Vivek Kaul
So now that Barack Obama is all set for a second term as the President of the United States of America, gold is set for another rally. As I write this gold is quoting at $1723.2 per ounce (1 troy ounce equals 31.1grams), up $40 or 2.4% in a day.
And this rally is likely to continue. There are several reasons for the same.
a) The Second Term President phenomenon: Second term presidents in the United States(US) usually tend to go overboard with spending money. This extra spending cannot be always matched by an increase in government revenue and is matched by printing dollars to meet this gap. This money printing devalues the dollar.
As Jan Skoyles the head of research at a U.K. bullion dealer called The Real Asset Co., put it in a recent research note “our research also found Presidents granted a second-term have a marvellous time showing everyone just how much money they can spend, devaluing the currency further and making that precious metal glister even more. It seems that during their first terms Presidents are more tempered than in their second. Is this because they decide to blow the doors off and show everyone what a great person they are, leaving the next guy to pick up the mess?”
And the numbers tell the story. Gold rallied 88.8% during George Bush Junior’s second term. It had rallied only 24.6% in his first term. The same stands true for Bill Clinton as well, with gold losing 5.6% in his first term and gaining 16.9% in his second term. The table here tells the complete story.
b) Democrats destroy the dollar more than Republicans: The Democratic Party to which Obama belongs, has a better track record of destroying the dollar and hence pushing up the gold price. As Skoyles puts it “The evidence showing Democrats destroying the dollar more than Republicans…is over-whelming. Even though Democrats prove to be the best party for gold investors worried about the gold price, the Republicans don’t do too badly themselves – accounting for a net increase of 121.27% across their terms in office since Nixon, versus 358.68% for the Democrats.” Richard Nixon was the President of America between 1969 and 1974.
c) Ben Bernanke will continue to be the Chairman of the Federal Reserve of the United States: One of the things that Mitt Romney, the Republican challenger to Barack Obama, had made very clear was that he would fire Ben Bernanke, the Chairman of the Federal Reserve of the United States, the American central bank, if he became the President of the United States.
As he had said in August earlier this year “I would want to select someone new and someone who shared my economic views…I want someone to provide monetary stability that leads to a strong dollar and confidence that America is not going to go down the road that other nations have gone down, to their peril.” His running mate, Paul Ryan wanted dollar to be “Sound Money” again. “We want to pursue a sound-money strategy so that we can get back the King Dollar,” Ryan said.
With Obama getting a second term, Ben Bernanke is likely to continue as the Chairman. Also he might now even get a third term when his current term ends in 2014. This means that the easy money policy run by the Federal Reserve is likely to continue and this can only mean good things for the price of gold.
Bernanke has been running a policy of quantitative easing and printing dollars, in the hope that banks lend these dollars, and people spend them, and this in turn helps in the revival of the American economy. But this money printing has also led to a stupendous rise in the price of gold.
Any round of quantitative easing ensures that there are more dollars in the financial system than before. The threat is that the greater number of dollars will chase the same number of goods and services. This will lead to an increase in their prices. But this hasn’t happened till now. Nevertheless that hasn’t stopped investors from buying gold to protect themselves from this debasement of money. Gold cannot be debased. Unlike paper money it cannot be created out of thin air.
During earlier days, paper money was backed by gold or silver. When governments printed more paper money than the precious metals backing it, people simply turned up with their paper at the central bank and government mints, and demanded that paper money be converted into gold or silver. Now, whenever people see more and more of paper money being printed, the smarter ones simply go out and buy that gold. Hence, bad money (that is, paper money) is driving out good money (that is, gold) away from the market.
d) The US Fed will go slow on manipulating the gold market: Another theory going around is that the US Federal Reserve has been manipulating the price of gold over the years with help from bullion banks. As the gold expert Tehmaas Gorimaar writes “One form of manipulation is the through setting of low lease rates for gold and silver. Low rates encourage bullion banks like J.P Morgan and HSBC to borrow gold and silver from central banks, dump the metal on the market and use the proceeds to invest in paper assets, thereby driving up the prices of these assets.” (you can read a more detailed argument on this here).
