9/2/2012: ECB rate decision

So we have ECB keeping rates at 1%... which relates to:

1) growth:

So with growth leading indicator stuck for the 4th month in a contraction territory, 1% repo rate is a bit too high, given we are now into the second leg of recession judging by leading indicators.

2) inflation:

So with inflation still anchored well ahead of 2% bound, that 1% repo rate is a bit too low for the ECB mandate, unless the ECB expects rapid de-acceleration of prices.

And in case you wonder, the pull on policy side comes from divergent growth/inflation dynamics:

And thus we have: ECB latest decision is inconsistent with either inflationary or growth signals. You might say that on average, that makes ECB policy balanced. Or you might want to say that this mismatch reflects monetary union internal inconsistency. Or both... take your pick.

8/2/2012: A more pleasant Sovereign arithmetic

And for a rather more pleasant sovereign arithmetic, here's an interesting table from the Global Macro Monitor (link here) summarizing yoy movements in 5 year CDS:

Frankly speaking, all of this suggest some severe overshooting in CDS and bonds markets on upward yield adjustments over time followed by repricing toward longer term equilibrium. What this doesn't tell us whether we have overshot equilibrium or not... Time will tell.

7/2/2012: An unpleasant risk arithmetic

Here's the guys Irish authorities trust so much on risk assessment, they contracted them to do banks stress tests - PCARs - back in 2010-2011. Note: this is a statement of fact, not an endorsement by me. The Blackrock folks produce quarterly report on sovereign risks and this the summary chart from the latest one - Q1 2012. Negative numbers refer to higher risks:

So Greece leads, Portugal follows, Egypt and Venezuela are in 3rd and 4th place worldwide of the riskiest nations league and then, in the fifth place is Ireland, followed by Italy. And here's the summary of the euro area ratings:

Yes, bond yields have been improving significantly, including due to both fundamentals and banks liquidity steroids, which is a good news. The bad news, yields have been declining for other countries as well and investors' relative sentiment is not improving as much as the absolute levels of yields declines suggest.

Today, one of the Irish Stuffbrokerages claimed in a note that: "The country’s success in meeting its targets under an EU/IMF bailout without social or political unrest and its export-focused economy has enabled it to dodge the recent Eurozone downgrades by S&P and Fitch and distance itself from fellow bailout recipients Greece and Portugal. " Distancing we might be, but the neighborhood we are lumped into is not changing as the result of this distancing. At least not for now.

Please note, the assessments above are consistent with CMA analysis based on CDS spreads, covered here.

6/2/2012: Fiscal Compact Treaty - Sunday Times 05/02/2012

This is an unedited version of my Sunday Times article from February 5, 2012.

In medical analogy terms, this week’s Fiscal Pact signed by the 25 EU Member States, is equivalent to a misdiagnosed patient (the euro area economy) receiving a potent cocktail of misprescribed medicines.

In other words, the Fiscal Pact is neither a necessary, nor a sufficient solution to the ongoing crisis of the euro area insolvency. Moreover, it saddles the euro area with a choice of only two equally unpalatable alternatives. The first choice is compliance with the Pact that will lead to a situation whereby a one-policy-fits-all monetary framework will be coupled with an equally mismatched one-policy-fits-all fiscal framework. The second choice is business as usual, with continued reckless borrowing, internal and external imbalances and ever deepening links between the sovereign finances, the ECB and the banking sector balancesheets. In other words, there is a choice of either pushing Euro area down the deflationary, stagnation-inducing deleveraging spiral, or leaving it in the current modus operandi of reckless borrowing.

Both alternatives are internecine for Ireland, and both increase the probability of an eventual collapse of the euro over the next 5-10 years.

Suppose the EU member states, opt for the first alternative. As a whole, to comply with the Pact parameters, the Euro area economy will have to shrink by some €535-540 billion every year between now and 2020 – an equivalent of reducing euro area growth by a massive 3.9% annually. Just for the purpose of comparison, during the 2009 recession, Euro area experienced a real decline of overall income of 4.25%.

