Digging Into The First Quarter Gold Demand Report

May 17, 2013

The World Gold Council has recently published its first quarter report on gold demand trends. Gold (GLD) is trading under $1450 once again. The report gives us a chance to see what's happening in the real world.

Here's the one single most important takeaway from the report: the overall gold demand was down 13% in the first quarter. The sole reason for this was the outflow from ETFs. Without this outflow, the demand growth would have been positive. Now, it's time to get into more detail.

Gold demand comes from jewelry and technology needs, as well as from investment and central bank purchases. Jewelry demand has grown 12% year-over-year. Countries responsible for the growth were China, India and the U.S. While China's most recent GDP numbers have disappointed investors, it's important to remember that the country is growing at high rates. More and more people in the world's most populated country can afford jewelry, so there is little surprise that China's demand for jewelry rose 20% year-over-year. India, the country which is obsessed with gold, showed a 27% year-over-year increase in demand. U.S. first quarter jewelry demand had its first year-over-year increase in more than seven years. Among the developed economies, U.S. is the sole leader. Europe's struggling economy has led to a 26% drop in jewelry demand. As of today, Europe is the pain point for almost every industry.

Technology demand has declined by 4%. This trend is led by diminishing demand in the dental industry. New materials substitute gold. This trend is likely to continue. Consumers in developed countries prefer the natural look of their teeth.

Investment demand is split into two camps - the ETF camp and the retail camp. While ETFs experienced outflows, bars and coins prospered. U.S. Mint had even run out of its smallest coins. The sales of gold coins have jumped to highest in three years. Retail investors were attracted by lower gold prices. As prices continue to stay low, this trend is likely to continue. What is more important - the ETF outflow or the retail inflow? I think that in the short term the ETF outflow is more important. We see its results - gold is down 17% year-to-date. One should not underestimate the importance of retail buying in the long term. The amount of gold in the world is fixed, so the more gold is bought, the less is left. It would be interesting to see the second quarter demand results. They would show if the surge in retail demand is just a buying rage or a long-term trend.

Central bank net purchases fell 5% year-over-year. What is more important, these net purchases are 272% higher than the 5-year average. Typically, central banks are the most informed players on the market and know what they are doing. This is certainly long-term bullish for gold.

Supply was 2% down in the first quarter of 2013 in comparison with the fourth quarter of 2012. It was flat in comparison with the first quarter of 2012. One should not count on the rise of supply in the near term. The prices are going down, and gold miners (GDX), whose stocks are getting hammered, are struggling to cut their costs. When some miners started to report all-in cash costs, it became obvious that these costs are high. For example, Barrick Gold (ABX) projected that its all-in costs would be in the range of $950 to $1050 per ounce. Goldcorp (GG) expects its all-in costs to range between $1000 and $1100. Some people argue that those costs are significantly higher. The more the gold price falls, the more gold mines become economically inefficient. The price of gold could become less than the cost of mining gold for the short term, but it would not stay low forever. Mines would have to be closed, the production would be cut and that would force prices to go up.

What does this data mean for the investor? It is clear that there is short-term pressure on gold. I expect more volatility to come. For a lot of players, gold would be the instrument for trading, not for investing. However, I believe that long-term fundamentals for gold are bullish, so investors who would like to build their long positions should start accumulating them now.

May 16, 2013

Can Obama Save Turkey From a Syrian Quagmire?


WASHINGTON — WHEN Turkey’s prime minister, Recep Tayyip Erdogan, met President Obama at the White House on Thursday, the most pressing topic was the war in Syria. Turkey has not faced a threat on this scale since Stalin demanded territory from the Turks in 1945.

In 2011, the Turkish government severed all diplomatic ties with the government of Bashar al-Assad and began to support the Syrian opposition groups seeking to oust him. But, thus far, this policy has failed, and it has exposed Turkey to growing risks, most recently two deadly bomb attacks in the Turkish border town of Reyhanli that were most likely planted by pro-Assad forces in retaliation for Turkish support of the Syrian rebels.

Turkey’s blessing over the past decade has been its reputation as a stable country in an otherwise unstable region. In November 2012, the global ratings agency Fitch rated Turkish bonds investment-grade for the first time since 1994. The country’s improved international reputation has alleviated a chronic economic problem: lack of capital. A steady infusion of foreign investment for over a decade has ushered in phenomenal growth, at some points exceeding 8 percent annually, and propelled Turkey into the Group of 20 industrialized nations.

