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Posts Tagged ‘gold’

Eerie timing right after our last post on Zimbabwe, this story appeared on the Telegraph yesterday about how gold has been climbing in recent months due to fears that the bailouts will result in the debasement of money and hyperinflation.

In dollar terms, gold is at a seven-month high of $964. This is below last spring’s peak of $1,030 but the circumstances today are radically different. The dollar itself has become a safe haven as the crisis goes from bad to worse – if only because it is the currency of a unified and powerful nation with institutions that have been tested over time. It is not yet clear how well the eurozone’s 16-strong bloc of disparate states will respond to extreme stress. The euro dived two cents to $1.26 against the dollar, threatening to break below a 24-year upward trend line.

Crucially, gold has decoupled from oil and base metals, finding once again its ancient role as a store of wealth in dangerous times.

Is this tick-up in gold price a reflection of reality, or just the fears and anticipation of people and investors? Then again, maybe the fears ARE the reality.

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In Zimbabwe, where money has been reduced to worthless paper due to hyperinflation, citizens are forced to panning for gold to pay for bread to stave off hunger.

Hyperinflation is an economic phenomenon, the root of which can be complex–but generally blamed on an increase in money supply, which consequently reduces the value of the money in stock. In Zimbabwe, as of 2008, the inflation rate is estimated at 516,000,000,000,000,000,000% (516 quintillion).

The sordid history of how great increases in money supply led to hyperinflation is chronicled in the wiki entry for Hyperinflation In Zimbabwe, which started with the government printing new currency to pay off international debts in 2006.

We previously featured Glenn Beck’s hockey stick presentation of potential US inflation. Are the US and European bailouts simply another Zimbabwe?

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This Bloomberg interview last November 2008 of notorious bearish commentator Marc Faber shares his thoughts on the recent recovery of global stock markets . Faber reveals some of the dynamics between the U.S. Dollar and asset markets, and how they move in opposite directions.

Faber also shares his criticism of monetary and fiscal policy in reaction to the financial crisis–which are all geared towards consumption, when he mentions the solution is to improve savings rates and production rates, similar to Peter Schiff’s comments. He also criticizes the bailouts of banks financial institutions which practically exonorate their bad investment and lending practices which created originally the housing bubble and the subprime mortgage bubble and subsequent crash.

He also expects the current rally to go a little further, as far as January to March of 2009 as Global Central Banks inject liquidity which will prop up asset markets. Afterwards, the recessionary pressures begin to reassert themselves. Faber is still in favor of acquiring assets that are outside the U.S. Dollar, especially precious metals such as gold to weather the crisis.

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Peter Schiff gets a little more blunt in this video. He states “the government is manufacturing these numbers”. 

Peter Schiff is asked point blank on how far the Dow will drop. Peter hesitates, but then explains that it also depends on what the dollar will be worth. His answer for me makes sense with the high posibility of inflation or even hyperinflation which could easily skew the actual meaning of the rise and fall of the Dow.  Peter later though explains that he feels that the Dow is more appropriately to be explained in terms of bars of gold. He later states that the Dow will soon be worth one ounce of gold.  Currently, he states that gold is worth 900 dollars an ounce. 

Try assimilating the video from 3:03. The other speaker has stated that Peter has been a bear since 2002, when the market was a lot lower. Peter then replies that the market is really lower now in terms of real money. He says that one should look at the Dow in terms of gold, euro’s, australian dollars, canadian dollars.

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Over afternoon snacks today, my father asked me about the bankruptcies of major US banks such as Lehman Brothers, Merrill Lynch, and Bear Sterns, and how that might affect us who lived in Asia. In this modern age of speculative finance, nearly everything you can think of from the food on your table to the prices of gas in your car, to the interest rates on your savings account are all interrelated.

I co-moderate a stock market and finance forum Finance Manila and I recently did a poll of respondents to check how sensitive or indifferent they were to the performance of the US markets the previous night. My poll showed that as much as 2 out of every 3 respondents (and these were mostly Philippine investors and traders) showed some affection for the DOW’s result.

You can check out the details of this poll here.

This level of sensitivity is not surprising, considering that the Philippine stock market has a positive correlation to the performance of the DOW the previous night. In another study I conducted, I found that the general correlation of the PSE Index to the DOW is .30 positive for the last 10 years, and increased to .56 positive in more recent months (since 2007):

You can check out more of the analysis here.

This almost identical movement in both equity markets is simply reflective of the close knit relationships amongst all financial and speculative markets nowdays. The simple reason: the same people investing in stocks here and in the US, are the same people investing in commodities, bonds, and every other securitized asset across the world.

For example, if we track the performance of Oil vs. the US Dollar in the last decade, we see an inverse relationship:

So the movements in various other financial markets is simply the movement of capital from one asset to another. Check out the other relationships here. In a latest CFTC report on Crude Oil, it showed that the level of participation in commodity markets, was heavily biased towards speculators rather than actual producers and manufacturers. This is the reason why, despite many compelling economic arguments for or against the rise in oil, the movement in price has behaved more according to the whim of speculators:

And how do speculators move? Well, that can be based on many factors, but primarily speculative funds move based on two things:

  • Where they can get more profits
  • Where they can avoid losses

And with the recent tumble of equity markes due to the bankruptcies of banks and investment banks, speculators initially sought refuge in commodities, which drove up prices of Gold, Oil, Wheat, and others in order to insulate them from initial losses in subprime mortgages and bank shares. But as the losses increased, speculators were also forced to sell their commodity holdings to help raise cash to pay for their margin calls in other investments.

This means, that even if there is no economic argument of why a bank’s loss can affect the price of fuel–that’s exactly what is happening now.

So going back to my father’s question: does the bankruptcy of Lehman Brothers, Merrill Lynch, and Bear Stearns have anything to do with us, all I can muster is an understatement:

Yup.

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