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Most of the “BRIC” Nations are Quietly Buying More Gold
At the end of May, 2014, gold closed at a disappointing $1251, down almost 10% from its mid-March peak. The decline is caused by a relaxation of tensions in the Ukrainian crisis, plus a series of record highs in the S&P 500 stock index, as momentum investors move away from gold and back into stocks.
The Wall Street Journal said last week (under the headline, “Gold Falls 2% as Economic Data Soothes Traders”) that “Gold fell to its lowest level in 15 weeks as signs of improvement in the U.S. economy and hopes of a more politically stable Ukraine dimmed investor appetite for the safe-harbor asset.”
While gold’s price action may be disappointing to many gold bugs, gold is still up $50 (over 4%) for 2014, about the same gain as the S&P 500. In addition, we don’t mind if gold prices retreat enough to give us another buying opportunity. We at Navellier Gold are different from most bullion dealers in that (1) we are affiliated with a stock market management team and we recommend investors place the lion’s share of their assets in stocks, using gold as a small (5-10%) portfolio balancer, and (2) we recommend the consistent and gradual accumulation of gold, not an “all in” position, followed by hoping and waiting.
We also believe that gold differs from standard “portfolio insurance” in that it offers tremendous long-term appreciation potential, despite its wide weekly and monthly price swings, usually caused by leveraged trading on the futures and ETF markets. At the same time, the steady purchase of physical gold by central banks and private investors in the “emerging” markets puts a “floor” under the price of gold.
Specifically, most of the BRIC (Brazil, Russia, India and China) nations are quietly making moves to bring more gold into their country, even though India’s demand has been super-quiet, i.e., smuggling!
India’s New Leader will Likely Open up the Gold Market There
Last week, Narendra Modi was sworn in as India’s next prime minister, following a landslide election victory. Modi campaigned in part on a more open gold market. The people of India revere gold, so Modi’s pro-gold stance undoubtedly led millions of gold-loving voters to cast a ballot in his favor.
In the last year, premiums on gold coins and jewelry have skyrocketed due to the government’s onerous import restrictions on gold, so it was only a matter of time until some populist politician took advantage of the people’s love of gold to get elected. As a result of Modi’s election, the Reserve Bank of India (RBI) and India’s finance ministry have already prepared plans for easing India’s onerous gold restrictions.
In India, gold still carries a $200 per ounce (16%) premium, down from $300 (25%) in mid-May. The partial decline in the gold premium came after India said it would allow some private trading companies to bring gold into the country, but most Indians will wait for premiums to fall below 5% before buying more. In fact, many Indians are selling gold at these prices, hoping to buy it back later at a cheaper price.
The Chairman of the All India Gem & Jewelry Traders’ Federation, Haresh Soni, said Modi “understands the problems we have been facing” and “he will solve our issues.” However, the Indian bureaucracy will no doubt take its time in making reforms, which could depress the price of gold short-term. The pent-up demand for gold in India will simmer until we see an avalanche of new demand after the tariffs are cut.
In the meantime, there is a great deal of gold smuggling going on in India, as creative people can always find ways to circumvent onerous trade restrictions. This increased smuggling will serve as a constant reminder to the leaders of India that they better move fast on gold tariff reforms. It’s better to tax a small share of a huge market than to force that market underground, where the tax collectors collect nothing.
Russia’s Central Bank is back in the Gold Market
Last week, the World Gold Council reported that the world’s central banks bought 122.4 tons of gold in the first quarter of 2014, the most central bank buying of any quarter since the first quarter of 2013, right before the gold market suddenly collapsed in mid-April 2013. Central bank buying last quarter represents an annual rate of 490 tons vs. only 409.3 tons for all of 2013, according to the World Gold Council’s data.
The second quarter of 2014 began with a bang in April, when the Russian Central Bank bought 28 tons (900,000 troy ounces) of gold, their second-largest monthly purchase in history (#1 was May, 2010).
You would think Russia would have loaded up on gold in the first quarter, before the imposition of sanctions connected with their Ukrainian adventures. But the opposite is true. Russian gold buying was dormant in the first quarter, followed by a huge surprise purchase in April. The Central Bank of the Russian Federation bought no gold in January and March, and just a little (200,000 ounces) in February.
Long-term, however, Russia has steadily bought gold to replace the euro, the U.S. dollar, its own ruble, or any other paper alternative. As this chart shows, Russia’s central bank has doubled its total gold holdings since the start of 2009, even though Russia bought no central bank gold in five of the last eight months.
China: Shanghai May Replace London as the Next Global Gold Center
With the London silver pool ending this summer, the days of the London gold “fix” might also be limited. China will likely take up the slack. Reuters reported last week that China intends to position Shanghai as the next London: “China has approached foreign banks and gold producers to participate in a global gold exchange in Shanghai,” said the Reuters report. “The Shanghai Gold Exchange (SGE) got the go-ahead from the central bank last week to launch a global trading platform in the city’s pilot free-trade zone, a move that could challenge the dominance of New York and London in gold trade and pricing.”
China is still the world’s leader in both gold production and gold demand, so it makes sense that China should become a leading gold trading center, too – perhaps the #1 gold trading center, in time. The World Gold Council has estimated that Chinese domestic demand will rise by another 5% this year and 5% each year through at least 2017, as tens of millions of Chinese gold consumers enter the middle class each year.
Another development linking two BRIC nations is the recent accord between China and Russia. The leaders of those two giant nations just met and signed an agreement in which Russia agreed to supply natural gas to China for the next 30 years. This may explain why Russia’s central bank bought so much gold in April. The move to gold may be part of a strategic move against the dollar as a reserve currency.
At the recent St. Petersburg International Economic Forum, Russian President Vladimir Putin said “For us (Russia and China) it is important to deposit (gold and currency reserves) in a rational and secure way.” Russian Prime Minister Dmitry Medvedev was clearly talking up the ruble (vs. the dollar) in his remarks: “This should ultimately move the ruble from the cohort of freely convertible currencies into the ranks of reserve currencies. … The more we sell, for example, our products, including oil, gas, machine-building, defense products for rubles, the more we will encourage such a quality for our currency.”
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