Oil Prices and The Possible Black Swan Risk from a Syrian War

Columnist Philip Coggan of the Buttonwood’s Notebook at the Economist writes (registration may be required) that risks from the escalation from a Syrian military strike shouldn’t be dismissed.

Analysts have been quick to point out that markets often wobble in the run-up to military interventions but then recover quickly as soon as they start; this was the case in the two Iraq wars. It may well be that a much more limited intervention in Syria (if, as is by no means certain, Congress approves it) will follow a similar pattern. What worried investors in the past, of course, was the wider ramifications of military action; whether the region would be set ablaze and oil supplies disrupted.

That remains the concern today. The Arab spring seems to have turned into an Islamic version of the Cold War, with proxy battles taking place between Sunni nations, led by Saudi Arabia and the Shia camp, led by Iran. (Syria is a predominantly Sunni nation but Assad draws his support from the Alawites, a branch of Shia). An attempt to dislodge Assad by the West could intensify this conflict, leading to an upsurge in terrorist incidents, attacks on Israel and so on; on the other hand, advocates of intervention argue that the long-running nature of the Syrian conflict has already destabilised the region.

Just because previous interventions did not lead to a wider war, does not mean the same will apply in Syria; if you juggle with a grenade long enough, it may go off. This is one of those scenarios where there are no clean outcomes, and it is foolish to predict which way events will turn out. But investors are well aware of this problem, which makes them uncertain at the prospect of western involvement.

Such palpable complacency from the lack of escalation is one reason why war mongers keep pushing for wars.

Of course wars are good businesses for the political class, their favored cronies (military industrial complex and banking) and welfare beneficiaries. And part of this agitation for war comes from ideology. 

As David Stockman writes at the Lew Rockwell.com

Indeed, the tragedy of this vast string of misbegotten interventions—from the 1953 coup against Mossedegh in Iran through the recent bombing campaign in Libya —-is that virtually none of them involved defending the homeland or any tangible, steely-eyed linkages to national security. They were all rooted in ideology—that is, anti-communism, anti-terrorism, humanitarianism, R2Pism, nation-building, American exceptionalism. These were the historic building blocks of a failed Pax Americana. Now the White House wants authorization for the last straw: Namely, to deliver from the firing tubes of U.S. naval destroyers a dose of righteous “punishment” that has no plausible military or strategic purpose. By the President’s own statements the proposed attack is merely designed to censure the Syrian regime for allegedly visiting one particularly horrific form of violence on its own citizens.

Well, really? After having rained napalm, white phosphorous, bunker-busters, drone missiles and the most violent machinery of conventional warfare ever assembled upon millions of innocent Vietnamese, Cambodians, Serbs, Somalis, Iraqis, Afghans, Pakistanis, Yemeni, Libyans and countless more, Washington now presupposes to be in the moral sanctions business?  That’s downright farcical.  Nevertheless, by declaring himself the world’s spanker-in-chief, President Obama has unwittingly precipitated the mother of all clarifying moments.

Nonetheless policy actions based on complacency increases the likelihood of a black swan event as Nassim Taleb posted in his facebook….

Something people don't realize about fat-tailed probabilities: We may accept to take risks with .00001 pct chance of blowing up the planet. May be OK for some. But the inconsistency is that we do serially and collectively take A LOT of "one-off" risk. If nothing happens, we may do it again. And again. Or we may take many of these at the same time. Merely allowing such action will eventually mean that we will have 100% chance of blowing up the planet.

Just change blowing up the planet with Middle East, this describes exactly how US foreign policy have worked.

Brandon Smith enumerates the potential contagion from the explosion of the Middle East Powder Keg here

And trouble in the Middle East has already been putting upside pressure on oil prices as shown by the US WTI (above) and Europe’s Brent (below)

But welfare states of the Gulf States and other oil producing nations will be comforted by rising oil prices since their welfare based political economies has been tied to oil prices (see above graphs).

In other words, politicians of the many Arab and other oil producing nations have been buying off their mandates or their political privileges via increasing welfare benefits on the population that requires high oil prices. And this serves as another reason why governments will keep on printing money. And this is one of the probable reasons why some Middle East countries secretly desire for more conflict in the region.

And unfolding events in the Middle East and other factors will like mean higher oil prices, as the independent research outfit BCA Research writes,

Risks to oil prices remain strongly skewed to the upside for the rest of 2013. Middle East tensions have removed significant spare capacity, at a time when the market is seasonally tight. Hence, any further supply disruption would be damaging.

