Thursday, April 19, 2012

Central Banks Favour Gold As IMF Warns of “Collapse of Euro” and “Full Blown Panic in Financial Markets”

Central Banks Favour Gold as IMF Warns of “Collapse of Euro” and “Full Blown Panic in Financial Markets”
Gold’s London AM fix this morning was USD 1,646.50, EUR 1,258.41, and GBP 1,030.80 per ounce. Friday's AM fix was USD 1,652.00, EUR 1,255.51 and GBP 1,035.54 per ounce.
Silver is trading at $31.61/oz, €24.16/oz and £19.78/oz. Platinum is trading at $1,577.25/oz, palladium at $656.90/oz and rhodium at $1,350/oz.
Cross Currency Table – (Bloomberg)
Gold fell $1.50 or 0.09% in New York and closed relatively unchanged at $1,650.20/oz yesterday. Gold traded sideways prior to gradually creeping up in late Asian trading. It then gave up those gains in European trading and is nearly unchanged from yesterday’s close in New York.
Gold remained relatively unchanged from yesterday as Spain’s debt auction eased some worries about the eurozone debt crisis. Although this is another temporary respite as the euro may remain under pressure ahead of Madrid’s long term debt sale later this week.
Investors appear more focused on Europe even though US industrial output numbers and housing starts were low.  A surprise jump in German business sentiment lifted riskier assets including equities.
Gold 1 Year Chart – (Bloomberg)
India’s central bank is further debasing the Indian rupee which will lead to further safe haven demand for gold, and is still the world’s largest buyer of gold.
India has had its first rate cut in 3 years and was cut by a higher than expected 50 basis points to 8%.
This comes despite inflation being higher in March compared to last month surging to 9.47%.
The recent tax increase on gold was a futile attempt to curtail gold demand – as Indian policy makers realised accelerating inflation would lead to further gold demand.
Wedding season is at its peak in India now and Akshaya Tritiya, a large gold buying festival, happens later this month. There are forecasts of a 25% increase in demand during the Hindu festival next week after demand was curtailed during the gold jewellers strike (see Other News below).
Deepening negative real interest rates in India and the risk of an inflation spiral will see Indian demand remain robust and it may even accelerate if inflation deepens - contrary to suggestions that Indian gold demand will fall precipitously.
IMF: Risk of Collapse of Euro and “Full Blown Panic in Financial Markets”The Eurozone could break up and trigger a “full-blown panic in financial markets and depositor flight” and a global economic slump to rival the Great Depression, the IMF warned yesterday.
In its World Economic Outlook report, the International Monetary Fund said the collapse of the crisis-torn single currency could not be ruled out.
It warned that a disorderly exit of one member country would have untold knock-on effects.
"The potential consequences of a disorderly default and exit by a euro area member are unpredictable... If such an event occurs, it is possible that other euro area economies perceived to have similar risk characteristics would come under severe pressure as well, with full-blown panic in financial markets and depositor flight from several banking systems," said the report.
"Under these circumstances, a break-up of the euro area could not be ruled out."
“This could cause major political shocks that could aggravate economic stress to levels well above those after the Lehman collapse," said the report.
Risk Averse Central Banks Favour Gold Over EuroThe risks outlined by the IMF are real and are being taken seriously by central banks who are becoming more favourable towards diversifying foreign exchange reserves into gold.
Central bank reserve managers responsible for trillions of dollars of investments are shunning euro assets and questioning the currency’s haven status because of the region’s sovereign debt crisis, research has found, according to the FT.
Among the most conservative of investors, central bankers have tended to keep much of their fx reserves in high quality euro and dollar denominated assets, such as government bonds.
However, a survey of reserve managers at 54 central banks responsible for portfolios worth $6 trillion, almost half the world’s total, signals that the sovereign debt crisis has sparked a reversal of that trend.
