Gold prices after an historic crash have rebounded very sharply. Since hitting $1320 per ounce on Monday April, 15th, Gold (NYSEMKT:GLD) has risen as much as $145 and looks ready to climb even higher to end this week.
Gold has risen every year since 2001 but is off more than 10% this year so far. Investors buy the yellow metal as protection against currency and savings buying power erosion. But, the combination of poor economic data and slowing inflation despite the Federal Reserve’s quantitative easing had investors skittish about the Fed ending its monetary stimulus program. That’s the official story. There are reports of failures to deliver allocated gold circulating as well as the announcement that allocated bullion accounts at Dutch banking giant ABN Amro would be settled in cash rather than physical metal which has radically increased the demand for the physical metal around the world
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In a hope to curb imports and control its current account deficit, the Government of India raised the import duty by 2% to 6%. However, officials expect that there will be only a minimal drop in the demand of gold. So, really this is simply another means by which to close the budget deficit because of the domestic inelasticity of demand for gold. The Indian government wants to reduce gold's share of its import bill from 11.5%, the second-highest item after oil.
The main reason for the duty hike is the rising current account deficit, driven largely by India's traditionally large gold imports – demand which has grown with the price pulling back below $1600 per ounce and the rupee strengthening somewhat from its worst levels. The current account deficit reached an all time high of 5.4% of Gross Domestic Product in the third quarter of 2012. India's current account deficit problems look similar to the balance of payments crisis in 1991, when the Reserve Bank of India had to sell 47 tons of gold to Europe as collateral for a loan to avert a sovereign default.
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India is all set to export three times more wheat than was expected this year, a record 6 million tonnes, thanks to a bumper crop. While this won't make much of a dent in overall market structure with exports falling worldwide it will help to counterbalance the scarcity of lower quality grain supply and keep global prices controlled at the margin.
The Indian government recently allowed exports of 2.5 million metric tons of wheat from overstocked government store-houses. The revised limit is an addition to the 2.0 million tons earlier cleared for exports.
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Despite headlines – and some data—to the contrary mortgage difficulties and increasing litigation costs plagued both Citigroup (NYSE:$C) and Bank of America (NYSE:$BAC) fourth quarter results. Both of them have been looking to focus on even more cost cutting measures. While the housing market may be improving somewhat there is still not only a ton of shadow inventory weighing on prices but also the continued hollowing out of the real economy in the U.S. at the expense of keeping the banks afloat. Any credit bubble the Fed manages to reflate will only result in another round of liquidations later with Citi and BofA at ground zero of the bust again.
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India’s government finally admitted defeat in subsidizing diesel prices and will repeal the subsidy in the near future. More than 80 percent of India’s fuel needs are fulfilled by imports. Petrol prices were liberalized by the government in June 2010 but the government has constantly tried to prevent prices from rising to insulate the Indian economy from ever-increasing oil prices on global markets. Fuel consumption in India increased 5 per cent in the last fiscal year, its fastest since 2007-08. If you subsidize something you get more of it. The Indian government has finally bowed to this simple economic reality.
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