The price of gold is set to remain high next year, putting it on track to break $US1000 an ounce for the first time, as it continues to offer investors a haven from volatile markets and supply remains tight.
This year, gold traded from a low of $US601.90 in January to a high of $US845.40 in November, as investors hedged against rising inflation and financial markets wobbled. Market watchers tip gold to rise a 28-year high of $US850 in the first quarter of 2008, and reach as high as $US1100 by December.
The chief executive of the world’s third-largest gold producer, AngloGold Ashanti, Mark Cutifani, is confident about ongoing strength of the gold price.
“You can take gold anywhere in the world and there will be a buyer, which can’t be said for many other commodities,” he said. He predicts gold to remain above $US800 next year on the back of heightened demand, “not taking into account factors such as the high oil price and instabilities in currencies”.
But while industrial development in China and India is putting upward pressure on commodity prices, the cost of producing gold is now more than $US700 an ounce, causing slimmer margins for producers.
Fat Prophets senior resources analyst Gavin Wendt agrees that gold supply will remain tight, with mine closures and fewer discoveries, and as the cost of mining gold becomes more expensive.
He said it was only a matter of time before the gold price moved up to the $US1000 mark.
“We’re going to see further weakness in the US dollar, which has to be positive for gold. We’ll see the continuation of strong oil prices and that inflationary effect will be positive for gold.”
In August, the vice-chairman of one of the world’s biggest gold miners, Newmont Mining Corp’s Pierre Lassonde, said the price of gold would break $US1000 within the medium term.
A well-known gold bull, Mr Lassonde’s predictions have already proved prescient, even if his time frames have been shortened by market events.
He correctly forecast gold to “attack” the $US750 level, which it did in October. He sees gold trading at more than $US850 early in 2008, particularly if the US economy slips into a recession.
Forecaster Argonaut Securities also expects the gold price to strengthen next year, with key support being driven by its role as a safe haven financial asset.
The World Gold Council says gold offers good protection against exchange rate fluctuations, particularly the US dollar.
It said there was little prospect of an increase in mine production in 2008, but demand would continue as investors tried to hedge against inflation and market volatility. Worsening geopolitical tensions could also add to the case for a higher gold price.
Commodity Broking Services managing director Jonathan Barratt said rising inflation in China would also make gold more attractive.
http://canberra.yourguide.com.au/news/local/business/gold-price-set-to-keep-rising/1153413.html
You have worked hard. Now Its time to work smart. Learn to Diversify Your Income.
by Doug Noland
Excerpt.
Credit Market Dislocation Watch:
December 10 - Bloomberg (Shannon D. Harrington): “Bank of America Corp…froze a $12 billion enhanced cash fund after losses on holdings that included short-term debt sold by structured investment vehicles. The Columbia Strategic Cash Portfolio was closed last week and is being ‘wound down,’ Robert Stickler, a [BAC] spokesman…said… The net asset value of the fund, which had $33 billion two weeks ago, was 99.4 cents on the dollar as of today… Enhanced cash funds, which hold about $850 billion in assets in the U.S., are sold to wealthy individuals and institutions as an alternative to money-market funds… The Columbia fund had been the biggest of its kind, according to Peter Crane, founder of Crane Data LLC…publisher of the Money Fund Intelligence. ‘This could be the death of enhanced cash funds,’ he said.”
December 10 - Bloomberg (Elena Logutenkova): “UBS AG will write down U.S. subprime mortgage investments by $10 billion, the biggest such loss by a European bank, and replenish capital by selling stakes to investors in Singapore and the Middle East. Europe’s largest bank by assets plans to raise 13 billion francs ($11.5 billion)…”
December 10 - Financial Times (Stacy-Marie Ishmael and Saskia Scholtes): “Specialist bond insurance companies such as MBIA and Ambac face a moment of reckoning in the coming weeks. Rating agencies Moody’s and Fitch will complete their reviews of how such companies are rated, and might conclude that mortgage losses have put the insurers’ triple-A rating at risk. But the bond insurers’ quest for new capital to secure their triple-A status could face significant challenges amid limited investor appetite for companies with exposure to structured securities backed by mortgage debt… The fate of bond insurers has emerged as a crucial concern in the credit crisis. These companies insure thousands of billions of dollars of debt, including securities backed by subprime mortgages, but hold relatively little capital to back these guarantees.”
December 13 - Financial Times (Stacy-Marie Ishmael): “Bond insurer Security Capital Assurance risks losing its top-flight credit rating unless it raises at least $2bn within the next six weeks, Fitch Ratings said… SCA has four to six weeks to either obtain ‘firm capital commitments’ from a ‘reliable source’, or reinsure its portfolio, Fitch said.”