Ireland will be one of the worst impacted economies in the group courtesy of our excessively high structural deficits, debt to GDP ratio and cyclical deficits. In 2012, Ireland is forecast to post a structural deficit in excess of 5.5% of potential GDP – the highest structural deficit in the entire Euro area. To cut our structural deficit to 0.5% will require reducing annual aggregate demand in the economy by some  €7-8 billion in today’s terms. Debt reductions over the period envisioned within the pact will take an additional €12 billion annually. For an economy with huge private sector debt overhang, paying some 12% of its GDP annually to adhere to the Fiscal Pact is a hefty bill on top of the already massive interest bill on public debt.

Ireland’s fiscal performance under the Fiscal pact constraints, 2012

Sources: author estimates based on the combination of data from the Department of Finance, Budget 2012, IMF World Economic Outlook database, and author own forecasts

Crucially, the idea of the Fiscal Pact as a tool for resolving the structural crisis faced by the Euro area is equivalent to doing more of the same and expecting a different outcome.

The crisis arose because the Euro area combined vastly heterogeneous and complex economies under a one-policy-fits-all monetary umbrella. This has meant that no matter what policy the ECB pursued, interest rates and money supply will never be in synch with all economies within the Euro. The modern economic theory suggests that fiscal transfers can act as automatic stabilizers, correcting for monetary policy disequilibrium.

In European case, this theory is a pipe dream. Firstly, fiscal transfers cannot happen with the same timing as monetary policy changes, especially given the bureaucratic nature of the EU and its institutions’ detachment from the member states’ realities. Take one example – Ireland and other euro areas have been experiencing severe unemployment problems since 2009. Yet, only this week did the EU wake up to the problem and thus far, there are no tangible plans for dealing with it. Automatic stabilizer of fiscal policy will never be timely and responsive enough to undo damages caused by the unsuitable monetary policy. Secondly, fiscal transfers are an imperfect substitute for private sector adjustments to dislocations that monetary policy generates. No need to go beyond the current crisis to see this with aggressive monetary policy interventions since 2008 yielding not an ounce of real economic impact on the ground. Which means that the theoretical stabilizers are not really that effective in stabilizing the economic disruptions caused by monetary policy misfiring. Lastly, neither the current Pact, nor any other institutional arrangements within the Union provide for any automatic fiscal transfers.

Yet, when it comes to the penalties that apply to member states breaching the Pact conditions the new agreement are automatic and very tangible. This imbalance – with the Pact being all stick and no carrot – risks destabilizing economic systems struggling with shocks.

Take for example a country like Ireland. Suppose ECB policy in the future leads to high interest rates – a scenario consistent with the current monetary policy developments. This would imply that our terms of trade will deteriorate, reducing our exports and driving our economy into an external deficit. Simultaneously, slowdown in the economy will put pressures on our fiscal balance. This deterioration will not be consistent with a cyclical recession, implying that we are likely to simultaneously breach the twin deficits targets under the Fiscal Pact, triggering automatic penalties. Economy brought to its knees by the monetary policy mismatch will be forced to pay additional price through fiscal penalties.

In other words, the Pact is now attempting to create another policy system that will risk further detaching fiscal policies within the Euro area from the monetary policy.

When it comes to dealing with the current crisis, the new Pact contains no tools for achieving structural reforms required to arrive at sustainable public finances. Paying down the debts and cutting back deficits requires simultaneously running surpluses on the Exchequer side and the current account side. In other words, both external and internal surpluses must be achieved simultaneously. As international research shows, the likelihood of any state moving from long-term external imbalances to a sustainable current account surplus is extremely low.

Matters are worse when it comes to both fiscal and external balances. My own research based on the Euro area data shows that during 1990-2008, only two euro countries – Finland and Malta – have complied with the Fiscal pact criteria more than 50% of the time. The rest of the member states, including Germany and France, have run sustained deficits more than 60% of the time. Once a euro state found itself stuck in twin current and fiscal deficits in one decade (the 1990s), transitioning to a twin current account and fiscal surplus in the next decade (the 2000s) was virtually impossible. For example of all states in EA17 who were in current account deficit throughout the 1990s, only 2 have managed to achieve current account surpluses during the following decade. Only one country that experienced fiscal deficits in the 1990s has managed to generate fiscal surpluses over the following decade. No country has been successful in restoring fiscal and external balances after a decade of twin deficits.

The Fiscal Pact implies even less flexibility in adopting structural reforms necessary to achieve an already highly unlikely economic transition to the long-term sustainability path for many euro area states, including Ireland.

