the World Economy

Gold Bullion Flowing from West to East

Alasdair MacLeod

Financial Sense,

22 October, 2012

Earlier this month Eric Sprott circulated a paper, co-authored by him, which concluded that Western central banks have considerably less physical gold than they claim. It shows that since the year 2000 there has been a net increase in identifiable annual demand of 2,268 tonnes, and concludes that some supply, apart from mine output from the “free” world, must come from Western central banks – because there can be no other source.

This supply amounts to price suppression in the name of demonetising gold. Therefore, while minimal investment interest is shown in precious metals in the West, central bank selling and net jewellery liquidation (currently running at about 1,000 tonnes annually) are effectively supplying Asia with gold at artificially low prices in what amounts to a transfer of wealth.

We do not know precisely the extent to which this has happened, because available statistics only tell part of the story. The World Gold Council (WGC) has demand data going back only to 1992, and some of this is defined as actually measured (e.g. import statistics, mint and hallmarking data); otherwise it is only “indicated” on a trade-sample basis. Importantly, no statistics can capture change of ownership for vaulted gold. But we can get a feel for gold ownership shifts by recounting events since the US dollar finally dropped all links with gold in 1971.

In 1971 bullion investment was still effectively banned in the US (except for foreign coins), and investment in the UK and a number of other countries was also more or less coins only. It is estimated that all existing coins today amount to about 3,500 tonnes.

The oil crisis of the 1970s led to substantial bullion-buying by the enriched Middle Eastern states. This continued through the 1980s and into the 1990s. Meanwhile conservative Swiss investment managers, who collectively were the largest holders of bullion, were replaced by a new generation of managers who by 2000 had disposed of nearly all of it, as had investment managers everywhere in the West. Even today very few investment managers have bullion in their clients’ portfolios. This gold quietly disappeared into Arab and Asian hands, and into jewellery fabrication boosted by low prices. However, even in 1992 when the WGC statistics started, Asian demand ex-Japan dominated markets, absorbing 1,650 tonnes – over twice that of the developed markets.

At that time private gold ownership in developed markets was predominantly in jewellery form. This accumulation is reversing as a consequence of higher prices and financial stress in some nations. Bullion investment remains unfashionable, and remarkably few people have even seen a gold coin, let alone possessed one. But the last decade has seen the growth of securitised gold in the form of exchange-traded funds and other listed vehicles, amounting to about 2,800 tonnes. While the deteriorating outlook for paper currencies has sparked a partial move into gold, much of this is in unallocated accounts with bullion banks or in synthetic derivatives.

The message behind the shift of wealth from advanced nations to Asia is that we are left with no “Plan B” in the event of a monetary crisis. A global collapse of paper money, which is inevitable if current monetary policies are not reversed, will give Asians considerable wealth relative to the rest of us.

History will surely judge the central banker’s promotion of ephemeral paper at the expense of gold in the harshest terms.

Asia Inundated With Cash

A flood of cash into Asian investments has pushed stocks, currencies and real estate markets sharply higher, leaving governments struggling to stem the inflows for fear they will fuel inflation.

WSJ,
22 October, 2012



The inflow is a result of aggressive stimulus measures by central banks including the U.S. Federal Reserve, which in September announced its latest round of bond buying to help keep U.S. yields low in hopes of sparking growth. Low rates have in turn sent money managers scrambling to all corners of Asia seeking better investment returns.



Residential tower blocks stand behind a construction site in the Tseung Kwan O area of the New Territories in Hong Kong in September.



Indonesia, for one, had a net inflow of about $1.3 billion in bonds last month, compared with a net outflow of $540 million in August, according to Standard Chartered PLC. STAN.LN -0.54% South Korea also witnessed net inflows of $1.4 billion in September, versus $2.4 billion in outflows the month before, the bank said in a recent report.



Standard Chartered said in the report that it expects investment inflows to Asia to accelerate "if Chinas economic data continues to stabilize and the Chinese yuan establishes a strengthening trend."



