Gold and inflation call it quits

Film at 11

Yesterday, the global banking giant (also the custodian for the bulk of GLD bullion) halved the gold allocation in its strategic and tactical portfolios citing an aim to reduce volatility. The new gold weightings in the aforementioned portfolios will now be at 7%. HSBC noted that the correlation between gold and US inflation has broken down somewhat over the past year. At this point, the bank and global gold trader believes that TIPS are a better inflation-hedging tool than gold might be. HSBC also gave a favorable nod to equities in its asset-weighting reshuffle.

However, that which HSBC said about certain other attributes that gold is supposed to have exhibited over the past year or more will surely come to be labeled as “heresy” in certain gold-oriented forums: the bank stated that “it no longer views gold as a "sound investment" should the global economy fall back into recession, as this would not now be driven by a major systematic event such as a sovereign default.

Moreover, HSBC also cautioned that-in a recession scenario-the price of gold could fall to $1,600 an ounce rather than rise to $2,200 as was previously forecast. The bank said that “This change means that we now expect gold to return -3.6 percent in a recession rather than the 32 percent that we forecast back in September.” How’s that for a change of heart on the matter of where gold could be headed? Why it is probably good enough for the same forums and blogs to declare that the “evidence” is in as to HSBC’s being part of the anti-gold (yet still invisible) gold “cabal.” Yeah, right.

Mind you, HSBC was not the only institution to issue a 2013 gold performance projection this week. French bank Societe Generale released an investor note on Monday that allows for the possibility that the current year could be the first one since 2000 in which gold ends with a negative performance. SocGen cited three bearish reasons for such a possibility: 1) Equities are –relative to gold-at their lowest level in twenty years, 2) the US dollar could gain ground as the American economy recovers, and 3) inflation is still contained.

As the SocGen’s analysis pointed out, “gold demand fell by 11 percent in the third quarter of last year compared with the same quarter of 2011, mainly because of moderate consumption in the world’s two biggest consumers of gold, China and India. This is not to say that there were no potentially bullish factors cited in the SocGen release. It’s just that-upon closer analysis-even those factors present some problems in terms of odds of materializing. Let us take a look:

SocGen opined that “1) “currency wars” and renewed monetary easing could push gold higher; 2) demand from emerging countries may increase; 3) in the long run, gold may play a role in the transition to an international currency reserve system.” How do these positives stack up, at this juncture? Not too well, actually.

First, let’s take issue –as someone else has- with the idea that we are in the midst or on the eve of some “currency wars” that will reshape the world as we know it. Despite the ominous language coming from Bundesbank President Jens Weidemann on Monday, the reality is that central bank independence was lost during the most recent financial crisis. They are all in the same boat, folks, and they cannot afford unilateral moves that might come to affect everyone else. So, don’t worry about that ‘war.’ It is as likely as WWIII at this juncture.

Moreover, the apocalyptic currency market visions of Messrs. Rickards, Faber, Schiff, Celente, etc. are not on target either. In fact, IMF Chief Economist Olivier Blanchard flat-out warned that “talk of a global currency war [following the BoJ anti-deflation move] is inappropriate. This increasing talk of currency wars is very much overblown.Mr. Blanchard noted that there has been no massive inflow of capital into emerging nations. He acknowledged that countries such as Japan “have to take the right measures to get their economies back to health” but that such does not imply that there is a fatal race to the bottom or a currency war underway.

The second potential bullish item in the SocGen release relates to gold demand from emerging countries. Once again, that is a problematic factor to be sure. Take India and China, for example. The IMF this week scaled back growth expectations on a global scale. With regard to India, the IMF believes that the country’s economy might expand at the 5.9% rate this year. Compare that to the 7.9% rate of growth we saw from India back in 2011. In order to buy gold, one needs spare cash. Spare cash in a relatively anemic (historically speaking) economic environment? Hmmm.

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