Consider for example two economies currently in a crisis – Ireland and Portugal. Portugal requires severe and substantial cuts in all public spending and then deep reforms in the private sectors of its economy. The country does not need a debt restructuring, but it needs huge capital injections to put it onto the path of capital investment convergence with the euro area average.

In contrast, Ireland needs restructuring of the private sector debts, deep reforms on the current expenditure side of the Irish exchequer, and more gradual reforms in the private sectors. Ireland has a functional exports generating economy, it has achieved current account surpluses on external side and balance on its Government spending side in the past. During the adjustment, Ireland needs structural reductions in the current spending best timed to start concurrently with the pick up in private sector jobs creation to offset adverse effects of these reforms on the most vulnerable – the unemployed. Ireland also needs to boost its after tax returns to human capital in the medium term – something that Portugal has no need for at this point in time.

There is nothing within the Pact that would facilitate either Portuguese or Irish economic stabilization and recovery. Neither will the Pact improve the chances of Spain, Belgium and Italy ever reaching real growth paths that imply sustainability of fiscal and external balances. In short, the Pact our Government so eagerly subscribed to is at the very best a continuation of the status quo. At its worst, Ireland and other member states of the Euro are now participants to a fiscal suicide pact, having previously signed up to a monetary straightjacket as well.

Box-out:

Last two weeks marked two significant milestones on Ireland’s economic performance front. Despite the adverse newsflow on the real economy side, Irish bond yields for 5 year bonds have dipped below 6% mark last week for the first time since the beginning of the crisis. This week, spreads on the 5 year Credit Default Swaps (the cost of insuring Irish bonds) also fell below 6% mark. For the first time since the crisis began our implied cumulative probability of default (CPD) – the probability that the Irish Government will default on its debt at some point over the next 5 years has touched 40%, down from over 46% at the end of 2011. Although the CPD is a mechanical function of CDS yields and not a statistical estimate of the true risk of the Government default, the CPD is an important metric for the markets. The significant decline in our CDS spreads this week, was prompted by the Irish banks buying into longer maturity bonds in the recent NTMA-led bond swap, plus the overall improving sentiment for sovereign debt in the euro area markets. The later itself was driven by the artificial forces, such as the ECB extending €497 billion to the banks in 3 year money. Nonetheless, our bond yields and CDS spreads declines are starting to show some improvement in overall markets risk-pricing for the Irish Government debt – a much needed stabilization and a moment of respite from the relentless crisis dynamics of the recent past.

6/2/2012: An interesting (non-scientific) poll

Here's an interesting set of results - note, sample size is small for the duration of this survey to draw any serious conclusions, so don't... but from the top of the results provided, and given this is the official site of the President of the European Parliament, with all the selection biases possible in terms of audience it attracts, the results would be unsettling:

The site for the poll is: http://www.martin-schulz.info/index.php?link=6&bereich=1#

5/2/2012: Irish Consumer Confidence - a bounce in January?

I have noticed that ESRI and KBC Bank are very enthusiastic about the latest reading for their consumer confidence barometer reading for January 2012. Absent the retail sales data for January, we can only speculate as to what the latest increase means. But here's a somewhat scientific method for doing this.

Chart below shows dynamics in Consumer Confidence index and historical and forecast values for two core retail sales indices. The forecasts are based on trend dynamics for each index from January 2008, accounting for the correlation between Consumer Confidence and specific retail sales index and accounting for the latest reading for Consumer Confidence index.

The chart above shows my own Retail Sector Activity Index with the forecast for January 2012 based on the above estimates shown in the first chart.

Here's what is clear from the above exercise. Assuming the Consumer Confidence index reading for January is to be trusted (see below on that), we can expect:

• Index of retail sales value to rise 7.4% qoq and 6.3% mom to the level of 101.8 or 4.1% ahead of where the index reading was 12 months ago. This would put the value index at the levels not seen since July 2009.
• Volume index of retail sales can be expected to rise 5.4% qoq and 3.4% mom. The index reading would reach 104.3 which is 2.6% ahead of where it was 12 months ago and the level not seen since April 2010.
• Of course, Consumer Confidence index now stands at 56.6 up on 49.2 in December 2011.
• My Retail Sector Activity Index, consistent with the current reading in the Consumer Confidence index would be around 110.5 - the level that is 1.6% ahead of where it was 3 months ago, 7.4% ahead of the previous month reading and 6.4% ahead of where the index stood 12 months ago. This reading - were it to materialise - will bring my index to the levels unseen since July 2010.

