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Tuesday, June 5, 2012

Forget India, China Gobbling Up Gold

Even though financial writers have been pointing to weak gold consumption in India recently, the fact is, historically, it really hasn't played much part in the movement of the price of gold, other than the seasonal impact it annually makes on the price of the metal.

China, in my opinion, is a much different story, as the Chinese government encourages its people to buy physical gold, and the government itself has been buying it up at an ever-quickening pace.

A recent note from HSBC (NYSE: HBC) said the Chinese have boosted their gold coin acquisitions from 5 kg in March to 1,857 kg in April; a huge increase by any measure.

I don't think India is weighing on anyone's minds in reference to the price of gold, as everyone that understands what's going on is looking to which governments will implement another round of quantitative easing.

That, more than anything, will cause the price of gold to skyrocket.

Much of that is centered in the sovereign debt crisis in Europe, which continues to deteriorate, with no real answers to the problem but continuing to implement austerity measures until spending comes in line with reality.

Growing pressure on Germany's Chancellor Angela Merkel to basically underwrite the outrageous spending and out-of-control benefits thrown at many people in the European Union, via eurobonds, points to the euro zone no longer really being valid. It's a joke, and gold could benefit from that exponentially if stimulus again rears it's ugly head, which many in the region are proposing, moving away from the austerity demanded by Germany from other deadbeat countries.

Merckle says it's the lack of competitiveness in the region that is the problem, not throwing more money at criminally irresponsible governments who have made promises they in no way are able to keep.

That's why they want the eurobonds, as it would require the harder working and more productive nations to underwrite the socialist and fascist nations of Europe without those nations having to pay for their horrid decisions.

Merkel chastised the leaders in the region for using the billions in stimulus already spent on consumption, instead of dealing with the lack of competitiveness and implementing real reforms.

She said, “The freedom created by this situation wasn’t exploited to improve long-term competitiveness. Instead, the time was used to spend too much money in consumption and too little time in tackling reforms.”

With all of Europe embracing Keynesianism, even the UK and France are calling for more stimulus and the acceptance of eurobonds. It's an incredible time with the fallout sure to be extraordinary.

More stimulus would obviously be a continuation of the failed economic policies of the region, yet most nations continue to call for more. They better be careful, they may just get what they ask for.

Merkel's right. If there are no changes in attitude and practice, throwing more money at it won't do anything to change the economics, it'll only give a short-term boost which will then have to be paid for as the enormous debt of the nations continue to rise.

This is all about politics, and it'll be interesting to see how it plays out as more and more politicians come up for re-election in their respective countries.

For gold prices, it could, and probably will, shoot through the roof if more stimulus is not only put on the table, but implemented.

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