As the World Turns
There's enough digital ink being spilled about the Syrian conflict and if we're "in our out" to last everyone the rest of their natural lives. So, I'm not about to go there. Besides, by the time you read this, we could have already done something or packed our bags and went home. I'll let that little adventure just play itself out as it has to.
What I want to just toss up in the air for a minute is some of the disturbing things we've seen coming out of India lately concerning gold. For those that don't know, India runs the worlds third largest current account deficit. They've been having a very hard time defending their currency, and they've employed a lot of underhanded tricks to try and halt the erosion.
In a twisted flashback to what the US did back in the 30's when they confiscated everyone's gold, India appears to be running straight down the same tracks that led to that horror show. Since the middle of last year, they have implemented 24 "gold unfriendly" actions in a push to have their citizens avoid buying gold and instead using their currency for transactions and savings. Each one of the measures has failed miserably and the latest action in the Indian markets shows that things are "broken" over there.
The Indian people have cherished gold for thousands of years. From Temples to jewelry adornments to dowries to you name it, they have always knows that "he who owns the gold" is king. So, they learned during centuries of tumult that personal ownership of gold would afford them some protection of their family wealth. Well, like most "modern" economies, there's a difference between what the people do and what the Government does. See... India's government has pretty much lost control of their economy.
So just like here in the states, when things get desperate they go on raids. They look for money in every nook and cranny. Their Government knows that folks want gold a hundred times more than they want Rupee's and they continue to try ways to push them away from it. Some of the measures don't sound horrid on the surface, but I tend to think it's just the warm up pitches before the big honkin fast ball they're winding up for.
They've hiked the import duties. (3 times!) They've asked the jeweler guild to stop selling gold bars. They've halted coin sales. They've increased taxes, and implemented trading halts. Sooner or later you come to a conclusion that these guys are looking desperate to do something big. Okay what is it and why? Well one of the biggest component of their out of whack trade deficit is the fact they import so much gold to satisfy the consumer demand. Thus, they're taking all those measures to halt the imports. The idea being that if there's none coming into the country, no one will buy it. But it's much deeper than that. They're going to try and mop up the citizens gold.
Like usual it will start "fairly harmless". They're going to try implementing a pilot program wherein banks are going to try and get customers to "sell" their gold to the bank in exchange for currency. They know they have to pay a premium for it, but that's okay with them, the Rupees are being printed. If they have to print more of them to pay the premium, so be it. Okay, so they're going to try and buy back all this gold. What's the goal? I tend to think they're going to try and settle up some of that account gap by then amassing all this "extra" gold from the citizens and selling it into the market. See,they don't want to touch their "sovereign" gold stores, oh no no... let's get a bunch of it from the citizens and sell that!
The problem is of course that the Indians aren't going to change 2500 years of culture and suddenly decide they'd rather have slips of paper adorning their wives necks than gold necklaces. Sorry. Won't happen. But then what? Desperate countries do desperate things (consider Cyprus and Syria). I suggest that they will forcibly "take" some percentage of the average folks gold. IN other words, confiscate it. The very same thing the US did to our citizens in 1933.
I bring this up for a couple reasons. One is naturally to show you that it isn't just Europe that's in dire straits or the US that is technically insolvent and desperate... there's a boatload of countries in the same situation. But secondly, since we are stout believers in holding gold, just like the Indian folks are, this is going to disturb the gold market when it all happens. India is hell bent on grabbing a big portion of the gold that is responsible for their account deficit and sell that gold right back out to the market. This will indeed have a pretty big impact on the gold markets.
Interestingly I don't think that the price of gold will actually fall that far. Frankly I think the June lows are the lows for many many years. But consider this...if they announce in the somewhat near future they're going to implement some form of confiscation with the determination to sell it into the market, the price of gold should go down and it will. But in WHAT CURRENCY?? In other words, gold isn't priced the same throughout the world, it is priced in home currency. Dollars, Rupee's, Euro's, yen, etc. If India dumps tons and tons of gold into the market, I suggest they and their neighbors will indeed see currency resets on value, but all across the globe other people seeing this action will scramble to get their hands on as much as they can so they can "hide it" and thus support the global price.
I know it reads like a spy novel, but you have to understand that we're talking about lunatic Central bankers, and Governments "gone wild". They never do the right thing and there's always unintended results. If I'm right and this plays out over the next year, I could easily see a pretty hefty dip hit gold's price, only to see it soar right back up and even considerably higher. Their plan will fail on all fronts.
What we're seeing is another country in the death throes of a failed economic policy. I detest the idea of a global melt down and reset, but I cannot ignore the fact that one is coming. Yes they kick the can as far as they can. We've seen Greece, Spain, Italy, Ireland, and Portugal do it. We've seen the US up the debt limit a dozen times. We've seen Japan come out with a monetary shock and awe program. All to kick the can. Well, India will try it their way too.
So keep your eyes open for news out of India and when you see it, prepare yourself to "buy the dip". The initial action will hit the global gold market. But it will not be the end of gold's rise. Use the opportunity.
PS... I hope you all can forget about all this craziness for a few days and enjoy your Labor Day holiday with family and friends. Some good food, good drink and good company can do wonders for the soul, if even for just a couple days. Have a great time.
The market...
The market couldn't make any headway this week for the obvious reasons. From Monday's open to Friday's close the DOW is off just about 200 points even. The tensions over the Middle East, combined with some really seriously poor action coming out of the emerging markets has them more eager to play "safe than sorry".
Hey, we can't blame them for that. This market is like walking on egg shells every day. One word out of a Fed head about taper and we dump 100 points. One Kerry appearance on TV and "boom" down 80 points. There's simply too much going on out there for anyone to feel that they can take a new position and not have it tossed right back in their face.
The fact that we're ONLY down 200 this week is really a testament to how savage their appetite for stocks still is. With all the ills facing the globe we could easily fall off another thousand points with no problem. Yet we haven't. Notice the word yet. We still have crazy Benji and his merry band of Fed heads to deal with. September 18 is just a couple weeks out, and if he announces tapering, even if it's just "taper light" of say 10 billion... I think it will be hard for them to continue holding us up.
So we've got a lousy atmosphere here right now. Each day is a question. Will they drop bombs tonight? How about tomorrow? Or the next day? Is Benji really going to taper or surprise everyone and soften his stance? Are the emerging markets going to stop taking a pounding? If there are no missile launches and Kerry says we're going to just do the diplomacy thing...do we then simply soar higher?
I want to be smart enough to know the answers. Unfortunately I'm not. I can take an opinion about where we're going but you all know the adage about opinions... everyone's got one. I think that if there's no Bombing by Tuesday at the latest... I think the market will stage a bounce. Why? Because the following Tuesday is the big G20 meeting in Russia. Everyone knows that he isn't going to drop bombs while he's in a foreign country discussing global politics. So, they either have to bomb fairly quickly or put it well off. If they put it off, I think the market bounces some.
It won't take us to the old highs and you can't marry it. But I do think it will be buyable for a decent trade.
Okay folks, that's my guess... good luck. Enjoy your holiday and we'll see you all on Wednesday
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