This manipulation to hold back the price of gold seems to have gone up in the run up to the Presidential election. As Gorimaar puts it“Because the dollar, like all other currencies, is a fiat currency, and gold is the antithesis of the dollar. A runaway gold price means that the so called “strong dollar policy” touted by American presidents isn’t working. Also, higher gold and a lower dollar would mean higher commodity prices, since commodities are priced in dollars. A weak dollar would also have given Mitt Romney more fodder for attack.” Hence, Bernanke was helping Obama here. Now what would be the quid pro quo for the same? Another term for Bernanke as the Chairman?
With the elections over the Federal Reserve is likely to take a breather on this front and gold is set to rally. “I think you’ll see gold at $3500 per ounce and silver above $100 per ounce by the end of 2013. This is because of the extreme suppression of their prices in this election year,” says Gorimaar.
e) Does that mean gold will rally in India? While the gold is set to rally in dollars, for Indians to make money it has to rally in rupee terms. For that to happen the Indian rupee either has to remain at the current levels against the dollar or depreciate further. Let us try and understand this through an example. Gold currently quotes at around $1723 per ounce. One dollar is worth Rs 54.3. This means one ounce of gold is priced at Rs 93558.9 per ounce (one troy ounce equals 31.1grams). If one dollar was worth Rs 50, then gold would have been at Rs 86,150 per ounce. If one dollar was worth Rs 60, gold would have been at Rs 1.03,380 per ounce. Hence more the rupee depreciates against the dollar; the greater will be the return on gold in rupee terms. For that to happen the UPA government needs to continue running the screwed up economic policy that it has been over the last few years. And that’s one thing they have been doing even better than all the scams that they have been running. So gold should rally in rupee terms as well.
The article originally appeared on www.firstpost.com on November 7, 2012. http://www.firstpost.com/economy/obama-is-good-for-gold-target-3500-by-2013-end-517752.html)
(Vivek Kaul is a writer. He can be reached at [email protected])
Gold
Western central banks maybe holding less gold than they claim
The price of gold as on January 1, 1979 was $226 per ounce (one troy ounce equals 31.1 grams).
On August 6,1979, Paul Volcker took over as the Chairman of the Federal Reserve of United States. The price of gold on that day was at $282.7 per ounce having risen by 25% since the beginning of the year.
When Volcker took office things were looking bad for the United States on the inflation front. The rate of inflation was at 12%. The price of gold against the dollar had also been rising at a very past pace. The price of gold on August 31, 1979, at the end of the month in which Volcker had taken charge was at $315.1 per ounce, up by 11.5% from the day he took charge.
The world had clearly lost its faith in the dollar. By the end of September 1979, gold was quoting at $397.25 per ounce having gone up by 26% in almost one month. And so the dollar would continue losing value against gold. On January 21, 1980, five and a half months after Volcker had taken over as the Chairman of the Federal Reserve of United States, the price of gold touched an all time high of $850 per ounce. In a period of five and a half months the price of gold had risen by an astonishing 200%. What was looked at as a mania for buying gold was essentially a mass decision to get out of the dollar and buy gold.
The mania ended quickly and the very next day(i.e. on Jan 22, 1980) the price of gold was down by around 13.2% to $737.5 per ounce. The price of gold kept falling over the next two decades and reached a low of $252.8 on July 20, 1999.
The central banks of Western Countries (i.e. United States, Canada, Japan and Europe) were the largest hoarders of gold. With gold prices having fallen to levels of $250 per ounce, the value of their gold holdings had taken a tremendous beating over the years. Also sitting in their vaults gold wasn’t earning any interest either. Hence they started lending out this gold to banks known as bullion banks.
As Eric Sprott & David Baker write in a recent report titled Do Western Central Banks Have Any Gold Left? “It made perfect sense for Western governments to lend out (or in the case of Canada – outright sell) their gold reserves in order to generate some interest income from their holdings. And that’s exactly what many central banks did from the late 1980’s through to the late 2000’s.”
This allowed the Western central banks to put gold which is essentially a useless asset to some use. As James Turk and John Rubino write in The Collapse of the Dollar and How to Profit from It – Make a Fortune By Investing in Gold and Other Hard Assets “Lending, for instance, involves, the central bank transferring gold to a major private bank, known as bullion bank, which pays the central bank a small-but-positive interest rate, then sells the gold on the open market,” write the authors. This allowed central banks to convert their gold into cash and also earn some interest on it.
Sprott and Baker suggest that “Collectively, the governments/central banks of the United States, United Kingdom, Japan, Switzerland, Eurozone and the International Monetary Fund (IMF) are believed to hold an impressive 23,349 tonnes of gold in their respective reserves, representing more than $1.3 trillion at today’s gold price.”