Another upside risk is the potential “product-pull” on crude prices. Strong diesel demand may already be challenging U.S. refinery capacity. U.S. distillate production is at its highest level in absolute terms and relative to gasoline. High distillate crack spreads motivate refiners to bid up oil grades with the highest distillate output. As a result, crude prices get pulled up.

The U.S. consumer will not feel the pinch until oil prices are much higher, because gasoline cracks are likely to absorb most of the increase in crude. This would support oil demand despite higher prices.

It's not clear if oil price dynamics will merely be 'consumption demand' based. There is a possibility that sustained inflationism by governments and increasingly fragile risk environment could extrapolate to an increase in 'reservation demand' for commodities. The public may want to hold commodities out of fear of a fall in purchasing power amidst a risk off milieu.

The bottom line:

Underestimating the potential contagion from a Syrian war could mean trouble for one’s portfolio. 

High oil prices are likely to magnify rising bonds yields and thus put a lid on risk appetite.

Gold and oil prices are likely beneficiaries from the current environment.

War on Coins: European Commission Proposes 1, 2 cent phase out as German Official Balks

Euro Commission officials has proposed to phase out small denomination coins. Such proposals follows other nations like Canada,  Netherland and Finland whom has similarly embarked on extinguishing coins from circulation.

From Reuters:

Saving pocket change may not end the euro zone crisis, but the European Commission hopes that scrapping the smallest coins could help penny-pinching governments cut costs.

The European Commission outlined proposals this week for the 17 euro zone countries to scrap their 1 and 2 cent coins, leaving 5-cent pieces as the smallest in circulation.

The Commission says the cost of making the coins has exceeded their face value for the past 11 years, effectively costing member states 1.4 billion euros ($1.8 billion).

More than 45 billion of the 1 and 2 cent coins have been minted since the euro entered circulation in 2002, but many are now buried behind sofas, lost in back pockets or left on the street rather than making their way to cash registers.

While scrapping them all together may appear to make sense, some consumers worry that rounding prices up to the nearest 5 cents will prove inflationary. On the other hand, rounding prices down to the nearest 5 cents might be beneficial.

Some observations:

European officials admit that these coins have greater value than the designated official face value.

Here is the content of the euro coins, according to the Wikipedia.org

The euro 1 and 2 coins are two-toned. The "gold" is an alloy, 75% copper, 20% zinc and 5% nickel. The "silver" is cupronickel, 75% copper, 25% nickel. The 10, 20 and 50-cent coins are a proprietary alloy known as "Nordic gold", consisting of 89% copper, 5% aluminium, 5% zinc and 1% tin. The 1, 2 and 5-cent coins are copper-coated steel fourrées. The copper alloys make the coinage antimicrobial.

So for the EU bureaucracy to cut further losses, it has been alleged, coin production need to be halted.

Next, EU officials imply that the public has been unintentionally hoarding coins: “buried behind sofas, lost in back pockets or left on the street rather than making their way to cash registers”.

Authorities acknowledge that such coins have higher value, but they insinuate that their constituents, the average citizens, don’t see or realize this. So the public is completely ignorant from real world affairs.

Such is an example where authorities are engaged in what seems as rhetorical sophistry which media imbibes as the gospel of truth.

In reality, such proposal has been all about political subterfuge.

Even if the ECB has been inflating less than her peers, they have been inflating. (charts from Cumber.com)

Yet by holding coins, one’s resources will affected less from the stealth transfer of being wealth conducted through inflationist policies.

In other words, coins provides refuge against policies that facilitate indirect looting of people’s savings, especially during run away inflation.

Recognizing this, the German central bank or Bundesbank president Jens Weidmann in an interview at the Bild.ge indirectly expressed opposition on such proposals…

In the German population, the desire to hold on to the coinage. Personally, I can only agree with that.

This is natural given the trauma from horrors of the Weimar hyperinflation as shown by the coin above in stating that “On 15 November 1923 1 pound of bread cost 80 billion, 1 pound of meat: 900 billion, 1 glass of beer: 52 billion”

Albeit, Mr. Weidmann leaves the decision on reducing the circulation of coins to the EU finance ministers than to central bankers.

Again whether it is cash transactions, gold and other precious metals, crypto-currencies like bitcoins or even government made coins, world governments have been working around the clock to ensure forced access on people’s savings.

Gold as a foreign policy tool: US Government Bans Gold Sales to Iran

The US government overtly intervenes in the gold markets when it uses gold as a foreign policy tool.