All of this, of course, is rather academic. The problem with the ESRI Consumer Confidence is that it has only weak relationship with both the Value Index of Retail Sales and the Volume Index of Retail Sales, as the charts below illustrates. Please note: this does not mean in any way that Consumer Confidence Index contains little relevant information, just that it is, in itself, a very weak predictor of the retail sales activity.

I wouldn't be holding my breath waiting for a big Retail Sales bounce in January-February this year.

5/2/2012: Irish Labour Productivity - some latest trends

Chart of the Week, folks, comes courtesy of the ECB database on labour productivity. It contains the full set of productivity indices for Ireland by sector, reported on the basis of productivity per person employed. And it speaks volumes of the myths we hear in the media.

So the Chart of the Week is:

Now, what does it tell us? (And please, no protests - I am decomposing the above chart into some interesting trends using as illustrations more charts).

• Irish productivity - overall, across all sectors - has been rising during the crisis 
• Although as I pointed out so many times, much of this rise in Ireland's overall productivity is due to jobs destruction in retail, construction and other sectors, not to some intrinsic rises in real productivity. Jobs destruction concentrated in less productive sector helps overall total productivity. Despite the fact that it causes massive unemployment and other problems. See chart below for evidence on this.

• Another interesting feature of the data is the rapid, continuous decline in productivity in the broadly-defined public sector, arrested around Q3 2010 and now running basically flat. But historically, public sector productivity has contributed negatively to overall productivity performance of the economy.

• Overall, so far, our labour productivity is 5.2% ahead of the EA17 and 4.7% ahead of EU27 in Q3 2011. Year on year, EA 17 labour productivity is up 1.04%, EU27 is up 1.34% and Irish total labour productivity is up 2.28%. This is a strong performance for Ireland, compared to EU and EA averages. As already mentioned above, Construction sector productivity declined in Q3 2011 some 15.2% yoy and productivity in Information & Communication sector fell 8.15% yoy. Productivity grew in Financial and Insurance Activities sector by 3.11%, in Agriculture and associated sub-sectors by a very impressive 24.8% (although this is largely due to higher commodities prices and exchange rates effects, as well as continued robust inflows of CAP money into Ireland). In Public Administration and the rest of the public sector sub-sectors, productivity grew 2.6% year on year in Q3 2011.

And to summarize the emerging new (crisis-period post Q1 2008) trends, here is a chart plotting correlations between productivity index performance for Ireland overall, against EU27, EA17 and specific sectors of the economy:

3/2/2012: De Kaufman Door 2

Another set of interesting survey results from the Kaufman Econ Bloggers Outlook Q1 2012:

John Cochrane asked: should the eurozone become: 1) a currency union without fiscal union, allowing

sovereign default; 2) a currency union with strong fiscal union; or 3) Broken up

(no euro) into national currencies or smaller units?

So let's set aside the political feasibility of each option, in the first-best economics world:

• Euro as a currency union without fiscal union, allowing sovereign default is an option for 22% of the respondents.
• Euro as a currency union with strong fiscal union is preferred by 27% of respondents
• No euro with national currencies returning or smaller sub-blocks emerging is favored by 51% of respondents

There are, really, only 2 surprises in the above:

1. Relatively large number of economists who believe that sovereign defaults can be sustained in a currency union with no automatic transfers specified (I presume that many could have simply thought that transfer systems can be established either under an EU Commission umbrella or via ECB) and
2. Only 51% of the respondents recognize that there is, under current institutional set up, no real chance of managing an economically effective functional monetary union. And that there is no need to do this either.

3/2/2012: De Kaufman Door 1

Kaufman Foundation - a research centre for studying entrepreneurship - runs quarterly reports on the panel of economics bloggers. These reports contain some brilliant insights into the cutting edge policies as well as some reaffirmations of orthodoxies.

