The return of the Gold bull as Cyprus issue makes strong come back?

Last Updated : 12 April 2013 at 08:40 IST

In a new twist to the Eurozone crisis, Cyprus creditors have suddenly found that the island nation would require at least 23 billion Euros to be rescued contrary to the earlier figure of 17.5 billion Euros.

As of now, it seems nobody knows for sure how this has suddenly come about. A spokesperson of Cyprus government blamed the previous government.

The BBC reports: He blamed the gulf between the original bailout total and the new 23bn figure on the previous administration and the time it took to negotiate a bailout, delays which pushed the cost of recapitalising its banks much higher. 

“…reality set in as a botched deal began to unravel. The recession will be far deeper, requiring greater government spending on benefits. And troubled banks might need further recapitalisation.”Mark Lowen of BBC News said in yet another analysis. 

The economy of Cyprus is expected to shrink at least by 10% this year.

Meanwhile, the Eurozone finance ministers are scheduled to meet on Friday to discuss the current development.

Last month, a deal had been clinched to rescue Cyprus, wherein the country was supposed to raise 7.5 billion Euros for the promised help from the troika of IMF, ECB and the European Commission which was to the tune of 10 billion Euros. Now, it looks like Cyprus will have to raise additional 5.5 billion Euros to 6 billion Euros taking the total figure it is supposed to raise in the range of 13 billion Euros.

In trying to raise the previous amount of money, not only was a bank packed up, depositors who held more than 100000 Euros had to take a hair cut of about 60%.

Gold sales

The Central Bank of Cyprus had clarified that reports of Cyprus' $523 million gold sale have not been “raised, discussed or debated” and there exists no “current or future plans to do so on the board’s agenda.” This was reported by Cyprus News Agency to whom the spokesperson for the Central Bank of Cyprus decided to talk.

[The news agency Reuters had reported Wednesday that “...European Commission documents showed Cyprus plans to sell 400 million euros' worth of reserves to finance part of its bailout - a move that marks the biggest euro zone bullion sale in four years.”]

In a twist, late on Thursday, Christos Stylianides, spokesperson of Cyprus government said that the option was on the table:

“The Cypriot government put various options forward, including this," Christos Stylianides told a news conference.

Last Updated : 12 April 2013 at 08:40 IST

The country holds bullion reserves of 13.9 tons as of February and an assessment by the European Commission says the island nation must have to sell close to 400m euros worth of gold. That amounts to 10.36 tons of gold (a figure almost equal to what Turkey bought in January.)

When the Reuters report on Cyprus’ gold sales emerged on Wednesday, it caused a fall in gold prices of at least 1%. But the miniscule sales by Cyprus will not dent the price of gold over the medium term as the appetite for gold in international markets far exceeds the supply.

Meanwhile, the uncertainty and potent risks that the twist in Cyprus has brought forth may ensure that safe haven demand in gold would persist. On the Comex, gold for delivery on June 13 closed at 1564.90, Thursday and as of Friday morning on the Globex platform, the markets ruled at $1561.45 an ounce.

Does it herald a bull run?

The answer depends on the actions of the island nation of population less than 1 million and the demanding troika! 

As published here: http://www.commodityonline.com/news/the-return-of-the-gold-bull-as-cyprus-issue-makes-strong-come-back-53867-3-53868.html

India Gold: Caught between a Bull and a Bear?

Last Updated : 12 October 2012 at 15:15 ISTGold! Everybody wants it these days...

Once dubbed the most-useless-asset, gold is now the darling, doyen and apple-of-eye of investment community. You will die for a piece to own it and you would rather die trying than not getting it.

No wonder, gold demand is surging through out the world. From central bankers in the mainstream to poor farmers far away from the ambience of growth have been vying to get hold of it. And yes, notwithstanding the everyday fluctuations gold prices are going up, dwarfing the Everest.( The commodity has appreciated by 200% in the period spanning 2005-2010; just an indicative trend)

So it would be interesting to know what drives gold prices northwards these days in India and what can bring it down.

--Good monsoons, strengthening rupee, festive season demand, ETF demand: factors that would bring gold higher up
--Weak monsoon, weak rupee, financial inclusion by virtue of Aadhar project, investments by upwardly mobile in other precious commodities: factors that can bring gold down.

