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Degeneration in ‘confidence’ in the US has been substantive

(OroyFinanzas.com) – It seems ahead of events that prompted a look at ‘confidence’ in the States, that it was timely and has now been emphasised in the storm that rippled beyond the weather. Stand back for a moment and pause for thought. Look back, just a year and compare today with then. The degeneration in ‘confidence’ has been substantive, from the breezy ridicule of danger in certain times to a positive reaffirmation of ‘confidence’ in difficult times. Perhaps the most visible symbol of the change is the $3.00+ gas price, not just in the U.S. but across the globe, where all are deciding what they must cut back on to afford the extra cost of petrol.

Reassurances that all will come back to normal is a reaction we all have, like turning over in bed to get more comfortable. But it seems that we are not more comfortable when we turn now. It seems we can’t turn far enough anymore to get comfortable. After all the consumer, the main driver of the economy is feeling threatened not just by the gas price, but by fears that house prices may turn down. The $ is not running ahead as it was expected to. Rises in the Stock Exchanges when seen in the perspective of one year ago look insignificant.

But we know the U.S. economy is robust, we know that the disaster in New Orleans and surrounds will go away and the area recover, but the underlying causes of the oil crisis and the $ and the growth of China are still there like heavy duty sand paper on our ‘confidence’. On the back of several structural problems, this crisis seems far greater than it in itself really is. But the ‘recovery as such has been on the back of a free-spending consumer, who has been encouraged by government to go into far deeper debt than he should have done, on the back of a housing boom that is moving inexorably to a bust. Bring all these together then it would take just a straw to break this camel’s back.

It is in this environment that prudent Investors cover their backs with investments like gold. And we are not talking only of the States! All the U.S.-dependent nations face the same problems and issues and the same abrasion of ‘confidence’.

Would it not be correct that uncertainty and lowering stability are indeed becoming the ‘norm’? It is in this environment that volatility thrives and doubts fester! We do expect Greenspan’s worry that the U.S. economy will be hurt, to turn to action to prevent dropping growth. Torn between the fight against inflation through rising interest rates and ‘pausing’ interest rate hikes to prevent dropping growth, we believe the Fed will choose the latter, because of falling growth and ‘confidence’ each inspiring the other. We warned of this earlier this year and since then. The warnings of potential crises came ahead of the storms and were waiting to happen. Clearly, there appears to be a financial accident waiting to happen.

With two more months of the ‘hurricane’ season to go we all dread another Katrina, or Lena, or Mary….
What will happen then to the core goal of the Fed: maximum sustainable economic growth underpinned by price stability?

India: Liberalisation of the gold market continues –

The liberalisation of the Indian gold market continues with a move that some expect will lower the cost of gold in India. The Reserve Bank of India has allowed all scheduled commercial banks to deal in retail gold. This means that local jewellery manufacturers can now take gold from the banks even if they are not exporters.

This will end the monopoly of the Bank of Nova Scotia in the Indian market. Until now the R.B.I. has only permitted the Canadian bank to give gold loans to local jewellers. Other bullion banks like Indus Ind Bank, SBI and Corporation Bank were allowed to trade only with exporters under the gold loan scheme. Now with this new scheme, which effectively broadens the bullion deposit scheme, under which local jewellers were allowed to borrow gold against jewellery deposited with them.

With repayment required within 90 days these loans may find their use still limited, whereas if they were extended to 180 days, full use may be made of them.

Marriages/Festivals and when is the buying season for gold?

From the first week in July until the third week of September no marriages take place amongst the Hindus.
The wedding season continues from then until December, when it stops, as these are religious periods up until the middle of January, which are allocated to the worship of departed family elders, so no retail gold buying takes place then. Hence the enormous buying seen in the first half of the year, this year and last year attended 70% of the marriages in the entire year take place in the first half. Gold in the second half of the year is mainly concentrated around Deepavali, a festival of light signified by worshipping “Laksmi”, the goddess of wealth.

So where did investments go to? Not to the Stock Exchanges as many thought. The Stock Exchange saw foreign investment replace Indian investment once the sensex cross the 6500 mark on the Bombay Stock Exchange, taking it up to the 7700 level with Japanese/European/FII buying chasing fewer and fewer stock with too much money. With property prices in India having doubled in the last six months in India, clearly profits liquidated on the Stock Exchange found there way into the property market, which has been as attractive an investment as gold and an alternative to gold. This explains the relative lack of physical Indian gold investment of late. However, once Indians have accepted these price levels, which ultimately depends on just how long prices hold here to prove that this is a new floor for gold, we will see renewed Indian demand, particularly in the run-up to Deepavali.

Julian D. W. Phillips

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