Turkey has become a majority middle-class society for the first time in its history, helping Mr. Erdogan’s Justice and Development Party win three successive elections since 2002.

But the war in Syria threatens these gains, and Mr. Erdogan’s political future. Turkey will not be immune to the fallout from a Somalia-style failed state next door — or from a rump Assad regime seeking revenge against Turkey for supporting the rebels. Turkey grows because it attracts international investment; and Turkey attracts investment because it is deemed stable. A spillover of the mess in Syria risks ending the country’s economic miracle.

Turkey has a community of over 500,000 Arab Alawites, whose ethnic kin in Syria have, with few exceptions, supported the Assad regime against the Sunni-led rebels. This sectarian conflict threatens to seep across the border into Turkey, pitting Syrian rebel fighters and Sunni Turks against pro-Assad Alawites, especially in the country’s southernmost province, Hatay, where the Alawite community is concentrated. There is also a risk of chemical weapons’ being deployed and spreading toxic agents over Turkish territory; and the proximity of Qaeda fighters in Syria poses a serious threat to Turkey’s vaunted stability.

The Syrian war has also awakened Turkey’s once dormant Marxist militant groups. These groups vehemently oppose any government policies they see as serving American imperialist interests and have already launched a number of attacks, including one at the United States Embassy in Ankara on Feb. 2. Turkish media reports that these Marxist groups, in cooperation with elements of Mr. Assad’s regime, may have been behind the May 11 attack that killed 51 people in Reyhanli.

This is bad news for Mr. Erdogan’s bid to remake the Turkish political system with a strong French-style presidency. Mr. Erdogan has aligned all the domestic political stars to be elected president in 2014. He has even made peace with the Kurdistan Workers’ Party, or the P.K.K., a move that would have been an unthinkable taboo just a few years ago. By entering a peace process with the P.K.K.’s reviled leader, the imprisoned Abdullah Ocalan, Mr. Erdogan has effectively ensured the country’s domestic stability in the run-up to 2014 and secured himself at least some Kurdish support. Yet an economic downturn brought on by the war in Syria could upset his plans.

Mr. Erdogan is aware that unless he secures greater American assistance against the Assad regime, Turkey could become the big loser in Syria, and Mr. Erdogan the big loser at the ballot box if he can’t cobble together an absolute majority in 2014. This is also bad news for the United States, which sees Turkey as one of the few stable, strong pillars of Western values in the region.

Turkey’s government believes that unless the balance of power in Syria is tilted in favor of the rebels now, the Syrian conflict will turn into an interminable sectarian civil war that pulls Hatay Province, and with it the rest of Turkey, into turmoil.

Only Washington can change the equation. Following the May 16 summit meeting between Mr. Obama and Mr. Erdogan, two options seem to be on the table.

The infusion of American power, by arming the rebels or enforcing a no-fly zone, would change the military and regional dynamic and help unite the often squabbling “Friends of Syria” behind American leadership. Only direct American military engagement will rally the disparate parties that want to act against Mr. Assad into unified action.

The wars in Kuwait and Bosnia are cases in point in proving the value of American leadership. It would tilt the balance of power in favor of the rebels and provide diplomatic cover for Turkey as it faces the wrath of Iran and Russia. By presenting Moscow with a counter-incentive, threatening to act alone if Moscow does not use its influence to bring an end to the conflict, the United States could demonstrate that it is serious about engagement. This would also lighten the pressure on Turkey, which is hesitant to take further steps in Syria without at least tacit Russian consent. Russia is Turkey’s historic nemesis and the only country in the region with an economy and military larger than Turkey’s. The Turks fear the Russians and will not confront them alone.

If convincing the Russians proves impossible, Washington should consider creating a buffer zone in northern Syria along the Turkish border to protect rebel-captured areas. A buffer zone, protected by American airpower and an international coalition, would endow the rebels with a staging ground from which to launch operations against Mr. Assad and it would also help Turkey push the conflict back into Syria by transferring rebels and their headquarters into the buffer zones on Syrian territory rather than offering sanctuary to militants on Turkish soil. (There would most likely be regional support for such a policy, including from Jordan, which would also benefit from a buffer zone inside southern Syria.)