Some of the region's smallest equity markets have been big beneficiaries, with Thailand's share index up 28% this year, the Philippines 24% higher and a main Indian index rallying 23%. Hong Kong reached a 14-month high on Monday. Only mainland China is lower this year as concerns linger over the health over its giant economy.



Hong Kong and Singapore, two of the most-developed economies in the region, have also received overseas cash that has pumped up not just their currencies and stocks but also their housing markets.



Home prices in Hong Kong have surged to records, after doubling over the past four years, leading Financial Secretary John Tsang to warn Sunday that the real estate market has "seriously disconnected" with the slowing economy, and he threatened to impose measures to curb property prices.



In Thailand, the central bank set new rules on Monday to encourage capital outflows and to balance the heavy influx of money. It did so by loosening restrictions for listed firms and individuals to invest in overseas equities and foreign-currency-denominated domestic bonds.



Singapore's policy makers are also concerned about high property prices as private-home prices jumped 56% since the market's most recent cyclical trough in the second quarter of 2009. Both Hong Kong and Singapore have stepped up efforts in the past few weeks to tighten rules on home loans to try to cool off the market.



"Given the relatively small and open economies, Singapore and Hong Kong are more exposed to loose monetary policy in the U.S.," said Andrew Colquhoun, Fitch Ratings' head of Asian-Pacific sovereign ratings. "That could possibly increase their risks of more volatile asset prices and inflationary pressure."



In currency markets, the Singapore dollar has jumped almost 6% this year against the U.S. dollar, making it Asia's strongest performer. And in Hong Kong, the de facto central bank stepped into the currency markets on Friday to weaken the tightly controlled Hong Kong dollar for the first time in almost three years after it had climbed to the top of its trading band.



Other countries in Southeast Asia are also feeling the wave of liquidity in the global economy. The flows are also seen in foreign direct investment, with Indonesia recording a 22% increase in FDI to a record high of 56.6 trillion rupiah ($5.9 billion) last quarter.



Meanwhile, the region's bond market has recorded unprecedented issuance of as much as $158 billion this year, up from $112.7 billion in all of last year, according to data provider Dealogic.



Some economists worry that all the money sloshing around will start to push up consumer prices in the region, and that will lead to interest-rate increases and start to choke off economic growth.



"Inflation is going to snap back next year," said Frederic Neumann, co-head of Asian economic research at HSBC Holdings PLC. HSBA.LN +0.44% "As the region's economy [picks up its growth momentum], with the global liquidity, increased wages and prices, inflation will be the No. 1 risk in the region."



Indonesia, Thailand, the Philippines and Malaysia are more prone to inflation, while China, with restricted capital inflows, will be less impacted in terms of prices, Mr. Neumann said.



Corrections & Amplifications
Private-home prices jumped 56% since the market's most recent cyclical trough in the second quarter of 2009. An earlier version of this article misstated that private-home prices jumped 56% last quarter.

Globalism is dead

Major trade powers using stealth protectionism: study

The world's biggest economies, especially the European Union and Japan are using protectionist policies that fly below the World Trade Organization's radar, according to a forthcoming study by two experts.

Fox Business,

22 October, 2012

The study, by Vinod Aggarwal, professor of political science at Berkeley, and Simon Evenett, professor of international trade and economic development at the University of St. Gallen, examined seven major economies and 869 non-macroeconomic trade policies they have taken since the financial crisis began.

"During the period November 2008-May 2012 there was considerable resort to less transparent policy instruments (so called murky protectionism') and to policy instruments that are not covered or are weakly covered by WTO rules," says the study, which will be published in the Oxford Review of Economic Policy.

At the start of the period under review, the world's largest economies vowed not to resort to protectionism at a G20 crisis summit in Washington.

If they have stuck to the letter of that promise, by and large, the study found they have not observed the spirit of it.

