Gold falling as Indian demand may drop 53% in 2012

In The Lead: “See PM Tallies As Seen By CPM”

To wit: Quite a few gold investors are piling into the metal in proportions that a far larger than what a prudent portfolio allocation model might suggest, because they are convinced that we will get sharply rising inflation owing to the recent round of global fiscal stimulus. Investors have also bought the line that negative real interest rates are gold-beneficial. It turns out that, historically speaking, returns on gold have actually shown a tendency to decline when real interest rates dipped under -2%. As for the topic of Weimar Republic-style inflation, CPM said that, in the near-term, this type of threat is a non-issue that the anticipated future inflation levels may also not occur.

One of the reasons for such a paradigm has been alluded to in these columns recently; it pertains to M2 and to the velocity of money in the system. CPM notes that “M2 money supply in the United States, which accounts for a quarter of global gross domestic product, was at a record high level at the end of 2011. The velocity of M2 money supply was at record low levels during the fourth quarter of 2011, however. The velocity of money supply tells us the rate at which money changes hands or the level of economic activity associated with a certain amount of money supply. In other words, it is the number of times one dollar is used to purchase final goods and services included in GDP. It is therefore considered a good indicator of inflation. Low velocity suggests low inflation at present.”

As regards the threat from destructive-level inflation, “monetary authorities are aware of this danger and plan to sop up the excess liquidity that could result when these funds begin being mobilized,” CPM said. CPM’s Mr. Christian then noted that actual correlation between inflation and gold prices “is nearly non-existent.” CPM calculates that the correlation between the price of gold and U.S. inflation levels –when looked at on a monthly basis from 1970 to 2011 (!) stands at 7% and that this correlation actually turned negative in the period between 1990 and 2011.” That kind of percentage is not exactly one that defines an effective inflation hedge…

Platinum, palladium, and rhodium also headed lower this morning losing $21, $6 and $25 respectively and coming in with bid-side quotes at $1,630, $650, and $1,400 per ounce respectively. Copper declined 1.65% while crude oil fell 1.3 per barrel (to $106.04). Hedge funds speculating on commodities apparently got it ‘dead wrong’ once again as they placed bullish bets on ‘stuff’ precisely when external market conditions turns against them. For an in-depth take on this, you may view this report by Bloomberg’s Alix Steel. China is mentioned therein, and more than once…

Meanwhile, the US dollar charts indicate that the technical setup is hinting at the fact that the two-week long pullback in the currency may have now run its course. Rising durable goods orders may imply added dollar strength and lower odds of another round of QE by the Fed while rising stockpiles of crude is seen contributing to easing inflationary pressures if prices continue to decline. France is thought to be planning tapping into strategic oil reserves in the wake of the latest speculative push to propel black gold prices beyond reasonable levels. One analyst has dubbed oil as the “new Greece” and warns that global economic growth is now at risk from the situation in oil.

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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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