From the Economic Times:

WASHINGTON: The United States is working to block sales of gold to Iranians in order to undermine their currency the rial and to step up pressure on Tehran over its nuclear program, officials said on Wednesday.

From July 1, the US will ban sales of gold by anyone to either the Iranian government or to Iranian citizens, a senior US Treasury official said. Washington has warned Iran's neighbors Turkey and the United Arab Emirates, key regional centers of the gold trade, to stop gold sales to Iran, said David Cohen, treasury under-secretary for terrorism and financial intelligence.

Embargoes and trade sanctions are acts of war. The US has been provoking Iran into a war ever since.

Yet the US government’s arbitrary ban gold sales are really an attack on the average Iranians whom has gravitated to gold and to bitcoins due to Iran’s simmering hyperinflation. 

This shows how ruthless governments are, in wanting to starve or sacrifice innocent civilians in order to serve the political (neocons) and economic (military industrial complex) interests of the powerful elites. 

And I don’t think gold has just been a foreign policy tool but a monetary signaling channel or central bank communications tool as well.

“Wall Street versus the world” attempts to impress upon the main street and the real economy that gold has lost its luster as inflation hedge. The Iranian ban seem to also suggest of the same. The same article quotes the above US official: (bold mine)

The move to block gold sales is part of the effort to further weaken the rial, he explained. "There's a tremendous demand for gold among private Iranian citizens, which in some respects is an indication of the success of our sanctions."

"They are dumping their rials to buy gold as a way to try to preserve their wealth. That is I think an indication that they recognize that the value of their currency is declining."

So from the political authority’s perspective, the ban on gold means that Iranians would have to revert to the rapidly diminishing value of the rial and die alongside with the decaying currency.

Nonetheless the average Iranians know better thus the “dumping their rials to buy gold as a way to try to preserve their wealth”. 

Gold, not an inflation hedge? Only in Wall Street.

 

Like all forms of prohibitions they are most likely to fail.

War on Bitcoin: US Government Seizes Assets of Mt Gox

The US government has officially launched a campaign against bitcoin by seizing accounts tied to one of the largest bitcoin exchange.

From the Wall Street Journal:

WASHINGTON—U.S. officials dealt a blow to the fledgling digital currency called bitcoin, freezing an account that is tied to the largest bitcoin exchange just months after regulators warned that such entities should follow traditional rules on money laundering.

The authorities obtained a warrant Tuesday to seize an account of a subsidiary of Mt. Gox held at the online payments firm Dwolla, according to a copy of the warrant provided by the Department of Homeland Security on Wednesday. The department declined to comment further on the matter.

The scrutiny from law enforcement comes after the Treasury Department ruled in March that the same money-laundering rules that apply to traditional money-order providers, such as Western Union Co., WU +0.98% would also be applied to firms that issue or exchange online cash, including currencies not backed by a central bank.

Bitcoins are supposedly decentralized. So technically speaking the US government cannot directly strike at bitcoin without taking on the internet itself. Thus the US government’s campaign against bitcoin has been channeled through the financing facilities of the trading platforms and not bitcoin itself. 

But so far, other exchanges as US-based competitors Seattle-based CoinLab and San Francisco-based Coinbase or bitcoin exchanges registered with the Treasury Department has not been subjected to the same harassment. On the other hand, the Mt. Gox case should benefit them.

The US government wants bitcoin dealers to operate under their umbrella and has assailed or harassed those operating outside their ambit.

In short, the governments will work on controlling cryptocurrencies covering all variants; aside from Bitcoin: Litecoin, PPcoin, Freicoin, Solidcoin, BBQcoin, Fairbrix, Geistgeld among the many more.

Besides, it may come as a coincidence but the Mt. Gox crackdown comes in the light of the second wave of selling pressure on gold prices. Gold fell 2.34% last night to close below the psychological $1,400 threshold level.

Remember that the Wall Street initiated flash crash in gold came alongside the crash in bitcoin prices during mid April. (chart from stockcharts.com and bitcoincharts.com)

The current actions against Mt.Gox’s bitcoin platform has so far unaffected prices of bitcoins.

The crux is--bitcoins and gold appear to be simultaneously under political pressure as expressed through prices or through direct government intervention

Yet look at the irony with the following headline: US Stocks Rise on Stimulus bets as Manufacturing Falls.

This means more bad news is good news; which also implies that stocks have been totally dependent on steroids, thus the parallel universe: stagnant economies yet surging stocks on steroids.