December 13 - Bloomberg (Christine Richard): “Ambac Financial Group Inc., struggling to avoid the crippling loss of its AAA credit rating, took out insurance on $29 billion in securities it guarantees. The world’s second-biggest bond insurer agreed to transfer the risk that the securities will default to Assured Guaranty Ltd… Reinsuring the debt will free up capital backing those bonds… Ambac guarantees $556 billion of securities and the loss of its AAA rating jeopardizes the rankings on that debt…”
December 11 - Financial Times (Stacy-Marie Ishmael): “Ratings agency Standard & Poor’s has downgraded the capital notes of all its rated structured investment vehicles and said it does not expect the asset class to survive. It also put 18 of these off-balance sheet vehicles on ‘ratings watch negative’, meaning downgrades are likely in the near future. ‘The SIV as a type of vehicle is unlikely to persist and thus we formally assigned negative outlooks due to the issues in this sector,’ it said… S&P analysts expect continued erosion in the net asset values of these vehicles, and do not expect investors to return to the market in sufficient numbers to reverse the SIV funding problem.”
December 14 - Bloomberg (Shannon D. Harrington and Elizabeth Hester): “Citigroup Inc. will take over seven troubled investment funds and assume $58 billion of debt to avoid forced asset sales that would further erode confidence in capital markets… Moody’s Investors Service lowered the bank’s credit ratings. The biggest U.S. bank by assets will rescue the so-called structured investment vehicles, or SIVs, taking responsibility for their $49 billion of assets…”
December 11 - Financial Times (Paul J Davies): “The decision by Société Générale to bail out its off-balance-sheet structured investment vehicle (SIV)means that six out of the original 10 banks have all rescued their sponsored vehicles as funding problems grip the sector. Of the four remaining banks, Citigroup’s SIVs are still the largest, followed by Dresdner Bank and Bank of Montreal, which have similar-sized vehicles, and Banque AIG with a much smaller operation.”
December 13 - Financial Times (Paul J Davies): “Downgrades and defaults of the complex debt securities that pool together mortgage backed bonds and other instruments have been breaking new records in recent weeks. According to Moody’s…more than $45bn worth of collateralised debt obligations of asset backed securities (CDOs of ABS)…have now gone into default… Meanwhile, the number of CDOs that have suffered credit ratings downgrades was more than 2,000 in November alone, according to analysts at Morgan Stanley… ‘November was the worst ever month for CDO downgrades since we have been tracking CDO rating actions,’ analysts at Morgan Stanley said. ‘There were 2,072 rating actions during the month, comprising 2,007 downgrades and only 65 upgrades.’ Structured finance CDOs - also known as CDOs of ABS - were the worst affected segment of the industry, with 1,900 of the downgrades from the three ratings agencies being on these kinds of deals, the analysts said.”
December 12 - Dow Jones (Aparajita Saha-Bubna): “Moody’s…said…that tranches of collateralized debt obligations receiving default notices has jumped to $45 billion as of Dec. 11. This is nearly nine times higher than the $5.6 billion of CDO pieces that Moody’s said were affected, as of the end of October, by these default notices. The increase in volume will likely trigger fresh concerns around forced liquidation of these complex securities by investors heading for the exits.”
December 11 - Bloomberg (Jody Shenn): “Downgrades on collateralized debt obligations by Standard & Poor’s, Moody’s… and Fitch Ratings last month totaled 2,007, a record, according to a Morgan Stanley report. The November downgrades, mainly among CDOs affected by the surge in late payments on U.S. subprime mortgages, represented 56% of the total for the first 11 months of this year… November upgrades totaled 65, just 6% of the year-to-date total.”
December 12 - Bloomberg (David Mildenberg and Hugh Son): “Bank of America Corp., Wachovia Corp. and PNC Financial Services Group said losses tied to bad debt will be worse than expected, providing fresh evidence that credit markets aren’t returning to normal…Bank of America Chief Executive Officer Kenneth Lewis predicted disruptions will stretch into next year at his company… Wachovia…said it may set aside twice as much for loan losses than planned in this quarter and that writedowns already equal the third quarter’s total. PNC, ranked 11th, said quarterly profit will be less than analysts estimated. Today’s announcements show bankers see no quick end to losses and writedowns… Lewis said loan losses will increase in 2008 at Bank of America and Wachovia Chief Executive Officer Kennedy Thompson said conditions are the ‘toughest’ in his 32-year career.”
December 13 - Financial Times (Norma Cohen): “The world’s largest banks have around $212bn of assets at risk of default as a result of the severe contraction in lending on commercial property and the expected fall in real estate values, according to a new report from…Morgan Stanley. Sales of commercial real estate have ground to a halt in recent months, as lending markets have frozen and buyers disappeared. Property experts have said that the sharp rise in real estate values in recent years has been fuelled largely by access to cheap credit and its sudden withdrawal is expected to lead to declining property prices. Because the banks made loans against the property, a drop in values could leave them holding collateral worth less than borrowings. The biggest buyers of commercial mortgage-backed securities have included the specialised investment vehicles which are themselves facing a severe liquidity shortage… Morgan Stanley is forecasting a 73% drop in the issuance of new CMBS, an activity which has made a significant contribution to profits at some banks.”
