Buried kruger­rands or out­per­form­ing emerg­ing mar­kets?

Financial Mirror (Cyprus) - - FRONT PAGE - Mar­cuard’s Mar­ket up­date by GaveKal Drago­nomics

Ap­proach­ing 2014’s half-way mark most ma­jor as­set classes have re­turned be­tween 3% and 6% over the year to date. There are two out­liers: Ja­pan, which has lagged other mar­kets fol­low­ing 2013’s gains, and pre­cious metals, which have out­per­formed. So far this year gold is up 9.4%.

There are sev­eral pos­si­ble ex­pla­na­tions for the rise of the shiny stuff. Paid-up mem­bers of the buried Kruger­rand so­ci­ety may link gold’s rise to Wash­ing­ton’s urge to claim ju­ris­dic­tion over each and ev­ery US dol­lar trans­ac­tion. Geopo­lit­i­cal ten­sions, ris­ing body counts in Ukraine, Syria and Iraq, and the grad­ual with­drawal of the US from the in­ter­na­tional scene should also in­crease mar­ginal de­mand for the ‘bar­barous relic’. In­vestors may also feel that with in­fla­tion pick­ing up in the US, and the US Federal Re­serve happy to stay far be­hind the curve, buy­ing pre­cious metals as an ‘in­fla­tion hedge’ makes good sense.

The point here is not to dis­par­age these ar­gu­ments. Nev­er­the­less, we have long main­tained that gold is pri­mar­ily a play on the ris­ing dis­pos­able in­come of emerg­ing mar­ket con­sumers. While most ‘gold bugs’ spend their days dis­sect­ing the Fed’s ac­tions, the re­al­ity is that roughly a third of global phys­i­cal de­mand comes from In­dia, a lit­tle over a quar­ter from China and some 15% from the Mid­dle East. In other words, ul­ti­mately it is these three main types of buyer - In­dian, Chi­nese and Arab - that in­flu­ence the world gold price, not the Western in­vestors who pop­u­late the com­ment sec­tions of fi­nan­cial web­sites.

- The Arab buyer: Mov­ing higher, el­e­vated oil prices usu­ally equate to more gold pur­chases in the Mid­dle East - and that’s be­fore fac­tor­ing in the re­gion’s es­ca­lat­ing sec­tar­ian strife, which should keep gold well bid.

- The In­dian buyer: In­dian con­sumers have not been the force they were since Delhi im­posed re­stric­tions on gold im­ports last sum­mer. But with smug­gling boom­ing, it is likely the new govern­ment will mod­ify In­dia’s im­port rules (un­less oil prices shoot up and of­fi­cials start wor­ry­ing about a de­te­ri­o­rat­ing cur­rent ac­count deficit). Still, with the eq­uity mar­ket ral­ly­ing, bank loans ex­pand­ing, and In­dia’s vibe pos­i­tive once again, this year’s wed­ding sea­son should be es­pe­cially fes­tive, with plenty of de­mand for jew­elry.

- The Chi­nese buyer: This is the big un­known. Tighter credit and Bei­jing’s anti-cor­rup­tion cam­paign have hurt gold de­mand. So has the grad­ual loos­en­ing of China’s cap­i­tal con­trols - with more in­vest­ment op­tions, Chi­nese in­vestors see less need to di­ver­sify into gold. On the other hand, Bei­jing is start­ing to loosen pol­icy again. More­over, now that Xi Jin­ping has suc­cess­fully con­sol­i­dated his power like no leader since Deng Xiao Ping, the cor­rup­tion crack­down should wind down.

The distinc­tion be­tween dif­fer­ent types of buy­ers is im­por­tant. If gold prices are ris­ing be­cause people are los­ing faith in the US dol­lar, or be­cause of fears of a wider Mid­dle East­ern war, or be­cause of a per­cep­tion that the Fed is poorly run, then the out­per­for­mance of pre­cious metals this year is an omi­nous sign.

But if gold prices are ris­ing be­cause con­sumers in the Mid­dle East, In­dia, China are feel­ing richer and buy­ing more jew­elry, the sig­nal is far more en­cour­ag­ing. With emerg­ing mar­ket eq­ui­ties now ral­ly­ing again, we are in­clined to the op­ti­mistic view.

But, should emerg­ing mar­kets un­der­per­form, and should gold con­tinue to head the per­for­mance ta­bles, then the log­i­cal con­clu­sion will be that we are head­ing for a more un­cer­tain and dan­ger­ous world. For­tu­nately, we are not there to­day - which is why we see the rise in gold as a con­fir­ma­tion that emerg­ing economies are on the mend and re­main bullish on emerg­ing mar­ket as­sets.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.