This also impresses on the public that the connection between gold and government steroids have become detached. People are being made to believe that gold have lost its “inflation hedge” function. (Although in the real world this hasn’t been true: Just take a look at the seminal hyperinflation phase in Argentina where the average citizens flee to gold and bitcoins as refuge)

What else am I saying? Well, governments simply hates competition. So currency alternatives as gold and bitcoins are not just being manipulated, they are being attacked.

All financial markets are being manipulated, but at different degrees. Assets that benefits the political objectives of governments such as stocks, bonds and the property sector are being subsidized (directly and indirectly) whereas those opposed such as short sellers, commodities and bitcoins are being marginalized. 

But the real economy, which allegedly has been the target of all these assistance, has been ignoring them.  

And yet the real objective behind all these has been to save or preserve the cartel of the political institutions of the banking system-central bank-welfare/warfare state. Remember rising asset prices buoy the balance sheets of insolvent banks and governments, thereby the cumulative inflationist policies.

Thus the parallel universe or the huge detachment between the real economy and prices of financial assets.

All these are really signs of bubble blowing activities everywhere and of how terribly desperate governments have become. 

Yet all failed government actions would translate to deeper confiscations of people's savings by governments. Hence, governments are working around the clock to close all possible loopholes as seen by the attack on Mt. Gox or from the Indian government's ban on gold imports.

Argentineans Find BMWs, Bitcoin and Gold as Inflation Hedges

The Argentine Peso continues to massively devalue to the point that they have become symptoms of hyperinflation. 

In barely a few days the peso has sunk to its weakest level ever at 10.45 pesos vis-à-vis the US dollar. As of last week, the implied annual rate of inflation, based on 9.87 pesos/USD, is at 98.7% as estimated by Cato’s Steve Hanke. In short, the peso fell by whopping 5.9% in less than a week. 

Yet Argentines don’t just hold cash and see their savings erode, they have sought refuge partly through purchases of luxury cars.

From the Bloomberg:

Argentines are buying more BMWs, Jaguars and other luxury cars as a store of value as inflation decimates their deposits and pummels the nation’s bonds.

Purchases of cars from Germany’s Bayerische Motoren Werke AG (BMW) and Jaguar Land Rover Automotive Plc, owned by India’s Tata Motors Ltd. (TTMT), jumped the most in April among brands sold in Argentina. The sales were part of a 30 percent surge in car sales from a year earlier that was the biggest increase in 20 months, according to the Argentine Car Producers Association. While used-car prices rose in line with inflation last year, or about 25 percent, peso bonds tied to consumer prices fell 13 percent. The drop was the biggest in emerging markets.

Car sales in Argentina increased by the most in almost two years last month as a ban on buying dollars made Argentines turn to vehicles to protect savings against the fastest inflation in the Western Hemisphere after Venezuela. Luxury models are becoming more attractive because they are imported at the official dollar rate, said Gonzalo Dalmasso, vehicle industry analyst at Buenos Aires research company Abeceb.com. Argentines with savings in dollars are able to purchase cars at half the cost by trading in the unofficial currency market.

It is not clear how the operations of these high end car merchants remain viable considering the wide disparity between currency rates from which such trade has been conducted. The blackmarket rate is nearly about 50% below the official rate, this should translate to significant economic losses for these firms.

On the other hand, used car sellers appear to be losing money as selling prices has only been expanding at the statistical inflation rate of 25% when real inflation rate has been above 90%. 

The unevenness of returns suggests of something fishy behind the surge in luxury car sales.

Though barter has reportedly been one of the options taken by these firms. From the same article:

The decree prompted BMW to export rice and Porsche Automobil Holding SE to begin exporting olives and Malbec red wine. Shizuoka Subaru Motor Co. agreed to export chicken feed, Hyundai Motor Co. began sending soy flour to Vietnam and Mitsubishi Motors Corp. (7211) started shipping peanuts.

These reports are really questionable.

Rather I suspect that these luxury car dealers are cronies or political allies, who are subsidized by Argentina’s politicians through the government. In turn, Argentina’s political elites and their allies could have been the major buyers of these high end cars.

In short, subsidies to exotic car traders are really transfers or subsidies to the political class and their cronies in disguise.

Yet the average Argentinean seeks gold and bitcoins as refuge.

More from the same article:

Argentines are buying cars, gold and even virtual currency such as bitcoin as they look for ways to preserve their savings as the peso is forecast to fall 17 percent this year.

It's pretty obvious that Argentina has gone into a debt default route via inflation. Again from the same article:

Argentina’s dollar-denominated bonds aren’t a better alternative as a U.S. legal dispute on repayment of the nation’s defaulted debt caused average yields to soar to 13.92 percent, almost three times the average in emerging markets, according to JPMorgan Chase & Co.

