Analysis - Mumbai attacks may give India a reason to buy gold

By Ruchira Singh

MUMBAI (Reuters) - A series of deadly attacks in the financial hub of Mumbai, coupled with lower world prices, might give Indian consumers a reason to buy gold as they worry that the hit to investor sentiment will keep equities and currencies subdued.

But the rise in demand may not be enough to lift the world price of gold -- now a fifth below a record high of $1,030.80 struck in March -- as a credit crisis and weak demand for commodities keep most investors away.

Traders added that any pick up in demand is unlikely to happen for a couple of weeks until the market stabilises.

"If people buy, they will probably buy physical gold rather than anything else like futures," said Ajay Mitra, India head of the World Gold Council.

Mumbai is one of the largest gold hubs, estimated to be trading around half of the 700-800 tonnes of the precious metal imported each year into India, the world's largest gold consumer. It houses around 400 jewellers and 1,000 traders and wholesalers, according to data from analyst Bhargav Vaidya.

It is also the main financial centre in India, and initial investor reaction to the attack suggested that India's traditionally resilient markets would take a bigger hit than from previous episodes in the city's violent history.

While the spot market in the city's Zaveri Bazar and the futures markets remained shut, banks reported minimal business as consumers stayed indoors following the attacks by suspected Islamist gunmen on a railway station, a popular restaurant and plush hotels, where they held hostages.

"We are open for business today, but as of now, no one is buying gold," said a dealer in a bank. Banks are the primary importers and sellers of gold in India.

The attacks, which have forced the closure of the country's stock and commodity exchanges, come ahead of the marriage season in India when demand for gold jewellery surges.

Industry officials said any big impact on prices would depend of whether the crisis drags on for more than a few days.

"Until we know more about who's involved, what their aims and ambitions are, it may well be considered to be an isolated incident," said Darren Heathcote of Investec Australia in Sydney, referring to the attacks in India.

"Therefore, it's less likely to affect the rest of the world, and therefore, the gold price," said Heathcote, adding that gold was likely to stay in the current range of $770 to $825.

CAUTIOUS TRADING

India, the world's largest gold consumer, has suffered a wave of bomb attacks in recent years. Most have been blamed on Islamist militants, although police have also arrested suspected Hindu extremists thought to be behind some of the attacks.

"It will take at least two weeks for normalcy to come back. It takes time for confidence of the consumers to return," said Haresh Kewalramani, a director at the Bombay Bullion Association.

"Even shopkeepers would be scared to open for business," Kewalramani said. Gold buyers were hard to find.

Industry officials said any slowdown in business in the next couple of weeks would be temporary and demand would pick up at a faster rate to offset any drop in purchases.

"If you look at the events, it is not targetted at the mass public, but at foreigners. So, from that perspective, it will have a limited impact on the Indian consumers," he added.

In 2007 India imported 769.2 tonnes of gold, of which 28 percent went for investment, according to the World Gold Council. The investment segment has been growing faster than jewellery as more and more Indians have been buying bars and coins.

Dealers and traders said investment buying may rise a bit but they would wait for prices to soften.

"The attacks won't make a difference as prices are too high. People have already bought at lower prices earlier," said Suresh Hundia, president of the Bombay Bullion Association.

Gold, which was often bought by investors in times of uncertainty, has staged a dramatic rebound since tumbling to a 13-month low of $680.80 in October.

Kewalramani said recent falls in the stock market and the general tightness of liquidity had moved most investors away even from gold, but some large investors would continue to eye prices.

"I don't see any panic buying or selling that is because prices don't move to local conditions," Vaidya said. "Besides most people already have the basic gold they need for their jewellery."

Gold edged up on Thursday after the euro bounced against the U.S. dollar. It was trading at $814.55 an ounce, up $2.80 an ounce from New York's notional close on Wednesday.

(Additional reporting by Biman Mukherji in NEW DELHI and Lewa Pardomuan in SINGAPORE)

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Obama's difficulties will be good for gold

Things are going to be tough for President Obama

Gold and silver both surged some 4% from oversold levels on US election day 2008 as the dollar weakened and oil surged. We said some weeks ago that the recent sell off in precious metals was likely to end around election day, and we believe that this has indeed happened and that gold will resume its secular bull market in the coming weeks. Important elections often see markets reverse course, and this is one of the most momentous election victories in US history.

There is a growing realisation that the 44th president will be confronted with a challenge akin to the monumental challenge facing Franklin D Roosevelt in November 1932, in the early days of the Great Depression.

