As The Crisis Deepens, Gold Flows East – Part 2 (of 3)

Gold is remaining steady ahead of the key U.S. Fed policy meeting later today.  Mixed economic data from the U.S. has left no clues as to when the Fed will taper its stimulus program. Gold bullion prices reached a five week high of $1,347.69/oz last week.

Support & Resistance Chart, 5 Year – (GoldCore)

In yesterday’s Market Update we began this 3 part series with a look at the global ‘power play’ currently in full swing where Organisation for Economic and Co-operation and Development (OECD) members are working assiduously to reduce their dependency on fossil fuels. The growth rates achieved by China and its rapidly industrializing neighbours has in part been made possible by the efficiencies achieved by OECD members. There is no doubt about that and as Sanders quite rightly points out, ‘The first major player to successfully make the switch to renewables will be the technology provider of choice to everyone else.’

Against this backdrop gold is emerging as a key component of China’s future economic plans. There is no official figure from the Chinese authorities that gives an exact statement of how much gold they hold but as we wrote back in February, ‘China’s gold imports from Hong Kong doubled to a new record in 2012.’ What is notable about this statistic is that the doubling in demand in 2012 is solely private demand and does not take into account official Chinese Central Bank purchases.

Chinese citizens were banned from owning gold bullion by Chairman Mao in 1950 and this prohibition continued until 2003. The current demand is coming off a very small base? and with a population of over 1.3 billion, the Hong Kong import figures may well be breached again in 2013.

Heading into today’s second Insight installment from As The Crisis Deepens, Gold Flows East’ the headline signifies that the stakes are high. In the shadow of this game, gold looks like a solid investment.

In A Zero Sum Game, Someone Has To Be The Loser
What is at stake is illustrated by the difference in oil consumption between Asia and the West. The former, exemplified by China and India, is still increasing its consumption growth. The latter, basically the OECD, has been using less oil each year since the crisis began in 2008. This is unsustainable. The OECD’s deepening recession is evidenced by its falling oil use while the fragility of the export dependent and imported energy dependent East’s growth prospects suggests that its real growth rate is about to peak or already has.

Energy & Metals: 2 Day Price Average – (Bloomberg)

Complicating matters is the zero interest rate policy and quantitative easing now being pursued across the OECD.

This has further exacerbated a forty year growth of income and wealth disparities that is displaying its tangible face in huge unemployment and underemployment rates and widening hunger as the unemployed fall out of the social safety nets that we have become accustomed to depending on to alleviate the human cost of recession.

These in any event are being reeled in everywhere even while taxes and user fees multiply and rise. The reality of ZIRP and QE is that they are starving the real business of investment incentives and destroying the consumption base on both of which growth depends.

This is a subsidy of the core of the money system, the largest international financial institutions. Subsidy it may be, but it is proving an effective if cruel way of reducing oil consumption. It has also preserved for the time being the capital structure of the industrial world by inflating the nominal value of the world equity and bond markets.

In the U.S., at least, this has received considerable help via stock buy backs. Nothing could illustrate the real outlook better when you think about it: if business prospects are so good why are so many corporations returning cash to their shareholders via buy backs, while an overwhelming proportion of insider trades are sales?

Unfortunately, business prospects are not good at all.

They couldn’t be when you consider that the marginal sources of petroleum and petroleum substitutes have very low net energy yields relative to conventional oil (or for that matter to conventional gas). At the margin, as I and many others have pointed out in the past, this means that the marginal unit of energy consumed in the process of powering economic activity is costing society at large exponentially more energy to produce that marginal energy for consumption. This is at odds with continued growth in the world population as well as with trends in finance.

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