While it did not matter what central banks did with their gold in the eighties, nineties and even in the 2000s, things have changed now. These countries now are highly indebted and are printing money left, right and centre to repay their accumulated debt as well as get their economies up and running again.
Given all the money printing that is happening it would be good for them if they do have some gold left in their vaults and haven’t lent out all of it. “The times have changed however, and today it absolutely does matter what they’re doing with their reserves, and where the reserves are actually held. Why? Because the countries in question are now all grossly over-indebted and printing their respective currencies with reckless abandon. It would be reassuring to know that they still have some of the ‘barbarous relic’(as John Maynard Keynes referred to gold) kicking around, collecting dust, just in case their experiment with collusive monetary accommodation doesn’t work out as planned,” write Sprott and Baker.
The central banks do not have to declare about the gold that they are lending out. So it continues to show as a part of their book even though they have lent it to bullion banks, which in turn have gone ahead and sold that gold. As the authors point out “Under current reporting guidelines, therefore, central banks are permitted to continue carrying the entry of physical gold on their balance sheet even if they’ve swapped it or lent it out entirely. You can see this in the way Western central banks refer to their gold reserves. The UK Government, for example, refers to its gold allocation as, “Gold (incl. gold swapped or on loan)”. That’s the verbatim phrase they use in their official statement. Same goes for the US Treasury and the European Central Bank.”
So the actual physical gold with the central banks might be much lesser than they claim. Also, Sprott and David feel that central banks are continuing to “lend” out their remaining gold reserves. This they conclude through a mismatch in the supply and demand for gold. The demand from the five main sources i.e. gold being bought by central banks all over the world, US and Canadian mint sales of gold coins, gold bought by exchange traded funds, Chinese consumption of gold and the Indian consumption of gold has increased by 2,268 tonnes over the last 12 years. Over and above this there is demand from private buyers of gold which go unreported.
“Then there are all the private buyers whose purchases go unreported and unacknowledged, like that of Greenlight Capital, the hedge fund managed by David Einhorn, that is reported to have purchased $500 million worth of physical gold starting in 2009. Or the $1 billion of physical gold purchased by the University of Texas Investment Management Co. in April 2011… or the myriad of other private investors (like Saudi Sheiks, Russian billionaires, this writer, probably many of our readers, etc.) who have purchased physical gold for their accounts over the past decade. None of these private purchases are ever considered in the research agencies’ summaries for investment demand, and yet these are real purchases of physical gold,” write Sprott and David.
Hence, the gold demand figures that are actually reported are actually underreported as many of the investments in gold aren’t taken into account. And thus demand is made to match supply of gold which is believed to be at 3700 tonnes. If more accurate demand numbers were to be used a huge discrepancy between demand for gold and the supply of gold, would be revealed. And the demand side would exceed the annual supply of gold. “In fact, we know it would exceed it based purely on China’s Hong Kong gold imports, which are now up to 458 tonnes year-to-date as of July, representing a 367% increase over its purchases during the same period last year. If the imports continue at their current rate, China will reach 785 tonnes of gold imports by year-end. That’s 785 tonnes in a market that’s only expected to produce roughly 2,700 tonnes of mine supply, and that’s just one buyer,” write the authors.
So the question is where is all this gold coming from? It might very well be that Western Central Banks are continuing to lend gold to bullion banks which in turn are continuing to sell this gold. As Sprott and David point out “They (i.e. Western Central Banks) are the only holders of physical gold who are capable of supplying gold in a quantity and manner that cannot be readily tracked… it can only lead to the conclusion that a large portion of the Western central banks’ stated 23,000 tonnes of gold reserves are merely a paper entry on their balance sheets_– completely un-backed by anything tangible other than an IOU from whatever counterparty leased it from them in years past.”
What are the implications of this on the price of gold? As the Turk and Rubino write “Because the bullion banks have promised to eventually return the borrowed gold to the central banks, they are, in effect, “short” gold. That is, at some point in the future they are obligated to buy gold in order to repay the central banks.” And when this happens “the result will be a classic “short squeeze,” in which everyone tries to buy at once, sending gold’s exchange rate through the roof.”
