Turbulence in a Changing World as Gold-loving Asia Rises
U.S. Bear Raid on Gold and its Sale out East
In 2013 we have seen, so far a massive bear raid on the gold market in the U.S. led by the big banks, JP Morgan Chase and Goldman Sachs, who along with their clients engineered the price of gold down, first with massive short positions on COMEX added to by selling over 200 tonnes of the physical stock of gold they held. This added to the persistent selling from the SPDR gold ETF which saw well over 400 tonnes of gold sold from it and a fall of 200 tonnes out of COMEX warehouses. The total was close to 1000 tonnes of gold.
This gold went east to Asia who picked up all the stock available. This demand was portrayed as only due to the low prices; however, this isn’t accurate. Yes, the following month demand was lower, but it is picking up and is a persistent, ongoing rising demand figure. It is related to the growing number of middle classes and their constantly increasing wealth. It is unlikely to wane, let alone in the short-term.
The demand from Asia (by which we mean all of Asia including the Philippines, Indonesia, Vietnam, etc.) did receive a boost when the gold price was around $1,200 but it also jumped in the developed world including Europe and the States. The buying power of Asia amazed western observers, who in the main, believe that events in the U.S. dictates the gold price. A body of evidence is growing that this is just not the case. The most visible piece of evidence is that part of the belief in the gold price is that it will fall as the U.S. economic recovery gains real traction. The data from the U.S. is being read as improving all the time. And yet the gold price since the bear-raid has been rising steadily. We expect it to continue to do so as the U.S. economy improves.
To be able to influence the gold price as it has done in the past the U.S. has to buy gold, at least as much as has been sold this year alone. This will take the gold price back to where it came from. Meanwhile Asia will continue buying forcing the U.S. to pay even more for the gold it sold.
Present & Future Currency Instability
In the last few weeks we have watched the emerging world currencies—from South Africa to India to Brazil—fall as the ‘carry trade’ fled with their dollars back to the U.S. (hot money invested by bank traders to get the interest rate differential as profit) from them. This is causing some serious currency instability as these nations are too small to see such tsunamis of capital leave their shores. They had come to depend heavily on the liquidity these funds provided and now that liquidity is dropping some face serious problems. In India this has already necessitated the imposition of Capital Controls on Indians.
When this money entered these nations it was fed into their reserves which built dramatically. The effect of the reserve build-up by China and others was to compress global bond yields, leading to property bubbles and equity booms in the West. The reversal of this process is deflationary.
Now add to this the reality of rising interest rates (10yr-Treasuries crossed the 2.9% yield last week as prices fell) and there is a danger of Bond markets falling heavily. We are seeing the effect of this in the actions of foreign investors. China sold $20 billion of US Treasuries in June and others are doing the same thing. This is contributing to the rise in U.S. yields with German yields rising even faster as yields outside of the U.S. will follow those inside the country. This has major implications for the world. The U.S. has a fragile economy so may not be able to withstand higher rates, but we are certain that the Eurozone and the U.K. cannot. Just as the build-up of reserves when these funds flowed into countries the sell-off of reserves may push rates to levels that are unjustified for the global economy as a whole. How close to that point are we already?
Any country with a large current account deficit will be a target of markets. A country like India has been trying to ward off a recession, so with this withdrawal of liquidity their battle looks lost already as its liquidity dries up. It now sits with a full-blown currency crisis that is crippling for companies with dollar debts.
India is not alone. Take South Africa where the exchange rate of the Rand has fallen since last October from R6.80 to the USD to today’s rate of R10.23. There we are about to see a string of strikes demanding 60% wage increases, a level that is unreachable. We expect to see the currency fall at least another 20% in the short-term. But there are a string of countries across the world grappling with variants of the same problem.
By the end of the year China is due to announce set of measures which bring a vastly widened convertibility level to the Yuan. We expect that while the Yuan will remain stable, currencies from the USD through to the rest of the world’s currencies will face levels of instability not seen since the seventies.
It’s appropriate the global investors appraise these instabilities; take a hard look at what’s going on in Asia to see just how far this gold-loving part of the world will rise in global economic and financial power. We believe that the developed world investors need to realize just what lies ahead in terms of changes in global cash-flow as it will affect all global markets, structurally from now on. We are looking at a future that will be turbulent where the norms we have been used to for so long will no longer apply.
It is clear from responsible research (see the OMFIF report on the gold.org website) that gold is needed in the system in a pivotal role for the global monetary system to survive as it is now. And please note this is the reason why it will be brought back in. It will be done through necessity not choice.
“The Times Are a’ Changing” Asian Consumer Driving Growth
With thanks to I.H.S. and to the past head of the World Bank, Mr. Wolfenson, we discuss the shift of power from the Western developed world to the Asian emerging nation.
The first vital fact to accept if we are to understand future developments in the world is that the US consumer is no longer the primary driver of world economic growth. We have in the past quoted the ex-head of the World Bank, Mr. Wolfenson, who said,
“In the past 80% of global income went to the developed world’s 20% of global population. By 2020 (if not before) 65% of global cash flow will go to the emerging world and 35% to the developed world.”