Here's the one I liked in the current Q1 2012 issue:

So let's run through these in the context of the latest conceptual reforms ideas floating in the Irish education system:

• Voucher system - 76% of bloggers are in favor and 11% opposing (remember - these responses come from the Left, Right, Libertarian, professional, academic etc economists). In Ireland, of course the idea of parental choice is anathema to the Department of Education and the rest of the crowd that is setting the education agenda.
• Charter schools (characterized by greater independence, more parental engagement in all aspects of schooling etc) - 74% of bloggers agree, 11% disagree. In Ireland - calls to shut down independent schools abound and new non-state schools are having problems getting teachers funds.
• Teacher choice - 59% in favor, 19% opposed - less decisive vote, but the idea would be a total 'No go' for Ireland.
• Flexibility for principals - 9% opposed, 81% in favor. Not the flavor of the month for the DofE or the rest of the education policy pack.
• Higher teacher pay overall gets 10% opposition and 53% support, but merit pay for teachers idea gets 9% opposition and 74% support. Which of course will never ever take hold in Ireland.
• Transparency for value-added gets 8% opposition and 71% support. Do note the emerging clear theme - accountability and independence are valued, merit to be rewarded... oh, no, these are not happening here in Ireland.
• Higher standards - 30% oppose, 33% support because, presumably, it is hard to really define or trust 'standards'. 
• Greater federal involvement gets support from 12% of respondents and is opposed by 59%, while less federal involvement gets support from 57% and opposition from 18%. Well, now, I am not exactly an education specialist, but I did notice as of late that Irish debate about the secondary education has distinctly taken an anti-private schools turn. And there are pretty powerful voices here calling for nationalization of secondary education. Hmmm...

Of course, the above policy options are not exhaustive nor comprehensive. And yes, there are big differences between the US and Irish systems. But it is pretty clear to me that the above preferences expressed by US economics bloggers for more transparency, more accountability, more independence in the education system run diametrically counter to the prevailing ideology surrounding education reforms in Ireland today.

3/2/2012: Big Bad Speculators & Little Red Riding Hoods

That "Gotcha..." moment, you know... speaking last night at a round table discussion on the future of Europe, I was confronted with a question from the audience and a fellow panelist remarks in the same vein that, roughly speaking, attributed the entire current crisis in Europe to the derivatives markets and speculative investment. More than that, the same were blamed for everything from the environmental disasters to increases in commodity prices. Some parts of the Left just love the idea of finding a "capitalist" (even arch-capitalist - aka speculative) root to every problem - the "Gotcha..." thingy of pseudo intellectualist disdain for facts as much as for 'speculators' and 'markets'.

This of course does not mean that financial instrumentation, speculation or other forces of the financial markets did not contribute to the crisis, but it is a distinct claim from the one made by those proposing that they caused the crisis single-handedly.

By sheer accident, looking through some old research papers, I came across this study from the ECB: Lombardi, Marco J. and Van Robays, Ine, Do Financial Investors Destabilize the Oil Price? (May 20, 2011). ECB Working Paper No. 1346. Available at SSRN: http://ssrn.com/abstract=1847503

The study looks into the large oil price fluctuations that were observed in the recent years. In particular, the study considers the role of financial activities in the determination of oil prices.

Per study (emphasis is mine):

"The oil futures market has indeed become increasingly liquid, and the activity of agents that do not deal with physical oil, the so-called non-commercials, has greatly increased. This led some to hypothesize that inflows of financial investors in the futures market may have pushed oil prices above the level warranted by fundamental forces of supply and demand, whereas others argue that the impact of financial activity on the oil spot market is negligible or non-existent beyond the very short term."

The paper studies "the importance of financial activity in determining the spot price of oil relative to the role of oil market fundamentals", using a sign-restricted structural VAR model. The model allows the study authors to separate financial activities into two types: stabilizing and destabilizing. This is achieved by postulating a model that links "the oil spot market to the futures market through a no-arbitrage condition", so that:

• Destabilizing financial shock is identified as one that creates "a deviation from the no-arbitrage condition, thereby ...driving oil futures prices away from the levels justified by oil market fundamentals. 
• Stabilizing financial activity is defined as "driven by changes in oil supply and demand-side fundamentals". 

In addition, the econometric framework adopted in the study allows to identify four different types of oil shocks:

• an oil supply shock
• an oil demand shock driven by economic activity 
• an oil-specific demand shock which captures changes in oil demand other than those caused by economic activity, and 
• a destabilizing financial shock (such as a spike in speculative activity).