Of course, the assumption here is that central banks demand their gold back. Whether that happens, remains to be seen. As Sprott and David conclude “At this stage of the game, we don’t believe these central banks will be able to get their gold back without extreme difficulty, especially if it turns out the gold has left their countries entirely.We might also suggest that if a proper audit of Western central bank gold reserves was ever launched…the proverbial cat would be let out of the bag – with explosive implications for the gold price.”
The article originally appeared on www.firstpost.com on October 26, 2012. http://www.firstpost.com/economy/western-central-banks-may-hold-less-gold-than-they-claim-503343.html
(Vivek Kaul is a writer. He can be reached at [email protected])
Why you should be nice to your mom – and buy some gold
Vivek Kaul
So let me start this piece by admitting Ben Bernanke, the Chairman of the Federal Reserve of United States (the American central bank) has proven me wrong.
I was wrong when I recently said that the Federal Reserve would not initiate a third round of quantitative easing (QE), before the November 6 presidential elections in the United States. (you can read about it here).
Bernanke announced late last night that the Federal Reserve would buy mortgage backed securities worth $40billion every month. This will continue till the job scenario in the United States improves substantially. The Federal Reserve will print money to buy the mortgage back securities.
I concluded that the Federal Reserve wouldn’t announce any QE till November 6, primarily on account of the fact that Mitt Romney, the Republican nominee for the Presidential elections, has been against any sort of QE to revive the economy.
“I don’t think QE-II was terribly effective. I think a QE-III and other Fed stimulus is not going to help this economy…I think that is the wrong way to go. I think it also seeds the kind of potential for inflation down the road that would be harmful to the value of the dollar and harmful to the stability of our nation’s needs,” Romney told Fox News on 23 August. This had held back the Federal Reserve from initiating QE III.
But from the looks of it Bernanke doesn’t feel that Romney has a chance at winning and that he is more likely than not going to continue working with Barack Obama, the current American President.
This round of quantitative easing is going to help Obama and hurt Romney. Let me explain. The theory behind quantitative easing is that when the Federal Reserve buys mortgage backed securities (in this case) by printing dollars, it pumps in more money into the economy. With more money in the economy, banks and financial institutions it is felt will lend that money and businesses and consumers will borrow. This will mean that spending by both businesses and consumers will start to up. Once that happens the economic scenario will start improving, which will lead to more jobs being created.
But as I said this is the theoretical part. And theory and practice do not always go together. Both American businesses and consumers have been shying away from borrowing. Hence, all this money floating around has found its way into stock and commodity markets around the world.
As more money enters the stock market, stock prices go up and this creates the “wealth effect”. People who invest money in the market feel richer and then they tend to spend part of the accumulated wealth. This, in turn, helps economic growth.
As Gary Dorsch, an investment newsletter writer, said in a recent column, “Historical observation reveals that the direction of the stock market has a notable influence over consumer confidence and spending levels. In particular, the top 20% of wealthiest Americans account for 40% of the spending in the US economy, so the Fed hopes that by inflating the value of the stock market, wealthier Americans would decide to spend more. It’s the Fed’s version of “trickle down” economics, otherwise known as the “wealth effect.””
When this happens, the economy is likely to grow faster and hence, people are more likely to vote for the incumbent President. As Dorsch explains “Incumbent presidents are always hard to beat. The powers of the presidency go a long way…In the 1972 election year, when Nixon pressured Arthur Burns, then the Fed chairman, to expand the money supply with the aim of reducing unemployment, and boosting the economy in order to insure Nixon’s re-election.”
Bernanke is looking to do the same, even though he has denied it completely. “We have tried very, very hard, and I think we’ve been successful, at the Federal Reserve to be non-partisan and apolitical…We make our decisions based entirely on the state of the economy,” the Financial Times quoted Bernanke as saying. Given this, Romney has been a vocal critic of quantitative easing knowing that another round of money printing will clearly benefit Obama.
Other than Obama and the stock markets, the other big beneficiary of QE III will be gold. The yellow metal has gone up by around 2.2% to $1768 per ounce, since the announcement for QE III was made. In fact the expectation of QE III has been on since the beginning of September after Ben Bernanke dropped hints in a speech. Gold has risen by 7.3% since the beginning of this month.
This is primarily because any round of quantitative easing ensures that there are more dollars in the financial system than before. The threat is that the greater number of dollars will chase the same number of goods and services. This will lead to an increase in their prices. But this hasn’t happened till now. Nevertheless that hasn’t stopped investors from buying gold to protect themselves from this debasement of money. Gold cannot be debased. Unlike paper money it cannot be created out of thin air.
