Gold ETF demand in 2011 lowest since 2005

In the Lead: “Captain [Credit] Crunch ”

If gold imports were removed from the equation, the deficit would have been half as large. Over $1 trillion in Indian wealth has been channeled into what is seen as ‘dormant’ and ‘unproductive’ – as gold is clearly an ‘inactive’ asset that normally does not get sold. Gold is India’s third largest import and albeit crude oil is a more important factor to the nation’s struggling balance sheet, the “contribution” that gold has made to that ledger ought not to be ignored just because one is in love with the “love trade” in the metal. The country’s government certainly is not ignorant of the issue, as reflected in its latest tariff slap on bullion.

As we noted in a recent article, there is an undeniable dark side to the production of gold around the world. We expressed optimism that there are some signs that small steps are being taken to rectify the environmental and human dramas unfolding in relation to the digging up of the precioussss…We are now even happier to report that, among other things, the World Gold Council has come up with “conflict standards” to be introduced this year.

In the markets’ background, the euro traded near $1.315 against the US dollar. While it was not yet reflected in the euro’s quotes from this morning, the much-dreaded credit implosion [AKA THE Credit Crunch] in the Eurozone could already be in progress, according to the readings of December’s lending and money supply data. Private sector lending in the region barely eked out a gain last month, while money supply (M3) growth also contracted significantly. While the focus is on the travails of Greece, Spain and Portugal continue to present a different type of threat to the union. Unemployment in Spain exceeded 5 million and is approaching almost a quarter of the nation’s workforce. Bank lending in Portugal fell by the most on record last month.

As well, while also not yet being mirrored by the $1.315 quote in the euro, the on-going quarrel over Greece’s debt write-downs is pushing that nation ever closer to a (disorderly) default. Little attention is being paid to the fact that the next 72 hours are critical to the future of the region and to the investor confidence levels in the same. Athens is hard at work in the meantime, trying to get a hold of another batch of bailout money from the EU, lest it does go bankrupt by March when it is due to repay more than 14 billion in bonds.

Equity and commodity markets are not yet apparently factoring in any negative news from Europe as they continue to remain enchanted by the Fed’s offer of cheap money for some time to come, even though there are those (insiders, to boot) who see it having to eat its own words and raise rates prior to that time. Also being dismissed in various bets being currently made is the Fed’s overt inflation target of 2% and its longer-range interest rate target level near 5%.

In fact, the latest Fed pronouncement could well push yield-hungry speculators (as well as a bunch of retirees who seek income) into risk-laden assets that they can ill-afford to hold in the event rates rise prior to the 2014 self-imposed target date by the Fed. And, make no mistake; rates could indeed rise swiftly provided the US economy picks up further steam and the European situation morphs into what is perceived as a good enough solution not to result in toxic contagion. For now, however, at least one leg of the US’ economic recovery is inexorably tied to what takes place in Europe these days and in coming ones.

Fourth quarter US GDP came in at the 2.8% mark, in large part owing to a bump in consumer spending and in business inventories. The gain was the largest in 18 months. Still, economists had anticipated a 3% gain on the quarter. As well, America’s GDP rose by 1.7% last year as compared to a 3% rate of expansion that was seen in 2010. Meanwhile, inflation continued to remain a non-threat, with consumer PCE rising by only 0.7% and with a 1.1% increase in the (ex food & energy) inflation index. Stock index futures appeared less than pleased with the data and the dollar remained under mild selling pressure in the wake of the same as well (at 79.22 on the trade-weighted index).

Have a pleasant weekend, everyone.

Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America

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About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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