Japan’s 0.10 percent (!) rate ‘cut’ surprised and rattled currency, bond, and metals overnight markets more than any of its previous currency market interventions did. The BoJ effectively ran out of rate-tinkering ammo with this ‘all stops removed’ accommodation. The bulls-eye landing on the big, fat, nil interest rate number plus the creation of a $60 billion fund intended to buy government bonds underscored the intensity of the anti-deflationary battle raging on within many a central bank around the world.
The Japanese action reinvigorated speculative expectations that U.S. version of QE2 will soon make a debut of its own and that global central banks are – despite public assertions to the contrary – effectively engaged in “CCD” (competitive currency devaluation). The ‘line in the sand’ that is thought to be drawn around the value of the yen vis a vis the dollar at the 82-mark came into question once again, and so did the speculation that there might still be currency market intervention missiles being loaded into the BoJ’s cannons. Behold the bets being placed under such turbulent conditions:
Almost a quarter of a trillion dollars. That is the size of the bond bubble that global investors have created in the hope that the low interest rate environment is about to become a permanent fixture around the world, and for some time to come. Forty basis points(!) as a ‘yield’ on two-year notes? Why not? The incessant flow of bad economic news has meant an epic boom in bond prices and an equally epic decline in their yields.
You think that someone’s/anyone’s call for $2K gold is reliable? Perhaps it might be worth considering that which Kitco News’ Debbie Carlson brought to her readers yesterday: a Citigroup quick-take on the ‘reliability’ (more like the futility) of trying to prognosticate gold prices. Wrote Ms. Carlson: “With gold making new highs, investors are looking for forecasts for gold prices following actions of gold miners, central bankers or chartists. None of them have been right in the past 40 years, said Citigroup Global Markets. When gold miners had to buy back massive hedges, they proved we should not look to them for gold-price forecasting.
“The same applies to central banks, which sold right at the bottom. Bankers don’t get it right, either. Many famous forecasters (high-profile academics and high-profile chartists), after gold had fallen from a high of $875/oz to $600/oz in 1981, forecast it would soon shoot above $1000. Instead, it entered a 20-year slumber party,” the bank wrote. “We now have popular forecasters (popular because they called sub-prime right) forecasting that gold is on its way to $4000/oz. It may well be. The history of unsuccessful forecasting shows it also may be on its way to $800/oz. And yet these high forecasts are no less popular than they were in 1981. As the famous saying goes, ‘It’s deja vu all over again’.”
Gold prices have risen 21 percent over the past year as the ‘Fed put’ intensified in the wake of this summer’s string of economic data that have shown a sluggish recovery underway in the U.S. $1,329.00 gold? Why not? That is exactly what the markets got overnight, and further paths were cleared towards the $1,375-$1,385 target zone in the metal.
The immediate cause was not very difficult to identify; the 0.81% slide in the U.S. dollar’s value (one that brought it to 78.00 on the index). No word on where the greenback’s ‘line in the sand’ may be drawn on the value scale, but yesterday’s gains in the currency were undone in a hurry following the news from Tokyo overnight.
Mind you, both bubble-like conditions are basically predicated on the credo that a) inflation is dead and/or turning deader and that b) the U.S. economy will basically never be able to fully recover. Translation: the true ‘cost’ of buying such puts with abandon is potentially enormous. Such instruments have now turned from simple insurance against uncertainty into the manifest method by which to make heaps of money, given the current environment. Strong opiates, these.
Mr. Bernanke did make reference to the potential dangers that the U.S. economy faces in a speech delivered last night. However, asset purchase program pitch notwithstanding, he framed such concerns within a scenario where the government doesn’t tackle budget deficits in coming years.
Mr. B’s speech also contained enough allusions to the idea of QE2 to give traders the perfect excuse with which to execute some of the trades the markets experienced overnight. One-way bets based on one-way perceptions of what was said. It did not hurt matters that billionaire George Soros urged economic stimulation – like right away, or else – either.
