This short article sums up the fear portion of the current gold trade. What the article fails to address is the massive amount of global quantitative easing (money printing) going on right. This is driving bond real interest rates to the floor. People see this happening and are taking notice. This is environment you want to preserve your purchasing power and not try and fight the central bank while they bail out their counter-parts (aka: commercial and investment banks).
We are going to see much higher gold prices and I am looking for $2200-2400 by the end of 2011. With the amount of liquidity in the financial system, I think we will see a knee jerk reaction in asset prices and they will spike and we will see gold leading the way by the smart money. 2011 will be a year to learn much, many programs are going on and many theories are being put to the test, we will see if ”this time is different?”.
Investor Chronicle - Uncertainty abounds, with ongoing concerns over eurozone sovereign debt, nervousness in global financial markets, and the potential for increased concern over deflationary pressures. In the current economic and global-political environment, we see potential for gold to re-test all-time highs, above $1,424/oz (£903.32) and push to $1,500/oz in early 2011.
There is a very interesting statement in this news piece. The writer said that investors in agency debt like mortgage bonds backed by Fannie & Freddie were cutting their holdings because the worry that the U.S. will push the refinance of mortgages that are underwater and borrowers that have no equity.
What is interesting is if they do not refinance these borrowers then many will default on their loan. If this happens then the available income for the mortgage bond payments would be less so you would think that this would be an undesirable effect if you were expecting payment from these bonds. If you did refinance then you would have more income to make these interest payments. Another problem with the defaults would be th affected value of homes around them and that could create more defaults. So the question is why would an investor sell agency debt if that was the was the real reason.
This seems like a pretty weak argument for correlating this 7% sellout and actions by the U.S. government. More likely it is because of our fiscal and monetary policy and they want to reduce their exposure to the U.S. dollar. The Federal Reserve is actively talking about doing more quantitative easing (money printing) and this is worrying investors in U.S. assets about the coming devaluation.
This pains me to say but at the moment, Bullard is correct on this point. With the Fed pursuing their policy of quantitative easing (print money), there is a real concern with foreign investors that hold significant U.S. bond holdings that an erosion of the Fed’s independence could be a sign that a more populist approach to this stage of the economic recession. If the investors think the amount of money printing will increase to pay for more stimulus and bailouts then they will demand much higher yields and will increase the cost of imported goods which in turn will import inflation into the U.S. Long term I do think the independence on the Federal Reserve will be eroded because they are not maintaining the normal policy central bankers use of “price stability”.
St. Louis Federal Reserve Bank President James Bullard said on Tuesday that public anger over the U.S. financial crisis and subsequent bailouts could cause big problems if this escalated into a political challenge to the independence of the U.S. central bank.
As the the carry-trade(borrow yen to purchase higher yielding assets) unwinds, the Yen has been strengthing at a profound level. According to Bloomberg, the Yen is trading at a 13-year high against the U.S. dollar. Near the bottom of this article, it mentions the Aussie Central Bank(ACB) has been conducting open market operations to purchase the Aussie Dollar to give it support after it has dropped over 30% in past months.
The yen rose to the strongest level versus the euro since May 2002 and traded near a 13-year high against the dollar as global economic turmoil encouraged investors to sell higher-yielding assets funded in Japan.
Looks like a secondary market is developing for the gold market in China. With the paper price of gold bullion a far cry from the “street-price” that you would great if you walked into a dealer to purchase. We will likely see more of this as long as there is manipulation in the markets in general.
The People’s Bank of China said on Thursday that “underground gold futures speculation” was “typical illegal trading on gold futures” and was not protected by law. The central bank warned Chinese investors of the extremely high risks in illegal futures trading.