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Gold Trends

November 6, 2013

If you could only make one argument for owning gold, what would it be? Perhaps the best case, in our view, is that the two countries in the world with the strongest cultural affinity for the metal are getting wealthier quickly. The chart above shows that the price of gold has moved in tandem with per capita GDP in India and China since the mid-1990’s. Projections show that by 2050, per capita GDP in both India and China will more than quadruple, and India will be the most populous country in the world. That is not an inference that gold will quadruple over that time period, because trends shift and correlations break down; perhaps Bitcoin will be the preferred store of value in 37 years. In the meantime, Indians and Chinese have a long history of storing their wealth in gold and undoubtedly that wealth will grow over the long-term.

Featured Chart: Per capita GDP (India-white, China-orange) and Gold

Gold in the Headlines:
Appetite for gold rises to six-month high – The Telegraph
India’s Gold Demand Fell by Half Ahead of Diwali This Year – WSJ
Prospectors find gold in Iowa and Illinois – WQAD
Where’s the Nazi gold? The mystery of still missing treasures plundered by the Nazis – Mirror

Recent Macro Developments:


China – Premier Li warned the government against further expanding already loose monetary policies – Reuters

China – the country needs 7.2% growth to ensure employment targets are met – WSJ

China HSBC/Markit services PMI rises M/M – came in at 52.6 in Oct (up from 52.4 in Sept)

Japan – Kuroda said Japan was on track to achieve 2% inflation and pledged further monetary easing should the goal appear out of reach – Reuters

Australia – RBA decision – Australia’s Reserve Bank today left the cash rate steady at 2.5%, as all 31 economists surveyed by Bloomberg had anticipated. The commentary sounded familiar; in fact, it pretty much repeated the verbiage from a month ago. The discussion of the economy was slightly more upbeat in places, but this essentially was offset by new anxiety about the elevated AUD – JPM

India – the HSBC/Markit services PMI rises M/M (from 44.6 in Sept to 47.1 for Oct) – Bloomberg

UK services PMI comes in strong – the Oct reading was 62.5 vs. the St 60 – Bloomberg

Spanish employment data weaker – Spain’s number of registered jobless rose by 87,028 people in October (vs. the St forecasting an increase of 82K) – Reuters/Bloomberg

Italy – the country’s economy minister urged the ECB to ease policy and questioned the present CB strategy; he thinks more needs to be done to combat the EUR strength; “The euro is now the strongest currency in the world vis-a-vis the dollar, the renminbi, the pound, the Swiss franc” – Reuters

Italian banks are nearing the saturation point when it comes to BTPs; the Italian Treasury is being forced to look for new buyers as domestic banks find themselves maxed out – Reuters

SBUX – raised UK lattes prices by 10 pence due to higher wages, milk & energy costs, the 1st increase in 3 years – Bloomberg

Fed could lower UR threshold to 6% (from 6.5%) at the Mar meeting according to papers being published by two Fed economists

Treasury official to step down, may head to Fed – Lael Brainard will step down from the Treasury but she is expected to be nominated by Obama to the Fed board – WSJ

Health care – economics of entire ACA at risk as more old/unhealthy sign up for insurance according to a WSJ report, the amount of older insurance buyers on the new ACA exchanges has been much larger than anticipated, raising the risk of a possible spike in premiums and undermining the entire program – WSJ

China + cotton – spec that China is gearing up to sell part of its massive cotton stockpile is weighing heavily on prices – FT

China + sugar – China may phase out sugar stockpiling effort – the country may phase out a stockpiling program that boosted inventories to a record – Bloomberg

New commodity limits considered by CFTC – according to Bloomberg, the CFTC is considering new limits that would cap the amount of futures contracts a single firm can hold in 28 commodities – Bloomberg

China + gold – China is creating new money at a faster rate than the US, prompting some Chinese investors to become gold bugs – FT

India + gold demand – Indians bought around half the gold they usually buy in the run-up to Diwali this year – WSJ

Anglo American cuts costs: The Australian reports that Anglo American will slash 200 jobs at its Dawson mine in Queensland. The company said cited low coals prices and their adverse impact on profitability as the reason behind the cuts – The Australian

Switzerland said it had opened an investigation into Argor-Heraeus, one of the world’s largest gold refiners, for suspected money laundering and complicity in war crimes. The probe follows a criminal complaint filed by Swiss NGO TRIAL on Nov. 1 which accused the refiner of processing close to three tonnes of gold sourced from an armed group in the Democratic Republic of Congo – Reuters

Charting the Dow Jones Industrial Average vs. the Russell 2000 is an exercise in seeing how large corporations (DJIA) are performing relative to smaller public companies (Russell 2000). Some commentators have indicated that an under-performing Russell 2000 last week is cause for concern and that tipping point has been breached for optimistic equity market valuations. Others say this could be nothing more than a small correction considering the monetary environment and huge out-performance of smaller companies since 2012 (chart below).

Dow Jones Industrial Average / Russell 2000 Index

Traditionally, larger companies have more assets/collateral than smaller companies, allowing them to borrow money at lower interest rates. However, in recent years, QE and zero-bound interest rates have leveled the borrowing playing field for all and corporate spreads have dropped significantly (chart below), eliminating an important advantage of large corporations.

Moody’s BAA Yield minus Moody’s AAA Yield

It would make sense for the Russell to be an early-indicator for tightening liquidity but there’s no sign of that in markets today. This is not to say that last week’s Dow – Russell divergence isn’t important, but until the monetary environment changes smaller companies should continue to prosper.

Bonus: When windmills go rogue

Source: www.bullioninternational.com

The information in this letter is not intended to be personalized recommendations to buy, hold or sell investments. This should not be considered as personalized trading or investment advice to subscribers. The information, statements, views and opinions included in this publication are based on sources (both internal and external sources) considered to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. Such information, statements, views and opinions are expressed as of the date of publication, are subject to change without further notice and do not constitute a solicitation for the purchase or sale of any investment referenced in the publication. Subscribers should verify all claims and do their own research before investing in any investment referenced in this publication. Investing in securities and other investments, such as options and futures is speculative and carries a high degree of risk. Subscribers may lose money trading and investing in such instruments.