December 11 - Financial Times (Norma Cohen): “Bonds backed by commercial real estate have suffered their sharpest fall in value in recent months with new issuance down sharply and turnover among older issues crawling to a near halt. Mike Kirby, head of research at Green Street Securities…says: ‘The CMBS [commercial mortgage-backed securities] market for the most part is shut down and dysfunctional right now. Banks still have an enormous amount of paper on their books from six months ago when lending standards were much looser.’”
December 14 - Bloomberg (Gavin Finch): “European money markets failed to respond for a second day to the biggest effort by central banks to restore confidence in the world financial system. The euro interbank offered rate banks charge each other for three-month loans stayed near a seven-year high, falling 1 basis point to 4.94%… That’s 94 basis points more than the ECB’s benchmark interest rate.”
December 10 - Bloomberg (Gavin Finch and Agnes Lovasz): “Investors expect the global credit squeeze to continue beyond the first quarter of 2008, according to the Bank for International Settlements. Models using derivatives based on money-market rates signal ‘expectations of a persistent lack of liquidity and lasting concerns about counterparty risk,’ the BIS said… The three-month Euribor rate…is at a seven-year high of 4.89%…”
Currency Watch:
The dollar index jumped 1.5% to 77.44. For the week, the South African rand declined 3.2%, the Australian dollar 2.7%, the Swiss franc 2.2%, the New Zealand dollar 2.1%, the Brazilian real 2.0%, the Euro 1.9%, and the Danish krone 1.9%.
Commodities Watch:
December 14 - Bloomberg (Tony C. Dreibus): “Wheat rose to a record as a dry spell threatened crops in Argentina and renewed concern that the world’s farmers may fail to deliver enough supply to meet rising demand for bread, pastas and livestock feed… Wheat futures for March delivery rose… 2.7% to $9.795 a bushel on the Chicago Board of Trade… The price has more than doubled in the past year. Most-active futures jumped 6.3% this week and have reached records 25 times since June 27…”
December 12 - Bloomberg (Eduard Gismatullin and Ayesha Daya): “Goldman Sachs Group Inc…raised its forecast for crude oil prices next year 12% on concerns that investment costs and weaker demand may prompt producers to limit supply. Goldman increased its average 2008 forecast for West Texas Intermediate crude oil to $95 a barrel from $85.”
For the week, Gold was little changed at $794.65, while Silver fell 3.6% to $13.98. March Copper sank 5.4%. January Crude gained $3.12 to $91.40. January Gasoline rose 3.3%, while January Natural Gas declined 1.9%. December Wheat jumped 3.9%. For the week, the CRB index rose 1.7% (up 13.5% y-t-d). The Goldman Sachs Commodities Index (GSCI) jumped 2.8%, increasing 2007 gains of 37%.
China Watch:
December 13 - Financial Times (Richard McGregor): “Beijing turned the tables on Washington yesterday after years of US criticism over its handling of the Chinese economy, warning of the serious global implications of the weak dollar, recent US interest rate cuts and the subprime crisis. Beijing highlighted US economic problems at the opening of a twice-yearly meeting between ministers from both countries… Chen Deming, incoming commerce minister, said the falling dollar had pushed up costs of imported resources and been a destabilising factor. ‘What I’m worrying about is the weakening dollar and its potential impact on global growth,’ he said… Zhou Xiaochuan, the governor of the People’s Bank of China, was…was closely watching the impact of US interest rate cuts and their impact on the world economy. ‘For China, what we worry about more is that very accommodative US monetary policy could give rise to a new burst of excess liquidity in global markets… In China, we have already had an excess liquidity problem in the domestic market, which we know is somewhat connected to the global markets.’”
December 12 - Bloomberg (Nipa Piboontanasawat): “China’s retail sales increased at the quickest pace in at least eight years on rising incomes… Sales climbed 18.8%…from a year earlier…”
December 10 - Bloomberg (Nipa Piboontanasawat): “China’s money-supply growth exceeded the central bank’s annual target for a 10th straight month as a ballooning trade surplus pumped cash into the world’s fastest-growing major economy. M2… rose 18.5% to 40 trillion yuan ($5.4 trillion) in November from a year earlier…”
December 11 - Financial Times (Richard McGregor): “Chinese inflation reached a new 11-year high in November of 6.9%, a figure which will harden Beijing’s resolve to tighten monetary policy… Although inflation continues to be driven primarily by food prices, because of a shortage of pigs and high global feed prices, broader underlying inflation was also up, to 1.4%, because of higher oil and coal prices. ‘The inflation issue has evolved into more of a macroeconomic problem,’ said Yiping Huang of Citigroup…”
December 11 - Bloomberg (Nipa Piboontanasawat): “China’s inflation accelerated at the quickest pace in 11 years and the trade surplus swelled, adding pressure on the central bank to raise interest rates and let the currency appreciate faster to cool the economy… Surging food and fuel costs and a record $238 billion surplus in the first 11 months have prompted the government to name inflation and overheating as the biggest threats to growth.”
