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Precious metals retest lows as Swiss vote on gold sends a false price signal as all Indian import restrictions suddenly end

 -- Published: Monday, 1 December 2014 | Print  | Disqus 

By Peter Cooper

Swiss voters yesterday resoundingly rejected a referendum to boost the role of gold in central bank reserves and ban exports. The price of gold headed back to $1,150 and silver fell below $15 an ounce. Traders said the rejection was expected and largely priced into the market.

The proposal stipulating the SNB raise the portion of its assets held in gold from eight per cent now was voted down by 77 per cent to 23 per cent. The initiative would have also prohibited the Swiss National Bank from ever selling any of its bullion and required the 30 per cent currently stored in Canada and the UK to be repatriated.

India votes for gold

Meanwhile, the world’s largest consumer of gold, India, has suddenly withdrawn all restrictions on the importing of gold, a major positive for precious metal prices almost entirely missed by most commentators as they focused on the Swiss referendum.

India’s 10 per cent import tax on gold and other restrictions was one of the major reasons for the post-2011 price collapse and this has now gone. Demand for gold will surge with prices at current levels. India is a far more important player in the gold market than Switzerland.

Polls forecast the initiative’s rejection after a strong campaign from the SNB. The referendum’s proponents perhaps overstated their case and made it easy for the ‘no’ campaign to ridicule them.

Inflation hedge

With lower oil prices reducing costs for consumers and the US considering raising interest rates, demand is fading for hedges against inflation such as gold, although whether this path to economic recovery is sustainable is doubtful. Usually a period of high inflation to detroy debt – and global debts have never been piled higher – is required before interest rates can be raised and a recession endured.

The US National Retail Federation just reported awful sales for the four-day Thanksgiving holiday, down by a whopping 11 per cent from $57.4 billion last year to $50.9 billion. Where’s the recovery in retail spending?

Renewed money printing is now a reality in Japan and perhaps soon the eurozone as the global economy stutters back into recession. How long before the same thing happens in the US and precious metal prices shine again? About as long as it took for oil to crash from a summer high of $115 to $66?

Money printing

Falling oil prices reflect falling global demand for energy due to a worldwide recession. Reason enough to crank up the printing presses again when the central banks finally get the message. Deflation is a bigger threat to the world economy than inflation, and inflation is absolutely necessary to reduce global debt burdens in real terms.

Gold has lost 19 per cent since peaking in March and investor holdings of exchange-traded products are near a five-year low. The immediate outlook for the precious metals does not look great though they continue to form a meaningful bottom on the charts. Central bank buying of 500-600 tonnes a year and considerable uncertainty over the economic outlook continue to support prices at these levels.

The Swiss vote at the weekend flagged gold’s importance to investors but unfortunately sent a false signal on where prices are going next. Ask Incredible India…


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