Gold Loses Luster

Gold prices for immediate delivery sank Wednesday by 4.34%, their worst fall since the first of December 2008, when they plummeted 5.85%, dragged by investor profit-taking after the announcement of positive indicators of the U.S. economy and in anxious anticipation of some type of announcement by Fed chairman Ben Bernanke this Friday.

Thus, gold closed the session at 1,751.55 dollars per ounce, the second consecutive down session making for a combined setback of 7.77% or 147.55 dollars. With the accumulated two-day results, the total advance for the month of August was reduced to 7.65%. In the futures market, contracts for December delivery closed at 1,757.30 dollars per ounce, for a drop of 5.92%.

With Wednesday’s setback, gold prices were situated 161 dollars per ounce away from the all-time high price of 1,912.84 dollars per ounce reached last Tuesday.

Eliminating Curbs On Foreign Capital

The National Foreign Investment Commission announced it will undertake an in-depth study to determine specific areas where restrictions to direct foreign investment can be eliminated or substantially reduced, as a means of attracting more foreign capital to assist economic growth. “Some restrictions were applied in different times, and shedding them would mean much more foreign investment”, says Economy undersecretary José Antonio Torre.

The commission is formed by the secretaries of the Interior, Foreign Relations, Finance, Social Development, Environment, Communications and Transport, Energy, Economy, Labor and Tourism. Early observations are that some of the sectors that could be opened up to more foreign capital include telecommunications, radio broadcasting, and transport (commercial aviation, ocean shipping, seaports, navigation and highway cargo).

Restrictions prevail to foreign investment in such areas as radio and television broadcasting, LP gas distribution, gasoline stations, fixed telephone lines and many others. The proposal is hardly new, and past history demonstrates that while the general idea is adequate, once the specific proposals reach Congress they become mired in endless political debate. But times demand that authorities keep trying to push the bills through a heavily partisan legislature.

Capital Flow Rises

During the first half of 2011, the flow of Direct Foreign Investment topped the US$10 billion mark, in line with private analysts’ estimates that the year’s total will reach US$20 billion, according to the central bank. The figures, however, do not provide a breakdown on how much of the total went to speculative portfolio investments and to productive plant capital.

The latest central bank survey among 26 leading analysts and economists showed a consensus of direct foreign capital arrivals for the full year of US$19.8 billion. Last year, the first half showed US$12.85 billion, and a full-year total of US$19.7 billion. The Economy Secretariat says the largest single foreign investment sector is the automobile industry, where Volkswagen earmarked US$550 million, Honda US$800 million and Mazda US$550 million to new facilities, all three in Guanajuato state.

Mexico is still far from the record foreign investment flows reached in 2001 with nearly US$30 billion, and again in 2007 with US$29.7 billion. According to the UN Conference on Trade and Development, last year’s direct foreign investment flows reached US$1.24 trillion, up 5% from the previous year. For this year, the outlook calls for a combined total of between US$1.4 and US$1.6 trillion, reaching pre-crisis levels.

Mexico in Slowdown

Mexico’s economic activity expanded in the second quarter at its slowest pace since the last quarter of 2009, the result of weakening industrial performance and a contraction of primary agricultural output. The National Statistics Institute (INEGI) reported that the Gross Domestic Product grew by 3.3% in the second quarter, compared to 7.6% in the same quarter last year, which clearly marks a slowing trend.

The April-June GDP growth, which was lower than anticipated by a consensus of private analysts, was the result of a 3.7% contraction in primary farming activities, along with increases of 3.4% in industrial activities and 3.6% in the services sector.

The INEGI report indicated that most industrial activities showed a lower rate of growth, and some sectors like the garment and footwear industries showed a contraction. Manufacturing activities advanced at a rate of 4.8%, with the interruption of the auto industry supply chain as a result of the Japanese quake and tsunami hurting automobile assembly and manufacturing activities in general.

Also, check out the following opinion columns:

“Rich and Powerful”, by Marco Mares

The nation’s oil monopoly Petróleos Mexicanos (Pemex) is about to dismantle an ancient and highly profitable scheme of purchasing that for many years benefited a small group of suppliers and vendors that, in the cozy comfort of their oligopoly, became enormously wealthy and enjoyed tremendous advantages without much in the way of competition, while significantly hurting the monopoly’s costs. One of the company’s four heavily subsidized units will announce today a new model of management and transparency, including new acquisition mechanisms that will make it more modern and efficient, but more than anything will eliminate those obscene privileges that resulted in huge fortunes. The new scheme is essentially based on the recommendations of the Organization for Economic Cooperation and Development.

“The Great Depression”, by Enrique Campos

Unpredictable as they are, markets expect Fed boss Ben Bernanke to go back to Wyoming and do an encore of last year’s number when he announced the controversial implementation of QE2. At the annual conference of the Fed Kansas branch at Jackson Hole, it is expected that Bernanke will deliver a prognosis of the U.S. economic situation, along with a recommendation. The market hopes, as reflected in the investor rush to risk, is that there will be additional liquidity measures to try to pull the economy out of the doldrums which become clearer each day with new indicators. To be sure, there could be no new measures announced, or worse yet, there could be confirmation that there is nothing more the central bank feels it can do at this point to boost the economy. For now, markets are betting on hikes in short-term interest rates and cuts in the longer term rates as a means of stimulating lending, while relaxing the inflation targets.

“Strongbox”, by Luis Miguel González

Common sense dictates that taxing should be proportional to individual earning power, but if we dig a little deeper, complications pop up. A group of French billionaires requested the application of an “exceptional tax” to those earning the most. It’s not a joke, but a serious proposal in the midst of France’s severe fiscal crisis. The list includes the 16 wealthiest, such as the owner of L’Oreal and the chairmen of Total, Air France-KLM, Danone and Societe Generale. It’s a symbolic gesture that shows awareness of a real problem, and comes on the eve of the French government’s announcement of special measures, including a special tax for those earning more than a million euros a year. The proposal echoes the 2010 manifesto by Bill Gates and Warren Buffett. Is it convenient to hike taxes on the very rich? As a point of reference, Mexico’s top tax rate is 30%, against 50% in Great Britain. But it’s not the same to earn a million dollars collecting rent than to generate it after having risked it on new capital ventures. The toughest thing to understand in the universe is income taxes, said Einstein.

rmena@eleconomista.com.mx