Gold higher following Japanese rate cut

Good Morning,

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.

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