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The Dollar's holed up in a
hotel shooting neat vodka, whatever its "people" are telling the
press...
IT'S A COLD & BITTER TRUTH
that the world's investment markets rarely act as sober as Britney Spears in
a new wig.
In fact, as John Maynard Keynes famously noted, they're prone to
stay much crazier for much longer than a right-minded investor can stay
solvent.
But is that really an excuse for the world's financial markets
acting so tired and emotional right now?
US Treasury bonds this week delivered their worst drop in more
than three years, but global stock markets also plunged – defying the
base logic that bonds rise when stocks fall, as
investors flee the risk of lower earnings for the safety of fixed income.
The Western world's five biggest central banks meantime pledged
$100bn in loans to help inter-bank lending, but short-term interest rates
barely flickered. "It's not going to help us find an exit to this
crisis," warned Cyril Beuzit at BNP Paribas in
London.
"Banks are still reluctant to lend money to each other because there are
serious concerns about potential further bad news."
The Dollar then bounced on surging inflation data, even after
the Federal Reserve cut US interest rates to stimulate fresh money creation.
Grain, soybean and oil prices all rose too, despite
analysts the world over forecasting a global slowdown.
And.Gold Prices
...? Well, gold gave back all of its gains from Monday, and sank to a
series of two-week lows for British and European investors, even though
rising inflation and lower interest rates are the very conditions that tend
to drive investors into the Gold Market – if
only when they finally have a moment of clarity and quit drinking at their
Bloomberg terminals.
"Gold down as Dollar strengthens," said a headline
late Thursday, "lower oil prices reduce inflation risk." Which all sounds fair enough, until you cock an ear to the
deafening thunder now rolling above Wall Street's very heads.
Most investors – and not least the big institutional
managers – would rather try to drown it out by replaying the newswires'
sound and fury on their new iPhones. But when
stocks and bonds all slip together...sliding alongside house prices and the
huge credit-derivative markets they now underpin...not even that pair of Bose
Quiet Comfort 2's you asked Santa to get you for Christmas is going to cancel
this noise.
Hark at the Dollar's bounce, for example...
 
Turning tail from its worst valuation ever on the world's
currency markets, the US Dollar has now gained more than 3% since the start
of November.
The fundamentals, however, are going about as well as Lindsay Lohan's post-rehab recovery if Star magazine is to be believed.
Believed about Lindsay, that is. The Dollar's holed up in a
hotel shooting neat vodka for sure, whatever its "people" are
telling the press...
- US interest rates
have been cut by 0.5% since Halloween;
- The number of
home-buyers now one month or more behind with their mortgage payments
rose by one-third in the third quarter alone, says RealtyTrac;
- Consumer Price
Inflation – even on the official measure – just broke 4.3%,
way ahead of even the gloomiest Wall Street forecasts;
- The trade deficit
refuses to shrink, despite the shrinking Dollar.
Trouble is, not least for US investors wanting to use this
bounce in the greenback to switch overseas, the same deafening thunder is
rolling across pretty much everywhere else right now, too.
Germany's
consumer-price inflation broke 3.1% year-on-year in November. Europe-wide,
the cost of living rose 0.5% last month alone from October. In the United Kingdom,
the CPI looks a little tamer. But the older and more trustworthy Retail Price
measure rose to 4.2%, even as the UK's 10-year housing boom continued to
plunge from the top of this summer.
Meantime in the oil pits, "I think we are going to give
back a lot of what we gained Wednesday, if not today at least during the next
week," reckoned Phil Flynn, senior trader at Alaron
Trading in Chicago, to Bloomberg on Thursday.
"The [oil] bulls need to be fed every day and I don't see
the Fed adding yet more liquidity to the market today."
Oh really? The New York Fed injected $20.75 billion in
short-term funds into the money market on Thursday, more than one-quarter of
it in two-week loans.
But hey – the average daily injection in November was
$45.95bn. So on a relative basis, and what with Christmas coming...good will
to all men, and all that...then sure. The Fed's doing its damnedest to
support the Dollar, keep a lid on oil prices, and ward off inflation with a
magic wand marked "tight money".
"Nor are the numbers devastating in the bond markets,"
says George Friedman of Stratfor, puzzling over the
on-going crisis in world money markets. It led to Wednesday's joint action by
five of the world's largest central banks, but the interbank
lending rate in London
– center of the world for short-term finance – didn't budge.
"By definition, a liquidity crisis occurs when the money
supply is too tight and demand is too great," says Friedman. "In
other words, a liquidity crisis would be reflected in high interest rates.
That hasn't happened.
"In fact, both short-term and, particularly, long-term
interest rates have trended downward over the past weeks. It might be said
that interest rates are low, but that lenders won't lend. If so, that is sectoral and short-term at most. Low interest rates and
no liquidity is an oxymoron."
All told, in short, the Western world's central bankers –
and by extension, the poor mugs who have to get by on the paper money they're
supposed to look after – now face a big, ugly challenge, almost as
angry as the pitbull chewing a wasp that Timothy Geithner, president of the New York Fed, waved a stick at
during a speech to Princeton University this week:
"Do we need additional instruments that would better enable
us to mitigate marketwide liquidity problems?"
he asked. "And how can we mitigate the moral hazard risk inherent in
such instruments?"
Note the lack of a conditional in Geithner's
second sentence. Gabbing "can" rather than "could", he
clearly believes the answer to Question #1 is "yes" – a loud,
happy kind of yes, usually barked by consenting adults drunk together in a
Vegas motel room. With a couple of friends along to watch.
If we were in the business of making short-term calls in the Gold Market here at BullionVault
(which we're not), we'd wager that gold below $800 per ounce will be all but
a happy memory sometime soon in 2008.
When things don't stack up – and when the markets get as
crazy and mixed-up as they are now – someone's sure to get hurt or lose
an eye. Our guess, for what it's worth, is that it won't be gold owners, not
if they buy gold for defense against the ailing Dollar, rising inflation,
slowing growth and on-going crunch in world money markets.
But we could be wrong. Right?
By : Adrian Ash
Head of Research
Bullionvault.com
City
correspondent for The Daily Reckoning in London,
Adrian Ash
is head of research at www.BullionVault.com
– giving you direct access to investment gold, vaulted
in Zurich, on
$3 spreads and 0.8% dealing fees.
Current gold price, no delay | FAQ | Detailed outlook for 2007
Please
Note: This
article is to inform your thinking, not lead it. Only you can decide the best
place for your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.
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