Although no details were provided as to exactly how a bond purchase program might help the apparent stall in the pace of economic recovery, and no assurances were given that such a program might actually have the intended effect at all, the bets actually being placed told the story: There is not even room for pondering what happens if the markets deem the package to be already fully priced into value equations. No room for pondering what happens if, say, the economy shows an uptick prior to, or just after, such purchases would take place. No room for pondering what happens if the program is phased in, say, a $100 billion per period of time “IV drip” manner.
Following yesterday’s ‘new’ version of a ‘correction’ (an event shallower than $10, and exhibiting the half-life of the transitional metal seaborgium) gold prices opened with an obvious manifestation of all of the aforementioned easing expectations baked into its price equation.
The spot metal rose $12.50 per ounce and was quoted at $1,327.50 the ounce. Later on, the yellow metal touched a new high at $1,332.00 the ounce. Economic slowdown? Don’t look for such apprehensions in the silver spot price either, as it started the Tuesday session with a 44-cent gain and a quote of $22.31 per troy ounce.
Ditto for the noble metals complex, where platinum climbed $23 to $1,686.00 and palladium advanced $10 to the $569.00 mark this morning. Rhodium remained stable at $2,230.00 per troy ounce. Clearly, the noble metals were not still only feeling the effects of robust September car sales figures reported by Ford (up 46%) and GM (up 11%), but also the ‘effects’ of spec fund participation – the same one lifting the remainder of the metals complex (and, evidently, not just the metals complex. Rubber bounced higher, sugar prices turned sweeter, palm oil slipped higher, corn grew stronger, and tin shone at record levels.
Copper and crude experienced a similar, cheap-money-with-which-to-go-commodities-hunting-flavored boost. Also playing into the longs’ hands this morning, the amalgam of news relating to a sharp decline in September eurozone growth, the rating warning issued by Moody’s to Ireland, and the stand-pat attitude on rates suddenly being adopted by the Aussie central bank.
The focus now shifts to the U.S. ISM figures due this morning. If copper prices were any early indication, the ISM data might show an advance to the 52 level and temper some of the Fed-centric expectations present in the marketplace. The U.S. is the second largest consumer of the orange metal. However, the ISM might not be the acronym over which traders spend the majority of their time (and perhaps speculation-earmarked funds) this morning. It could well be the I.M.F.
The institution said this morning that global financial system conditions are showing a ‘gradual improvement’ but that there remains a risk of further problems as well. The operative word used to describe the financial system should sound familiar, as it is the same one that has been employed to characterize the state of the global economic recovery: “fragile.” The IMF report depicts an uneven global recovery; one that reveals sluggish conditions in wealthy countries and energetic growth among developing ones. The illustration below sheds some light on just how this progress appears to shape up.
The world recovery map as seen in this recent Guardian UK perspective does not appear to be the dire one riddled with a plethora of (colors) signs of contraction that is being described by some fretful market diagnosticians. In that sense, the dangers of the Bernanke ‘put’ and the conviction that the path taken by the Fed are ‘givens’ appear to be larger than conventional wisdom allows for. About 0.6% of global growth was actually ‘given up’ during the ‘big’ contraction over recent years. Now, the climb-out from the pothole is here to see:
The last six months may have dealt a setback to one type of previously achieved stability; that of the dollar following its lows last fall. The resulting trades have seen gold, equities, bonds, and commodities being bought with said cheapening dollars. The next six to 12 months may deal a setback to another type of stability; that of the convictions that one-way trading streets are the new ‘normal.’ In no small part, the map seen above will play a role in the advent of that probability. The Fed will supply the other part after it possibly hands out that which is expected to be handed out in November. For now, the happy/strange positively correlated close dance of equities and gold continues.
There are, after all, bucks to be made on bucks being sold.
It looked like this, at the last tally: Dow up 0.73%, Nasdaq up 1.01%, S&P up 0.86%, Gold up 1.18%, Oil up 1%. Dollar down 0.81%.
Happy buck-making. ISM came in higher than anticipated. Happy economic reality check.
Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America