December 10 - Bloomberg (Zhang Dingmin): “China faces ‘big’ inflation pressures in 2008 and an ‘arduous’ task in preventing price gains from broadening, the nation’s top planning agency said. Increases in global commodity prices, strong domestic demand and planned changes to China’s pricing of resources will add to the pressure, the National Development and Reform Commission said…”
December 11 - Bloomberg (Xiao Yu): “China’s central bank has instructed the country’s commercial banks to tighten rules for real estate loans to help rein in rising property prices and curb fraudulent lending…”
December 11 - Market News International: “Chinese banks should learn a lesson from the ongoing US subprime mortgage crisis and avoid risky property lending, government regulators warned… ‘Current property lending growth is too fast and there is too much competition and too many irregularities. In particular, some commercial banks are offered second mortgage services without approval, which greatly increases the risks in the property lending business,’ the People’s Bank of China and the China Banking Regulatory Commission said… ‘We should learn a lesson from the US subprime crisis … (and) enhance risk management in the property lending business,’ said Jiang Dingzhi, deputy chairman of the CBRC…”
December 11 - Financial Times (Richard McGregor): “The surge in Chinese electricity demand continued unabated this year, with the country building enough new power plants to surpass the capacity of the UK’s entire electricity grid. About 85% of the new generating capacity of 90GW is coal-fired… Although its economy is one-quarter to one-third the size of the US, China will take over as the world’s largest greenhouse gases emitter this year… Even with the surge in capacity, the newly generated power has easily been absorbed by a fast-growing economy still propelled by large investments in energy-intensive industries, such as steel, aluminium and cement… Power demand this year so far has grown at an annualised rate of 16.2%, well ahead of the 2006 rate of 13.7%…”
December 14 - Associated Press: “China may be losing its competitive advantage, mainly because of rising costs, according to a survey of companies compiled by the American Chamber of Commerce in Shanghai.”
India Watch:
December 14 - Bloomberg (Kartik Goyal): “India’s inflation accelerated to a three-month high as the prices of fruits, vegetables and oil products increased, the government said. Wholesale prices rose 3.75%…”
Unbalanced Global Economy Watch:
December 14 - Bloomberg (Fergal O’Brien): “European inflation accelerated more than initially estimated in November, to the fastest pace since May 2001, preventing central bankers from cutting interest rates as economic growth slows. The inflation rate in the 13-nation euro area rose to 3.1% from 2.6% in October…”
December 10 - Bloomberg (Brian Swint and Svenja O’Donnell): “U.K. factories increased prices at the fastest annual pace since 1991 in November as companies passed on higher costs of food and oil. Manufacturing output prices rose 4.5% from a year ago after a 3.8% gain in October… ‘It’s clear that inflation is going to go even higher,’ said Samra Al Harthy, an economist at Standard Chartered Plc…”
December 13 - Bloomberg (Brian Swint): “Britons’ inflation expectations rose to the highest in at least eight years in a Bank of England survey last month, making it harder for the central bank to lower interest rates further after the first cut since 2005. Consumers predict prices will increase 3% in the next 12 months, the highest median forecast since the report started in 1999…”
December 13 - Bloomberg (Svenja O’Donnell): “U.K. real-estate agents and surveyors became the most pessimistic about house prices since at least 1998 last month as a property-market decline spread to London, the Royal Institution of Chartered Surveyors said.”
December 13 - Associated Press: “Inflation in Ireland rose last month to 5.0% — the highest rate in Western Europe — on the back of higher fuel and food prices… The rise from October’s rate of 4.8 percent increased Ireland’s long-standing run as the price-rise leader of Western Europe dating back seven years, when inflation peaked here at 7.0 percent. Only new euro-zone entrant Slovenia, with 5.8% inflation, has a higher current rate than Ireland within the 13-nation zone that uses the European common currency. Inflation throughout the euro zone is averaging 3.0%, itself a 6 1/2-year high that reflects global rises in the cost of oil and agricultural goods.”
December 14 - Bloomberg (Gabi Thesing): “German inflation accelerated in November to the fastest pace in 12 years, led by surging oil and food costs. Consumer prices, measured using a harmonized European Union method, rose 3.3% from a year ago…”
December 11 - Bloomberg (Gabi Thesing): “Investor confidence in Germany dropped to the lowest in almost 15 years in December as rising credit costs dimmed the outlook for economic growth.”
December 10 - Bloomberg (Tasneem Brogger): “Denmark’s inflation rate rose to the highest in more than four years in November as fuel and food prices increased and accelerating wage growth added to pressure on costs. Inflation quickened to 2.5%, the highest annual rate since March 2003… ‘We’ve quite clearly passed a milestone with this inflation rate,’ said Jes Asmussen, chief economist at Svenska Handelsbanken AB…”
December 11 - Bloomberg (Jonas Bergman): “Sweden’s inflation rate rose to a four-year high of 1.9% in November, adding to pressure on the central bank to raise interest rates further.”