During earlier days, paper money was backed by gold or silver. When governments printed more paper money than the precious metals backing it, people simply turned up with their paper at the central bank and government mints, and demanded that paper money be converted into gold or silver. Now, whenever people see more and more of paper money being printed, the smarter ones simply go out and buy that gold. Hence, bad money (that is, paper money) is driving out good money (that is, gold) away from the market.
But that’s just one part of the story. The governments and central banks around the world, led by the Federal Reserve of United States and the European Central Bank, are likely to continue printing more money, in the hope that people spend this money and this revives economic growth. This in turn increases the threat of inflation which would mean that the price of gold is likely to keep going up. “Gold tends to benefit from easy-money policies as investors utilize the precious metal as a hedge against potential inflation that could ultimately result from the Fed’s policies,” Steven Russolillo, wrote on WSJ Blogs.
Market watchers have also started to believe that the Federal Reserve is now only bothered about economic growth and has abandoned the goal of keeping inflation under control. Growth and inflation control are typically the twin goals of any central bank.
“They are emphasizing the growth mandate, and that means they don’t care about inflation other than giving lip service to it,” Axel Merk, chief investment officer at Merk Funds, told Reuters. “The price of gold will do very well in the years to come,”he added.
Something that Jeffrey Sherman, commodities portfolio manager of DoubleLine Capital, agrees with. “The Fed’s inflationary behavior should be bearish for the dollar in the long run and drive investors to seek protection via the gold market,” he told Reuters.
Also unlike previous two rounds of money printing there are no upper limits on this QE, although at $40billion a month it’s much smaller in size. QE II, the second round of money printing, was $600billion in size.
Something that can bring down the returns on gold in rupee terms is the appreciation of the rupee against the dollar. Yesterday the rupee appreciated against the dollar by nearly 2%. This is happening primarily because the UPA government has suddenly turned reformist. (To understand the complete relationship between rupee, dollar and gold, read this).
In the end let me quote William Bonner & Addison Wiggin, the authors of Empire of Debt — The Rise of an Epic Financial Crisis. As they say “There is never a good time to die. Nor is there a good time for a crash or a slump. Still, death happens. Be prepared. Say something nice to your mother. Offer a bum a drink. And buy gold.”
So be nice to your mother and buy gold.
Disclosure: This writer has investments in gold through the mutual fund route.
(The article originally appeared on www.firstpost.com on September 15,2012. http://www.firstpost.com/investing/why-you-should-be-nice-to-your-mom-and-buy-some-gold-456915.html)
(Vivek Kaul is a writer. He can be reached at [email protected])
How Obama and Manmohan Singh will drive up the price of gold
Vivek Kaul
‘Miss deMaas,’ Van Veeteren decided, ‘if there’s anything I’ve learned in this job, it’s that there are more connections in the world than there are particles in the universe.’
He paused and allowed her green eyes to observe him.
‘The hard bit is finding the right ones,’ he added. – Chief Inspector Van Veeteren in Håkan Nesser’s The Mind’s Eye
I love reading police procedurals, a genre of crime fiction in which murders are investigated by police detectives. These detectives are smart but they are nowhere as smart as Agatha Christie’s Hercule Poirot or Sir Arthur Conan Doyle’s Sherlock Holmes. They look for clues and the right connections, to link them up and figure out who the murderer is.
And unlike Poirot or Holmes they take time to come to their conclusions. Often they are wrong and take time to get back on the right track. But what they don’t stop doing is thinking of connections.
Like Chief Inspector Van Veeteren, a fictional character created by Swedish writer Håkan Nesser, says above “there are more connections in the world than there are particles in the universe… The hard bit is finding the right ones.”
The murder is caught only when the right connections are made.
The same is true about gold as well. There are several connections that are responsible for the recent rapid rise in the price of the yellow metal. And these connections need to continue if the gold rally has to continue.
As I write this, gold is quoting at $1734 per ounce (1 ounce equals 31.1 grams). Gold is traded in dollar terms internationally.
It has given a return of 8.4% since the beginning of August and 5.2% since the beginning of this month in dollar terms. In rupee terms gold has done equally well and crossed an all time high of Rs 32,500 per ten grams.
So what is driving up the price of gold?
