India

The drums of war are beating louder and louder ... What's really going on?

Of course, if only one had seen that there is absolutely nothing different or new about the gold "story" at all since March 2009, there would have been no need to strengthen positions. Otherwise, more or less as has been said here all along. Furthermore, below are some pretty charts from the latest World Gold Council demand trends letter, presented below.

Global demand for gold reached 4,067.1 tonnes last year, the highest tonnage since 1997, due in large part to a nearly 5% increase in investment demand, which hit a record 1,640.7 tonnes. Asian countries like China, India, Vietnam, Thailand and others see bullion as a store of value against the growing inflation and the ongoing debasement of their currencies. The fundamentals for gold in 2012 look good.  Continuing low and often negative real interest rates will continue to support gold’s safe haven status. The Fed’s statement that it will continue to see rates remain very low until 2014 is very bullish for gold. Central banks were net buyers of gold and their demand surged nearly 6 fold (570%) to 439.7 tonnes in 2011 (compared with 77 tonnes in 2010), more metal than at any time since the end of the gold standard in 1971. The World Gold Council noted that, “The buyers are all ... in Latin America, Asia and the Far East and they are basically enjoying strong growth, fiscal surpluses and growing foreign exchange reserves." 

Previously we presented some alternative thoughts to the mainstream misperception of the Iranian "isolation" by some of its biggest oil trading partners. Unlike others, we simply believe that the gulf nation, together with the new axis of anti-USD (as confirmed once again earlier today) is simply preparing itself for a barter based economy, or alternatively, one with commoditized intermediates. However, this ignores the likelihood of geopolitical instability caused by intervening US and Israeli interest in the region. Below are some thoughts from Doug Casey of Casey Research on the likelihood of another full blown shooting war erupting in the Persian Gulf, as well as his thoughts on how one may prepare for such a contingency.

Must ... Not ... Think ...

While today's market session has been broadly calm for the time being, that has not prevented Oil from falling back to its old norm of being impacted by the merest rumor of geopolitical tensions, of which we have had quite a few of already, following car explosion attacks targeting Israel embassy officials in India and Georgia. While Iran has yet to make any announcement on these events, which oddly enough resulted in no deaths, Israel has already blamed Iran for everything. From Reuters: "Prime Minister Benjamin Netanyahu said Israel's  arch-foe Iran "stands behind" bombers who targeted Israeli embassy cars in India and Georgia on Monday. Netanyahu linked the incidents  to reports of foiled attacks in Thailand and Azerbaijan last month for  which, he said, Iran and its Lebanese guerrilla "proxy" Hezbollah were  responsible."Iran, which stands behind these attacks, is the  largest exporter of terror in the world," Netanyahu said, addressing his  Likud party faction in parliament." It appears that when it comes to car bomb assassination plots, Iran still has to learn from those which targeted its own nuclear scientist successfully a few weeks ago. Yet this latest escalation in attempted provocations is not unexpected: it comes on the heels of the announcement of a US Naval Official who said that "Iran is building up its forces in the Persian Gulf and has prepared speedboats loaded with explosives." Whether it actually has or has not is irrelevant: all that matters is that the US navy 'says so.'

Last week, there were relatively few US data releases, but Initial Jobless Claims continued to surprise on the positive side, while U of Michigan Consumer Sentiment saw a small decline. This week, the FOMC minutes on Wednesday with guidance on the Fed's balance sheet will be the key event. Aside from the Fed, there will be many key releases in the US with IP, CPI, and the regional business surveys. The market expects an increase of 0.6%mom in IP, 0.3%mom in CPI, and small gains in the surveys. ?In Greece, negative headlines over the new austerity package on Friday caused some reversal of the rally in the first part of the week, and as a result, we were stopped out of our short $/CAD recommendation (for a small potential gain). However, the Greek cabinet agreed on the new austerity measures late on Friday, and parliament appears to be on track for a positive vote. The Eurogroup meeting scheduled this coming week will be important to watch as well, and Greek GDP will give a sense of the cyclical damage caused by austerity.

Members of the RIAA, Department of Homeland Security, Sony, Universal and Fox may have illegally downloaded files from BitTorrent ... And Lamar Smith – the Congressman sponsoring SOPA – used a pirated photograph on his official campaign website ...

