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Last week saw the Fed stand pat on rates
and the Australian Reserve Bank increase prime interest rates by 0.25%. Stock
markets remained nervous and exceptionally volatile.
The question foremost on investors minds
is whether a turbulent stock market warrants halting interest rate increases
or, in the case of the US, decreasing rates to resuscitate the Real Estate
and credit markets.
Alas, the question is now resolved,
central bankers in their wisdom have determined that growth trumps all and
higher rates are warranted to combat price inflation.
That's the official line anyway!
It never ceases to amaze us that central
bankers blame price inflation for increasing interest rates when in fact it
is their own money printing that causes price levels to rise. The simple fact
is that global printing presses have run too hard for too long for anyone to
be able to prevent price levels from breaking out. This leaves jawboning and
raising interest rate as the only effective tools in controlling the public
perception on inflation. In other words, inflation is now baked in the cake
and in the world of central banking (where perception is king) the blame is
put on stronger than expected global growth.
Boil it down for us Greg. What does it
all mean?
It means we are in for higher interest
rates across the entire yield curve at exactly the WORST possible time:
Short Yields:
Chart 1 - Australia 1 month Bank Bill prime interest rates
The recent hike in interest rates by the
Reserve Bank of Australia
caused rates to break above previous support (red line) and painted a target
of 8.25% (green line).
Australia has
lead the charge on inflation because its economy is
so sensitive to underlying commodity price pressures.
Long Yields:
Up until now the treasury market has
been the major recipient of a flight to quality. But as chart 2 shows, Bonds
are about to hit some headwinds as they approach support in the form of a
long-term rising trend line.
Chart 2 - Bonds are approaching Long-term support (lower blue line)
The implications of the above chart is
that long-term yields are about to reverse higher. There are 2 possible
scenarios we could envisage which would cause Bonds to lose their safe haven
status:
1 - The strong global growth scenario
regains dominance, perceived market risk decreases and inflation has its way.
2 - The credit market contagion spreads
into AAA paper and finally into treasuries causing the US Dollar to drop like a stone.
It seems improbable (to us at least)
that scenario 1 will play out due to the extent of the credit market
problems. Which leaves scenario 2 as our high probability
outcome.
Needless to say, when the perfect storm
hits gold and silver prices per ounce
will soar!
More commentary and stock picks follow for subscribers...
Greg Silberman CA(SA), CFA
greg@goldandoilstocks.com
I am an investor
and newsletter writer specializing in Junior Mining and Energy Stocks. Please
visit my website for more free articles and analysis
Click here: http://blog.goldandoilstocks.com
This article is
intended solely for information purposes. The opinions are those of the
author only. Please conduct further research and consult your financial
advisor before making any investment/trading decision. No responsibility can
be accepted for losses that may result as a consequence of trading on the
basis of this analysis.
_______________________________________________________________________
This
article is intended solely for information purposes. The opinions are those
of the author only. Please conduct further research and consult your
financial advisor before making any investment/trading decision. No
responsibility can be accepted for losses that may result as a consequence of
trading on the basis of this analysis.
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