The Federal Reserve of United States (the American central bank like the Reserve Bank of India in India) is expected to announce the third round of money printing, technically referred to as quantitative easing (QE). The idea being that with more money in the economy, banks will lend, and consumers and businesses will borrow and spend that money. And this in turn will revive the slow American economy.
Ben Bernanke, the current Chairman of the Federal Reserve, has been resorting to what investment letter writer Gary Dorsch calls “open mouth operations” i.e. dropping hints that QE III is on its way, for a while now. The earlier two rounds of money printing by the Federal Reserve were referred as QE I and QE II. Hence, the expected third round is being referred to as QE III.
At its last meeting held on July 31-August 1, the Federal Open Market Committee (FOMC) led by Bernanke said in a statement “The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.” The phrase to mark here is additional accommodation which is a hint at another round of quantitative easing. Gold has rallied by more than 8% since then.
But that was more than a month back. Ben Bernanke has dropped more hints since then. In a speech titled Monetary Policy since the Onset of the Crisis made at the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming, on August 31, 2012, Bernanke, said: “Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”
Central bank governors are known not to speak in language that everybody can understand. As Alan Greenspan, the Chairman of the Federal Reserve before Bernanke took over once famously said ““If you think you understood what I was saying, you weren’t listening.”
But the phrase to mark in Bernanke’s speech is “additional policy accommodation” which is essentially a euphemism for quantitative easing or more printing of dollars by the Federal Reserve.
The question that crops up here is that FOMC in its August 1 statement more or less said the same thing. Why didn’t that statement attract much interest? And why did Bernanke’s statement at Jackson Hole get everybody excited and has led to the yellow metal rising by more than 5% since the beginning of this month.
The answer lies in what Bernanke said in a speech at the same venue two years back. “We will continue to monitor economic developments closely and to evaluate whether additional monetary easing would be beneficial. In particular, the Committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly,” he said.
The two statements have an uncanny similarity to them. In 2010 the phrase used was “additional monetary accommodation”. In 2012, the phrase used became “additional policy accommodation”.
Bernanke’s August 2010 statement was followed by the second round of quantitative easing or QE II as it was better known as. The Federal Reserve pumped in $600billion of new money into the economy by printing it. Drawing from this, the market is expecting that the Federal Reserve will resort to another round of money printing by the time November is here.
Any round of quantitative easing ensures that there are more dollars in the financial system than before. To protect themselves from this debasement, people buy another asset; that is, gold in this case, something which cannot be debased. During earlier days, paper money was backed by gold or silver. When governments printed more paper money than they had precious metal backing it, people simply turned up with their paper at the central bank and demanded it be converted into gold or silver. Now, whenever people see more and more of paper money, the smarter ones simply go out there and buy that gold. Also this lot of investors doesn’t wait for the QE to start. Any hint of QE is enough for them to start buying gold.
But why is the Fed just dropping hints and not doing some real QE?
The past two QEs have had the blessings of the American President Barack Obama. But what has held back Bernanke from printing money again is some direct criticism from Mitt Romney, the Republican candidate against the current President Barack Obama, for the forthcoming Presidential elections.
“I don’t think QE-2 was terribly effective. I think a QE-3 and other Fed stimulus is not going to help this economy…I think that is the wrong way to go. I think it also seeds the kind of potential for inflation down the road that would be harmful to the value of the dollar and harmful to the stability of our nation’s needs,” Romney told Fox News on August 23.
Paul Ryan, Romney’s running mate also echoed his views when he said “Sound money… We want to pursue a sound-money strategy so that we can get back the King Dollar.”
This has held back the Federal Reserve from resorting to QE III because come November and chances are that Bernanke will be working with Romney and Obama. Romney has made clear his views on Bernanke by saying that “I would want to select someone new and someone who shared my economic views.”
So what are the connections?
So gold is rising in dollar terms primarily because the market expects Ben Bernanke to resort to another round of money printing. But at the same time it is important that Barack Obama wins the Presidential elections scheduled on November 6, 2012.
