Among similar opinions, are the views of one David Frum. The former Canadian-American George W. Bush speechwriter had this capsule observation to tender to his FrumForum readers last Thursday in the wake of yet another massive drop in prices: “Gold is a uniquely strange asset, because so many people in the gold market buy gold as a matter of ideology and identity. Cocoa, copper, or cotton trade as commodities. Gold trades as a way to make a statement. That’s simply not a sensible way to invest. A great many Americans are paying a steep price – and may pay a much steeper price yet – for allowing hucksters and ideologues to sway their economic judgment.” The hucksters and ideologues were unnamed but your inbox contains many of their “advisory” publications – that’s a safe bet.
Recall that most of the gains achieved in gold in recent years (specifically since 2008) came on the back of apprehensions that the Fed’s QE programs would fatally wound the US dollar and that the EU debt crisis would not only make for the demise of another fiat currency (the euro) but would also bring the entire global financial system to its knees, leaving gold as the only alternative holding. The Globe and Mail noted that – according to at least one analyst, Alfred Lee, an investment strategist with BMO Asset Management Inc. in Toronto – “[A stronger U.S. dollar is] going to create a headwind for most of the commodities, and more so for gold because a lot of people were using gold as a hedge against the U.S. dollar,” “Now [the dollar’s rise is] really testing their thesis: Is gold really an alternative to the U.S. dollar?”
Wait. Did he say “stronger dollar?” How is that supposed to be true? How could the dollar already have gained 13% from its record low seen in March of 2008 (that year keeps coming up…) in the wake of the Fed opening its QE spigots to “full-on” (twice) and the crisis in Europe having reached mushroom cloud proportions? Well, it did. The buck rose 13% against the pre-written obituaries it has enjoyed. Not only did the American currency – with all of its flaws (deficits, S&P downgrade, the circus in DC last summer, etc.) flourish in terms of value, but (gasp!) it has actually increased its share of global foreign-exchange reserves. In Q3 of 2011, it did so at the largest clip since…2008, reaching 61.7% of said reserves. This is why we closed out the string of 2011 articles with an undisguised piece of advice about watching your back on account of the…greenback in 2012. Some have already come forward with characterizations of this year as the “Year of the Dollar.”
That same, recent downside price action in gold has prompted veteran market watcher Martin Pring to declare that the “precious metals are in a primary bear market” even if gold did appear somewhat oversold near $1,530. Bullish gold pundits are now hoping that since the Year of the Dragon comes early in 2012 physical demand from China might be as fiery as that creature’s breath. One might as well hope for China to come to the rescue, since the anticipated bump in seasonal gold demand from India last quarter turned out to be more of a…slump.
The so-called “love trade” turned into a “neglect trade” as India failed to import the gold tonnage that many had predicted. We mentioned recently that the probability that gold imports might have declined some 50% in the face of ultra-high prices in that country. As it turns out, the decline was actually on the order of 56% and it resulted in only 125 tonnes being brought into India on the quarter. For a little history and perspective on India and gold and…the weather (as in: the Monsoons) see this Seeking Alpha article. Bring your umbrella, or, your parasol, as the case may be.
Bombay Bullion Association President Prithviraj Kothari noted that locals were even selling (!) gold during the period when the World Gold Council said they ought to have bought almost 300 tonnes of it. Mr. Kothari also feels that Q1 of this year might witness a similarly large (50%) drop in bullion imports in comparison to 2011’s level. Meanwhile, local technical analysts warn their readers over at the Daily News and Analysis that gold has “violated bullish channel support” and that they ought to (for now) “avoid bargain hunting.”
However, it is not just India where the locals have begun to reassess the ‘value’ of $1,900 gold and have started to look elsewhere for the next batch of potential returns on investment. The Saudi Arabians have been similarly “distracted” (primarily with local real estate) as the spiking volatility and record price tags in gold have prompted them to shift funds into other markets. Some local buyers were seen seeking silver as a more affordable alternative but many have opted to plow money into a different “hard” asset: Apartment buildings.
Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America