December 10 - Bloomberg (Robin Wigglesworth): “Norway’s annual inflation rate rose to 1.5% in November as the fastest pace of economic growth in 22 years fuels wage growth and prices… The economy expanded 6.6% in the third quarter, the fastest since 1985, threatening to stoke inflation.”
December 14 - Bloomberg (Kati Pohjanpalo): “Finland’s annual inflation rate rose to 2.9% in November, the highest since June 2001, as higher oil costs began to show in fuel prices.”
December 10 - Bloomberg (Marketa Fiserova): “The Czech inflation rate climbed in November to the highest in more than six years, driven by food and motor fuels… The rate gained to 5 percent…”
December 11 - Bloomberg (Balazs Penz): “Hungarian inflation accelerated in November because of rising food and oil prices… The inflation rate rose to 7.1% from 6.7%…”
December 11 - Financial Times (Vincent Boland): “Turkey’s economic growth slowed in the third quarter to its lowest level since a devastating financial crisis six years ago… Gross domestic product in the third quarter of 2007 was 1.5%…”
December 14 - United Press International: “Australian Treasurer Wayne Swan said inflation is likely to remain a problem for the country for the next 18 months. Swan, making his first major address since the Labor Party’s electoral victory three weeks ago, said the underlying inflation rate was running at about 3% and faced further pressure throughout 2008… Swan said the inflation threat was not just of interest to economists. ‘It’s one of those measures I think that Australian families are intensely interested in. They know as well as we do that inflation puts our prosperity - individual, business and national — at risk,’ he said.”
Bubble Economy Watch:
December 14 - Bloomberg (Shobhana Chandra): “U.S. consumer prices rose the most in more than two years last month on record energy costs, reinforcing the Federal Reserve’s concern that inflation will erode confidence in the economy. The consumer price index increased 0.8% in November… Consumer prices increased 4.3% in the 12 months to November… ‘It puts the Fed between a rock and a hard place,’ Ethan Harris, chief U.S. economist at Lehman Brothers… ‘They say they are worried about inflation, but that doesn’t stop them from cutting rates.”
December 12 - Dow Jones (Brian Blackstone): “U.S. import prices soared last month at their fastest pace since 1990 on sharp gains in petroleum, natural gas and industrial supply prices. And in a troubling sign for Federal Reserve officials, prices of other imported goods like consumer products, capital goods and automobiles also rose…a sign that the weak dollar is feeding into import prices. Import prices jumped 2.7% in November… In the 12 months through November, import prices soared 11.4%, a sharp acceleration from the 1.3% gain registered between November 2005 and November 2006 and the fastest annual increase since the series was first published in 1982.”
December 12 - Bloomberg (Joe Richter): “The U.S. trade deficit widened in October as the value of imported crude oil rose to a record. The gap grew 1.2% to $57.8 billion… Imports, exports and the shortfall with China were the biggest ever.”
Central Banker Watch:
December 12 - Bloomberg (Matthew Brown): “Four Gulf states followed the U.S. Federal Reserve and cut their key interest rates by a quarter point, helping to maintain their currency pegs to the dollar… Saudi Arabia, the United Arab Emirates, Qatar and Bahrain cut rates today to stem speculation they would revalue their currencies following a slump in the dollar.”
December 14 - Market News International: “With consumer prices spiking on the back of rising oil and food prices, there is a danger the eurozone economy could fall into an inflationary wage-price spiral despite the strength of the euro, European Central Bank Governing Council member Klaus Liebscher said… Liebscher…said he was ‘worried’ about the recent spike in eurozone consumer price inflation to above 3%. ‘Something’s gone amiss,’ he said.”
MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:
December 13 - Bloomberg (Neil Unmack): “U.S. homebuilder credit rating cuts may force investors to unwind collateralized debt obligations with the top investment-grade rankings at a loss, according to a report by Barclays Capital analysts. CDOs that pool credit-default swaps tied to the debt of homebuilders may lose their AAA grades, triggering a selloff, if ratings firms ’significantly’ downgrade the underlying debt… As much as $5 billion of CDOs sold since 2006 reference homebuilders… CDO ratings ‘are particularly sensitive to downgrades in homebuilders,’ the analysts led by Jeff Meli…wrote. Some deals ‘could get downgraded to the point where ratings-conscious investors might choose to unwind their trades.’”
Mortgage Finance Bust Watch:
December 13 - Bloomberg (David Mildenberg): “Countrywide Financial Corp…said foreclosures doubled in November and late payments continued to rise amid the U.S. housing slump… Foreclosures measured by unpaid principal climbed to 1.3% from 0.6% a year earlier… Late payments of at least 60 days advanced to 6.5% of unpaid balances from 4.2%.”
Real Estate Bubbles Watch:
December 10 - BusinessWire: “Single-family home sales in Connecticut continued their steady drop in October, reaching the lowest number of sales during that month since 1993…according to The Warren Group… ‘Clearly, Connecticut’s immunity to the national housing problem is over,’ said Timothy Warren Jr., CEO of the Warren Group. ‘The state is showing all the symptoms of having caught this housing flu, and it looks like the fever is getting worse.’”
