U.K./U.S. Data Shows Stagflation Threat Deepening, Asian Gold Demand Remains High

Includes: EGO, FCX, GG
by: GoldCore

Gold and silver have snapped their three day losing streak so far this morning and both are higher in all currencies. Sterling has fallen on this morning's very poor U.K. employment data. This in conjunction with yesterday's high inflation figure in the U.K. and negative data in the U.S. confirm the increasing threat of stagflation to western economies.

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Cross Currency Rates

U.K. unemployment claims rose in April at the fastest pace since January 2010, showing the very fragile nature of the recent tentative economic recovery. Government spending cuts, austerity measures and accelerating inflation are clearly beginning to impact embattled consumers.

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G10 and Precious Metal Returns – Year to Date

In the U.S., stagflation is also an increasing, if unacknowledged, threat as the classic symptoms of inflation - slow growth, high unemployment and inflation are present. Weak U.S. factory output and home building data yesterday suggests that the world's largest economy is slowing down again.

Official inflation figures in the U.S. remain benign but hedonic adjustments and many adjustments to the methodology of calculating inflation in the last 20 years mean that that the Consumer Price Index is no longer an accurate measure of real inflation in the economy.

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Total Known ETF Holdings of Gold

This macroeconomic risk coupled with continuing geopolitical risk is supportive of gold continuing to receive safe haven demand.

Geopolitical risk remains ever present as seen in Pakistan yesterday where two Pakistani troops were injured after exchanging fire with NATO helicopters that had entered Pakistan's airspace in the tribal region of North Waziristan. The conflict in Libya looks like it may soon escalate and tensions between Israel and the regimes in Syria and Iran remain high.

Asian Demand for Gold Remains High as Seen in Gold Bar Premiums

A clear sign of healthy appetite in China are the premiums being paid for gold bars in Shanghai and Hong Kong. Shanghai gold closed at a premium of $3.57 to world gold of $1,495.95. The premium increased from that seen Monday when it was $3.09 at $$1,497.45.

The premium on gold bars in Hong Kong increased 10 cents this week to between $1.30 and $1.80 per ounce over London spot prices.

Reuters reports that gold bars in Vietnam, where demand has been voracious in recent months due to a sharp depreciation in the Vietnamese dong, were trading at a $3.92 premium to world gold spot Monday.

India's banking system was closed yesterday and there are therefore no reported premiums but recent days have seen healthy premiums for gold around the $1,500/oz level in India.

The launch of the new Hong Kong Commodity Exchange will result in Asia having an even bigger say in prices of commodities and precious metals. The exchange is backed by China's biggest bank and a Russian tycoon and will challenge established markets and exchanges in Europe and the U.S.

Asians increasing power in financial markets and the fundamentals of robust and sustainable demand for gold and silver bullion throughout Asia will mean that speculative interests on Wall Street will find it harder to artificially suppress prices and the massive concentrated short positions on the COMEX may be forced to close their positions propelling bullion prices higher.

George Soros – Bullish or Bearish on Gold?

Despite his exit from ownership of the gold ETFs, Soros continues to have large allocations to gold investments through owning more high risk gold mining shares and a gold mining ETF.

Soros' fund added Eldorado Gold (NYSE:EGO), Freeport-McMoran Cooper & Gold (NYSE:FCX) and Goldcorp (NYSE:GG) to their investments during Q1 2011.

This would suggest that contrary to simplistic reporting Soros continues to remain positive on the gold sector.

It also suggests that as we have long pointed out, a hedge fund selling their gold ETF position does not necessarily mean they are bearish on gold. It can mean that they are concerned about the nature of the structure and intermediation involved in an exchange traded fund and prefer the security of actual physical bullion.

UBS pointed this yesterday. "Some of the ETF liquidation in the quarter was not actually outright gold selling," UBS's Tully said. "In some cases, investors switched their gold exposure from ETP-based to allocated, and so this somewhat distorts the ETP ownership picture."

In the first quarter, gold ETP holdings declined 3.3 percent (see chart above), the first decline in a year. Silver holdings rose 1.9 percent, palladium assets fell 1 percent, and platinum holdings gained 12 percent.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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