One set of less-than-often – in fact, rarely — quoted reasons for gold prices to potentially work their way lower comes from Wednesday’s analysis by Seeking Alpha contributor Ananthan Thangavel, the Managing Director of Lakshmi Capital and author of The Commodity Analyst. Mr. Thangavel is noted for having called the precise top in the silver market last year and for having forecast gold’s slide in September as well. While he too focuses on the fact that the Fed has been “standing pat” since the end of QE2 and that such inaction (along with US dollar vigor) is contributing to waning enthusiasm in gold and other commodities, Mr. Thangaval delves deeper into the situation and uncovers some surprising (to some) facts in the process.
To wit, while the majority of players in the commodities’ space have benefited from the expansion of the Fed’s balance sheet (QE1 +QE2), their continuing expectations for more of the same are flying in the face of a reality in which, by now, not only is there no further likelihood of that balance sheet swelling much further (or in a non-inflation-sanitized manner), but also one in which the huge inflation that was expected as an outcome of QEs I and II has not materialized. Aside from that, the US treasury market may be telling us something quite “meaningful” at this juncture and it applies to gold and even more so to silver. The signs in the US bond market also point to expectations of a stronger economy of late.
So, anyway, many will ask: How can you get low inflation in the aftermath of serious monetary supply injections? The answer is pretty simple, really; just have the velocity of money wind down instead of in the opposite direction. That is precisely what has been going on in the US, as the money that the Fed has pumped into the economy has largely not moved through the economy at a clip large enough to engender the type of inflation that the gold bugs have been betting on (heavily so since 2008). The Fed’s cheap dough — for the most part — has been sitting pretty on US bank balance sheets.
Mr. Thangaval also brings to our attention the shifting pubic attitude towards debt and the monetization thereof via inflation: A resounding “No!” is what it sounds like. We’ve heard it from the GOP, we’ve heard it from the Tea Party, and we’re hearing it from the Obama White House as well. Cutting spending where possible, raising taxes where applicable, and trimming deficits before they become lethal, these are all ‘in vogue’ attitudes in America lately and without party lines coming into the equation. It should be an interesting year-end, to be sure.
Finally, Mr. Thangaval opines that “emerging markets are much less able to buy gold than they once were. Consider for a moment that the average per capita income in China in 2010 was…$2,425. While India and China have valued gold as an investment for years as a cultural bias, the per capita incomes in these countries can simply no longer support robust gold purchases, especially if their currencies are outperformed by the U.S. dollar. This phenomenon was witnessed in India when gold purchases actually fell in Q4 2011 despite gold prices also having fallen during the period. The fall in demand was a result of high prices, accentuated by the rupee's fall against the U.S. dollar.
Conclusion? “While many gold investors would like to believe that emerging markets can keep prices rising indefinitely, they would be much better served by realizing that U.S. hedge funds and investors are ones necessary for them to see positive returns.” Author’s note: The aforementioned hedge funds-according to the CFTC-have now slashed their gold-bullish bets by the most since about August of 2008. Mom and pops, however, have not yet joined the exodus. In this context it is further worth noting that after having just recently hiked import tariffs on gold and silver by a substantial amount, according to sources at UBS AG, India, the world’s biggest buyer, may [once again] be considering higher gold import taxes because of budget deficits.