Barack Obama's election also has historical parallels with the mid 1970s and the election of Jimmy Carter in 1976. Back then, America and much of the Western world was confronted with deep stagflation. The world was facing an oil crisis; Nixon had ended the convertibility of gold into dollars and backing of dollars by gold in the international marketplace in 1971. Deepening stagflation saw gold surge from $35/oz to over $200/oz in 1974. Then gold fell sharply by some 50% - from $200/oz to $100/oz in 1976. This should put gold's recent price fall into perspective.

After Carter's election, gold resumed its bull market and surged from $100/oz in 1976 to over $850/oz in January 1980. It is not outlandish to foresee similar price increases in the coming years, and gold's inflation adjusted high of some $2,400/oz looks a very comfortable price target.

With President Obama's promise of a new 'New Deal', gold is again set to confound the critics and show itself as an essential component in a properly diversified portfolio. No matter who was elected president, in the medium to long term the dollar is likely to come under increasing pressure because of the US's deteriorating fiscal position. This should see gold remain in a bull market.

Ex Goldman Sachs CEO, Treasury Secretary Hank Paulson, and the Republican leadership may have been glad to see the dollar rally and oil fall sharply in recent months. That is what came to pass, greatly aided by the credit and solvency crisis and gigantic deleveraging of the global financial system. However, with the elections over, these likely countertrends may be reversed and the primary trends of a fall in the value of the dollar and a rise in the value of gold are likely to reassert themselves in the coming months

President Bush and his administration spent money like drunken sailors and their guns-and-butter economic policies (more guns than butter) have left Obama with a poisoned chalice.

Goldman Sachs predicts that next year the US Treasury will issue an incredible $US2 trillion in debt, or twice last year's record total. These are figures are more akin to those of a Latin American banana republic.

The policies of enormous tax cuts for the already extremely wealthy - and favouring corporate, financial and Wall Street interests at the expense of Main Street and the majority of Americans - has left Main Street America on its knees and the great hope is that President Obama will help alleviate the suffering of those Americans who are now losing their jobs and/or their homes.

President Obama must be careful that his fiscal stimulus and efforts to reflate the rapidly deflating economy do not result in deepening inflation and stagflation. This would then call for a Paul Volker style Federal Reserve chairman who would hawkishly increase interest rates in order to tame inflation and encourage Americans to forego consumption and rebuild a culture of prudent saving which will be necessary if America wishes to regain its economic health again.

Interestingly, the highly respected Volker (who is rightly increasingly seen as the best Federal Reserve chairman in recent history as Greenspan and Bernanke's reputations become tarnished) is likely to be one of Obama's 'wise men' who will advise him on economic matters.

Physical demand for bullion remains very robust. There may also be a realisation that gold bullion's intrinsic value is something to be sought after in a world of volatile paper assets where politicians and central bankers have adopted the 'inflate or die' fiscal and monetary policy option.

Central bankers and politicians look set to try and inflate their way out of the recent deflationary spiral. It is worth noting that gold outperforms other asset classes not just in periods of inflation or stagflation. Gold also outperforms in deflationary depressions, as it did in the 1930s when Roosevelt sharply devalued the dollar (which was backed by gold, unlike today in our modern floating fiat currency monetary system) from $22/oz to $35/oz. Thus, overnight in January 1934, gold was revalued by 59%.

It is worth remembering that the Dow Jones fell by 90% during the period and property prices fell by more than 50%.

After a brief hiatus of deflation due to massive deleveraging, we are likely to get a sharp bout of stagflation in the coming months. If not tended to carefully, quantitive easing and the injection of trillions of dollars, pounds, euros and other fiat currencies could lead to a more serious hyperinflation.

Investors and savers should be aware of the big-picture historical trends and prepare, invest and save accordingly.

• This article was written by Mark O'Byrne, executive director of Gold and Silver Investments Limited.

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World Gold Production Expected to Hit 11-Year Low

By Gold World Staff

It's either feast or famine.

A long and and painful five-month correction in gold prices has raised doubts over the continuation of the current gold bull market. However, a significant increase to prices over the last few weeks has gold investors looking perky again.

Gold has climbed over $100 (14%) since the beginning of November, signaling that prices may have already bottomed out and the gold bull market is far from over. And with world gold production in decline while demand is rising, we could start to see major leaps in prices.

World Gold Production and Demand

Last week we looked at world gold demand statistics. If you recall, we mentioned that world gold demand totaled 1,133.4 tonnes during the third-quarter, an increase of 170.1 tonnes (18%) from levels of a year earlier.

In dollar terms, this represented a 51% rise to $31.8 billion, an all-time record high and 45% leap from the previous record set during the second-quarter.

Gold demand—especially investment demand—is stronger than ever right now. However, world gold production is expected to hit an 11-year low. This suggests the supply and demand fundamentals may start to play a larger role in elevating gold prices.