The notes have plunged 10 percent his year.

The rate banks pay for 30-day deposits of more than 1 million pesos was 15.38 percent on May 10….

The cost to insure Argentine debt against default within the next five years through credit default swaps rose 107 basis points to 2,770 basis points, according to data compiled by CMA Ltd.

While inflation and a gap in the exchange rates is fueling sales, the same reasons are also deterring investment in the car industry, said Cristiano Rattazzi, President of Fiat Auto Argentina SA.

See what I mean? The gap in inflation and exchange rate has simply not been consistent with soaring sales for the toys for wealthy class unless they have been subsidized. 

Unfortunately for the political elites, when hyperinflation will hit critical levels enough to spur social violent unrest, these luxury cars will easily become objects of agitation and consequently will be transformed into junk.

Blazing Start for 2013: Phisix 6,000!

I have already made my case for 2013 last week. 

To summarize, ultimately the direction of interest rates will likely drive the direction of the Phisix where higher rates may put a lid on the gains of the Phisix while continued low rates may inspire a blowoff phase.

Yet the direction of local interest rates in 2013 will not be limited to domestic events as they will most likely be influenced by the external environment and by the collaborative efforts by central banks

I also believe that low interest rates will persist, at least until the first quarter. This means that the momentum from the yearend rally will likely be carried over the same period, but of course subject to sporadic profit taking.

As I previously noted[1],

This week’s fiery opening has essentially signified a carryover from last year’s final quarter blitzkrieg (right window), a thrust which may last until the first quarter..

Global equity markets have remained buoyant, even if many major emerging markets, such as the BRICs and ASEAN have begun to manifest signs of profit-taking (this week). The chart above, shows of the weekly performance via the blue bars and the year-to-date or two week performance through the red bars.

Obviously given the trailblazing start, the huge two week gains and signs of overextended run, a short profit taking phase should be a natural consequence…unless we have already reached a blowoff phase.

Mining Index: Head Fake or Dominant Theme for 2013?

I also noted that 2013 will be dominated by the mines

Again from last week

for as long as the inflationary boom remains, I also expect a rotation towards last year’s laggards: the mining sector and possibly the service industry.

I’d like to refresh a perspective which I have been pounding on the table since the latter half of 2012.

The idea is that the mining index (blue) has been in alternating leadership with the Phisix (red) for the past 6 years or since 2007. The mines had two successive year of gains in 2006-2007

Of course, this hasn’t just been about patterns. This has been about the relative price effects of money creation and credit expansion or the Cantillon Effects applied to the stock markets.

The narrow breadth of the Philippine stock market, where only 344 companies are listed according to Wikipedia.org[2], amplifies the effects of the inflationary boom via rotational patterns.

Specifically, industries which recently outperformed eventually encounters a year-long reprieve and industries that have underperformed become the next market darlings. The eventual result: the rising tide lifts all boats or that price levels of publicly listed securities generally increase overtime, but again the relative difference lies in the degree of increases and the timing.

For the past 2 weeks the local Mining index bannered the Phisix (blue-weekly gains) to fresh record highs (8.78% gains in 2 weeks).

The holding industry, one of last year’s best performers, remains resilient and has managed to grab the second spot. Nonetheless another 2012 tailender, the service sector, has narrowed the lead of the Holding industry, and placed third.

Remember, the two former laggards were last year’s politically persecuted industries: The mining industry, particularly, for environmental issues (tailing spills, EO 79) and taxes (excise taxes), while the telecoms (as the industry’s heavyweights) had also been pressured for higher taxes (through the proposed SMS Tax). Telecoms account for about 64% of the service industry index.

The markets may have begun to discount the posturing for political uprightness by Philippine authorities through sustained media assault on these industries, perhaps due to the coming national elections in May

The market could be also be saying that a political comprise or accommodation may be in the pipeline for the contending parties, or that the sheer inundation of money in the system, has been enough to negate or benumb the markets to the political risks involving these industries.

Aside from the potential political accommodation, mainstream media’s take on the mining industry will likely be predicated on the return of foreign investments and of a ‘recovery’ of ‘demand’ via global economic statistical growth.

Here, I am predicting how mainstream media and their preferred ‘experts’ will depict on the mining resurgence, if sustained. These are the likely narratives that will be used. 

To validate the assumption of the supposed recovery of global growth, mainly from emerging markets, we need to see a broad based rise in prices of metals and other commodities. Also industrial metals should outperform gold and or the precious metals group.

