With a little reasoned forethought, one could have predicted that short sellers would hammer the gold market just before US Thanksgiving which was followed by an abbreviated trading session on Friday and the Swiss Gold referendum on Sunday.
The referendum was not expected to pass and the market reaction Sunday night was hardly justified because the no vote had largely been factored into the gold price beforehand.
All of these events unfolded in the face of India suddenly removing import restrictions on gold which in fact had deprived the government of tax revenue because of the massive amount of smuggling it promoted.
When it comes to gold – a traditional storehouse of value in India and elsewhere in the world for that matter – it’s never a good idea to tell Indians they can’t buy gold because they will want it more than ever.
Let’s not forget that India is the biggest gold consuming nation on the planet and for the lifting of import restrictions to have no impact whatsoever on the gold price seemed like a bit more than an anomaly in my opinion.
China has also been a heavy buyer of gold with all its domestic production (China is the world’s largest gold producer) never leaving the country. Also, imports remain at near record levels.
Russia has also been busy adding to its gold reserves which has helped the country hedge against further declines in the ruble, while diversifying its foreign exchange reserves away from the US dollar.
Both Russia and China are seeking ways to reduce the influence of the US dollar on their respective economies. While it’s doubtful the dominance of the US dollar as the world’s reserve currency will end any time soon, the emergence of China as the world’s second largest economy and the increasing transactional use of the Chinese Yuan could hasten the dollar’s demise as the world’s undisputed reserve currency.
The action in the spot market today has been nothing short of spectacular. As I write this, spot gold is up nearly $50 and the shorts are covering from last week’s orchestrated end-of-week attack on the gold price.
I invite you to read this piece on Bloomberg headlined “Gold Advances Most Since June as Crude Rebound Revives Demand.” This must be the dumbest headline I have read in my 35 years writing about commodities. Gold’s breakout today has nothing to do with the modest 3.5% increase in crude oil prices (WTI) and almost everything to do with the removal of Indian restrictions on gold imports.
Accompanying the story is an interview with Willem Buiter, chief economist at Citigroup, who came out with a bizarre take-down treatise on gold before the Swiss referendum that implied that gold had no value whatsoever. All this after his native country, Holland, repatriated more than 122 tons of the worthless metal.
In the Bloomberg interview, Buiter suggested that during the Asian financial crises in the late 1990s people could have sold diamonds just as easily as gold. I wrote a book on diamonds at the time and can tell you that diamond pricing is highly subjective. You can buy a diamond from a jeweler for $5,000.00 and I can guarantee you that you won’t get the same amount for it when you sell it back to him five minutes later. Diamonds are hardly a storehouse of value. Gold on the other hand has a fixed value for which there is no subjective influence.
The incredible volatility in the gold price suggests we could see some wild markets in the months ahead. Fasten your seat belts!