December 10 - Bloomberg (Peter Woodifield): “Investment in U.K. commercial real estate may slump 60% in the fourth quarter as buyers shun large acquisitions of shops and offices, Jones Lang Lasalle…said… Investment for all of 2007 may fall 24%…”
Fiscal Watch:
December 12 - The Wall Street Journal (Peter R. Orszag, Director of the Congressional Budget Office): “The nation’s economic outlook may look troubling in the short run, but these difficulties pale beside the economic consequences that will follow if we don’t address the nation’s long-term fiscal gap… The fiscal gap does not arise, as many believe, primarily from the coming retirement of the baby boomers. Rather, the rate at which health-care costs grow will be the primary determinant of the nation’s long-term budget picture… CBO projects that under current law, federal spending on Medicare and Medicaid measured as a percentage of gross domestic product will rise to 12% in 2050 and almost 20% around 2080 from 4% today. The bulk of that projected increase arises from steadily growing health-care costs per beneficiary.”
Financial Sector Credit:
U.S. Consumer Prices were up 4.3% y-o-y in November. Our Producer Price index registered a 7.2% y-o-y surge. November Import Prices were up 11.4% from a year earlier. Euro-zone inflation jumped to 3.1% y-o-y, the strongest rate since May, 2001. German consumer inflation rose to an 11-year high (3.3%). Chinese inflation was at an 11-year high of 6.9% in November. Score of countries and regions - including Australia, Russia, Eastern Europe, and the Middle East - now confront heightened inflationary pressures, in what has developed into a powerful global phenomenon.
U.S. financial markets traded dazed and confused - understandably. For some time now, Wall Street has operated under a premise of how the Fed would respond to a financial crisis. Recent expectations had our central bankers poised to lower rates to whatever level necessary to rekindle “animal spirits” and spur the Credit system and Wall Street risk intermediation more generally. The overriding presumption has been that inflation was a moot issue: inflationary pressures were well contained and, in any event, would rapidly dissipate in the face of housing, Credit and economic woes. This week the market came face-to-face with the reality that inflation is not only a major issue; inflation is in the process of significantly limiting the Fed’s flexibility and capacity to orchestrate another Wall Street bailout.
Markets boisterously protested the meagerness of the Fed’s 25 bps cuts in Fed Funds and the Discount Rate. Wednesday morning’s news of concerted global central bank unconventional liquidity injections garnered a curiously lukewarm reception. This was likely due to its limited scope as well as the recognition that such an approach indicated the Fed was exploring policy instruments outside of Greenspan-style zealous rate slashing. Many on Wall Street are calling the Fed’s handling of the situation a “fiasco,” while some are even asking for Dr. Bernanke’s head. I would instead argue that unrealistic Wall Street expectations were once again instrumental in fostering marketplace instability.
There is certainly more than ample pontificating these days on the nuances of central banking. Meantime, there remains scant attention paid to underlying fundamental forces driving both the financial markets and monetary management. Last week’s Z.1 “flow of funds” data go far in illuminating today’s Market and Federal Reserve Dilemma: The enormous scope of Credit expansion necessary to sustain Wall Street’s bloated securities markets - to keep the contemporary Credit mechanisms generally liquid and functioning - has become patently inflationary for the system overall.
The third quarter demonstrated how, in spite of double-digit system Credit growth, an acutely fragile Credit system came to the brink of imploding. In particular, ongoing rampant Financial Sector expansion could not ameliorate revulsion to Wall Street-backed securitizations. Double-digit expansion in “money-like” debt instruments - including Treasuries, agencies debt, GSE MBS, and bank and money fund Deposits - had become powerless in providing liquidity support for Wall Street’s asset-backed commercial paper, CDO, ABS, and private-label (non-GSE guaranteed) MBS markets. Rapid expansion of Financial Market Credit (15.6% annualized!) was, at the same time, sufficient to adequately (over)finance the real economy, certainly including corporate cash-flows and household incomes and attendant ongoing massive Current Account Deficits.
Back in 2001/02, some Wall Street analysts (the “inflationists”) were keen to argue that aggressive Fed reflationary policies were required to elevate “THE price level” to ensure that deflation was not allowed to take hold. Alluring, yes, but this was dangerously flawed reasoning. There was not and is not today an actual “price level” within the real economy to be manipulated by central banks. Instead, inflationary policies ensured the interrelated operations of Wall Street’s asset-based lending, securitization, and leveraged securities speculation ballooned in unimaginable excess. Resulting Monetary Disorder saw wildly destabilizing price inflation and distortion, especially in housing, securities and asset markets generally. U.S. CPI may have remained tame, but massive Credit-induced Current Account Deficits and the depreciating dollar set in motion Credit and asset Bubble dynamics in economies around the globe.
