Monitor originally sent to subscribers on September 28, 2015, 7:39 AM.
German carmaker Volkswagen (VW) was cheating on American air pollution tests. Could it affect the global economy and the gold market?
On September 18, the U.S. Environmental Protection Agencythat Volkswagen had violated the Clean Air Act, by installing elaborate software in “clean diesel” vehicles, which could detect when cars were being tested and change the performance accordingly to improve results. The rest of the time, the vehicles emitted 10 to 40 times the legal amount. Volkswagen have already made a provision of $7.3 billion to cover costs connected with recalling 500,000 cars in the U.S., but it may face a fine levied by the EPA as high as $18 billion. There may also be class-action lawsuits from customers and a criminal probe launched by the U.S. Department of Justice. And VW’s problems are not confined only to the U.S., as the company admitted that 11 million vehicles worldwide are equipped with the “defeat device” software. Not surprisingly, the carmaker's shares plunged around 30 percent after the scandal broke. In other words, the VW is in deep shit.
But why are we writing about the scandal of some European car manufacturer? Are there any links to the gold market? Well, contrary to appearances, the case may be very important, as Volkswagen is the biggest of Germany’s car makers and one of the country’s largest employers. Given that the automotive industry is the largest industry sector in Germany, the scandal – especially if there are spillovers to other producers – would likely hit the German economy. This should further weaken the euro and support the U.S. dollar, which could exert some downward pressure on the price of gold.
However, the scandal may hit also the U.S., as it could trigger a bust of the auto bubble. Given the fact that U.S. retail sales and manufacturing relied recently on the strength in vehicles, there may be important consequences for the whole economy. Volkswagen owns only a 2 percent of the U.S. market share, but the scandal may change the sentiment toward the car industry, not mentioning the indirect spillovers and a tougher EPA’s stance. It is said that practically all producers cheat on absurdly strict emission tests. Therefore, other car manufacturers may sink with Volkswagen.
Lastly, investors should not forget about the company’s finance arm with assets worth €164 billion. VW’s finance operations include making loans to car buyers and dealers and also taking deposits. Thus, it may be vulnerable to a run. General Motors’ former finance arm, GMAC, had to be bailed out in 2009.
Regarding precious metals, the scandal hit platinum and supported palladium, as diesel-powered cars use more platinum as auto catalyst, while the latter is more widely used in the gasoline-powered car market, which could gain on the scandal. Gold is rather uncorrelated to platinum and palladium, much more industrial metals, but higher gold prices in relation to platinum reflect that the level of fear about the economy is elevated.
The take-home message is that the Volkswagen emissions scandal may hit Germany, which strongly relies on the automotive industry, and thus the European Union’s growth may be endangered. This should be supportive for the greenback and negative for gold. However, there may be some spillovers into the U.S. which could drag down its economic growth, which has recently been dependent on the auto boom. Such spillovers should be positive for the shiny metal.
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Sunshine Profits‘ and Editor