The Berlin Wall (Of Worry) Comes Down
If Monday's action was led by the â€œShanghai Sell-Offâ€? then it is fair to say that Tuesday's early market developments had all the markings of the â€œBerlin Bounce.â€? German investor confidence rose to its highest level in three years this month, following readings of an expanding economy during Q2. No V-shaped recovery, this. Good enough for a pop in the DAX and other markets, that's for sure. And, of late, any time the equity markets either swoon or jump back to life, so does gold; in a cheek-to-cheek-close tango. This morning was no different.
The number of nations appearing to be finally making an exit out of the dark woods of 2007-2009 is growing, and along with them, the levels of confidence among global investors. France and Japan posted 'almost all-clear' economic flags last week. Prayers for no more macro-level surprises accompany every investment decision that is even slightly more than a pure speculative toss of the dice. Read: this is still recently cooled lava and treading lightly is beyond well-advised. That said, none other than the IMF declared the global recession as â€œover.â€?
The global recession is over and a recovery has begun, Olivier Blanchard, the top economist for the International Monetary Fund, said Tuesday. "The turnaround will not be simple," Blanchard wrote in an article released by the IMF. "The crisis has left deep scars, which will affect both supply and demand for many years to come." Growth is coming for most countries, he said, but it won't be strong enough to reduce unemployment for a while. Potential output may have been permanently reduced. Growth is still highly dependent on government stimulus from fiscal and monetary policies. Sustaining growth "will require delicate rebalancing acts, both within and across countries," he said.â€?
Not exactly the kind of recovery we would make large, and/or wild commodity bets based upon. But whatever is going on is being labeled as a recovery, nevertheless. Perhaps now, there is one more reason to fear deflation a tad less. See below. Turns out occasional deflation is your friend and mine.
Gold prices rebounded by about 0.36% early on Tuesday, motivated primarily (again) by a dollar whose three-day long wind in the sails was diverted by a rise in the euro after the aforementioned German confidence level readings. A 75-cent gain in crude oil added support to today's bounce as well.
However, just like the big picture recovery that is still fuzzy around the edges as the IMF opined, gold's own comeback following its worst slide since spring looks somewhat like a toddler's first steps. There is much strengthening still required, and balance still to be gained. And, yes, there will be a few sit-downs in the interim. For the moment, gold investors appear to be rooting for the same thing that stock buyers are hoping for: banishing the threat of deflation and opting for the (market) 'benefits' of inflation.
New York spot dealings opened with a $3.70 per ounce gain in gold. The yellow metal was quoted at $936.90 on the bid side, while players eyed he next delicate steps in the dollar-oil-stocks-gold dance, one that -as we said- normally does not include stocks in the picture. Silver was grappling with the task of maintaining the $14 level at the open, adding one penny to start at $13.99 an ounce. Platinum lost another $2 and opened at $1219 - that's nearly $100 lower than what the noble metal traded at, as recently as the 5th of the month. Palladium rose $1 to the $267 per ounce level.
The afternoon hours brought nothing very different to the equation, save for a further decline in the US dollar (now down to 79.02 on the index) and more of a robust rise in crude oil (it was up by about $2.11 per barrel and was quoted at $68.86). That combination failed to ignite a $5 or $10 rally in gold however. At last check, bullion was looking at a similar $3.10 per ounce gain with which it started the day. Silver on the other hand declined by 7 cents, to sink into the sub-$14 level (to $13.81) territory.Â Platinum regained a bit of composure and rose $2 to $1223, while palladium climbed $3 to $269 an ounce.
The lack of growth in the gold ETFs continues to remain a concern for participants. It simply cannot be that every would-be pension firm or spec fund has gone fishing since early June. Perhaps, theyâ€™ve gone fishing in other markets... Confidence (or lack of same) in further and/or significant price gains beyond the mid $960s has to be part of the picture here, as is the essential requirement to get convincingly past the old $1034 blow-off top of 2008. As is the utter disaster that Indian gold buying is turning out to be for the current year. There is no lipstick possibly thick enough to apply to this one, and even then it could not cover the cracks that have formed. Reuters paints the following picture, you draw your own conclusions:
"India's July gold imports slumped by two-thirds to 7.8 tonnes from a year earlier as high prices dented demand in the world's biggest market for the metal and a drought in some parts of the country could keep buying low, the head of a trade body said on Tuesday. Monsoon rains, crucial for India's economy, have been 29 percent below average since the start of the season on June 1 and could hurt farm incomes in the hinterland and drive prices of food items higher.
"People don't have money enough for essentials, why would they buy gold," said Suresh Hundia, president of the Bombay Bullion Association, who had earlier estimated imports at 8-10 tonnes. Demand for gold usually rises during the festival months from August to November, when annual bonuses and weddings spur purchases. Sales have picked up in August but they are not very robust because of firm prices, Hundia said.
High prices are also affecting demand. Gold on the Multi Commodity Exchange of India Ltd was at 14,879 rupees ($305) per 10 grams at around 0800 GMT, up 29 percent on year. India, the world's biggest consumer of gold, had imported 24 tonnes in July last year and a total of 396 tonnes in 2008, the Bombay Bullion Association data showed. Imports from January to July have plummeted 56 percent to 71.6 tonnes, compared with the same period last year, it showed. "Prices were too high," said Hundia, explaining why imports fell last month against his estimates of 8-10 tonnes."
Mr. Hundia is not only impeccably honest; he goes right to the heart of the matter. His network of merchants tells a story that begins at the level of individual households, their financial condition, and perception of value.
Speaking of perceptions based on facts, this morning's stats out of the US were as follows: Housing starts fell 1% in July. Producer prices fell 0.9% in July. Let the jockeying for market plays based upon these figures begin. But, is deflation a non-threat? Or has it already played out?
