The Finance Minister of India said last week, “Banks have a role to play in dampening the enthusiasm for gold. I think the RBI [Reserve Bank of India] has advised banks that they should not sell gold coins.” He added, “I would urge all banks to please advise their branches that they should not encourage their customers to invest in or buy gold.” (Source: “P. Chidambaram hints banks likely to stop gold coin sales to curb demand,” The Indian Express, June 7, 2013.)
The appetite for gold bullion by Indian consumers has forced its government to increase the import tax on the yellow metal to eight percent—it has increased this tax rate twice in the past six months!
But the Indian economy isn’t the only one experiencing a surge in gold demand.
The acting director of the U.S. Mint, Richard Peterson, was quoted last week saying, “Demand [for gold bullion] right now is unprecedented…” (Source: “US bullion coin demand still at unprecedented levels-US Mint Chief,” Reuters, June 5, 2013.)
Looking at the sales of gold bullion coins from the U.S. Mint, demand has more than doubled. In the first five months of this year ending in May, the U.S. Mint sold 572,000 ounces of gold bullion in coins. In the same period a year ago, the Mint sold only 283,500 ounces of gold bullion. (Source: The United States Mint web site, last accessed June 7, 2013.)
Dear reader, the numbers are speaking louder than the words. Even when there’s a significant amount of downward price pressure toward gold bullion, demand is doing the opposite and increasing sharply.
Aside from what I have written above, I still believe central banks will eventually be the major force driving gold bullion prices. Countries like Russia, Turkey, and Kazakhstan continue to add gold bullion to their reserves.
Central banks want stability in their reserves and gold bullion does the job perfectly. Just look at the chart below of the U.S. Dollar Index (which measures the value of the dollar compared to other major currencies):
Chart courtesy of www.StockCharts.com
Now ask this question: as the most conservative investors, why would central banks be willing to hold the U.S. dollar in their reserves when the Federal Reserve just keeps printing more of them? Central banks are worried about paper currencies, thus, they are looking at gold bullion again as the alternative to reserve stability.
The Japanese economy is a prime example of what happens when central bank–infused “economic growth” crumbles.
Quantitative easing may have been needed in the U.S. economy when the financial system was on the verge of collapse, but artificially low interest rates and vast amounts of paper money printing could be creating major troubles for our future, just like it did in the Japanese economy.
The Bank of Japan and the Japanese government have taken a strong stance on bringing economic growth to the Japanese economy. The Bank of Japan has taken the concept of quantitative easing to a new level, and it plans to continue increasing the country’s money supply. Similar to what’s happening here in America, the Bank of Japan is printing new money to buy government bonds. Japan’s central bank has become heavily involved in the stock market of the Japanese economy by buying units in exchange-traded funds (ETFs) and real estate investment trusts (REITs).
Sadly, the outcomes of this rigorous quantitative easing are dismal. The Japanese economy isn’t improving. Rather, the currency of the country has become a major victim, and the stock market in the Japanese economy is bursting.
Take a look at the chart below, which shows the value of the Japanese yen (black line) declining continuously, while the stock market is rising and bursting (red/black line).
Chart courtesy of www.StockCharts.com
On May 23, the stock market in the Japanese economy took a turn downward; since then, it has been declining quickly.
When I look at this, it makes me question the stability of the key stock indices here in the U.S. economy. The Federal Reserve is still going ahead with its quantitative easing and printing $85.0 billion a month to spur economic growth. As a result of this, the stock market has risen significantly, giving investors a false idea about prosperity here in the U.S.
I still continue to be skeptical about the rise of the stock markets in the U.S. economy. Many are questioning whether the rise in American stock markets is a direct result of the Fed’s quantitative easing program.
The stock market in the Japanese economy tumbled more than 3,000 points in a matter of weeks as its bubble burst; it wouldn’t be a surprise for me to see the Dow Jones Industrial Average do the same.
What He Said:
“Consumer confidence does not change overnight. In the U.S., 70% of GDP is based on consumer spending. And in my life, all the recessions I have seen or studied have only come to an end when consumers started spending. With consumer sentiment getting worse, and with the U.S. personal savings rate at near record lows, it may take two or three years for consumers to start spending again.” Michael Lombardi in Profit Confidential, February 25, 2008. By the end of 2008, the rest of the world was realizing the recession would be much longer and deeper than most had realized.