The survey reported that “global growth expectations continued to drop, with a net 15% of fund managers expecting the global economy to strengthen over the next 12 months. This is down from its recent peak in March 2012, but is still well above levels associated with recession.” The chart above, which I edited, shows that majority of the time economic slowdowns or recessions intensify with below net 50% of managers expecting weak growth ahead. Currently we aren’t even close to those readings yet, but since this is not an normal economic cycle based on strong fundamental growth (like 03 – 07), an external surprise shock out of Eurozone could easily derail growth in an instant.

The survey also reported that, against trend seen in global expectations, net percentage of managers thinking that the Chinese growth will improve rose to an 18-month high reading of above 10%. Major Chinese growth recoveries occur when we see close to net 50% of managers expecting the growth to improve and unfortunately we aren’t even close yet.

Moving forward, interestingly the sharp drop in growth expectations also showed a sharp drop in inflation expectations too. The report went onto say that “a net 2% expect inflation to rise in 12 months, down from 21% last month. This paves the way for policy easing.” Merrill Lynch went onto to summarise the growth outlook by stating the following:

“After peaking in March, global growth expectations are down for a second month and only 9% see above-trend growth over the next 12 months. But no recession is forecast, and China growth optimism rose to an 18-month high. Inflation expectations dropped sharply and hopes of policy easing continue to rise modestly: 56% now expect Fed QE3 and 65% expect further QE by the ECB.”

Fund managers continued to raise cash in May. Managers weightings towards cash allocations jumped higher this month towards a net 28% overweight, which is up from a net 24% overweight last month. We are now once again reach close to one standard deviation highs, which means fund managers remain fearful.Average cash balances remained the same to previous month at 4.7%. From a  contrarian point of view, reading above 5.0% should be considered as a major buy signal. In 2008 the cash balance reading peaked at 5.5% in December. In 2011 the cash balance reading peaked at 5.2% in August. Both proved to be close to a major bottom in all risk assets, including equities.

While the chart doesn’t show exposure to global equities, the survey went onto show that is has modestly been reduced. Merrill Lynch stated that “equity allocations declined to a net 16% overweight from 26% overweight last month as investors took risk off the table. The current allocation to equities falls roughly in the middle of the range relative to history.” So in other words, equity managers are not yet in panic mode, but do keep in mind that the survey was done between 4th and 10th of May, which means as selling intensified, managers could have cut their weightings further.

The survey shows that overall risk appetite among fund managers continues to decline for the second month in the row. A net % of fund managers taking higher than normal risk dropped to -35%, down from -21% last month. In the chart above, readings at -40% or below tend to signal extreme readings. Investor perceptions of liquidity conditions are also declining, with a net 23% of managers viewing current conditions as positive, down from 36% of managers last month.

Merrill Lynch survey also showed that cash is not the only popular safe haven investment right now. Bond allocations also rose in May, as risk appetite waned. A net 33% of fund managers are now underweight bonds, which is down from a net 48% of fund managers only a month ago. Despite a powerful rally in the Bond market, majority of fund managers still seem to be only modestly exposed to this asset class, even with ongoing Eurozone worries.

Currency Markets
Nothing new to report.

The survey also showed that fund managers reduced their allocation to commodities this month as well. A net 2% of fund managers are now underweight commodities sector, as opposed to net 8% overweight in April. Commodity prices suffered further declines after the survey was concluded, so it is also very possible that fund managers reduced their commodity weightings even further as well.

Relative to the survey’s history, which spans for over a decade, global fund managers are very underweight the Materials Sector, with mining companies being out of favour. The survey went onto report that “the current allocation to resources is low at net 10% of fund managers being underweight this sector.” This signal is now very similar to last months, but has yet to produce a buy signal. Also to point out is that majority of mining companies drifted lower since the survey was down, so there is a chance managers have reduced weightings here even further.

Nothing new to report.

• I still own S&P 500 Calls from earlier in the week, so I will not be doing anything in the Equity market for now.
• I also still own SLV Calls from last week, so I will not be doing anything in the PMs market for now either.
• I am still looking at Agricultural commodities, with RJA being my favourite way to own this sector. I haven’t done anything yet.
• My further action depends on Western central bank further actions. Weak action will make me reduce my core holdings and close out Calls.
• Other assets on my watch list are Australian Dollar, Russian / Brazilian equity ETFs and Gold Mining stocks.

The Short Side of Long Blog

Below we take a brief look at Turkey’s relationship with gold, and ask why does it now seem to be a focus of the international community’s concerns?

Disobeying the UN

In January it was reported that Turkey were preparing to bypass UN sanctions by trading with Iran for oil in exchange for gold.

This was confirmed when, in early May, the Turkish Statistical Institute reported that gold sales to Iran, from Turkey, soared over 30 times in March. Data shows gold exports between the two countries increased by nine metric tonnes; a significant amount considering the previous year this amount sat at just 286kg.

The Turkish government has assured the US that they will reduce oil imports from the Islamic Republic this year, however total trade increased by 47% in the first quarter of 2012 between the two countries. It is not surprising Iran has become one of Turkey’s biggest trading partners; the country benefited heavily from the Iran-Iraq war in 1980-1988, becoming a trading partner to both parties.