The recent the global asset boom may have partially created such impression as industrial metals (GYX) have now outclassed gold.

But of course, this has been more about the mirage from the tsunami of money unleashed by global central banks, and likewise, the domestic counterpart.

For me, given the absence of an active and liquid physical metals spot or futures commodity markets in the Philippines, the mines signifies as the best alternative or hedge against the growing risks of price inflation or even stagflation.

Furthermore, despite the seeming underperformance of the price of gold, which I believe has been actively suppressed, this time through the US Federal Reserve communications strategy in portraying the tilting of balance towards the ‘hawks’, the string of record breaking activities as evidenced by record buying of physical gold and silver in the US (first 2 weeks of 2013), record ETF holdings of gold (as of November 2012) and record gold imports of India and China (fourth quarter 2012), aside from milestone third quarter rate of growth in the gold buying of emerging market central banks (third quarter of 2012), suggests of the blatant disconnect between gold prices and real economic activities underpinning the gold markets[3]. Yes some Fed officials have openly been chattering about risks of price inflation!

Gold prices may not immediately rise, or may even fall in the interim—for the simple reason –gold have risen for 12 straight years!!! This simply is regression to the mean or a normal function of the market process.

However if gold’s real economic activities continues with its current record breaking pace, then bullish pressure building underneath today’s politically constrained prices will eventually be vented on the marketplace—once such pressures become powerful enough to force upon a fissure or a valve or an outlet to release them.

And this is what differentiates between value investing marked by “sit and wait” based on fundamentals compared to the ticker tape mentality, which is based on impulse and skewed towards momentum or price chasing punts.

And given the 2013 sturdy recoil from last year’s selloff, like the Phisix, I expect the natural process of profit taking in the mining sector to occur over the interim. And this should serve as an opportunity to enter.

Of course, two weeks may not make a trend. And I could be wrong, where the recent rebound may be all about an oversold bear market bounce or a head fake. But of course, such perspective essentially ignores the real drivers of today’s boom.

---

[1] See What to Expect in 2013 January 7, 2013

[2] Wikipedia.org Philippine Stock Exchange

[3] See Is the US Federal Reserve Indirectly Putting Down Gold Prices? January 12, 2013

Is the US Federal Reserve Indirectly Putting Down Gold Prices?

Have US Federal Reserve officials been indirectly trying to take down gold prices?

In barely 2 weeks of 2013, gold prices attempted twice to move higher (See ellipses). One peaked during New Year just right after the fiscal cliff deal. The second was during Thursday of this week.

However, both gains had been cut short. This appears coincidentally timed with two occasions where Fed communications (FOMC minutes) had been released and when Fed officials went on air expressing doubts over QE 4.0.

The first came with the announcement of the FOMC minutes which revealed of growing dissension over unlimited asset purchases, a day after the fiscal deal.  I earlier wrote that this signifies another of the Fed’s serial Poker bluff. 

Last night, while switching channel after watching another TV program, I happen to stumble upon Federal Reserve Bank of Philadelphia President Charles Plosser’s Bloomberg interview, where he hinted of his bias against pursuing more balance sheet expansion. If memory serves me right, prices of gold was then trading at $1,669-1,670. Bloomberg seem to have featured this interview in a follow up article

Then I learned today that other Fed officials featured by mainstream outlets also covered the FED hawks.

And in both occasions where hawkish sentiments by FED officials were aired, the earlier gains scored by gold prices had nearly been erased.

Gold has been marginally up this week.

Considering that FED employs communication strategies to influence market behavior called as “signaling channel”, my suspicion is that this has been part of the implicit tactic to mute the public’s inflation expectations, expressed via gold prices.

Nonetheless, I expect such mind manipulation ploys to be ephemeral.

That’s because as I pointed out during my last stock market commentary for 2012

Evidence suggest that gold prices may have departed from real world activities. Sales of physical gold have exploded to record highs. Moreover central bank buying has been gathering steam, which seems on path to hit new highs this year (500 tons), along with record ETF gold holdings at 2,627 tons.

It seems that only after a month, we are getting more proof on this

In the US, sales of physical gold and silver has been exploding: The US mint reports 57,000 gold ounce sales for the first two days of the year and sale of silver coins tripled from December.

In the meantime, India’s gold imports reportedly surged amidst fears that the Indian government may continue to act to suppress demand for gold. According to Mineweb.com, after two earlier hikes of import duties, gold smuggling has also reached new levels. Smuggling is a typical reaction to prohibitions or quasi-prohibitions edicts via tax increases.

