany had a jobless rate of 5.6% in March, and although there was a headline increase of 19,000 it was only the second rise in 25 months.
While these leaders debate the pros and cons of austerity and growth or whether sound finances will generate growth through structural reform, one thing I am sure of, is that things are going to get worse before they get any better. And, as the bullion banks continue with their surreptitious interventions in the gold markets, I am not going to be duped by any political rhetoric that things are improving.
Minutes before the opening of the US session, the price of gold gets sold off. I believe it will rebound from $1600/oz level.
About the author
David Levenstein began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.