World Gold Production Expected to Hit 11-Year Low

World gold production peaked in 2001 at 84.3 million troy ounces. Since that time global gold production has slipped significantly

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We're heading for a rally – here's what to buy now

By Dominic Frisby

We all know what is causing the huge falls across virtually every asset class. It’s the global margin call, deleveraging on an unprecedented scale, forced selling of everything – call it what you will. Assets – the more liquid the better – are being sold off wholesale, regardless of their fundamentals, to raise cash to repay debt.

But at some point this deleveraging has to end. What we all want to know is – when? And what will be the best performing asset class when it does?

Recent price action may be giving us some clues. Let's take a look at some charts and see what they tell us. Things, finally, are looking up for gold stocks…

Gold stocks will be the first to rise from this disaster

At the World Money Show two weeks ago, I was asked what I thought would be the best performing asset class coming out of all this. Straight away, I said, gold stocks. Just as they were coming out of the dot com crash, I think gold stocks will be the first to rise from the ashes of this financial disaster.

This first chart shows the ratio of the major gold producers (XAU) against gold (the ratio is the blue line in the bottom half of the chart). As you can see, it is at an extreme level not seen in the last twenty years. Just a reversion to the mean will see a significant outperformance by the stocks over the metal itself.

The HUI is an index of the gold producers who have not sold their production forward (in other words, they are exposed to changes in the gold spot price). The gold to HUI ratio (again, the blue line) is almost at the levels seen in 2001 at the beginning of that bull market in gold stocks.



Even without a significant rise in the price of gold, miners will be making more money. Their costs are coming down. Energy costs are falling. Many base metals mines are closing down. This will lead to an oversupply of labour and equipment and a subsequent fall in the price of both.

The gold stocks followed the stock markets down. We had a major capitulation in October, followed by a bounce and then a retest of the lows. What is interesting is that the October low in gold stocks held on the retest. In fact they made a higher low (see chart below).

This is a bullish set-up. The chart action suggests there are fewer sellers and more buyers at the lows. And looking at a slightly longer-term chart of the HUI, we can see an almost perfect double or W bottom (below).

However, if we look at other commodities, we see that the October low did not hold and in November we made a lower low (below). This suggests there are still more sellers and fewer buyers. It does not indicate a strong market.

Oil, too, made a much lower low. Oil has a tendency to exaggerate to the upside and the downside during a boom and a bust, but the considerably lower November low does not show the same strength displayed by the gold stocks.



The same goes for the stock markets, as shown below by the S&P. The October lows did not hold.



However, if we look at a longer term chart (below), we see this is an obvious place from which to stage a rally. The post-dotcom crash 2002 lows have held. For now.

I think a bounce into the spring in virtually every class is on the cards, with a corresponding decline in the dollar. But I'm hoping gold stocks will be the outstanding performer until spring and beyond. The easiest way to play this is with the US-listed exchange-traded fund, Market Vectors Gold Miners (GDX), which more or less tracks the HUI.

A number of you have asked me for more specific junior gold mining tips, so I'll try to provide some in the coming weeks. But, please, do not trade on margin (using borrowed money) and only drip money into the markets. Swings are so violent even on a daily basis, you can be wiped out even before you've had a chance to re-assess your position.

What happened to gold stocks after 1929?

We have just had a stock market crash of 1929 proportions. There are so many parallels between then and now, that it’s not unreasonable to use that period as a model. Homestake was the biggest gold miner back then. As you can see below, despite falling at first with the overall markets, like the HUI now, it was the first sector to show strength, and went on to perform extremely well during the 1930s, up some 700% and paying a hefty dividend along the way.

Roosevelt made it illegal for Americans to own gold in 1933. He confiscated citizens' gold in exchange for dollars, then devalued the dollar. It must have been one of history's greatest thefts. But it was still possible for citizens to own Homestake – and look how the price gapped up in 1933 as the American government stole from its people.

I doubt with the HUI we will see quite the same scale of success, but measured in badly flawed sterling it may well do. It’s nice to have something positive to look forward to after all this time.

Good news for those who bought gold with sterling

Talking of sterling, another positive note can be sung by those of you who bought gold with it. Last week gold in sterling broke out to new highs (see below). It's up about 25% on the year. You have messrs Brown and Darling to thank for that.

This financial mess was brought on by loose monetary policy, loose lending and easy credit. That the Government is proposing to solve the mess by borrowing more at just a time when we should be saving is, I think, despicable. It is placing an unreasonable and heavy burden on the future and we will all pay dearly for it – as though we haven't enough already - with more inflation and possibly the collapse of our currency. Buying gold – particularly for sterling investors – just looks better and better every day.

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