In addition, central bank gold buying have also been ramping up. According to International Business Times

In the third quarter, according to the World Gold Council (WGC), the world's central banks bought a total 97.6 metric tons of gold.

In six out of the last seven quarters, central bank demand has been around 100 metric tons, which is a sharp increase from as recently as 2010, the bank said in a statement, adding that through the third quarter of this year, total central bank buying was up 9 percent.

Moreover, China's government via the PBoC reportedly will increase gold acquisition to diversify from her foreign exchange holdings.

The China Daily notes,

China may decide to increase the percentage of gold holdings in its monetary reserves in the next few years, said the report, an analysis of the world monetary system commissioned by the World Gold Council.

Demand for gold is likely to rise amid the uncertainty about the stability of the US dollar and the euro, the main assets held by central banks and sovereign funds, it added.

China almost doubled its gold reserves in the last five years. The country had holdings of 1,054metric tons in July 2012 and is now the sixth-largest holder of monetary gold.

In 2011, gold accounted for 14.4 percent of the world's total monetary reserves.

In a country-by-country comparison, the figure was 1.6 percent in China, while it was 74.5percent in the United States, 71.4 percent in Germany and 71.1 percent in France, according to data from the World Gold Council and the International Monetary Fund.

China holds the world's largest foreign exchange reserves, which were worth more than $3.31trillion by the end of 2012, according to figures from the People's Bank of China, the country's central bank.

China has been approaching gold with “talk the talk” as November gold imports have doubled from October.

According to Zero Hedge, (italics original)

at 90.8 tons, this was the second highest gross import number of 2012, double the 47 tons imported in October (which many saw,incorrectly, as an indication of China's waning interest in the yellow metal), and brings the Year to Date total to a massive 720 tons of gold through November. If last year is any indication, the December total will be roughly the same amount, and will bring the total 2012 import amount to over 800 tons, double the 392.6 tons imported in 2011.

Meanwhile, ETF holdings of gold remain at record levels

 

According to my digital financial chronicle,

Exchange traded funds (ETFs), with gold as the underlying asset, have contributed to its prices. Institutional and retail inflows into global gold ETFs are at record levels. ETF holdings have been a key indicator of price movements in the recent years. Reports suggest that at November end last year ETF holdings were at an all-time high of over $150 billion. Till November, holdings in ETFs had risen by 12 per cent to 2,630 tonnes.

In short, the strings of record highs from various activities such as buying of physical gold, ETF holdings, record imports of China and India (two largest gold consumers) and lastly central bank buying simply doesn’t square with current consolidation phase.

Interventions to suppress gold prices are likely to have short term impact.

Syria’s Gold Market Thrives Amidst Civil War

Syria’s gold markets remains buoyant despite the ongoing civil war. 

Importantly events in Syria has been providing some insights on resident Syrians perceived value of gold.

For these economically marginalized by the war, gold has been sold in order to raise cash

From Al Arabiya News

In a Damascus jewelry shop, the customer’s jaw drops when he hears what he is being offered for his gold ring. Barely $100. “Can’t you do any better?” he asks timidly before accepting the deal.

After nearly 20 long months of conflict, many Syrians are now digging deep into their pockets, with many having to sell their jewelry -- including family heirlooms -- just to survive.

The conflict between government troops and the rebels may have brought the economy to a stalemate, but the gold market is experiencing an unprecedented frenzy.

For those who have lost their livelihood with the closing down or destruction of their workplace, selling off jewelry is an unwelcome but necessary option so they can feed their families.

Because gold has not yet been recognized as money on the street levels, and because gold is yet considered an asset, economically marginalized people prefer cash over gold.

The point here is that gold hardly signifies hedge against “economic hardships” or what others would (mis) classify as “deflation”.

But it has been a different story for those who have savings

From the same article:

For the rich, the precious metal represents a bulwark against the collapse of the Syrian pound.

According to Sonia Khanji, a member of the Damascus Chamber of Commerce, 30 percent of small and medium enterprises in the country have now closed, throwing roughly a quarter of the workforce out of a job.

Long accustomed to stable prices and currency, Syrians have seen rampant inflation reduce their purchasing power by one third since the revolt against the regime of President Bashar al-Assad broke out in March 2011.

Damascus blames the country’s economic woes on sanctions imposed by Europe and the United States, whose administrations accuse the regime of conducting a bloody crackdown on its own people.

Blaming external factors has been a mechanical response by almost every politicians.  In reality, wars are mainly funded by inflationism. 