The results suggest that 

• Financial activity in the futures market can significantly affect oil prices in the spot market, although only in the short run. 
• The destabilizing financial shock (speculation) only explains about 10 percent of the total variability in oil prices.
• Shocks to fundamentals "are clearly more important over our sample. Indeed, looking at specific points in time, the gradual run-up in oil prices between 2002 and the summer of 2008 was mainly driven by a series of stronger-than-expected oil demand shocks on the back of booming economic activity, in combination with an increasingly tight oil supply from mid 2004 on. Strong demand-side growth together with stagnating supply were also the main driving factors behind the surge in oil prices in 2007-mid 2008, and the drop in oil prices in the second half of 2008 can be mainly explained by a substantial fallback in economic activity following the financial crisis and the associated decline in global oil demand. Since the beginning of 2009, rising oil demand on the back of a recovering global economy also drove most of the recovery in oil prices."

However, the study did find that financial investors "did cause oil prices to significantly diverge from the level justified by oil supply and demand at specific points in time. In general, inefficient financial activity in the futures market pushed oil prices about 15 percent above the level justified by (current and expected) oil fundamentals over the period 2000-mid 2008, when the volume of crude oil derivatives traded on NYMEX quintupled. Particularly in 2007-2008, destabilizing financial shocks aggravated the volatility present in the oil market and caused oil prices to respectively over- and undershoot their fundamental values by significant amounts, although oil fundamentals clearly remain more important."

So some speculation is harmful to fundamentals-determined pricing, although the study does not consider the potential benefits from speculation-induced greater liquidity in the markets (which was not the core objective of the study to begin with), but largely, 5-fold increase in speculative activity accounts for just 10 percent of prices variability. 

3/2/2012: Ireland's Jobs Creation & Destruction data

CSO recently published its analysis of the labour market looking into jobs creation and destruction in the economy - a new study, currently in the 'experimental' stage and a very welcome addition to CSO tools, in my view.

Here's the core data:

Per charts (source for the chart is CSO):

• Job creation has increased slightly from 9% in 2009 to 12% in 2010
• Job destruction has fallen significantly from 28% in 2009 to 18% in 2010 
• Net job creation (job creation less job destruction) remained negative at – 6% in 2010

Note to CSO - a table with data would be good - or at least labeling of values in the chart. And do please continue with this analysis.

2/2/2012: US Mint Sales for January - signaling return to fundamentals-driven demand?

January data is out for US Mint sales and time to update my semi-regular analysis. Here's the note. I am putting a disclaimer below - so the Irish stuffbrokers' community that somehow gets their facts wrong when no one is around to correct them breaths easier. Everything you read below is my personal opinion informed by my analysis of the official data from the US Mint.

January data from the US Mint on sales of gold coins presents an interesting picture, both in terms of seasonality and overall demand for the asset class.

Some background to start with. 

Gold prices have been moving sideways with some relatively moderate volatility in recent months. Between August 2011 - the monthly peak in US Dollar-quoted price and January 2012, price has fallen 4.55%, but in the last month, monthly move was 10.82% and year on year prices are up 30.4%. Crisis-period average price is now at USD1,154/oz and the standard deviation in prices is around 337 against the historical (1987-present) standard deviation of 330. In 2011 standard deviation for monthly prices stood at (small sample-adjusted) 144, well below historical volatility, due to a relatively established trend through August 2011. However, prices returned to elevated volatility in August 2011-January 2012.

These price dynamics would normally suggest rising caution and buyer demand reductions over time. And to some extent, this sub-trend was traceable in the data for US Mint sales in some recent months too. For example, unadjusted for seasonal variation, August 2011 sales of Mint coins peaked at 112,000 oz with relatively moderate 0.67 oz/coin sold gold content. By November 2011, sales slowed down to a relative trickle of 41,000 oz at 0.71 oz/coin sold. December sales came in at 65,000 oz with gold content on average of 1 oz per coin sold. Much media hullabaloo ensued with calls for catastrophic fall off in demand, the renewed claims that a gold bubble is now in action and the decline is coinage sales as evidence of that.

In reality, there was very little surprising in the sales trends overall.

Chart 1 below shows US Mint sales in terms of the number of coins sold. Care to spot any dramatic bubble-formation or bubble-deflation here? Not really. There is a gentle historical upward trend since January 1987. There is volatility around that trend in 2010 and far less of it in 2011. There is seasonality around the trend with Q1 sales uplifts in January, some Christmas season buying supports in early Q4 etc. There is also a slightly elevated sub-trend starting from early 2009 and continuing through today. More interestingly, the sub-trend is mean-reverting (heading down) which is - dynamically-speaking stabilizing, rather than 'bubble-expanding' or 'bubble-deflating'.