â€œFor much of the last year, central bankers, industrial leaders and politicians have been warning us about deflation. Falling prices, they tell us, will create another 1930s-style depression. The only answer is to print money furiously. Now it turns out the theory is a lemon. Deflation is no threat at all.
It doesnâ€™t prevent an economy from functioning, and it doesnâ€™t stop it from recovering either. The evidence suggests a period of sustained deflation might be what indebted economies need to get them back on the right track. U.K. Chancellor of the Exchequer Alistair Darling said in a speech earlier this year that the Bank of England must be â€œprepared to actâ€? to prevent price deflation.
â€œWe are very keen on avoiding deflationary risk,â€? said European Central Bank President Jean-Claude Trichet in an interview this month. Much the same message has been pumped out around the world by economic leaders. Nor have they been slow to put their freshly minted money where their mouth is. The Bank of England has embarked on a program of â€œquantitative easing,â€? or creating new money, to stave off the threat. The trouble is, the theory doesnâ€™t stack up. Deflation, after all, has already arrived.
In the euro region, prices fell a record 0.7 percent in July from a year earlier, after declining 0.1 percent in June, according to the European Unionâ€™s statistics office. In Germany, Europeâ€™s largest economy, consumer prices posted their first annual drop in more than 22 years in July. Wholesale prices plunged almost 11 percent.
So the â€œdeflatingâ€? euro area is disappearing over an economic precipice, right? Not quite. It is leading the world out of recession. Figures released last week showed Germany and France were hauling the region out of the global decline -- both expanded 0.3 percent in the three months through June after four consecutive quarters of contraction. Not much sign of the dangers of deflation there.
In reality, anyone with a sense of economic history would have been aware that the whole deflation story was oversold. In the U.K., the House of Commons Library publishes data on prices going back to 1750. From 1814 to 1914, prices rose a bit in some years, and dropped a bit in others, so there was no real change in the price level over the century.
In other words, there were plenty of deflationary years. Yet over that period, the U.K. became the greatest economic power in the world: Its relative decline only started once inflation took hold. Deflation didnâ€™t stop the Industrial Revolution, one of the most sustained times of economic creativity ever seen.
Likewise, a 2004 study by the Federal Reserve Bank of Minneapolis looked at the data on deflation across 17 countries over 100 years. It found that although the Great Depression of the 1930s was linked with falling prices, that wasnâ€™t true of any other historical period. There was, it said, â€œvirtually no evidenceâ€? that deflation caused a depression. Why should it? We are constantly told that deflation is bad because it makes consumers hold off from buying things, thinking they will be cheaper tomorrow. But that is just silly.
Everyone knows that a computer or an iPod will be both better and cheaper in six months. And people really want one right now. Torn between those two impulses, plenty of shoppers go out and buy computers and music players. It is true in the electronics industry, and, once they get used to falling prices, it will be true for other industries as well.
Deflation may be bad for particular interest groups, which happen to be very powerful. It is bad for chief executives. It is easier to keep your profits rising in a mildly inflationary environment. You can just jack up your prices a bit, and you can often cut workersâ€™ wages by stealth by holding wages steady.
The banking industry, which has come to rely on inflation to make highly leveraged loans sustainable, also dislikes deflation. Likewise, it is bad for governments, which use inflation to reduce the value of their debts. On the other hand, deflation is good news for savers, who get richer just by hanging on to their cash. And it is beneficial for consumers, who get cheaper prices. It is usually good for workers as well, as they can generally hold the value of their wages, even while prices fall.
There are winners and losers, just as there are from most economic developments. The important point is that the people who lose are more powerful than the people who gain. That might explain why we hear about the dangers of deflation, and not about its advantages. It still doesnâ€™t make them right. There is no threat from deflation. It may even be desirable if it encourages a balance between saving and consumption, and discourages governments and banks from taking on debt.â€?
The article was written by Matthew Lynn in London for Bloombergâ€™s Opinion Section. (NB: opinionâ€¦section.)
While on the subject of opinions, here is one from ZealLLCâ€™s Adam Hamilton â€“ the producer of more than one level-headed gold-oriented analysis over the years (including one on the nonsense surrounding alleged imminent and/or sinister governmental gold confiscation). Mr. Hamilton discredits the still-at-it gold price conspiracy theorists with a simple, but lethally effective weapon: logic. Says he in an upbeat piece on goldâ€™s prospects following the recent CBGA announcement:
â€œConspiracy theorists often point out that gold, historyâ€™s ultimate form of money, is the mortal nemesis of todayâ€™s fiat paper currencies. They are certainly right on this fact. But then they extrapolate it too far, inferring that CBs want to drive the gold price as close to zero as possible. What better way to eliminate the monetary competition than killing gold?Â The 10 years of CBGA history utterly refute this extreme thesis.
So contrary to Internet mythology, central banks are no threat to this gold bull. If the CBs really wanted to crush gold, they wouldnâ€™t have agreed to 15 years of measured and orderly sales via the CBGAs. The European CBs could have all sold in 2000 and 2001, which would have slaughtered gold since sentiment was so poor then and they had such dominant market share. But today, even without the CBGA, they are just too small relative to investment demand. Goldâ€™s bull did and will easily power higher despite them.â€? What could be simpler? And why would such fact still leave room for wasting time on chasing ghosts? Because like conspiracies. However, as Marketwatchâ€™s Paul Farrell warns: â€œA good conspiracy is un-provable. If you can prove it, it means â€˜theyâ€™ screwed up somewhere along the line.â€?
A Good Evening to All.Â Â Â Â Â Â Â Â Â Â Â The Truth Is Out There. Better Stay Inside.
Kitco Bullion Dealers Montreal
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