Gold Fever

Gold Fever

Is the gold “bubble”, as George Soros puts it, heading towards its last waltz? Is Cyprus, its economy, found to be in need of Euro 30 billion now, not Euro 10 billion as estimated earlier, going to sell its gold reserves? Is this going to compound the stampede for the door evident amongst the Hedge Funds and other speculators in gold?

But Jim Rogers, another famous billionaire investor like Soros, is buying gold, and keeping his current holdings. He thinks, perhaps, that it has intrinsic value, in the jewellery business certainly, and as a traditional hedge against inflation.

Is France, under Francois Hollande’s disastrous Socialist leadership, said to be headed for a worse recession than Spain, going to also unload some of its gold to ease the pressure?

Being the second biggest economy in Eurozone after Germany, France’s fate is very important to the EU and the world economy.

Certainly, its high profile people, hit by Hollande’s punitive 75% tax imposition on income, are running away into tax exile, and that includes the Socialist rich people.

Does gold, a decorative precious metal,  actually have intrinsic value beyond its relative scarcity? All the gold mined and above ground over the last 6,000 years amounts to no more than 170,000 tons. About 52,000 tons is still estimated to be in the ground. Accounting for new discoveries, the grand total will not exceed 300,000 tons.

This is neither a little nor a lot, but 300,000 tons of decorative yellow metal seems adequate, even though for the first time, some 12% of the gold above ground is being consumed by electronic devices, and is not recycled, being in miniscule quantities in any one device.

So theoretically, the world’s gold reserves could be depleted gradually if a substitute is not found.

But today’s economies and currencies are not on the old gold standard. Neither are they much bothered by how much money they actually have in their kitties, because of the prevalence of deficit financing.

The world’s No.1 economy has trillions in debt amounting to many times its annual GDP, and every other country is in the same boat. Some, including all the major economies of the US, the EU and Japan, are suffering the consequences of overdoing their debt- fuelled growth.

But, coming back to the sell-off, the present run for the exits is not just from gold but all commodities, including petroleum.

Economic channels, business pages and assorted analysts are saying commodity prices,  that of petroleum, gold, zinc, copper, etc. are declining because of slowed growth in China. This implies the days of double digit Chinese growth are over for the foreseeable future.

But what about the fact that most commodities were priced at levels that were much higher than what could be justified by any “fair value” reckoning?

For the present,   China’s exports to the West are indeed down because of recession in the host countries. Its showcase mega infrastructure development in- country is slowing, but this is partially by declared design. The new leaders Xi and Li have stated as much. China wants to consolidate its vast hinterland now to avoid possible social unrest.

It will therefore start growing strongly again as soon as they have recalibrated its spending on domestic development, in multiple local level projects. So commodity prices too should rise again once this happens. Besides,  Chinese overseas infra- building in Africa, Afghanistan, Pakistan and other points distant is going on apace.

But, another, more immediate reason for lowering commodity prices, is that the speculators in commodities are simply booking profits and exiting. The logic for this is in Newton’s gravity inspired statement: “What goes up must come down”.

The trick, as always in high risk gambling, is in leaving the casino soon enough, and with your profits. A lot of Hedge Fund Managers are very good at this.

Meanwhile, a happy side- effect of falling commodity prices is lower inflation. Especially in a country  like ours that imports about 75% of its petroleum.  So if the economy picks up, it is on the basis of a commodity price decline, but welcome nevertheless.

Gold prices falling has already fuelled India’s insatiable demand for the metal. Why that happens in India has many cultural and religious reasons besides the traditional hedge against hard times.

The decline in commodity prices may not do much for the mature economies though, because of the sheer magnitude of their accumulated debt.

Further down the road, if strong growth recommences, in India, China and elsewhere, then commodity prices easing may be regarded in hindsight as an early green shoot, heralding revival. 

(766 words)

19^th April 2013

Gautam Mukherjee