Gold, and rest of metals, climb higher still

Good Morning,

Reverberations of the surprise easing by the Bank of Japan continued to buoy a host of assets during the overnight and Wednesday daytime trading hours. Asian equity markets staged strong rallies, as did those in Europe, following yesterday’s hefty US market gains. Commodities also continued to gain in value following Tuesday’s melt-up in gold, copper and tin prices.

Following the first drop in private sector payrolls (as reported by ADP’s survey released earlier today) since the beginning of the year engendered a further slide in the US dollar which sank to an eight-month low (against the euro) and stoked further apprehensions about what the Labour Department’s Friday report might reveal.

In addition, Fitch’s rating service sliced on “A-“ from its grading of Ireland; however the move did not come as a surprise and the European common currency maintained previously achieved gains on the perception that the remainder of the PIIGS group is not showing signs of contagion from the Irish economic situation.

Gold prices climbed further, setting a fresh price pinnacle at the $1,3252.00 level earlier this morning. The rest of the complex benefited from lavish fund (and now retail-origin) investment, with silver trading at $23.05 and platinum climbing to $10 above the $1,700 mark (for a $19 per ounce gain). Palladium rose $10 to the $587.00 level while rhodium remained static at $2,230.00 the ounce.

Crude oil exhibited similar speculative-induced value-additions, rising to $83.54 per barrel, while copper, advanced to a 27-month high. The overall commodities sector was lifted to 24-month highs in the wake of the aforementioned frenzied speculation that asset purchases by a string of central banks is a virtual certainty.

Treasurys climbed while yields on five-year instruments fell to record lows. Speculation that the Japanese move is but the first salvo in a barrage of global easing yet to come remained the sole identifiable factor behind the sudden investor euphoria and grab by spec funds of practically every asset class within reach.

The near nil, or practically even sub-zero interest rate environment has been compelling market participants to seek returns in otherwise normally risk-laden niches. To wit, the search for a ‘yield’ in gold. To wit, the surge in the sales of junk bonds at the very same juncture. To wit, the huge demand for structured notes, M&A deals flourishing faster than green goo in a Petri dish, and the stubborn price resilience in real estate markets such as London, Vancouver, Perth or Singapore.

Not the normal order of the investment universe, this. Look no further than the ownership structure of the largest gold ETF. About 10% of its total pile of bullion is held but by three such return-thrill-seekers: Messrs. Paulson, Mindich, and Soros. No, this is no quest for capital preservation; this is a quest for yields/returns/profits – pure as 9999 gold and simple. Blomberg’s Matthew Lynn sums up the conditions by warning that: “All of these markets have gone bonkers.” Headlines blare: “Want to catch gold fever?”

“Among savers, low rates are creating demand for assets that don’t really belong in the portfolios of most ordinary investors, and are bound to collapse in price once money becomes more expensive again.” Notes Mr. Lynn. “Central bankers,” also says Mr. Lynn “may believe they are propping up demand.” However, he adds: “they also need to recognize that they are creating new bubbles.” -the kind that got everyone into trouble, to begin with. Well, at least we can count on the consistency of human nature…

While we will be among the first ones to perennially remind such ‘ordinary’ investors that gold does in fact have a clear-cut rationale for being present even in an ‘ordinary’ portfolio (and at a level that would make a ‘conventional’ money manager wince: 10%) there is also something to be said about trying to overload in an asset (any asset) for the sake of profits-before-safety. You know how that formula worked out for dot-com and/or Florida condo ‘investors.’ “Diversify or die” (with paper profits never realized) may sound trite, but, does it ever ring true these days.

Next up, the markets will parse the Bank of England’s and also the ECB’s imminent decisions on whether or not to also offer any additional stimulus or go “on hold.” Australia’s central bank, as well as those of Canada and New Zealand have decided that while they shall offer no further QE-flavored economic sweeteners, they will also put on hold the process of raising interest rates upon which they had embarked in previous months. The mere cessation of such exit strategies has emboldened speculators to pile on risk despite the fact that the strategies apparently being adopted by various monetary authorities have no guarantees of turning out to be effective.

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