Today, the Fed confronts bursting Credit Bubbles throughout Wall Street finance, with resulting acute asset market vulnerability. Yet the unusual structures that permeate the U.S. Financial Sector at this time foster continuing rampant inflationary Credit creation. First of all, “money-like” financial sector liabilities (i.e. agencies, “repos”, and bank/money fund deposits) are proving thus far sufficient to sustain Bubble economy excesses. Second, the global recycling of ongoing massive Current Account Deficits and speculative outflows ensures over-liquefied markets (and artificially low interest rates!) for key debt instruments, certainly including Treasuries, agencies and other perceived low-risk securities. Bubble dynamics proliferate in the face of a Wall Street bust.
The extreme divergence in liquidity conditions between bursting Bubbles in Wall Street finance and still rapidly inflating Bubbles in “money-like” Financial Sector Liabilities poses both a major quandary and policy dilemma. Aggressive rate cuts would definitely further stoke the powerful Bubbles inflating in GSE, “repo”, money fund, and bank deposit liabilities. Such ongoing Financial Sector Debt expansion would likely sustain destabilizing liquidity outflows to the world, further fueling myriad global bubbles and worsening an already problematic global inflationary backdrop. A rapidly expanding U.S. financial sector (with the accompanying heavy risk intermediation burden associated with transforming highly risky loans into perceived safe liabilities) also significantly increases the risk of an eventual catastrophic breakdown in U.S. and international financial systems. Besides, it is likely that lower rates would have only minimal effect on the investor and speculator revulsion that has taken hold throughout the Wall Street securitization marketplace.
Those arguing for a Greenspan-style rate collapse fail to appreciate the extraordinary circumstances and risks that have accumulated from years of Reckless Credit Bubble Excess. The outcry for an audacious policy response to avert a recession is misguided. Importantly, today’s rampant Financial Sector expansion is unsustainable. There are today acute inflationary risks to go with major financial system stability issues. While the dislocation will be substantial, the sooner the Bubble in Financial Credit is reined in the better. We are today in the midst of dangerous “blow-off” excesses in “money-like” Financial Sector liability issuance. Few seem to appreciate that such a circumstance places the stability of the “bedrock” of the entire U.S. and global financial system at considerable risk. Wall Street is clamoring for a rate collapse and bold inflation in “money” to bailout its faltering securitization markets. At this point, this would equate to throwing massive (relatively) good “money” after bad - ensuring that a dreadful situation festers into a historic calamity. The least bad course for central bank policymaking would be to hold the line on rates, while injecting liquidity as necessary as part of a program to check Credit excess and permit the economy to commence its desperately needed adjustment period.
http://www.safehaven.com/article-9027.htm
You have worked hard. Now Its time to work smart. Learn to Diversify Your Income.
by Emanuel Balarie
…and the next year….and the year after that!
For several years now, commodities have garnered attention because of their prolific appreciation. The price of oil has climbed by over $80/barrel during this first stage of this bull market, gold prices have more than tripled in price, and soybeans, corn, wheat and coal have suddenly become part of the investor’s vocabulary. At the same time, however, it seems that while investors are now more familiar with commodities (in the general sense), they are still apprehensive about finally taking the steps to add commodities to their investment portfolios. The reasons vary, but it has a lot to do with the fact that most investors focus on the fact that prices are too high (gold at $800/ounce, for instance). As a result, the average investor feels more comfortable waiting for the next bull market in commodities, rather than being the fool that buys in at the “top”.
Interestingly enough, not only is it not too late to invest in the commodity bull market, but it is also perhaps one of the best times to start investing. In this article, I will not list the fundamentals for why I believe we are still in the first half of this commodity bull market. I have written about this topic on various occasions, and I write about it in detail in my new book,Commodities for Every Portfolio: How You Can Profit from the Long-Term Commodity Boom. I recommend buying this as a Christmas gift for yourself or your skeptic friend! Instead, I will make the case for why I believe this is probably the best time (since the start of this bull market in 2001) to actually allocate a portion of your portfolio to the commodity markets.
The Last Seven Years
I fully realize that most people will initially scoff at my belief that now is a much better (and critical) time to buy commodities. How could I possibly believe that buying gold today( when it is trading at $800/ounce) is better than buying gold seven years ago (when it was trading around $250/ounce)? Or how could I argue that oil at $90/barrel is a better investment than oil at $15/barrel? Indeed, if one were to look simply at the price of commodities, my argument would not make sense. However, if you look at the bigger picture, it becomes clear that investing in the second leg of this bull market is much more important.
Consider, for instance, the potential investments (and their returns) of the previous seven years. There is no question that the commodity markets have tallied significant gains. But so have other investments. For instance, while commodity bulls point the gains they made investing in the energy sector, real estate investors can readily point to the appreciation that they experienced by investing in housing. While gold bugs boast about the massive gains that they accumulated by buying gold at $300/ounce, stock market investors simply point at the fact that Google has moved from just over $100 in 2004 to over $700 today.
