India

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Gold coin purchases gained 13% last year and will increase 2.7% in the first half. Purchases of gold bars increased by 36% to nearly 2,000 (1,194) metric tonnes, concentrated in China, Germany, Switzerland and Austria. East Asia demand for gold bars rose 53% to 456 metric tonnes. India rose 9% to 297 metric tonnes and western markets demand for gold bars rose 41% to 335 metric tonnes. Central banks increased net purchases by a massive fivefold to 430 tons last year, and may buy another 90 tons in the first half, GFMS said. Combined official holdings stand at 30,788.9 tons, data from the London-based World Gold Council show. “Attitudes among central banks haven’t really changed,” Thomson Reuters GFMS annual survey said. “There’s still that desire to come into the gold market to diversify some of the assets away from foreign exchange and to boost gold holdings.” The Thomson Reuters GFMS annual gold survey also predicts that gold will struggle in the first half of the year, increasing in the later half towards $2,000. It also says the gold bull market is losing steam and predicts an end to the run as economies recover next year and interest rates begin to rise.

Although gold had its largest drop in the last 2 weeks on Friday, (-1.6%), it was 1.3% higher on the week and trading higher this morning.  Many analysts feel that current sovereign, macroeconomic and geopolitical risks are not reflected in gold's price. Friday's news of France's loss of its AAA rating has put the European Financial Stability Facility (EFSF) at risk. The Eurozone economy resembles a large ship sailing in rough seas since France fund's 20% of the EFSF fund and 8 other members were also downgraded. This will almost certainly lead to the EFSF's downgrade which would result in the fund too paying more to borrow as credit costs rise.  There are icebergs lurking in increasingly murky Eurozone waters. The European downgrades were long expected and may have been priced in the markets. The risk of a non orderly Greek default and of contagion in the Eurozone remains and is not priced into markets. It would lead to the euro falling sharply against other fiat currencies and particularly against gold.

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Demand in Asia continues to be strong.  China remains the world’s largest producer of mined gold. Premiums for gold bullion bars in Asia are rising again and are at their highest since October in Hong Kong and Singapore. Premiums are at $2.15/oz in Hong Kong and $1.65/oz in Singapore.  Bullion’s strength was also attributed to the euro’s 16 month low, with Fitch warning the ECB to purchase assets to try to stabilize the euro.   Spot gold was up 0.6 percent at $1,650.34 an ounce at 1009 GMT, having earlier touched a one-month high at $1,652.30. U.S. gold futures for February delivery were up $12.60 an ounce at $1,652.20.  A stronger rupee has boosted the purchasing power of gold bullion consumers in India.  This is in the run up for the Indian Wedding Season which resumes January 15th and continues until April, leaving a  few weeks break for a period that is considered bad luck for nuptials.  Chinese demand will weaken next week as many factories and businesses are set to close for the Lunar New Year’s celebrations.

Quick, what country is the economic engine that will power world growth? If you answered "China," you're far from alone. But there's another country that deserves as much attention and better yet, is much friendlier to investment: India, home to 1.2 billion people. To electrify all those houses, power the industries that keep all those people employed, and fuel the vehicles that more and more Indians own, India's energy needs are shooting skyward. First question to consider: what kind of energy does India need? Just about every kind, really. India encompasses significant reserves of coal, oil, and gas, but each year it has to import more and more to meet its rapidly rising demand. Domestic production increases have been hampered by land disputes, interminably slow permitting, and government-regulated pricing mechanisms that discourage development. That's got to change if India wants to keep up, and its government knows it. Domestic supplies always come with better reliability, better prices, and other benefits that we can shorten into two words: energy security. So India is reaching out to foreign oil majors, quietly setting up deals to exchange stakes in giant, underexplored oil and gas fields for the technical expertise it needs to best develop these resources. These partnerships are working into place slowly. However, they show Delhi is serious about the welcome mat it rolled out in 2000, when it passed a policy that allows foreign companies to own 100% of any oil and gas assets they may want to acquire for exploration and development. And what we really like is that explorers are welcome in a democratic and reasonably friendly country that harbors none of the risk of asset nationalization that clings to other underexplored locales, like Venezuela.

The run into Chinese Lunar New Year has again seen higher than expected Chinese demand for gold and China's voracious appetite for gold is surprising even analysts who are positive about gold. As Chinese people's disposable incomes gain and concerns grow over inflation and equity and property markets, Chinese consumers and investors are turning to gold as a long term investment hedge. There is informed speculation that commercial Chinese banks may have taken advantage of the recent price dip to build stocks of coins and bars and accumulate bullion. China's demand for physical gold bullion has rocketed past India with the country now overtaking India in the third quarter as the largest gold jewellery market according to the World Gold Council. There is also informed speculation that some of the buying was from the People's Bank of China with one analyst telling Bloomberg that “there is always the possibility that some purchases were made by the central bank.”