Monsoon factor

A strong monsoon is always bullish for India gold. But the monsoon that has just past, the South west monsoon, is deemed a failure as far as the farmer community is concerned. They have been unable to reap the benefits of monsoons beyond a point; some of the crops like paddy have seen a growth in sowing area in excess of the normal area; others like coarse cereals and pulses have fallen behind in acreage. This is expected to result in a drop in farmer incomes.

The farmers who generally seek credit before the sowing season commences in June-July expect to pay back the same when the harvesting season concludes with the money they amass. So a failed or unsatisfactory monsoon heralds a crunch time and farmers scramble for money to pay back to money lenders. Since they lack banking access, the farmers generally store their valuables in gold.

When the fields and incomes turn out to be dry, cash parched farmers tend to liquidate their gold. Since monsoon is a national phenomenon, failure of monsoons would mean failure of Indian farmers. In order to save their dignity and protect their children and women folk from the goons of local money-lenders, the poor farmers would take gold to this very money lender who lent them a sum in the first place.

This could possibly mean more and more of gold reaching the markets as well as gold demand plummeting as farmers refrain from buying gold and resort to selling. No wonder, failure of monsoons not only kill the demand of yellow metal but also add to some market surplus in gold. The latter case is however is an assumption and not backed by any studies or data.

Now, with their gold assets emptied, farmers would again have to seek money from the lenders on credit as they have nil alternatives on the onset of north east monsoons.

Meanwhile, once the dry northeast monsoon begins in September, most precipitation in India falls on Tamil Nadu, leaving other states comparatively dry. [The state's normal annual rainfall is about 945 mm (37.2 in), of which 48% is delivered by the northeast monsoon and 32% by the southwest monsoon.--according to a wikipedia article.]

This means that farmers other than those of Tamil Nadu may find it difficult to raise money as lenders may be unwilling to lend them money. They may ultimately have to leave their fields fallow and may have to join the umpteen migrants heading for the cities in search for some menial jobs.

This means that demand for gold may further plummet post the north east monsoon time ie December.

However, the Aadhar project floated by the government at the centre is an initiative that can bring farmers into the mainstream of financial inclusion. The project has the potential to give the crucial item that farmers may need to open a bank account: a trustworthy identity card. This can push the farmers further to save money in terms of currency rather than gold. The factor thus is bearish for gold.

Rupee factor

Indian rupee has been volatile for many a weeks now. With dollar too fluctuating wildly, responding to various crises and data releases and moving back and forth, it is no wonder that rupee too fluctuated. The fickle nature of FIIs too contributed to the volatile trend.

It is text book knowledge that when rupee strengthens, or dollar weakens there are two possibilities

1. Gold prices can go up because gold is a dollar denominated commodity and it take less of rupee to buy more of gold
2. Gold prices can come down because strengthening of rupee can aid import of gold thereby bringing its prices down

But in India, gold import tax has been hiked by 2% and currently rules at 4%. This has significantly dampened gold imports since the last budget.

This leaves the choice open for the first case.

With India government announcing reform measures in a big way, and also putting its foot down on it, the rupee and equity markets have strengthened. The factor would ultimately aid gold prices.

With the US government continuing with its money printing program, or QE3, dollar is expected to remain weak over the longer term. Besides the eurozone crisis and the monetary easing measures by other nations too would aid the uptrend in gold prices.

Festive season demand

Festive season is generally the time when gold prices go up as demand goes up considerably. Last year, even as the jewellers expected festive season demand in gold to pick up during the Akshaya Thrithiya, it did not happen. This time around, things are much worse than last year and with a gloomy economic outlook, it is doubtful if gold demand would pick up in Deepavali.

The festivity time is a time of cheer. Gloominess can dampen the outlook and may lead to cutbacks in jewelery demand.

ETF demand

India demand for gold ETFs have hit an all-time high and according to Business standard has seen investment flow in yellow metal pushing the size of assets held through gold exchange traded funds to an all-time high of Rs 11,198 crore.

“According to data compiled by mutual fund industry body AMFI, the assets under management of gold ETFs crossed the Rs 11,000 crore mark in September from Rs 10,701 crore in August” the report continued to say.

The factor is thus bullish for gold.

Investments in precious metals other than gold by upwardly mobile is yet another factor that can affect gold prices in a negative way.

Diversification of precious metal assets is a sound investment advise and the upper middle class is really keen to follow the advise.

As published in: http://www.commodityonline.com/news/india-gold-caught-between-a-bull-and-a-bear-50842-3-50843.html

Inflation: Can you have your Gold cake and keep it too?

