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Wednesday, June 13, 2007

The Outlook for Gold

India's rising imports promise 'good year' for gold

MUMBAI (Reuters) - India's rising gold imports promise a "good year" after volatility and all-time highs damped buying enthusiasm last year, a senior official of a trade body said on Wednesday.

India imported 211 tonnes of gold in January-March, a 50 percent jump over the same period last year, data from WGC showed. In 2006, gold imports were at 715.5 tonnes, down less than a percent over the previous year.

XX Well, that's good news. Now, let's look at a chart of gold ...
The rise in interest rates has hammered gold and gold mining shares, for a couple of reasons. One, investors can get higher returns in bonds, so many say, "why risk stocks?" I think their returns will be eaten up by inflation, but that's one man's opinion.

Another reason is that rising interest rates crimps the supply of cheap money for these growing stocks. Investors are pricing that in. They're also pricing in more risk in the market. Small-cap miners are more risky, so some investors are reducing their holdings in those stocks and rotating money to other stocks.

However, there was news today that could be interpreted as bullish for bonds (which, in turn, would mean lower interest rates). Imported goods prices were a mixed bag. While commodity prices were up, consumer goods prices were flat. If the Fed watches consumer prices as its inflation gauge, as it says it does, this is not as inflationary as many feared.

I should add that we're of mixed opinions on this at Weiss. Mike Larson, our interest rate guru, thinks the import data is still inflationary. Maybe he's right. But bonds bounced on the news, and gold bounced off its lows. As for mining stocks -- they're still in the sick ward. We may need to see more good news before they recover.

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