More decisive American engagement would simultaneously end doubts about the United States’ commitment to Syria and save Turkey from being pulled further into a conflict that threatens to squander its progress toward resolving the Kurdish conflict and undermine its impressive economic achievements.

Soner Cagaptay, the author of the forthcoming book “The Rise of Turkey: The 21st Century’s First Muslim Power,” is director of the Turkish Research Program at the Washington Institute for Near East Policy, where James F. Jeffrey, a former United States ambassador to Turkey and Iraq, is a distinguished visiting fellow.

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Open-Access Economics

Barry Eichengreen

17 May 2013

CANBERRA – The brouhaha over Carmen Reinhart’s and Kenneth Rogoff’s article “Growth in a Time of Debt” may be the most conspicuous and incendiary scholarly controversy since 1974, when two earlier economists, Robert Fogel and Stanley Engerman, published a notorious book, Time on the Cross, defending the efficiency of American plantation slavery.

As with Time on the Cross, the Reinhart/Rogoff controversy, while ostensibly stemming from the authors’ statistical procedures, is actually rooted in the purposes to which others put their study.

Some of the results reported by Fogel and Engerman were used – not by the authors themselves, it should be noted – to challenge affirmative action and question the civil-rights movement. Similarly, some of the results reported by Reinhart and Rogoff have been used by politicians and others to justify fiscal austerity.

When the problems with the Reinhart/Rogoff analysis came to light, the critics were aghast. The authors had inadvertently omitted data, used a questionable weighting scheme, and employed an erroneous observation on GDP growth.

This raised uncomfortable questions not only about the efficacy of austerity, but also about the reliability of economic analysis. How could a flawed study have appeared first in the prestigious working-paper series of the National Bureau of Economic Research (NBER) and then in a journal of the American Economic Association? And, if this was possible, why should policymakers and a discerning public vest any credibility in economic research?

It was possible because economists are not obliged to make their data and programs publicly available when publishing scientific research. It is said that NBER working papers are even more prestigious than publication in refereed journals. Yet the Bureau does not require scholars to post their data and programs to its Web site as a condition for working-paper publication.

Independent scholars seeking to replicate these studies’ findings must first replicate the data and then replicate the programs. And, as empirical economics has progressed, the difficulty of doing so has grown. Reinhart and Rogoff may have used a relatively small set of mostly publicly available data, but the profession as a whole is using ever-larger tailor-made data sets.

Big data promises big progress. But large data sets also make replication impossible without the author’s cooperation. And the incentive for authors to cooperate is, at best, mixed. It is therefore the responsibility of editorial boards and the directors of organizations like the NBER to make open access obligatory.

Moreover, in a discipline that regards ingenuity as the ultimate virtue, those who engage in the grunt work of data cleaning and replication receive few rewards. Nobel prizes are not awarded for constructing new historical estimates of GDP that allow policy analysis to be extended back in time.

Then there is the fact that correlation is not causation. In the case of Reinhart and Rogoff, the observation that highly indebted countries grow more slowly, even if true, does not tell us anything about whether high debt causes slow growth or vice versa.

These are difficult questions, but they have simple solutions. What is needed is not more sophisticated statistical methods, but serious historical analysis of the political and economic particulars of specific historical cases in which countries were burdened with heavy debts. A proper historical analysis would help to identify cases in which debt was incurred for reasons other than the state of the economy, so that causality arguably runs from debt to growth, rather than the other way around.

Economic historians have shown how this can be done. My Berkeley colleagues David and Christina Romer, for example, faced an analogous problem when seeking to determine whether monetary-policy shocks affect economic growth. They used careful historical analysis to identify and focus on cases in which the policy stance changed for reasons not having to do with the current state of the economy. Doing so allowed them to isolate the impact of monetary shocks on growth.

Statistics are helpful. But in economics, as in other lines of social inquiry, they are no substitute for proper historical analysis.

In impugning the authors’ motives and criticizing the uses to which others have put their research, critics of Reinhart and Rogoff have taken their eye off the ball. The real problem is scholarly procedures and priorities, not motives. If the problem of procedures and priorities is addressed, the fact that politicians are tempted to misuse scholarly analysis for their own ends will take care of itself.

In other words, what is true of the economy is equally true of economic analysis. A crisis is a terrible thing to waste.

Barry Eichengreen is Professor of Economics and Political Science at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund. His most recent book is Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System.