Here Comes The Double Dip!!

The G20 finance ministers have decided have a double dip and I believe it is the right thing to do in the longer term, but it ain't going to be peaches and cream for everyone.
The Financial Times broke the news: read here.

Finance ministers from the world’s leading economies ripped up their support for fiscal stimulus on Saturday, recognising that financial market concerns over sovereign debt had forced a much greater focus on deficit reduction.

This is a big deal. Fiscal policies must be cleaned up to restore integrity to Sovereign balance sheets. The trouble is these are contractionary policies being implemented while substantial deflationary pressures still exist.
Fiscal restraint also requires responsible politicians risk the ire of the public and loss of elections. Modern politicians rather assiduously avoid that kind of thing. 

This may cause a setback in Gold too.

Related:

G20: All change on the fiscal front

Pimco's El Erian on the G20

Jeff Saut good this week

Jeff Saut in his weekly commentary for Raymond James is right on. Read it all here but this is just a taste:

A “permanent investment,” what an intriguing concept! When I first entered this business one of my mentors, namely Lucien Hooper (securities analyst extraordinary), often spoke of permanent investments. In fact he once stated, “You should put one quarter of your investment portfolio in stocks, one quarter in bonds, one quarter in precious metals, and one quarter in farmland. His reasoning was that such a non-correlated asset allocation would grow, and preserve, capital through any multi-generational economic cycle. This morning, we focus on precious metals and farmland.

Last week a “tree fell in the forest and nobody heard it.” The headline read, “CME To Allow Gold As Collateral For All Exchange Products.” The lead paragraph was:

“U.S.-based clearing house CME Group Inc. (CME/$319.96/Market Perform) will allow physical gold to be used as collateral for margin requirements on all exchange products, a spokesman said Monday. The new global policy is effective Oct. 19 in accordance with a member's notice issued late Friday, said spokesman Jeremy Hughes in London. Clearing member firms will be allowed to post up to a maximum of $200 million worth of gold as collateral to cover performance bond, or margin, requirements, Hughes said.”

Then on Friday there was this gold-quip on the Broad Tape:

“If you’ve invested in gold, you’re about to gain a powerful ally: pension funds. ‘I think the largest institutions like our own are realizing that we barely own any [gold],’ Shayne McGuire, Director of Global Research of the Teacher Retirement System of Texas said in an interview in Hong Kong very early this morning. ‘The same thing applies to most of the pension funds which manage trillions of dollars in world wealth.’ TRS oversees $95 billion, and just opened an internally managed gold fund for the 1.3 million public education employees, and suggests other pension funds follow suit. Owning gold is ‘financial insurance,’ he said, sounding a lot like David Einhorn at the Value Investing Congress earlier this week. ‘Consider the tremendous fiscal excess that major governments have made to prevent the world economy from collapsing ... I don’t think the question really is what is gold worth but what are currencies not worth’.”

Pop Go the Gold Gnomes!

Could Gold be telling us something is about to happen? Chart courtesy of www.Bloomberg.com

Review of 1st quarter

I decided to take a look at the first quarter compared to my expectations at the beginning of 2009.
I have posted my document on SCRIBD but I am still trying to learn how to use it. If you have problems please note in a comment so I will know to fix it.

Ouroborous Review Mch 2009.

Donald Coxe Commentary

Thanks to Preur du Plessis of Investment Postcards From Capetown:
Donald Coxe's latest recommendations at the link plus a link to read his latest Basic Points issue.

Highly recommended so click on through.

Tim Price:on "Dilbert, Dow and Gold Theory"

Very good article by Tim Price at the Price of Everything and I include this chart from that article.

The Next Shoe Drops: Collapse of Eastern Europe

Looks like the next shoe is dropping. How many feet does this thing have? Henry Blodgett puts together a very informative article on the financial troubles in Eastern Europe and the resulting problems that will mean for Western Europe and the ECB. The Picture is not pretty.
If you think things are bad here, take a quick peek at what's going on across the pond:

The Telegraph: Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut.

Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.

"This is the largest run on a currency in history," said Mr Jen.

In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.

Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets.

Continued at Clusterstock
This problem is why we have seen both the dollar and gold going up.

Gold breaks out in EuroCurrency terms.

Panic in Bond Market and Banking System

I have been in the market as a futures trader for 30 years and some very painful trades are creating consternation in the debt markets today. Two bank prop desks have bought approximately 40,000 210 calls on the five year treasury note today. That strike price implies a negative 9% (all numbers approx) rate of interest. NEGATIVE!! That means paying 9% to give the government your money for 2 years!

This is almost certainly a panic extreme hedge against some risk in a non exchange traded derivative that is causing capital impairment charges. Here is a link talking about this issue:
money at aol


I don't want to pass rumors so I won't give names but this is extraordinary and a really desperate protective measure. Desperate enough that gold is up.

How low can she go?

ratio of the gold price to the S&P500 chart courtesy of Fullermoney.

Gold Price Crosses Above S&P500

I wrote this here in January:

Tuesday, January 8, 2008

FT: Gold is the new global currency

The Financial Times editorial today claims :

Gold is the new global currency

The world’s major economies have experienced rapid money supply growth of 10 per cent plus per annum in recent years. The Fed remains the world’s biggest holder of gold, yet supplies of the metal are no longer growing annually. If gold is a finite currency, its value against not just the dollar, but sterling and the euro too, should rise.

I made a note of the gold price rise in several currencies in this post last week. I traded in gold during the big rise in the 70's and the climax in the early 1980's. The single most reliable sign of a short term top in gold was an article on the front page of the local newspaper ( The Dallas Morning News ) declaring gold makes new all time high. We are not there yet but, if you see mainstream non-financial news coverage of a new high in gold prepare for a sharp setback. The chart above is from Google Trends and does not indicate an explosion of interest in gold by the general searching public yet. I believe this trend has a good ways to go and would look for a lot of press attention when the market cracks $900, and enormous attention when it cracks $1000. Those will be times to expect a big correction. When the gold price crosses above the SP500 price will be another big news day.

