Global Money Blowout Engulfs Fiscal Austerity

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Published : October 25th, 2010
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Category : Market Analysis





With China’s central bank in tightening mode, the bad guys had their best chance in months to knock down the price of gold last week. Their best efforts proved feeble, however:  When the dust had settled, gold quotes were down just five percent from the record $1388 peak recorded on October 14.  And although Silver fared somewhat worse, falling eight percent over the last seven days, even in the throes of this relative weakness, Comex Silver resisted getting shoved lower for more than a single day at a time.  “Up” days alternated with “down” days, suggesting that the playground bullies of the precious metals world – i.e., Fed-sanctioned bullion bankers -- were having trouble suppressing the price of precious metals, gold in particular.  Indeed, if last week’s moderate decline was the worst damage they could inflict on bullion when the news was on their side, then we shouldn’t doubt that precious-metal prices will soon be bounding higher once again.


The announcement last week that China’s central bank would boost the yuan lending rate by 25 basis points was like a kick in the teeth to global markets that had been wafting blithely skyward on the prospect of perpetual global easing. China has good reason to shun the party, however, since, even in weak fiscal quarters, GDP growth is running at eight percent or better. Last week’s announcement was an attempt to rein in speculation and to quiet inflation, and it should have surprised no one that bourses around the world reacted hysterically, as is their entrenched habit even when the news is stale from anticipation. This time the dollar’s response was worse than merely hysterical, however, since the greenback rose sharply on news that should have caused it to fall (i.e., stronger yuan = weaker dollar).  Go figure -- and heaven help us if the prop-desk yobs who drove the dollar higher did so under the pale illusion that they were fleeing to safety/quality.


Mass Delusion


Whatever the case, gold and silver came down because speculators believe that China, the world’s remaining economic engine, will continue to tighten in the months ahead. That would be deflationary, the thinking goes, and bullion prices should ease in anticipation.  The thinking is wrong, however, for the simple reason that the move toward fiscal austerity around the world, especially in euroland, is no match for the rampant monetary stimulus that is being used to counter the worst global recession since the 1930s. Beggaring-thy-neighbor via currrency devaluations is not merely in vogue, it is the Tulip-o-mania of these times. If this trend is capable of causing the price of gold and silver to fall, then pigs can fly and the world is entering a period of unprecedented peace, prosperity, harmony, with high-paying jobs for everyone.  If you believe this, then you should be hoarding all the paper money you can get your hands on, stuffing it in your mattress, and in Treasury Bills and Notes that yield almost nothing. For our part, we’ll put out trust in gold and silver, which for the last decade have steadily climbed in value no matter what investment story was in vogue; regardless of whether it was inflation or deflation that we feared; and even as the world’s financial system has edged toward the deepest imaginable abyss.



Rick Ackerman

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Rick Ackerman is the editor of Rick’s Picks, a daily trading newsletter and intraday advisory packed with detailed strategies, fresh ideas and plain old horse sense. Access to it and to all other Rick’s Picks services is available via a free seven day trial subscription available by clicking here.




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