Experts following the US elections have recently started to say that the elections are too close to call. As Minaz Merchant wrote in the Times of India “Obama’s steady 3% lead over Romney has evaporated in recent opinion polls… Ironically, one big demographic slice of America’s electorate could deny Obama a second term as president: white men. Up to an extraordinary 75% of American Caucasian males, the latest opinion polls confirm, are likely to vote against Obama… the Republican ace is the white male who makes up 35% of America’s population. If three out of four white men, cutting across Democratic and Republican party lines, vote for Mitt Romney, he starts with a huge electoral advantage, locking up over 25% of the total electorate.” (You can read the complete piece here)
If gold has to continue to go up it is important that Obama wins. And for that to happen it is important that a major portion of white American men vote for Obama. While Federal Reserve is an independent body, the Chairman is appointed by the President. Also, a combative Fed which goes against the government is rarity. So if Mitt Romney wins the elections on November 6, 2012, it is unlikely that Ben Bernanke will resort to another round of money printing unless Romney changes his mind by then. And that would mean no more rallies gold.
But even all this is not enough
All the connections explained above need to come together to ensure that gold rallies in dollar terms. But gold rallying in dollar terms doesn’t necessarily mean returns in rupee terms as well. For that to happen the Indian rupee has to continue to be weak against the dollar. As I write this one dollar is worth around Rs 55.5. At the same time an ounce of gold is worth $1734. As we know one ounce is worth 31.1grams. Hence, one ounce of gold in rupee terms costs Rs96,237 (Rs 1734 x Rs 55.5). This calculation for the ease of simplicity does not take into account the costs involved in converting currencies or taxes for that matter.
If one dollar was worth Rs 60, then one ounce of gold in rupee terms would have cost around Rs 1.04 lakh. If one dollar was worth Rs 50, then one ounce of gold in rupee terms would have been Rs 86,700. So the moral of the story is that other than the price of gold in dollar terms it is also important what the dollar rupee exchange rate is.
So the ideal situation for the Indian investor to make money by investing in gold is that the price of gold in dollar terms goes up, and at the same time the rupee either continues to be at the current levels against the dollar or depreciates further, and thus spruces up the overall return.
For this to happen Manmohan Singh has to keep screwing the Indian economy and ensure that foreign investors continue to stay away. If foreign investors decide to bring dollars into India then they will have to exchange these dollars for rupees. This will increase the demand for the rupee and ensure that it apprecaits against the dollar. This will bring down the returns that Indian investors can earn on gold. As we saw earlier at Rs60to a dollar one ounce of gold is worth Rs 1.04 lakh, but at Rs 50, it is worth Rs 86,700.
One way of keeping the foreign investors away is to ensure that the fiscal deficit of the Indian government keeps increasing. And that’s precisely what Singh and his government have been doing. At the time the budget was presented in mid March, the fiscal deficit was expected to be at 5.1% of GDP. Now it is expected to cross 6%. As the Times of India recently reported “The government is slowly reconciling to the prospect of ending the year with a fiscal deficit of over 6% of gross domestic project,higher than the 5.1% it has budgeted for, due to its inability to reduce subsidies, especially on fuel.
Sources said that internally there is acknowledgement that the fiscal deficit the difference between spending and tax and non-tax revenue and disinvestment receipts would be much higher than the calculations made by Pranab Mukherjee when he presented the Budget.” (You can read the complete story here).
To conclude
So for gold to continue to rise there are several connections that need to come together. Let me summarise them here:
1. Ben Bernanke needs to keep hinting at QE till November
2. Obama needs to win the American Presidential elections in November
3. For Obama to win the white American male needs to vote for him
4. If Obama wins,Bernanke has to announce and carry out QE III
5. With all this, the rupee needs to maintain its current level against the dollar or depreciate further.
6. And above all this, Manmohan Singh needs to keep thinking of newer ways of pulling the Indian economy down
(The article originally appeared on www.firstpost.com on September 11,2012. http://www.firstpost.com/economy/how-obama-and-manmohan-will-drive-up-the-price-of-gold-450440.html)
(Vivek Kaul is a writer and can be reached at [email protected])
Why gold is not running up as fast as it can…
Vivek Kaul
Gold is on a roll. Again!
The price of the yellow metal has risen 8.5% since August 1 and is currently quoting at $1,735 per ounce (one ounce equals 31.1gram). In fact, just since August 31, the price of gold has risen by around $87, or 5.2%.
Still, the price is nowhere near how high it could go. All thanks to the US Presidential elections, as we will see here.
Today, it is widely expected that the US Federal Reserve (Fed), the American central bank, will soon carry out another round of quantitative easing (QE) — that’s the big reason for the spurt.
