247Bull.com Editor: The amount of money that has been created by central banks around the world is more than enough to produce a huge bout of inflation. However, in order for that to happen the newly created money needs to find its way into the economy and right now it’s just sitting in the banks. In addition, as this chart of money velocity from the Federal Reserve shows, the notes and coins already in circulation are changing hands at the slowest pace in more than 50 years. If governments want to create inflation, and there can be little doubt that they do, they will need to find ways of forcing banks to lend, or of getting the newly created money directly into the hands of consumers. We can expect to see such measures in the not too distant future.
Wholesale gold bullion prices ended Tuesday morning in London at $1655 per ounce, regaining ground lost yesterday to climb back to where it started the week, with dealers reporting signs of strong demand from India and China, the world’s two biggest gold buying nations.
Silver climbed to $30.40 an ounce, slightly up on the week so far, while stocks and commodities also edged higher and US Treasuries fell.
The Shanghai Gold Exchange Monday reported record trading volumes equivalent to 19.5 tonnes for its Au9999 contract, which represents gold bullion of 99.99% purity. Tuesday’s Au9999 volume fell to just under 9.3 tonnes, still significantly above the last year’s daily average.
“Physical [gold] demand is very strong,” one Beijing trader told newswire Reuters this morning.
“It’s a combination of the attraction of lower prices as well as pre-holiday demand.”
China celebrates Lunar New Year on 10 February this year.
Official customs data from Hong Kong meantime shows China imported 90.7 tonnes of gold from Hong Kong in November, a 91% increase from the previous month. The volume of gold flowing the other way rose 23% to 27.7 tonnes. Hong Kong is widely regarded as the major conduit for Chinese precious metals imports.
Premiums on gold bullion shipments to India hit a two-month high Tuesday, with dealers blaming a rush to buy gold before an expected import duty hike.
Gold shipped to India traded between $2 and $3 an ounce above London prices, dealers reported.
By comparison, premiums in Singapore this morning were around $1-$1.20 an ounce.
“Our physical desk has already noted significant interest from Indian clients looking for gold, which could push up imports until the tax in announced,” says a note from Nick Trevethan, senior commodity strategist at ANZ.
“Nothing is available readily,” adds one dealer at a bullion importing bank in Mumbai, adding that some shipments are taking up to a week to arrive.
Western investors meantime continued to add to their gold positions in December, according to data from BullionVault.
The Gold Investor Index, which tracks buying and selling on the world’s largest online precious metals exchange, rose to a 12-month high in December.
Over in Japan, investment by pension funds in gold exchange traded funds could more than double over the next two years, according to Itsuo Toshima, pension fund advisor and former regional director Japan/Korea at the World Gold Council.
“Bullion’s role as an inflation hedge, long ignored by Japanese fund operators, has come under the spotlight thanks to [Japan's prime minister Shinzo] Abe’s economic policy,” said Toshima Tuesday.
Following his election victory last month, Abe said the Bank of Japan should adopt a 2% inflation target, double the current targeted level, having previously called for unlimited quantitative easing during the election campaign.
“Gold may be a standard asset-class in the portfolio of Japanese pension funds as Abe’s target is realized,” said Toshima.
Over in Europe, the Eurozone unemployment rate rose to a record 11.8% last month, figures published Tuesday show. Spain had the highest unemployment rate of any Euro member at 26.6%, while Austria’s rate was the lowest at 4.5%.
“The Eurozone needs easier monetary policy,” says Standard Bank currency analyst Steve Barrow.
“This can happen through lower policy rates…[as well as] the activation of the [European Central Bank's] Outright Monetary Transactions program, although the ECB would claim that this is not equivalent to monetary easing.”
The OMT program, announced last September, would see the ECB commit to buy sovereign bonds in whatever quantity needed to prevent borrowing costs rising too far above those of other Euro members. A condition of the OMT is that a beneficiary government has accepted a bailout program and its attached conditions.
“A move to negative deposit rates [also] seems very possible in our view,” adds Barrow, “and we would not even rule out the possibility that the ECB will have to undertake quantitative easing of its own.”
The ECB announces its latest policy decisions this Thursday.
Deutsche Bank meantime cut its average gold price forecasts for 2013 and 2014 Tuesday.
Deutsche’s 2013 forecast is down 12.1% to $1856 an ounce, while next year’s forecast is down 5% to $1900 an ounce.
“The whole debt situation remains a major challenge, and accommodative monetary policy is very much seen as a way to minimize the negative repercussions of that,” says Daniel Brebner, the bank’s head of metals research.
“So I don’t believe the gold story is over, but certainly, the market is likely to continue to pause.”
Shares in London-listed African Barrick Gold meantime fell 20%this morning after the state-owned China National Gold ended talks to buy the 74% stake in African Barrick owned by parent Barrick Gold.
Ben Traynor | BullionVault