More than three-quarters said the sovereign debt crisis has had a profound impact on their reserve management strategy, with their central banks pulling back from eurozone counterparties and reconsidering attitudes toward the single currency.
Signifying the mood of caution among the world’s central bankers, 71% of those polled said gold was a more attractive investment than it had been at the start of last year. Central banks made their largest purchases of gold in more than four decades last year and have continued to buy the precious metal in the early months of 2012.
Central bank demand is set to continue and may accelerate as the global debt crisis deepens in the coming months.
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XAU/GBP 1 Year Chart – (Bloomberg)
(Bloomberg) -- Hindu Festival Seen Reviving Gold Demand in India After Shutdown 
Gold demand in India, the world’s biggest importer, may climb as much as 25 percent during a Hindu festival next week, according to Rajesh Exports Ltd., reviving jewelry buying that was curtailed by a nationwide shutdown.
Consumption may increase to as much 15 metric tons on Akshaya Tritiya on April 24, said Rajesh Mehta, chairman of Rajesh Exports, India’s biggest gold jewelry exporter. The festival is considered by the majority Hindu population in the South Asian nation as an auspicious day to buy precious metals.
Imports plunged last month after Finance Minister Pranab Mukherjee raised taxes to curb a widening current-account deficit fuelled by record bullion purchases. The National Spot Exchange Ltd., India’s biggest bourse for physical gold, expects its festival coin sales to double from a year earlier, according to Chief Executive Officer Anjani Sinha.
“People will buy a lot of gold this Akshaya Tritiya,” Rajesh Exports’ Mehta said. “We expect sales to be good, especially because of the strike” and the pent-up demand from the shutdown, he said.
Jewelers closed stores for three weeks in the longest-ever shutdown, curbing imports, after Mukherjee doubled import levies on gold and imposed a 1 percent excise duty on non-branded ornaments. The shutdown ended on April 6 after the government assured jewelers’ that their concerns on taxes will be considered. The strike cost the industry about 200 billion rupees ($3.9 billion) in lost revenue, according to the All India Gems & Jewellery Trade Federation.
‘Kickstart Momentum’
The Akshaya Tritiya “will kickstart momentum to slack imports,” Kunal Shah, head of research with Nirmal Bang Commodities Pvt., said from Mumbai. “It will support the ongoing bull run in gold.”
During Akshaya, a Sanskrit word meaning “that which never diminishes,” Indians begin a new venture or buy valuables with the belief it will bring luck and prosperity. Based on the lunar calendar, the date changes every year. It is the second-biggest gold buying day in the country after Dhanteras, according to fund manager Quantum Asset Management Co.
Bullion for immediate delivery rose 0.2 percent to $1,652.82 an ounce at 9:08 a.m. in Mumbai today. The June- delivery contract fell 0.3 percent to 28,482 rupees ($554) per 10 grams on the Multi Commodity Exchange of India Ltd. yesterday. Gold has advanced 5.6 percent this year, adding to 11 consecutive annual gains buoyed by central bank buying and increased haven demand driven by Europe’s sovereign-debt crisis.
Competitive Asset
“Gold is very competitive in its asset class,” said Anindya Mitra, senior vice president of retail liabilities at HDFC Bank Ltd., the second-largest coins seller among Indian banks. “We are looking at doing good business this year.”
Coins sales may be 10 percent to 15 percent higher on the festival day from a year ago after HDFC increased outlets and on investment demand, Mitra said.
The national exchange has 1,700 orders for coins for delivery on Akshaya Tritiya, or about 25 kilograms worth of bullion, National Spot Exchange’s Sinha said. Demand will double to as much as 34 kilograms from 17 kilograms last year, he said.
“It is a special occasion, demand will be very good,” Sinha said. “People don’t expect the price to go down from here.”
India’s gold imports may fall to 700 tons to 800 tons in 2012, Prithviraj Kothari, president of the Bombay Bullion Association, said April 2. That compares with record purchases last year of 969 tons, according to World Gold Council data.

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