Let's hope it stops soon.

Coxe weekly broadcast

UPDATE: click here for link to Donald Coxe's Basic Points newsletter at the Investment Postcard's From The Edge website.

Negative Real Interest Rates = Positive Inflation Rates

Econbrowser has a very good article on inflation, rising energy and commodity prices, and negative real interest rates. the charts are from the article and there are more. Also I posted a chart of real rates in my previous post.
Late in his article econbrowser says:

I also find it implausible to attribute the commodity price increase to a surge in demand. The economic news over the last three months has been very convincing that output is slowing, not accelerating.

Instead I believe that the price of oil, like the price of all the other storable commodities, and for that matter the dollar cost of a euro, is primarily responding to the Fed's decision to move the real interest rate strongly into negative territory.

But once again the Fed has a golden opportunity to prove me wrong. Fed funds futures prices currently reflect an expectation that the Fed will make one more cut to 2% at the meeting at the end of this month, and then stay there. Here's a prediction for you. If the Fed surprises the markets by holding steady at 2.25%, all those commodities will begin to crash within hours of the news.

First I would respond that the commodity price rise has been significantly driven by increased demand and was forecast to do so by analysts like David Fuller and Donald Coxe a number of years ago. Another contributor has been the allocation of money to long only commodity funds by institutional money managers as a diversification tool. These investments while relatively small to the institutions involved amount to enormous incremental demand in the physical commodity markets. Furthermore the success of this strategy is leading to the usual herd behavior on Wall Street and the sums are increasing. A third contributor to the big price rise in commodities has been the tepid response of commodity producers to the increase. Three decades of low pricing power made these producers reluctant to invest in the expansion of productive capacity for fear of a cyclical downswing. Thus the supply response we would normally expect from high prices has not yet occurred. The last contributor and a big one it is now, is rising inflation expectations and the weak dollar. Econbrowser is exactly right that the blame for this can be laid at the Fed's doorstep.
Rumors in the markets friday were swirling that there was going to be a meeting oc central banks this weekend and also that the Fed might not ease again at the next meeting. And as Econbrowser suggested might happen the dollar rallied, gold fell, and stocks rallied sharply.

HSM: How cheap are gold stocks relative to bullion?

from Humble Student of the Markets.

BCA: Gold $1000

Bank Credit Analyst:

Gold punched through the $1000 mark and the precious metal is being propelled higher by building rate cut expectations and a soft U.S. dollar.

Watch for those front page headlines, if you are not getting them then we aren't ready to correct.

The Decline Of Fiat Money

Fiat money is money backed by politicians. There would seem to be a world wide bear market in trust of politicians.

The Bear Market Case

I posted three somewhat bullish articles in a row so here is the other side.
Martin Wolf at the FT makes the bear case with the help of Nouriel Roubini. in this article:

America’s economy risks mother of all meltdowns

Recently, Professor Roubini’s scenarios have been dire enough to make the flesh creep. But his thinking deserves to be taken seriously. He first predicted a US recession in July 2006*. At that time, his view was extremely controversial. It is so no longer. Now he states that there is “a rising probability of a ‘catastrophic’ financial and economic outcome”**. The characteristics of this scenario are, he argues: “A vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe.

The article goes on to spell out Professor Roubini's list of twelve steps to a very bad recession. I don't know if these things will happen (some have already) but they are all certainly possible. The most encouraging thing I can say is that people are talking about these risks now whereas a year ago such talk was dismissed out of hand.

PS. Mr Roubini has an interesting site here.

Dow Versus Gold Ratio

Strong trend in this chart which came from the Fullermoney site.

FT: Gold is the new global currency

The Financial Times editorial today claims :

Gold is the new global currency

The world’s major economies have experienced rapid money supply growth of 10 per cent plus per annum in recent years. The Fed remains the world’s biggest holder of gold, yet supplies of the metal are no longer growing annually. If gold is a finite currency, its value against not just the dollar, but sterling and the euro too, should rise.

I made a note of the gold price rise in several currencies in this post last week. I traded in gold during the big rise in the 70's and the climax in the early 1980's. The single most reliable sign of a short term top in gold was an article on the front page of the local newspaper ( The Dallas Morning News ) declaring gold makes new all time high. We are not there yet but, if you see mainstream non-financial news coverage of a new high in gold prepare for a sharp setback. The chart above is from Google Trends and does not indicate an explosion of interest in gold by the general searching public yet. I believe this trend has a good ways to go and would look for a lot of press attention when the market cracks $900, and enormous attention when it cracks $1000. Those will be times to expect a big correction. When the gold price crosses above the SP500 price will be another big news day.

Gold Starts 2008 Strong

Gold which closed 2007 with its highest monthly closing price ever keeps going strong today. This is not just an anti dollar move as the charts from Fullermoney show. Fullermoney points out a good article by Prieur Du Plessis on the gold move and the potential for a lot more to come:

It is, of course, true that in inflation-adjusted terms the gold price is still a long way off its euphoric days of 1980. If adjusted for movements in the US consumer price index, the $850 record would today be around $2 250 and the average for January 1980 around $1 790.

The significance of gold moving in terms of all currencies is that this move is not just an anti dollar move. Gold is responding to a credit crisis and questions about whether the central banks have an answer to the crisis. also to fear that the only answer the banks hace is to inject very large sums of money into the world economy leading to inflation later. Donald Coxe wrote recently that he is watching the TED spread, gold, and the dollar index for signs the crisis is abating. No positive signals showing up yet.