Gold’s rally this year to numerous record highs shows investors remain unconvinced that the economic recovery in the US, Europe, Japan and other major economies won’t send inflation higher because of the surge in government stimulus spending and resulting rise in debt.
Gold hit a new highs yesterday including $US1057 an ounce.
Helped by all that cheap money from the likes of the Fed, investors are down on the US dollar.
That is worrying some central banks and there were reports that central banks in Asia, such as Thailand, Hong Kong, Malaysia, Taiwan and Singapore bought greenbacks on Thursday to try and limit the rise of their currencies, which would threaten the recovery in the region.
And that will continue.
Non-decisions from the European Central Bank and the Bank of England (or rather, deciding to stay put on current rates) overnight won’t change the poor view of the US dollar.
They didn’t follow Australia’s RBA and lift rates because their economies are still very, very weak.
All it will take is for the ECB in particular to express some vague change in policy (one of those delphic like utterances that its bosses like to make) and the greenback will take another dive and the Australian dollar will bounce even closer to parity.
Gold is up by just over 20% and most of that has come since early July.
The Aussie dollar crashed through 90 US cents yesterday.
The US dollar is down 6.2% or so against the six major other currencies (which are dominated by the euro).
But we must remember that if the world has another crisis, the very same people will sell their Aussie dollars, Kiwis and options over gold, gold futures contracts and anything else and head for the safety of the US dollar and US Treasury bonds and notes.
All this fretting though about the value of the greenback ignores one thing: in trade weighted terms, it is now only back to where it was in August 2007, when the credit crunch actually started.
The view about inflation and the like is strange, to very odd.
Forecasts from analysts on Wall Street and in Europe and the US bond markets suggest stable prices, and perhaps a mild bout of near deflation in the US.
They are not listening to the Fed and its members who consistently warn that the recovery won’t feel like one with unemployment still rising (as we found with the September report last Friday).
The Fed says interest rates will remain low for an extended period of time and “inflation will remain subdued for some time”.
Federal Reserve Bank of New York President William Dudley said on Monday that slowing inflation is “problematic” for the economy and that interest rates should stay low.
And yet gold bugs ignore these comments and are driven by a belief that flies in the face of the economic reality that very weak production, sales and other figures are telling us about the state of the global economy.
China, Australia, India, Indonesia, Brazil and a flock of other smaller, mostly emerging economies, are doing well.
But the enormous output gaps in the US, Japan and Europe are pressing down on their various economies, crunching employment, inflation and anything linked to costs.
The Financial Times made a good point this week.
It pointed to the change in news reports and tried to link them to the changed sentiment about gold and the US dollar, and how this had coincided with the flood of low cost money looking for higher yields (sounds familiar doesn’t it? next someone will starting marketing a high yielding security that will be characterised as safe and Triple A….).
"An analysis of news flow by London’s Absolute Strategy Research shows stories about inflation swamping stories on deflation," the FT wrote.
"Emerging markets as a whole, according to FTSE indices, have doubled since hitting rock bottom.
"Inflation does not yet show up in economic data or in the markets that most directly try to predict it.
"Core inflation, excluding food and fuel, is falling in the US, the eurozone and Japan. Implicit 10-year inflation expectations in the bond market are lower than earlier this year.
"How to explain this? Either the “sweet spot” of low rates and strong emerging market demand will persist, the interpretation du jour , or markets are premature to put such weight on the revelation story.
"In spite of the optimism triggered by the Australian increase of 25 basis points to 3.25 per cent, analysts said that the real link between all the market moves was too much cheap money flooding the financial system following central banks’ efforts to stimulate the economy.
"Economists do not expect other leading central banks to follow Australia’s lead.
"Low interest rates are pushing investors to park their funds in higher-returning assets lifting the prices of gold, equities and corporate bonds, which do not usually rally at the same time."
And Bloomberg had a good point about the impact of the higher gold prices on gold retailers (and presumably wholesalers).
It quoted a well known UK businessman and jeweller, Gerald Rather, as warning that gold jewelers (who are the biggest users of the precious metal), will have a “very difficult” time recouping higher metal costs during year-end holiday sales.
World Gold Council figures showed that jewellery sales dropped 22% in the second quarter of this year, after a big fall in the first quarter when gold prices jumped to around $US1,000 from February into March.
Bloomberg quoted Rather as saying: “We tried raisi