Much has been made of today's Reuters story how "Iran turns to barter for food as sanctions cripple imports" in which we learn that "Iran is turning to barter - offering gold bullion in overseas vaults or tankerloads of oil - in return for food", and whose purpose no doubt is to demonstrate just how crippled the Iranian economy is as a result of the ongoing US embargo. Incidentally this story is 100% the opposite of the Debka-spun groundless disinformation from a few weeks ago that India was preparing to pay for Iran's oil in gold (they got the asset right, but the flow of funds direction hopelessly wrong). While there is certainly truth to the fact that the US is actively seeking to destabilize the local government, we wonder why? After all as the opportunity cost for the existing regime to do something drastic gets ever lower as the popular resentment rises, leaving the local administration with few options but to engage either the US or Israel. Unless of course, this is the ultimate goal. Yet going back to the Reuters story, it would be quite dramatic, if only it was not the case that Iran has been laying the groundwork for a barter economy for many months now, something which various other analysts perceive as the basis for the destruction of the petrodollar system. Perhaps regular readers will recall that back in July, we wrote an article titled "China And Iran To Bypass Dollar, Plan Oil Barter System." Specifically, we wrote that "according to the FT, China has decided to commence a barter system in which Iranian oil is exchanged directly for Chinese exports. The net result: not only a slap for the US Dollar, but implicitly for all fiat intermediaries, as Iran and China are about to prove that when it comes to exchanging hard resources for critical Chinese goods and services, the world's so called reserve currency is completely irrelevant." Seen in this light the fact that Iran is actually proceeding with a barter system, something that had been in the works for quite a while, actually puts the Reuters story in a totally different light: instead of one predicting the imminent demise of the Iranian economy, the conclusion is inverted, and underscores the culmination of what may have been an extended barter preparation period, has finally gone from beta to (pardon the pun) gold, and Iran is now successfully engaging in global trade without the use of the historical reserve currency.

The concept of social fractals can be illustrated with a simple example. If the individuals in a family unit are all healthy, thrifty, honest, caring and responsible, then how could that family be dysfunctional, spendthrift, venal and dishonest? It is not possible to aggregate individuals into a family unit and not have that family manifest the self-same characteristics of the individuals. This is the essence of fractals. If we aggregate healthy, thrifty, honest, caring and responsible families into a community, how can that community not share these same characteristics? And if we aggregate these communities into a nation, how can that nation not exhibit these same characteristics? If this is so, then how do we explain the complete corruption of America's financial and political Elites? What else can you call a nation that passively accepts financial predation, looting, robosigning, etc. by protected cartels as the Status Quo but thoroughly corrupt?

Mohamed El-Erian, CEO and co-chief investment officer of bond fund giant PIMCO, said investors should be underweight equities while favoring "selected commodities" such as gold and oil, given the fragile global economy and geopolitical risks. Over the long term gold will reward investors who own gold as part of a diversified portfolio. Trying to time purchases and market movements is not recommended – especially for inexperienced investors.  New research from Credit Suisse and London Business School entitled ‘The Credit Suisse Global Investment Returns Yearbook 2012’ continues to be analysed by market participants. The 2012 Yearbook investigates data from 1900 to 2011 and looks at how best to protect against inflation and deflation, and how currency exposure should be steered. The chief findings are that bonds do well in deflation and benefit from currency hedging, and equities are not a perfect inflation hedge, but benefit from international diversification.  The report shows that gold offers a timely inflation hedge and long term holders of gold should expect a positive correlation to inflation – gold is one of only two assets since 1900 to have positive sensitivity to inflation (of 0.26). Only inflation-linked bonds had more - 1.00, as expected. By contrast, when inflation rises 10%, bond returns have fallen an average 7.4%; Treasuries fell 6.2%, and equities lost 5.2%. Property fell by between 3.3% and 2%. Importantly, gold managed to increase its value across both extreme inflationary and deflationary scenarios. The academics from LBS analysed 2,128 individual years in 19 major countries (1900-2011), finding gold rose 12.2% in the most deflationary years - when average deflation was 26%.