We need to add to the B.R.I.C.S. nations countries such as Indonesia, Poland and Turkey to see just who will benefits. Each of these nations has a rising upper class with strong purchasing power. In central Europe, Poland has avoided the recession ravaging Southern Europe, while Turkey has been outperforming many of its European counterparts.
More notably the differences in spending between the developed world and the emerging world is significant.
The implications for all financial markets, including precious metals are astounding!
Asia Becoming Focal Point of Marketers
The United States and Western Europe have become dependent on imports from Asia to feed their domestic consumption needs and wants. The shift in trade patterns has been such that lower value-added goods are being produced abroad, mostly in China and then shipped to the North American and Western European consumer markets.
Emerging markets’ consumers are now entering the world stage in greater numbers, making a noticeable impression on multinational corporations, which view consumers in these nations as the new target of global marketers compared to the fatigued and frugal consumers in the developed countries.
BRICs Moving Up, while Europe & United States Moving Down
The U.S. consumer market is increasingly becoming a battleground of retailers vying for market share, whereas consumer demand is growing at a very rapid pace in emerging markets.
Inflation-adjusted (real) consumer spending growth in the United States has averaged 2.1% since the Great Recession (December 2007–June 2009) ended, while real consumer spending growth in India was above 7% each year from 2006 to 2009, and has been above 3.5% each year since.
The real consumption in China has been growing at an even faster pace of more than 8% every year during 2006–09, and above 5.5% annually ever since. Even though the U.S. consumer still reigns supreme in total and per-capita spending, growth in U.S. G.D.P. and consumer spending is being eclipsed by that in emerging markets, most notably Brazil, Russia, India, and China. Since 2007, the global economy has entered a transitional phase where Chinese and Indian consumers are more prominent in the international trade picture.
U.S. consumption as a percentage of worlds G.D.P. peaked at approximately 22% in 2001, and has declined steadily since then. Consumer spending in Western Europe reached almost 18% of world G.D.P. in 2004 and has since fallen at roughly the same pace.
IHS Global Consumer Markets’ econometric model predicts that, combined, U.S. and Western European consumer spending will account for only 26.7% of world G.D.P. by 2015, down considerably from 38.4% in 2002.
Meanwhile, BRIC consumer spending was 8.0% of world G.D.P. in 2010, after averaging 4.4% from 1995 through 2005, and its share is projected to approach 10.5% by 2015.
While the Great Recession, the Eurozone debt debacle, and anemic growth in Europe and the United States may have kicked off this process, strong underlying demographic and economic forces drive it. Prior to the Great Recession, real consumer spending in the United States had peaked in the fourth quarter of 2007, at $9.3 trillion. Over the course of the deep downturn, consumer expenditures experienced the largest decline in a generation. Real consumption dropped $313.3 billion from peak to trough, hitting a low of $9.0 trillion in the second quarter of 2009. It took US consumer spending three full years to regain its prerecession peak. Western Europe has yet to match its pre-recession peak, and it may be some time before it does, given that the region is on the brink of another recession.
Consumer spending is approximately 70% of U.S. G.D.P., while it accounts for slightly less than 58% of Western European G.D.P.
Western Europe has yet to match its prerecession peak, and it may be some time before it does, given that the region is on the brink of another recession. Consumer spending is approximately 70% of US GDP, while it accounts for slightly less than 58% of Western European GDP.
China's consumption to GDP ratio is low, at 34.5%, whereas India’s is one of the highest in the developing world, on a par with Western Europe. Foreign trade (imports plus exports) has been playing a smaller role in the BRIC countries, but a more significant role for Western Europe and the United States as they try to promote higher export growth to enhance their economic options in the face of weakening domestic consumer demand. In the past, the developed economies depended on consumers spending more by increasing their debt and saving less to spur economic growth. During the 2011 National People's Congress of China, Beijing was very clear that one of its top priorities was to have domestic consumption play a stronger role in the economy, rather than relying heavily on exports and investment to generate growth. In addition, the Indian government is still struggling with the process of opening up its domestic market to foreign multi-brand stores.
Why Is this Important to Precious Metal Investors?
- Because the Asian emerging middle classes believe that physical gold is an important permanent asset in their savings. In China the government encourages this thinking too.
- The approximate total of Asian middle-classes (Indonesia and other Asian nations included) is greater in numbers that the combined total population of the U.S.A. and Eurozone.
- The global monetary system will change from one based on the USD to a multi-currency system including the Chinese Yuan, who will walk its own road and not be dictated to by the U.S. or the rest of the developed world.
These facts alone confirm the future of gold as one not only acting in a pivotal role in the world’s money, but a future that will see a much higher price, so as to encourage the redistribution of gold to the areas where physical demand is greatest, namely Asia. With doubts about the recoverability of central banks leased gold growing, questions are being asked about the quantity of gold central banks hold. When push comes to shove, they will need to access more gold!
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