Gold hurt as downside momentum accelerates

In the Lead: “Momentous Momentum Moment”

News from India and the physical side of the gold market continues to be disturbing for those who heavily rely on that country to take up the slack in the metal’s fundamental overhang. India is reported to have notified Thailand that it intends to slap a 10% duty on Thai-imported baubles into the country. Once again, the move reflects how serious the Indian government is about trying to curb gold demand appetite in the country.

India’s Business Standard reports that “currently, India has early harvest scheme (EHS) with Thailand under which gold jewelry has been imported at 0% [duty] since 2004. This concession is available only if there is minimum 20% value addition in jewelry in Thailand before coming to India.” However, “The [Indian] government suspects that the norm of value addition of 20% is not being adhered to. In fact, instead of gold jewelry, [actual] gold is being imported [read: de facto smuggled] into India, it is suspected. Besides, most gold jewelry imported from Thailand is reportedly coming from China and Malaysia since Thailand is not a known gold jewelry producer.”

Meanwhile, The Cutting Edge News reports that large-scale gold imports are straining not only India’s finance but, potentially, its social fabric as well. India produces virtually no gold yet it imports about from 500 to 900 tonnes every year in order to feed domestic demand. Professor N. Bhanumurthy of the National Institute of Public Finance and Policy says that the real cost of the $56 billion of imported gold in the most recent fiscal year (11% of the country’s total imports) is the contribution it makes to the Indian trade deficit. Prof. Bhanamurthy says gold should be viewed as an “unproductive” investment. “More than half of the current account deficit has been contributed by the imports of gold in the recent period. The savings should be channelized for some investment activity. Gold is neither investment nor financial savings.”  

Evidently, there is still some ‘education’ left to do. India is reported to have imported 33% more gold this month in an effort by its traders and jewelers to race ahead of the government’s imminent duty hike. While that’s not the same as being able to conclude that higher tariffs won’t make a difference (as some have declared), it is reflective of a possible protracted ‘battle’ between the government and (at least) India’s jewelers and (possibly most) denizens.

Meanwhile, the key to some commodities’ fate in 2013 lies just a short airplane’s journey away in China. Dankse Bank has issued a set of views the other day that might elate some commodity bulls — at least for a short while.  Danske Bank’s analysts are projecting that, while rebounding Chinese growth might make for good price gains in certain “stuff” in the first half of this year, the latter six months might cause some grief for same. Let’s dive into these views a bit more:

Danske Bank advised that “overall, we recommend clients on the consumer side to hedge [first half] commodities exposure early in the year, but potentially leave some exposure open for [second half] to benefit from the stabilization or even price declines.” Now, while this may sound like some far-fetched and perhaps ill-conceived speculation on the part of Danske Bank, we really want you to pay attention to the core concepts being relayed therein. Read on:

The over-arching theme in the Danske Bank advisory review is that (contrary to the stuff you might read in a plethora of hard-money newsletters): “Even as Chinese data lately have provided spots of sunshine, there is no guarantee that this is a longer-term trend. Before the upbeat readings recently, the Chinese economy had been slowing down for almost two years, fueling ‘the question of whether the slowdown has been partly structural in the sense that China’s long-term growth potential is starting to decline.’”  

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