Chart 1

Source: US Mint and author own analysis

Now, January sales are strong in the historical context and within the sub-trend since 2009. January 2012 sales of US Mint coins came in at 127,000 oz with relatively low 0.50 oz/coin sales. So coinage sales in terms of oz weight are 95.4% up on December, but 4.9% down on January 2011. For comparison, 2011 average monthly sales were 83,292 and crisis-period average monthly sales were 94,745 all at least 0.5 standard deviations below January 2012 sales. As chart above clearly shows, sales are now well ahead of historical averages and above 6 months moving average.

However, as chart below shows, sales in January were well below the trend line for average coin weight for sold coins: oz per coin sold is down 50.5% mom and down 43.1% year on year. Significantly, smaller coins were sold in January this year than in 2011. 2011 average oz/coin sold was 1.0 and the latest sales are closer to 0.59 oz/coin historical average.

Chart 2

Source: Author own data and analysis based on underlying data from the US Mint

There is no panic in the overall trends in demand for coins when set against the price changes, with negative general trend in correlations between demand and gold price established in mid-2009 continuing unabated, as shown in Chart 3

CHART 3

 Source: US Mint, World Gold Council and author own analysis

However, when we look closer at the 12 months rolling correlations and 24 months rolling correlations, the picture that emerges for January is consistent with gentle negative correlation that has been present since the beginning of 2011. See Chart 4 below. January 2012 12mo rolling correlation between gold price and volume of gold sold via US Mint coins is +0.02, having reverted to the positive from -0.42 in December 2011. This is the first positive (albeit extremely low) monthly 12mo rolling correlation reading since July 2010. 24 mo rolling correlation in January 2012 stood at benign -0.30, slightly up on -0.34 in December 2012. Again, resilience if present in the longer term series and at shorter horizon there are no huge surprises either. Of course, in general, one can make a case, based on the recent data, that investors are simply turning back to the specific instrument after gold price corrected sufficiently enough. In this light, latest US Mint data would be consistent with fundamentals-supported firming of demand. But crucially, there is no evidence of either panic buying or selling.

CHART 4

Source: Author own analysis based on the data from US Mint

Lastly, let's take a look at seasonally-neutral like-for-like January sales. Chart below shows data for January sales, suppressing the huge spike at 1999. Clearly, sales are booming in terms of coins numbers sold. But recall that coins sold in January 2012 are smaller in gold content, so overall gold sold via US Mint coinage is marginally down on January 2011, making January 2012 sales the fourth highest on record.

CHART 5

 Source: Author own analysis based on the data from US Mint

The Table below shows summary of US Mint coins sales for 3 months November-January covering holidays periods sales, including the Chinese New Year sales. While January 2012 period shows healthy sales across all three parameters, there is still no sign of any panic buying by small retail investors anywhere in sight here. Sales are ticking nicely, in 2011 and 2012, well ahead of 2001-2008 levels (confirming lack of evidence that sustained price appreciation over the last 18 months has provided a signal to dampen retail demand), but behind 2009-2010 spikes (further supporting the view that 2011-2012 dynamics are those of potential moderation in the precautionary and flight-to-safety motives for demand, and more buying on long-term gold fundamentals).

TABLE: US Mint sales – 3 months through January

 Source: Author own analysis based on the data from US Mint

Welcome back to ‘normalcy’ in US Mint sales.

Disclaimer:

1) I am a non-executive member of the GoldCore Investment Committee
2) I am a Director and Head of Research with St.Columbanus AG, where we do not invest in any specific individual commodity
3) I am long gold in fixed amount over at least the last 5 years with my allocation being extremely moderate. I hold no assets linked to gold mining or processing companies.
4) I have done and am continuing doing academic work on gold as an asset class, but also on other asset classes. You can see my research on my ssrn page the link to which is provided on this blog front page.

5) Yes, you can find points (1)-(3) disclosed properly and permanently on my public profiles. 

6) I receive no compensation for anything that appears on this blog. Never did and not planning to start now either. Everything your read here is my own personal opinion and not the opinion of any of my employers, current, past or future.