The Syrian government recently announced a significant spending hike to cover salary increases (+13%) and subsidies on food, fuel, power and agriculture (+25%), apparently to buy popular support even when the economy has been hit hard by the rebellion.

Yet without sufficient tax revenues to cover the added expenses including the existing ones, then the Syrian government may have already become dependent on her central bank for financing, thus the recent spike in price inflation (chart from tradingeconomics.com)

And many Syrians see gold as safe haven of their savings against monetary inflation

Again from the same Al Arabiya News article

Today, those who still have a steady income put their faith in gold.

“People prefer to buy gold or sterling ounces rather than trinkets,” Mdari says, adding that people are hunkering down for a protracted period of unrest.

“People have lost faith in the national currency. Whenever new economic sanctions are announced, I notice that the rich flock to buy gold. They believe that acquiring the yellow metal offers security,” says Michel, a jeweler.

Damascus industry professionals agree that the precious metal provides a form of savings that appreciates in times of political and economic uncertainty.

“To save money, people prefer gold. They fear a rising dollar and the fall of the Syrian pound, and gold is easier to transport if we need to leave quickly,” said Hisham, a goldsmith on Abed Street in downtown Damascus.

In the real world, gold represents a hedge against currency inflation.

War on Gold: India’s Government Mulls Restraint on Gold Imports

The proverbial shot across the bow against gold holdings by India’s citizenry, has been fired by the Indian government.

Reports the Mineweb.com,

India's top policy advisory body, the Prime Minister's Economic Advisory Council headed by C Rangarajan, has urged government to discourage gold imports into the country and rather channel savings into formal financial instruments.

The Council made the recommendation in its review of the economy that the government discourage gold purchases and instead provide incentives for investment in financial assets because gold accentuates the current account deficit and hence, import of the yellow metal is unsustainable…

Massive gold imports have rung alarm bells with Indian economists, investment bankers and analysts stating that India's fascination with gold could be a reason why growth appears to be flagging. The gold import bill is expected to touch $100 billion by 2015-16, industry body Assocham (Associated Chambers of Commerce and Industry) has said. "Calculated on the basis of CAGR of period 2010-11 over 1999-2000, the gold import bill could total $100 billion soon. At these levels, gold imports are a huge burden on the balance of payments and accentuates the current account deficit," said Assocham secretary general D S Rawat.

What in reality has been unsustainable isn’t the average Indian’s fixation with gold, but rather the government’s insatiable spending habits.

chart from tradingeconomics.com

India’s fiscal balance has deteriorated sharply since 2008.

chart from tradingeconomics.com

And growing consumption activities, substantially out of government spending, has been reflected on the India’s trade and current account balance through ballooning deficits.

Besides, expansion in government activities essentially crowds out the private sector. This essentially reduces productive opportunities.

The great Murray N. Rothbard explains that fiscal deficits,

whichever way you look at them, cause grave economic problems. If they are financed by the banking system, they are inflationary. But even if they are financed by the public, they will still cause severe crowding-out effects, diverting much-needed savings from productive private investment to wasteful government projects. And, furthermore, the greater the deficits the greater the permanent income tax burden…to pay for the mounting interest payments, a problem aggravated by the high interest rates brought about by inflationary deficits

Yet the political agents abetted by mainstream experts wants the average Indians to shift their savings to financial assets which in reality are meant to finance more of government’s profligacy.

from tradingeconomics.com

The Indian government has last year embarked on monetary tightening policies where interest rates had been raised 13 times…

from tradingeconomics.com

…this has has led to a temporary drop in consumer price inflation, but whose long term trend remains up…

…and the tightening has likewise prompted for a decline in her stock market.

However, whatever discipline India’s government wanted to demonstrate appears to have been fleeting. India’s government recently announced the reversal of tightening policies, which has been instrumental to the vigorous rally of India’s stock market.

At the end of the day, a stirring revelation can be gleaned from gold prices based on India’s rupee over the long term

chart from goldprice.org

Aside from the cultural and traditional affinity with gold, the average Indians appears to have been hedging against government’s inflationism.

The rupee’s purchasing power against gold has fallen off the cliff, or seen conversely, gold prices in rupee terms have skyrocketed!

As the distinguished Henry Hazlitt wrote,

The next inflation hedge we have to consider is the purchase of gold. This seems to many the best hedge of all. They remember that in the great German inflation those Germans who consistently bought gold whenever and to the extent they could, and held it until the inflation ended, came out with at least their principal intact. From a strictly economic point of view, buying gold in a major inflation and holding it probably presents the least risk of capital loss of any investment or speculation.