Heading into the North American open, European equity futures are trading lower, with comments from Fitch’s Riley, who suggested that the ECB must do more to prevent cataclysmic EURO collapse, causing the most recent bout of risk averse sentiment. As a result, major FX pairs are trading lower, with EUR/USD testing 1.2700, while GBP/USD fell through 1.5400 level. Looking elsewhere, apart from being buoyed by Fitch comments, German Bunds benefited from a well received German Bobl auction. Of note, European bond yield spreads are predominantly tighter for the time being, with analysts noting buying of Spanish and Italian paper by domestic and real money account names.  Finally, there is little in terms of macro-economic data and instead the attention will be on the publication of various EU related economic outlooks and the US Treasury is set to sell USD 21bln in 10-y notes.

• Europe’s $39T Pension Threat Grows as Economy Sputters (Bloomberg)
• Monti Warns of Italy Protests as He Meets Merkel (Bloomberg)
• Bernanke Doubling Down on Housing Bet Asks Government to Help: Mortgages (Bloomberg)
• Europe Banks Resist Draghi Bid to Avoid Crunch by Hoarding Cash (Bloomberg)
• Europe Fears Rising Greek Cost (WSJ)
• ECB’s Nowotny Sees Risk of Mild Recession in Euro Region (Bloomberg)
• Republican Senators Criticize Fed Recommendations on Housing (Bloomberg)
• Spanish Banks Try to Build Their Way Out of Home Glut (WSJ)
• Europe Stocks Fluctuate After German Auction (Bloomberg)

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We have now entered the fifth year of this Fourth Turning Crisis. George Washington and his troops were barely holding on at Valley Forge during the fifth year of the American Revolution Fourth Turning. By year five of the Civil War Fourth Turning 700,000 Americans were dead, the South left in ruins, a President assassinated and a military victory attained that felt like defeat. By the fifth year of the Great Depression/World War II Fourth Turning, FDR’s New Deal was in place and Adolf Hitler had been democratically elected and was formulating big plans for his Third Reich. The insight from prior Fourth Turnings that applies to 2012 is that things will not improve. They call it a Crisis because the risk of calamity is constant. There is zero percent chance that 2012 will result in a recovery and return to normalcy. Not one of the issues that caused our economic collapse has been solved. The “solutions” implemented since 2008 have exacerbated the problems of debt, civic decay and global disorder. The choices we make as a nation in 2012 will determine the future course of this Fourth Turning. If we fail in our duty, this Fourth Turning could go catastrophically wrong. I pray we choose wisely. Have a great 2012.

For anyone wondering how the abandonment of the dollar reserve status would look like we have a Hollow Men reference: not with a bang, but a whimper... Or in this case a whole series of bilateral agreements that quietly seeks to remove the US currency as an intermediate. Such as these: "World's Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In Direct Currency Trade", "China, Russia Drop Dollar In Bilateral Trade", "China And Iran To Bypass Dollar, Plan Oil Barter System", "India and Japan sign new $15bn currency swap agreement", and now this: "Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says." And ironically, the proposal to dump the greenback did not come from Iran. Per Bloomberg: "Iran and Russia replaced the U.S. dollar with their national currencies in bilateral trade, Iran’s state-run Fars news agency reported, citing Seyed Reza Sajjadi, the Iranian ambassador in Moscow. The proposal to switch to the ruble and the rial was raised by Russian President Dmitry Medvedev at a meeting with his Iranian counterpart, Mahmoud Ahmadinejad, in Astana, Kazakhstan, of the Shanghai Cooperation Organization, the ambassador said." Is Iran gradually becoming the poster child of an energy rich country that just says no to the dollar: "Iran has replaced the dollar in its oil trade with India, China and Japan, Fars reported." Next thing you know China, Russia and Japan will engage in bilateral trade agreements with the Eurozone in exchange for purchasing European or EFSF (which at last check are now forced to give 30% guaranatees) bonds, and bypassing dollars completely. But yes, aside from everyone else, virtually everyone (footnote 1) is still using the dollar as currency of global exchange.

The meeting between Merkel and Sarkozy on Monday is likely to be the main focus of next week, as well as continued debate of the Greek PSI. Overall, this process is likely to push the EUR lower in the next couple of weeks, while the missing details for better fiscal policy coordination are getting negotiated. On the macro side, IP in Germany will have slowed by 0.2% mom in November and consensus expects the aggregate Euro-zone IP to have contracted by the same amount. But we also get November IP in many other places, including the UK and India. Already released over the weekend, Chinese money supply data has been stronger than expected and the amount of new loans issues in December is clear evidence of policy easing.