Gold Bugs Hope They’ve Put The Weakest Quarter Of The Year Behind Them As Prices Rocket In Many Local Currencies

Gold closed the third quarter down 4.8 per cent at $1,115 an ounce. The summer months are the traditional doldrums for the gold market. But it could have been much worse with the early August low of $1,080. Gold bugs hope that was the bottom of the recent correction and from here the only way is up.

However, good US jobs data threw another spanner in the works yesterday. Any hint that the Fed might raise interest rates seems to spook gold buyer, though many are now asking why the Fed has not already raised rates if it was going to do so. More weak Chinese PMI figures today surely gave a tip back in the other direction.

Global devaluations

The Chinese devaluation on August 11th caused a panic flight into gold which touched $1,155 last month before sliding again. Gold is priced in US dollars so its value in yuan went up when the currency fell.

Perhaps some of China’s 1.3 billion citizens noticed this advance and will now be keen to hedge against further devaluation of the yuan in the future. Some experts think China requires a minimum of a 20 per cent devaluation to make a meaningful difference to its trade balances, and that’s a 14 per cent hiked for gold prices in yuan to still come for gold holders.

Those who argue that investing in gold does not make any sense are clearly not from China, or India for that matter whose slashing of interest rates this week is bad for the rupee and good for rupee gold prices. That’s around a third of the world’s population benefiting from higher gold prices due to devaluation.

Of course, the two most populous nations are not alone. The dollar’s appreciation is causing gold prices to soar in local currencies in places as far flung as Australia, Brazil, Nigeria, Turkey, Indonesia, Malaysia, Vietnam and Russia.

Small wonder then that China and Russia are buying a lot of gold at the moment. China announced last night that the People’s Bank of China added another 16.2 tons to its official registered reserves of gold in August, bringing the total to 1,694 tons. Russia bought even more last month, adding 31 tons.

Inflation hedge

If you want to know why demand for gold is still rising in these countries then understand that the gold price in local currencies is on a tear, and that is what matters to local investors and consumers as well as their central banks. For them at least gold is a hedge against the inflation that we are told to believe does not exist in the world today.

For what does devaluation do to any dollar imports? It inflates their value. And we are not talking about small economies, are we?

Anybody who says gold has lost its value as a safe haven is probably living in the United States. Even for euro and sterling areas gold is performing very defensively against falling currencies. And one day it will be a hedge against a falling dollar. What goes up will always come down.

http://www.arabianmoney.net/