Gold and inflation call it quits

Film at 11

The IMF sees China’s economy expanding at the 7.8% rate this year. Back in 2011 China grew at a 9.3% annualized clip. Said the IMF: “Growth is not projected to rebound to the high rates recorded in 2010–2011. Weakness in advanced economies will weigh on external demand, as well as on the terms of trade of commodity exporters, given the assumption of lower commodity prices in 2013.”

On top of that, India’s government is overtly “striving to undermine its gold bugs” according to some sources. Perhaps not “undermine” them, but certainly to dampen their current account deficit-aggravating appetite for the yellow metal. Less than one year after it doubled the import duty on gold from 2 to 4 percent, the tariff was once again hiked to 6% on Monday.

The import duty lift is part of a package of measures that includes allowing golf ETFs to deposit physical gold with banks as well as modifying bank-based gold-deposit schemes to make gold less attractive as an asset.  Naysayers may dismiss the official efforts as being doomed to fail in view of India’s historic love affair with gold. Yes, but…note the 28% decline in Indian gold imports (Sept. 2011- Sept. 2012) as well as the 11% drop in same (calendar 2012) to 593 tonnes.

Finally, the SocGen material posits the idea that gold might recapture some of its lost stature in the international currency reserve system. A whole lotta noise was made in various gold forums and on several “news” outlets catering exclusively to the gold bug community this week about the imminent move by China to back its currency with gold (dream on) and/or that gold is about to make a big return as the world returns to sanity.

After decades of benign and not-so-benign neglect, perhaps gold might be elevated by a few notches in the eyes of the world’s central bankers. However, purchases by Borat’s homeland and other third tier countries notwithstanding, will gold once again come to represent 60%+ of global reserves (as opposes to ~11% now)? Nope. Sorry to be the bearer of unpleasant news. But, hey, let’s take a quote directly from the OMFIF document’s pages themselves. Conclusion Number Three:

Gold will not replace fiat currencies; the Gold Standard will not return. Nostalgia for a supposed golden age of the Gold Standard, coupled with concerns about governments' ability to manipulate fiat currencies, occasionally gives rise to calls for, or predictions of, a return to gold as the underlying basis for the international monetary system. This is not possible. Gold’s relative scarcity means that it could only ever replace a fiat currency on a fractional basis. Even that is unlikely, as a legacy of history.”

When a World Gold Council-commissioned study (perhaps more adequately named as the World Mining Federation’s Gold Promotion Association)such as the above draws such a conclusion, the case for gold-as-money (in the classical sense) is open and shut. Mostly, it is the latter. You are sure not to read any such finding in your weekend parsing of gold-oriented websites. It is, after all, heresy of the highest order.

The overarching potential price-moving agent that SocGen sees for gold however remains the level of real interest rates. Therein, of course, lies the proverbial ointment-coated housefly. As Goldman and Citi recently pointed out as well, if interest rates rise, gold will “likely get crushed.” Or, you could ask billionaire investor George “Gold Is The Ultimate Bubble” Soros about this topic and get the same results.

Mr. Soros said on Thursday that “once the [US] economy gets going, then interest rates are going to take a big leap.” As far as he is concerned, such a jump may well take place later this year. Mr. Soros believes that the process “may have already begun.” Indeed, this might be the case, especially if we were to take a look at what’s happening in the bond firm business and where the ‘smart’ money has started heading.

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