A Billion Gold Bugs Get Squeezed
Well, this is kind of confusing. In a week when commodities and mining stocks get a general lift, the Wall Street Journal puts the spotlight on Chinese banks and finds a lot to reckon with on the downside.
Normally any hint of trouble in the Middle Kingdom gives mining stocks the shudders. But gold stocks especially are enjoying a nice bounce. But are they factoring in the ineptitude of Indian politicians? More on that shortly.
Let's start with China. The four largest State-owned Chinese banks have a hefty challenge ahead, according to the WSJ. The banks are facing a future of rising bad loans and lower earnings growth. Or, as our colleague Greg Canavan predicted, what looks like the end game of a credit binge.
In fact, the quote below reads like his message to investors for the last 12 months. From the WSJ:
'A cornerstone of China's financial edifice is beginning to show some cracks. The country's banking sector, a key part of a financial system that has powered China through three decades of breakneck expansion, is feeling the strain of years of rapid credit growth.
'Bank-fueled lending to state enterprises and local governments has led to overcapacity; serious debt problems for local governments, companies and lenders alike; and numerous white-elephant projects, from nearly empty malls and resorts to bridges to nowhere.'
In the face of this, the big four banks are trying to get their hands on $44 billion dollars of capital to beef up their balance sheets. They might even need double that number over the next two years. Apparently, too, they're looking for debt that won't mature for at least five years. Maybe they figure they better lock what they can in now. But the question hangs: would you be game to lend them the money?
As we pointed out, absolutely none of this seems to be bothering the commodity markets or mining stocks right now. The iron ore price is actually coasting higher, over USD$130. It's actually been a fair performance this year from the red dirt.
The Australian Financial Review suggested on Tuesday that Australian iron ore producers might even sneak in a profit upgrade or two. That's thanks to a combo of the high spot price and weaker Australian dollar.
But it's not just iron ore looking more rosy. The price of copper hit a nine month high, and silver took a jump.
Of course, some current weakness in the US dollar might explain some of this. The Wall Street Journal reported this week that the bullish dollar trade has stumbled recently thanks to some poor numbers out of the US: 'Investors have slashed bets on a rising dollar by 49%, to $21.7 billion, since late May.'
Thanks to that, gold has jumped up from its June low and hovers around $US1350. A view we keep coming across is the yellow metal must hold above this key level. Over at Slipstream Trader, Murray Dawes likes the look of the charts in gold mining stocks. He says the intermediate trends are signalling buy.
Enter the tricky problem of India. This makes us cautious. They say when America sneezes, the world catches a cold. It's kind of like that with India and gold. The subcontinent is the biggest market for the DR's favourite metal
That's an issue if you're a gold investor, because right now India has all sorts of problems. The big ones are a trade deficit, a current account deficit and a collapsing currency. The rupee is down 28% over the last two years. That's the biggest fall since 1991.
International investors are pulling their money out of India. This is putting pressure on the currency. To try and stabilise the rupee, India wants to cut its trade deficit. Two of India's biggest imports are oil and gold. There is not much Indian politicians can do about the oil. But they can blame gold for the trade deficit.
To import gold India must send money abroad, which adds to the capital outflow. In order to stop this money leaving, the Indian government Is putting the squeeze on gold imports into the country, raising taxes and restrictions, and banning the sale of coins.
This is a classic case of politicians attacking a symptom, not a cause. Instead of liberalising their economy and encouraging foreign investment, the Indian government is reaching for the band-aids.
Check this out from Bloomberg.
'India increased efforts to stem the rupee's plunge and stop capital outflows that are pushing the economy toward its biggest crisis in more than two decades...
'Policy makers' moves since July to tighten cash supply, restrict currency derivatives and curb gold imports have failed to arrest the rupee's slump to record lows as they struggle to attract capital to fund a record current account deficit.'
That brings us to the World Gold Council. It blamed the major slump in gold from selling in ETF's but pointed out the very robust physical demand in Asia, mostly India and China, in the first half of 2013.
But even the WGC admits the next quarter may not be too rosy for gold in India thanks to the bureaucrats:
'...imports tailed off in June with demand slowing sharply as the market entered its seasonal quiet period and as the government extended the restrictions on gold imports as well as further raising import duties to 8%.
'In more recent weeks, the change in emphasis from restricting payment terms to linking import quotas to exports is likely to create further confusion and exaggerate the normal Q3 lull in Indian demand ahead of the Q4 festival and wedding season.'
The takeaway is an enormous amount of gold demand is for now being put under some pressure. If you're watching gold, watch India.
Enjoy your weekend!
Regards,
Callum Newman+
for The Daily Reckoning Australia