Ahead of the North American open, European Indices are trading in negative territory following further deliberations over a Greek settlement, with a tentative meeting between the Greek PM and his respective Party Leaders scheduled for some time after 1600GMT as well as an underperforming Basic Materials sector following caution over the upcoming Glencore/Xstrata merger. In foreign exchange news, the EUR/CHF currency pair has exhibited volatility following comments from the SNB’s acting Chair Jordan. Jordan has committed the Central Banks’ resources to preventing any further appreciation of the CHF adding that the SNB will buy unlimited amounts of Forex to defend the minimum level of 1.2000. Overnight, the AUD index has appreciated following an unexpected move by the RBA to hold its base rate at 4.25%, with many analysts expecting a drop in rates due to the global economic outlook and domestic job losses. In terms of European economic releases, German Industrial Production data fell below expectations for the month of December, posting a 2.9% fall while the figure was expected to stay flat at 0.0%.

Gold has followed the now familiar trading pattern of gains in Asia followed by weakness in Europe. While gold has fallen and is weaker in most currencies gold remains higher in euro terms due to euro weakness on the concern of a Greek default. Spot gold bounced back in Asian trading Monday as investors snatched up bargains after a 2% dip the previous session.  The Greek debt debacle is still supporting the price as a deal remains elusive. There continue to be concerns of a “Lehman moment” but markets remain fairly sanguine of a positive outcome despite the continual risk of a Greek default.  Gold remains an essential diversification as central banks keep money loose with record low interest rates and Asian powerhouses China and India still drive demand.  Silver has also fallen this morning. Barclays Capital, who have been quite bearish on silver in recent years, say that they are “expecting prices to rise in the next few sessions, along with gold, pegging silver's next resistance level at $35.70/oz and support near $33/oz.”

In contrast with better news from macro data, the negotiations about the next Greek package intensified and this will likely remain the key focus in the upcoming week. On one hand, the present value reduction in a PSI has still not been formally agreed. On the other, the Greek Government still has to commit to more reforms in order for the Troika to agree to a new program. A key deadline for this commitment is on Monday at 11am local time in Athens. Eurogroup President Juncker has talked openly about the possibility of a default on Saturday in the German weekly Der Spiegel. Beyond the ongoing focus on Greece, the week sees a relatively heavy concentration in central bank meetings, including the RBA, ECB, BOE, Poland, Indonesia and a few others. On the data side, the focus is likely on the December IP numbers due in a number of countries, including in some key Eurozone countries (Germany, Italy, France).

UPDATE: Hardly reassuring (from Bloomberg): *U.S. IS `DISGUSTED' WITH RUSSIA, AMBASSADOR RICE SAYS AT UN

The world is suddenly aflutter in its usual fake indignation (how many times have we seen this) having realized what has been going on in Syria for months on end. It was none other than the Headhunter In Chief who "condemned the "unspeakable assault" Saturday by Syrian forces on the city of Homs, a sustained attack that activists say killed more than 200 people in what may be the bloodiest confrontation of the uprising against Bashar Assad's regime.  The assault sparked fierce international outcry ahead of a meeting Saturday of the U.N. Security Council, where the U.S. and other nations are pushing for a vote on an Arab League-backed resolution calling for Assad to step down." Needless to say, just like in the case of Libya, both China and Russia are now a confirmed veto for any security council resolution that enforces a regime change, no fly zone, or what have you. Only this time the stake for Russia (and China as well, as Syria is nothing but a gateway to Iran), are far higher. And as Zero Hedge noted regarding Iranian developments yesterday, "We've seen this play by play many times before and frankly at this point the posturing is getting just silly. What we do want to find out, however, is how will Russia get involved in all of this. Because if recent actions are any precedent, we fully expect Putin to send an aircraft carrier, purely symbolically, in the Arabian Sea himself, just to indicate that any invasion, pardon, liberation, of Iran crude, will first have to go through him. And not to mention China... or India." Sure enough, speaking of aircraft carriers, it was none other than the Russian navy's aircraft carrier Kuznetsov that landed at the Russian naval base in Tartus "in support of the al-Assad regime" back in November, and it is the Tartus base that is arguably one of the most critical locations for the US military vis-a-vis developments in the middle east. And here is why Russia will block any attempt by the west to impose its own will in Syria.