Australia may be on brink of collapse; China, India may not be able to rescue gold; Financial firms sour on India investments

1 Australia may be on brink of collapse (Larry Elliott in The Guardian) Australia now bears all the hallmarks of a country where its industrial base has hollowed out. The decision by Ford Australia to close its manufacturing plants at Broadmeadows and Geelong is evidence of what economists call Dutch disease: a natural resource boom drives up the exchange rate and makes all other exports deeply uncompetitive.

With the outlook for the global economy far less rosy than it was, the mining sector is also cutting back on investment. That has left the economy propped up by the one remaining source of growth – an overvalued real estate market. As the economist John Llewellyn has pointed out, household debt in Australia rose sharply in the 1990s and 2000s and now stands at 150% of GDP.

Noting that the housing market may already be in bubble territory, he adds: "Depending on a strong pickup in housing as a means to sustain growth and rebalance the economy would therefore appear to be fraught with danger. The risk is of unsustainable boom followed by destabilising bust, with considerable collateral damage to both financial and non-financial private sector balance sheets."

The Reserve Bank of Australia is now cutting interest rates and talking down the currency in an attempt to rebalance the economy. That is easier said than done when your economy amounts to a large hole in the ground ringed by some expensive property. The risk is of a sudden Aussie collapse of the sort that has become all too familiar on English cricket grounds this summer.

2 China, India may not be able to rescue gold (Clyde Russell in Khaleej Times) With gold demand slumping to the lowest in four years in the second quarter, bulls are grasping to hold on to anything positive and right now that means India and China. If there was a bright spot in the quarterly report of the World Gold Council, or WGC, it was that demand in the world’s top two consumers surged.

India regained its lead over China by buying 310 tonnes in the second quarter, up 71 per cent from the same period in 2012 and 21 per cent above first quarter purchases. China bought 275.7 tonnes in the second quarter, a jump of 87 per cent from the same period last year, but six per cent below the first quarter’s demand. But even the strong demand in the Asian giants wasn’t enough to offset the dramatic outflows from exchange-traded funds, or ETFs, which saw 402.2 tonnes of sales, more than double the 176.5 tonnes that flowed out in the first quarter.

While there has been a recovery since then to the current price of around $1,368 an ounce, there remain risks to saying prices will recover further on the back of Indian and Chinese buying. Firstly, one has to assume that gold ETF outflows will diminish, and while it’s true that the net selling has slowed from the pace of the first half, it looks like the third quarter will produce another negative number. Another bearish factor is slowing central bank purchases. These were still positive at 71.1 tonnes in the second quarter, but this was the lowest in two years and about half the rate of buying in 2012.

If the Indian government does keep raising taxes and taking other steps, then it’s hard to make a case that the nation’s imports will keep growing, or at least its legal imports at any rate as the new taxes may well encourage smuggling. China also appears to be on track for gold demand of 1,000 tonnes this year, with first half purchases at 570 tonnes, putting it just ahead of India, which up to the end of last year was the world’s top buyer.

China looks a far better bet than India on gold demand, but it remains doubtful that even if the bullish predictions for the two Asian nations are correct that they would be enough to spark a renewed gold rally.

3 Financial firms sour on India investments (Kenan Machado & Nupur Acharya in The Wall Street Journal) Exasperated by a lack of growth and profitability, Western firms, mostly financial institutions, are selling their Indian investments, with a weakening rupee expediting the departures. Bankers and analysts said more exits are expected.

Aviva  PLC and New York Life Insurance Co. are among insurers that are selling or have sold their India franchises in the past year. A person close to Aviva said last week that the UK insurer was leaving India because its venture hadn’t grown as much as expected. Banks, too, are scaling back, including Barclays PLC and Royal Bank of Scotland Group PLC, which said it would sell some of its Indian assets to a local bank as part of its strategy to exit noncore investments.