The now traditional ramp in all risk assets continues to underperform the increasing fund flow into gold: a phenomenon we last disclosed after the most recent FOMC meeting. In other words, the S&P expressed in gold is down for the day. Which basically means that even with today's joke of a market move, the purchasing power lost as a result of now global currency debasement is not offset by some high beta name surging to all time highs. Even basicalier, it means that gold continues to do better than stocks every time there is a central bank intervention. And there will be much more central bank intervention before the location of the next world war release party is officially disclosed. Basicaliest: stocks ramp, gold ramps more. Nuf said.
Here is how Rosie describes this "surreal" situation from his daily notes:
The U.S. dollar has weakened again, which is one reason why the equity markets are on a more even keel today; however, we should be on a lookout for a countertrend rally in the greenback. The long euro trade has become quite crowded and it got a boost this morning from the service sector PMI, which came in at 54.1 in September from an earlier reading of 53.6. Make no mistake, the continent, together with the U.K., are every bit prone to a renewed economic contraction. Just look at Ireland and their banking systems, which are even more of a basket case than in the U.S.A.
A lot of attention is being placed on the Fed’s strong hints of QE2, but very quietly the ECB was buying a huge $730 million of bonds last week — ostensibly the only backstop out there for Irish and Portuguese debt. Now, in a sign of desperation — soon to come America’s way, so it seems — the Bank of Japan cut its policy rate the grand total of 10 basis point to zero on the nose and at the same time said it would establish a $60 billion facility to buy JGBs and other assets. So this helped trigger a rally today in both the Nikkei (up 1.5%) and the JGB market (10-year yield down to 90bps).
At the same time, there were more verbal hints of additional FX intervention to weaken the yen, and a sign that no country wants a strong currency today. The Reserve Bank of Australia refrained from raising Aussie rates today at the policy meeting — the Aussie dollar slipped sharply (by over a cent) on the no-move. The Bank of Canada has followed suit in shifting its rhetoric from “hawkish” to “dovish” in a bid to clip the loonie’s wings, especially given the sudden slowing in the domestic economy.
All sorts of efforts are either being announced or contemplated to resist currency appreciation from India to Korea to Taiwan and now Brazil as well (the latter just doubled its tax on foreign bond holders, to 4%). Hence the allure of gold and silver as currency surrogates with a more inelastic supply curve (we could probably even include platinum in there).
Tin is hardly precious, but global supply disruptions have helped it to a 51% price surge this year. Again, more attention is being placed on the fact that the S&P 500 is up 2% so far this year than on where the real money is being made — commodities in general, metals in particular.
Are currency wars any different from trade wars? We may indeed look back at that comment (“currency war”) by Brazil’s finance minister (Mantega) back on September 27 as a critical inflection point. The fact that nobody talks about this, preferring instead to justify their positions on a bond yield/earnings yield gap, is even more reason for caution. And of course, overnight Bernanke voiced his support for additional expansion of the Fed balance sheet, which means more expansion of the money supply. Whether or not velocity turns up ahead of a new credit cycle remains to be seen, but again, the implications from all this global stimulus is clear: nobody wants a strong exchange rate, and the only certain investment theme that comes out of this, in this era of intense uncertainty and beggar-thy-neighbour currencypolicies, is precious metals.
Indeed, gold just hit a new record high of $1,328/oz this morning (in the aftermath of the BoJ move) for another 1% gain and is now up 21% for the year, and as far as we can tell, the only asset class to have generated a positive return now for 10 years running (longest winning streak since at least 1920, according to Bloomberg). The legendary Jimmy Rogers reportedly told CNBC today that the yellow metal may well hit $2,000 in the next decade (and that may end up being conservative — then again, 4%-plus average returns are not that bad at all in a deflationary backdrop).
Silver, without much fanfare, is performing even better, with burgeoning global demand for solar panels and batteries providing some extra torque from the already solid investment-related buying activity. Even if we are due for a technical pullback, the precious metals complex is in a full-fledged bull market, and not until the world’s central banks have the gusto to start tightening monetary policy, then rest assured that ultra-low gold leasing rates will keep the trend in prices on an upward trajectory.
Meanwhile, stresses are still evident in areas like consumer credit delinquency rates, which edged up in the U.S.A. to 3% in Q2 from 2.98%, stalling a three-quarter improvement. U.S. consumer bankruptcies also rose 11% in the first nine months of 2010, to 1.16 million.
Moreover, for all the talk of recovery and reflation, from our lens, these are next to impossible without credit expansion. The latest data from the Fed showed that in the September 22 week, bank credit contracted $71.8 billion on top of a $13.7 billion decline the week before for the sixth steepest slide over a two-week span on record (and right across the board from business credit to real estate to consumer loans).