The miscalculation by the Troika in Cyprus has finally put the last nail in the medium term short gold (NYSEARCA:GLD) investment thesis. For just over a year and a half the central banks have coordinated, very effectively, to build an edifice of confidence in the global financial system that would allow the idea that quantitative easing would no longer be needed to finish the job of cleaning up the mess post-Lehman Bros. The Troika, and most explicitly, the IMF, overplayed their hand last weekend with their demands for explicit looting of savers in order to go forward with a rescue plan for Cyprus’ over-leveraged banking system.
This act and the subsequent chaos it has spawned has now firmly put in place a bottom in the price of gold. Regardless of the final outcome in Cyprus – exit from the eurozone, acceptance of the bail-in, civil unrest, etc. – the net effect will be a steady loss of confidence in the banking system, capital flight from both the US and the EU and grater movement into gold as a vehicle for savings and wealth preservation. While I would have preferred a close above $1620 per ounce this week, closing above $1600 as we approach the end of the month is strength enough given the current sentiment.
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.
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.
For the past 40 years, those in the US have been regaled by politicians about the need to rid the nation of the dependency on foreign oil, all the while operating a foreign policy built solely around the securing and maximizing of the flow of said foreign oil to the US. Now that Energy Return on Energy Invested (ERoEI) has become a topic of real interest, and the structural price for a barrel of oil equivalent (BOE) is firmly in the $100 per barrel range, the unlocking of various unconventional or tight supplies of oil and gas are not only economically viable, but are creating a production glut that current infrastructure cannot keep up with. This has resulted in the crash of US natural gas prices and the widening of the price spread between West Texas Intermediate Crude (AMEX:$USO) and Brent Crude (AMEX:$BNO).
These massive changes in US production are causing massive changes within the greater energy market. It’s created a massive arbitrage between the US and the rest of the liquid natural gas-using world, so much so that pressure is mounting to allow exports of LNG, which would be a huge boon to global growth, allowing that cheaper energy to disperse through the global market and keep a lid on LNG prices. Normally, something like this would be a boon to the world at large, but political reality is far different than market reality. As always, the two are in direct conflict with each other.
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.
Peter Pham is an author, international fund manager, and a registered financial director by the Cayman Monetary Authority (CIMA). In 2013 he published his first book entitled, The Big Trade: Simple Strategies for Maximum Market Returns. He currently manages the portfolio of a global hedge fund and runs an asset management company, Phoenix Capital. (read more)
The Big Trade: Simple Strategies for Maximum Market Returns
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