QE is a technical term that refers to the Fed printing dollars and pumping them into the American economy.
“Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labour market conditions in a context of price stability,” Ben Bernanke, the current Fed chairman, said in a speech titled Monetary Policy since the Onset of the Crisis at the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming, on August 31.
Fed chairmen are not known to speak in simple English. What Bernanke said is, therefore, being seen as Fedspeak for another round of easing.
Interestingly, in a speech he made at the same venue two years earlier, on August 27, 2010, Bernanke had said, “We will continue to monitor economic developments closely and to evaluate whether additional monetary easing would be beneficial. In particular, the committee (Federal Open Market Committee, or FOMC) is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly.”
The two statements bear an uncanny similarity to each other. Bernanke’s August 2010 statement was followed by the second round of quantitative easing, in which the Federal Reserve pumped in $600 billion of new money into the economy.
QE2, as it came to be known as, started in November 2010.
Between August 2010 and beginning of November 2010, gold prices went up by around 9% to around $1,350 per ounce. QE2 went on till June 2011, and by then gold had touched $1,530 an ounce.
No wonder the market is now expecting another round of easing — QE3 if you please.
To be sure, the Fed has been hinting at another round of QE for a while now. At its last meeting, held on July 31 and August 1, the FOMC said in a statement, “The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labour market conditions in a context of price stability.”
Mark the phrase “additional accommodation”, which is a hint at another round of easing.
Gold has rallied 8.5% since then.
But these hints haven’t been followed by any concrete action, primarily on account of the fact Mitt Romney, the Republican candidate against the current US President, Barack Obama, has been highly critical of the Fed’s quantitative easing policies.
“I don’t think QE2 was terribly effective. I think a QE3 and other Fed stimulus is not going to help this economy… I think that is the wrong way to go. I think it also seeds the kind of potential for inflation down the road that would be harmful to the value of the dollar and harmful to the stability of our nation’s needs,” Romney told Fox News on August 23.
Paul Ryan, Romney’s running mate, echoed his views, when he said, “Sound money… We want to pursue a sound-money strategy so that we can get back the King Dollar.”
The theory behind quantitative easing is that with more money in the economy, banks and financial institutions will lend that money and businesses and consumers will borrow. But both American businesses and consumers have been shying away from borrowing. Hence, all this money floating around has found its way into stock markets around the world.
As more money enters the stock market, stock prices go up and this creates the “wealth effect”. People who invest money in the market feel richer and then they tend to spend part of the accumulated wealth. This, in turn, helps economic growth.
As Gary Dorsch, an investment newsletter writer, said in a recent column, “Historical observation reveals that the direction of the stock market has a notable influence over consumer confidence and spending levels. In particular, the top 20% of wealthiest Americans account for 40% of the spending in the US economy, so the Fed hopes that by inflating the value of the stock market, wealthier Americans would decide to spend more. It’s the Fed’s version of “trickle down” economics, otherwise known as the “wealth effect.””
That suggests the economy is likely to grow faster and hence, people aremore likely to vote for the incumbent President.
Given this, Romney has been a vocal critic of quantitative easing, knowing that another round of money printing will clearly benefit Obama.
But Bernanke is unlikely to start another round of quantitative easing before November 6, the day the Presidential elections are scheduled, because he might end up with Romney as his boss.
Currently, most opinion polls put Obama ahead in the race. But the election is still two months away, a long time in politics.
Romney has made clear his views on Bernanke by saying, “I would want to select someone new and someone who shared my economic views.”
This has held back the price of gold from rising any faster.
As such, any round of quantitative easing ensures that there are more dollars in the financial system than before. And to protect themselves from this debasement, people buy another asset — gold — something that cannot be debased.
During earlier days, paper money was backed by gold or silver. When governments printed more paper money than they had precious metal backing it, people simply turned up with their paper at the central bank and demanded it be converted into gold or silver.
Now, whenever people see more and more of paper money, the smarter ones simply go out there and buy that gold.
So, all eyes will now be on Bernanke and what he does in the days to come. From the way he has been going, there will surely be some hints towards QE3 in the next FOMC meeting, scheduled for September 12-13.
(The article originally appeared in the Daily News and Analysis on September 8,2012. http://www.dnaindia.com/money/column_why-golds-not-running-up-as-fast-as-it-can_1738192))
Vivek Kaul is a writer and can be reached at [email protected]