Last Updated : 01 October 2012 at 21:55 IST

This morning, when the gold retreated in markets, nobody should have thought of a tsunami in gold prices invading the bearish sands.

The prices reached $1,794.40 an ounce, the highest for a most- active contract since Nov. 14 on Monday.

It simply happened and all it took was a few words from the President of Federal Reserve Bank of Chicago, Charles Evans. He maintained that unemployment probably will not fall to 7 percent until 2014 and that the Federal Reserve can do a lot more to boost the economy. He said that the Federal Reserve can back off from its easing drives if inflation presented a greater threat. The market interpreted this as impending series of inflation data and pounding hoofs of gold bull.

This announcement when broken down means a couple of things:

1. The US authorities consider it a top priority to rein in unemployment

2. The US authorities do not give a damn to inflation until it may rise to uncomfortable levels.

Perhaps Evans knows it. That inflation on a moderate scale is always a boon for growth and prevents the US economy from turning Japanese. That unemployment is a bane and can have political ramifications especially in the election year. Choose the one that apparently does not appear evil.

But it is also dangerous when central bank officials, thorough-bred economists, start talking politics.

Look at the nature of the third round of QE. It is a measure of buying mortgage backed securities or MBS from the markets on a monthly basis at $40 bn a month until the labour markets show substantial improvements.

What is this if not politics, one may argue.

The US authorities may resort to additional buying of treasuries too as and when the Operation Twist comes to a close by the end of this year.

All these measures, when added together mean a scourge emerging from thin air: inflation.

But herein lays the caveat: if inflation gets way too ahead of job creation and becomes a drag on the economy, the Federal Reserve may simply increase the lending rates or other umpteen tools with them to heal the economy.

The question is can inflation be reined in so easily after the economy has marched ahead in supersonic speeds.

In other words, is inflation so obedient a genie?

The debate, I think can continue forever. May be Bernanke could shed more light on the impending measures in today’s speech scheduled at 11.00 PM IST.

This time around, Ben Bernanke is expected to address the QE skeptics and may stress on two things: the QE 3 measure—the third round of Quantitative Easing wherein the Federal Reserve would buy mortgage-backed securities to the tune of $40bn a month until the labour markets recover —has the potential to work well and can be managed well. He will speak on ‘Five questions about Federal Reserve and Monetary Policy’.

Meanwhile gold prices retreated to 1780.5 levels on positive PMI data.

As published in: http://www.commodityonline.com/news/inflation-can-you-have-your-gold-cake-and-keep-it-too-50641-3-50642.html

Two reasons why QE3 did not set the Gold bull on fire

Last Updated : 01 October 2012 at 14:50 IST

In fact, Quantitative Easing measures are supposed to be the holy grail of commodity markets. Cometh a QE and the gold bulls rev up, it is widely thought.

Outrageous projections dotted the markets almost on a daily basis in the run up to the third round of Quantitative Easing. But it seems the gold prices have not gone beyond a point subsequent to the QE3 measures. It has not climbed the great plateaus that it was supposed to be. May be a hillock, it has.

Why this has been so?

There are two reasons:

--The gold prices had already been at a high when the QE3 was announced.

--The QE3 is not akin to an atom bomb this time around, blasting of which would pump up enormous amounts of liquidity pressure; but more like a sniper. It spares a bullet a time but definitely serves the purpose.

A look at a rudimentary gold chart will tell you how gold prices have appreciated since the Quantitative Easing measures have been announced each time. The second round of QE, the QE2, saw liquidity to the tune of $600 bn getting injected into the markets in one go. That was a massive bond buying program and took gold to dizzying heights.

And when the prices are at a rational high, it is almost impossible to climb from that levels to further highs given the leverage potential of the commodity and many other factors including psychological. Now, what if the prices are at insane high levels?

The government is not intending to inject massive liquidity at one go into the markets this time around.

The US Federal Reserve intends to buy mortgage backed securities or MBS to the tune of only $40 billion a month. It may also buy treasuries at the end of this year to the tune of $45 billion a month, as Operation Twist comes to an end. Though the figures may sound huge, it is just a drop in the ocean.

The QE3 is open ended and is tied to the labour market figures, meaning the initiative would continue until the $40 billion a month program brings about tangible differences in case of labour market data.

Now, the effect of these measures would require that it takes at least many months before some effect is on the commodity markets and the bullion.

Nevertheless it would happen!

As published in: http://www.commodityonline.com/news/two-reasons-why-qe3-did-not-set-the-gold-bull-on-fire-50627-3-50628.html