Indeed, it is clear that those that have missed the “boat” during this first stage of this bull market have had ample opportunity to ride other crafts to financial gains. In a sense, the financial opportunities of this decade have been ample and widespread. However, this unprecedented and goldilocks scenario is clearly coming to a screeching halt. As a result, investors can no longer afford to ignore the benefits of holding commodities in their portfolio.
The Next Several Years
The economic environment of tomorrow paints a picture that is polar opposite to what has transpired in the previous years. Whereas investors were able to profit from real estate gains (via the real-estate bubble), they are now realizing losses (via the real-estate burst). Whereas investors were able to profit from a rising stock market (due to consumer spending), the housing decline and upcoming recession will inevitably result in a bear market in stocks. And while the skewed and archaic fed data (think: the core CPI) has failed to warn investors about inflationary pressures, the massive printing of money to finance the war in Iraq, Afghanistan, and other government expenditures will undoubtedly lead to inflationary pressures that will erode the wealth of many investors.
In short, the benefits of commodities can serve as a remedy for the problems of tomorrow. While I have always espoused the profitable reasons for investing in commodities, I believe it is now more a question of protecting your wealth. In other words, the intrinsic benefits of holding commodities in your typical stock and bond portfolio far out way the potential gains you might see. Now don’t get me wrong. I still believe commodity prices will soar for another decade or so, but if you are concerned about inflation, a bear market in stocks, and the inevitable recession — commodities make sense.
Why Commodities Belong In Your Stocking
So why exactly do commodities still make sense? And why do they belong in your stocking? Well consider the following study conducted by a couple professors and the gifts (or benefits) that commodities provide investors this holiday season.
In 2004, Professor Gary Gorton of University of Pennsylvania and K. Geert Rouwenhorst of Yale School of Management published “Facts and Fantasies about Commodity Futures”. In the study, the two professors examined the long-term relationships of these three different asset classes. Their results were groundbreaking on a number of levels. First, the study shattered several ongoing myths about commodity futures. One of these myths was simply that commodities are more volatile than stocks. Looking back over a period of 45 years, the professors found the opposite to be true; the risk premium for stocks was greater than that for commodities.
Gift #1: Commodities provide investors with a hedge against a bear market in stocks.
In addition to debunking several myths about commodities, Gorton and Rouwenhorst concluded that over a prolonged period of time, commodity futures were negatively correlated to stocks and bonds. This, of course, makes perfect sense. Consider for example the effects higher commodity prices have on companies. As the price of commodities rise, companies have to pay more to make those products. In turn, they will have to pass on those costs to the consumer. Since the price of the product is now more expensive, not as many consumers will buy the product. The end result is lower earnings, and lower stock price.
Gift #2: Commodities provide investors with a hedge against rising inflation.
In addition to commodities being negatively correlated to stocks (and thus serving as a hedge against a bear market in stocks), the study as mentioned that commodity futures were positively correlated with inflation. In other words, commodity prices increase with rising inflation and decrease with declining inflation. Again, this makes perfect sense. Throughout the 1980’s and early 90’s, a period of low inflation, commodity prices were in a decline. Today, commodity prices are increasing in the midst of rising inflation. For instance, as the price of corn, soybeans, and other food products rise in price, you will have now have to pay more for your food products (See Food Inflation Article). While rising inflation erodes the purchasing power of your dollar (and subsequently diminishes your wealth), investing some of your wealth in tangible real assets can counteract the inflationary pressures.
Gift # 3: Commodities provide investors with the opportunity to profit from the greatest generational bull market of our time.
Of course, commodities can still provide investors with the opportunity to profit from the greatest generation bull market of our time. While there might be pullbacks and consolidation along this bull ride, the sheer demand for commodities from China, India, and other emerging economies will continue to push commodity prices higher. Additionally, while many investors continue to focus on how high commodities prices have risen over the last 7 years, they fail to realize that commodity prices were in a bear market for the previous 20 years. And if you look back at the history of commodity bull markets, they have all lasted longer than 15 years.
It is becoming evident that commodities should have a place in an investors’ portfolio. It is no longer simply a matter of whether or not you believe that we are in a bull market or a bubble, but it is a matter of properly diversifying your investments. While diversification might not seem as important when most every investment is going up, it becomes increasingly important during times of economic uncertainty. Hopefully this Christmas Santa will bring you some coal….or oil…or gold. Personally, I prefer gold.
Say tuned for the official launch of www.commoditynewscenter.com in early 2008. With commodity news, pertinent commentary, quotes, and trading tools, CNC is poised to become your home for commodities online. I will also be launching a daily blog and send my subscribers a free report on which commodities to own…and not own…in 2008!
Emanuel Balarie
CommodityNewsCenter.com
http://www.safehaven.com/article-9025.htm
You have worked hard. Now Its time to work smart. Learn to Diversify Your Income.
RSS
![[Most Recent Quotes from www.kitco.com]](http://www.kitconet.com/charts/metals/gold/t24_au_en_usoz_2.gif)
![[Most Recent Quotes from www.kitco.com]](http://www.kitconet.com/charts/metals/silver/t24_ag_en_usoz_2.gif)