It is this recent surge in trade with Iran which analysts believe accounts for the tripling in demand by Iran for Turkey’s precious metals, mainly gold.  The longer the Islamic Republic remains isolated, the greater the trade in Turkish gold, and the longer high prices in the local market are maintained. Reuters report that the fall in the rial’s value against the dollar has caused an increase gold investment for savings purposes.

Gold demand starts at home

However, the gold market is not just an export-opportunity for Turkey. The World Gold Council reports a change in the demand pattern within the country.

The graph below shows the gradual switch between demand for gold jewellery and gold for investment purposes (coins and bars).

Between 2010 and 2011, an 80% increase (year-on-year) was seen in retail investment demand for gold coins and bars. The WGC expects this rise to continue ‘despite recent gold price performance’; the gold price increased by 216% when priced in Turkish Lira between May 2007 and April 2012. It is interesting to note that as the gold price has increased, the demand for jewellery has decreased, yet gold investment demand has grown. The WGC report; ‘In 2011, for the first time, gold investment accounted for the lion’s share of the country’s total consumer demand.’

Gold is Turkey’s safe-haven

We suspect this increasing demand will continue to exhibit itself thanks to growing concerns in regard to the international economic arena, but also Turkish citizens’ concern for their own economic situation.

Gold is the traditional form of saving in a country whose current account deficit is slowly getting out of control. The WGC estimates there to be approximately 5,000 tonnes of accumulated gold in homes across the country. This is greater than Germany’s Bundesbank which (reportedly) has only 3,400 tonnes. Compared to Turkey’s own central bank, the Turkish citizens have over 3,800 tonnes more.

According to the recent WGC report, Turkey has the 8^th largest retail demand for investment gold. This year they have invested in 72.9 tonnes of gold bullion. Per capita, the country has 21.9g of gold consumption intensity.

Prior to 1993, the Turkish gold market was not fully liberalised. However since then the World Gold Council report to have seen ‘rapid growth of the sector’. It seems that the Turkish government are actively persuading individuals to invest in gold, but this may have an ulterior motive.

Turkish economic history

For a country whose average inflation rate between 1965 and 2010 was 39.78% and experienced triple digit inflation in May 1980, it is not surprising that individuals have chosen to buy gold bullion, the most secure store of value.

The modern economic history of Turkey does not make comfortable reading. Since 1950, the country has experienced at least one economic crisis per decade.

In a similar series of events to that seen recently in Britain, between the 1970s and 1990s the country saw a series of rapid expansion plans, military operations and significant balance of payments deficits. Turkey ran serious current account deficits, usually financed by foreign loans. Their external debt rose to more than a quarter of GDP, a significantly lower number than that shouldered by both the US and UK at present.

We want your gold

Recently the Turkish government have gained some attention thanks to their plans to draw ‘under the pillow’ savings into the economy.

This has raised warnings of the danger of keeping your gold in the banking system. As Zero Hedge wrote back in March, in light of the Wall Street Journal report, ‘How will Turkey spin gold confiscation in the politest of ways?’ In reference to Executive Order 6102, whereby President Roosevelt signed an order which forbid the hoarding of gold within the United States.

The Turkish government now allow gold, in any form, be it coins, bars or bangles, to be used as collateral. Meanwhile the central bank has increased the allowance of gold that could qualify as reserves by commercial banks to 20%. This is purportedly in order to improve the liquidity of the Turkish banking system.

It is estimated that Turkish banks are holding $2.8bn worth of gold-related deposit accounts and $1bn worth of gold-related investment funds. The heavy promotion of gold-linked savings accounts by the Turkish government has now seen gold become the top investment option, after real estate and property, for private investment.

The current-account deficit, which we alluded to earlier, is the assumed reason for the Turkish government’s offerings of incentives in order to encourage the deposits of privately held gold into the banking system.

Future of gold for Turkey

It is reported that there are approximately 23 million ounces of gold still to be mined in Turkey. This more than allows for future increases in private gold investment and any further gold payments to other countries such as Russia, India, China and Iran who have all showed their willingness to partake in the gold-for-goods trade.

The Turkish citizens continue to find their currency devalued against other currencies, such as the US dollar; in 2011 it lost 23% of its value against the US currency. It has been devalued against gold by an even greater number.

It is interesting to see yet another country, which does not seem to be dominating the headlines as much as its Western counterparts, in regard to the financial crisis, to be hoarding gold in response to the slow but continued unfolding of the financial crisis.

The new initiatives by both the government, central bank and commercial banks all indicate that the appreciation for gold as an insurance policy remains strong. The issue is whether or not the Western world has registered that a country, which has been through similar crises to that which they are going through at present, has shown that after several IMF loans and conditional international support the only thing anyone can trust is gold.

Want to invest in gold as an insurance? Invest in gold like a professional in minutes…

Please Note: Information published here is provided to aid your thinking and investment decisions, not lead them. You should independently decide the best place for your money, and any investment decision you make is done so at your own risk. Data included here within may already be out of date.

Jan Skoyles

Jan first became interested in precious metals and sound money when she met Ned Naylor-Leyland whilst working at Cheviot Asset Management in the summer of 2010. Jan then went on to write her undergraduate dissertation on the use of precious metals in the monetary system. After graduating from university Jan joined The Real Asset Co research desk and now contributes to the Cobden Centre, The Commentator, The Renegade Economist and Market Oracle.View all posts by Jan Skoyles →