The authors surveyed Brazil, China, the European Union, South Korea, Japan, Russia and the United States, and found that they had not only tried to protect their economies against foreign competition but also often "picked winners" among their own firms, leaving the rest to bear the brunt of the crisis.

"Here's the bottom line for managers: don't count on WTO rules to protect your interests," the authors wrote in a blog published by the Harvard Business Review on Monday.

"Don't be misled by the avowed rejections of protectionism. Just because tariffs aren't being raised across the board, it doesn't mean firms' overseas commercial interests are being treated without prejudice."

WTO Director General Pascal Lamy said in June that there was "very broad confidence" in the WTO's dispute settlement system but also warned of an "alarming" rise in trade restrictions, now affecting 3 percent of global merchandise trade.

Aggarwal and Evenett said trade disputes had begun to crop up over crisis-era policies affecting auto parts, wind power, and solar panels, but said those formal disputes could represent the tip of the iceberg.

UNCONSTRAINED

The European Union and its 27 member states generated more than a third of the policies identified by the study, and 93 percent of them discriminated against foreign competition, a slightly higher proportion than in Japan and the United States.

European and Japanese discriminatory policies were also the most "selective", with more than two-thirds specifically targeting particular firms in the domestic market.

A tally of the 10 most affected sectors in each of the seven economies revealed that - in varying concentrations - all of them used policies that either discriminated against foreign competition or selectively favored domestic firms.

And the economies that resorted most to discrimination tended to rely most on policies where the WTO rules were weakest, such as bailouts, trade finance, and investment incentives - in 84 percent of cases in the EU.

Brazil, which was the least discriminatory and selective in its policies, generally regulated trade with measures that were subject to the toughest WTO scrutiny.

"Such a correlation casts doubt on some of the strong claims in the industrial policy literature that WTO rules impose substantial constraints on government intervention, at least during the crisis era," the authors wrote in the study.

Appliances Hit Slow Cycle

Philips, Electrolux Warn of Weakness in North America

WSJ,

22 October, 2012

Electrolux AB ELUX-B.SK +1.56% and Royal Philips Electronics NV PHIA.AE +5.76% warned of a slowdown in North American demand for consumer appliances while European consumers continue to cut back.

"The economy in the U.S. is at the moment moving a little bit sideways," Electrolux Chief Executive Keith McLoughlin said Monday. "It's a tough macro situation, there is still high unemployment there…and you have elections going on, so people are waiting and seeing."

Philips CEO Frans van Houten agreed. "There is more and more uncertainty with consumers caused by the fiscal cliff and the elections," he said, referring to spending programs and tax cuts that are set to expire at year-end.

"The first effects are already visible in the third-quarter results. The world has become a riskier place," he said.

Sweden's Electrolux, the world's second-largest maker of home appliances by revenue, after U.S.-based Whirlpool Corp., WHR -0.85% expects the U.S. appliance market to decrease by as much as 1% this year. Electrolux previously forecast growth of as much as 2%. Philips also said it expects the U.S. market to slow toward year-end.

That is despite signs of recovery in the U.S. housing market, which has a strong bearing on purchases of appliance such as air conditioners, washing machines and vacuum cleaners. U.S. housing starts rose 15% last month to the highest level in four years.

"We continue to see a positive, albeit gradual improvement in the U.S. housing market," said Electrolux's Mr. McLoughlin.

The European market remains challenging, with demand set to fall 2% this year as weakness in southern Europe spreads, he said. Mr. McLoughlin said Europe is likely to get worse before it gets better and confirmed plans to adjust Electrolux's manufacturing footprint in Europe.

The company is starting talks to end some production at its plant in Revin, France, and starting to reduce output in Sweden and Switzerland.

Netherlands-based Philips—whose products include medical scanners, lighting and consumer goods—said the slow European economy especially hit sales in its consumer and lighting businesses.....

http://online.wsj.com/article/SB10001424052970203406404578072921615065096.html