Commodities Surge as Crack-Up Boom Gathers PaceCommodities / CRB Index Oct 13, 2007 - 09:18 PM GMT
Gold surged $11.50 in New York yesterday, from $739.80 to $751.30. It was sold off subsequently in the illiquid New York Access Market and has traded sideways in Asian and early European trade.
Gold was trading at $748.410/ 748.60 at 1200 GMT.
Gold's close at $751.30 was only the fourth time that gold has ever closed above $750. Continuing strength will likely lead to gold challenging the non inflation adjusted high for gold in 1980 at $850 in the coming months.
The dollar remains on the ropes and oil and all the base metals except copper were higher again yesterday. The continuing fall in South African gold output which fell 4.9 percent in volume terms and overall minerals production fell 3.1 percent in August compared with the same month the previous year at a time of very robust demand is very bullish. PPI, retail sales and Michigan consumer sentiment data due for release today will help the market further assess the health of the U.S. economy.
Bloomberg reports that Morgan Stanley & Co, the second-biggest U.S. securities firm, said that gold may average $800 an ounce in 2008, driven by global economic growth, inflation, and demand from expanding middle classes in developing countries. "If the U.S. keeps interest rates at accommodative levels, thereby supporting global liquidity, inflation-related pressures on gold will continue,'' New York-based research analysts Hussein Allodia and Jeremy Friesen wrote in a report yesterday. Gold has been supported this year by a weakening dollar and by jewellery demand, especially in fast-growing economies like China and India. Some investors also buy the precious metal as a store of value at times of inflation.
It is worth remembering that U.S. investment banks' gold price forecasts have been very conservative and since 2001 they have tended to err on the downside.
A recent report from Morgan Stanley said that “Gold loves a bear (weak market).” The report said the reason for the leap in gold prices in the last month-and-half is in fact due to the increase in investors rushing to purchase the precious commodity in droves. It's this volatility that has people avoiding stocks or currency purchases, in turn leading investors to put their money into something they trust and gold is usually the safest option because it always holds its value proving the term Morgan Stanley used: “Gold loves a bear.” Chief economist of SAAB Bank in Riyadh, John Sfakanakis, confirmed the claims mentioned in the report by explaining: “Most businesses and individual investors see gold as a safe-haven during times when the US economy witnesses a slowdown, showing signs of a possible recession.”
- U.S. home foreclosure filings doubled last month from a year ago and the nation's biggest mortgage lender said late payments rose, suggesting the U.S. mortgage crisis is not abating.
- Investment bank JP Morgan says in a new research report, that the current relative stability of credit markets may be the calm that precedes the storm as the worst of the credit markets turmoil is yet to come.
- The Wall Street Journal reports today that the richest Americans' share of national income has hit a postwar record, surpassing the highs reached in the 1990s bull market, and underlining the divergence of economic fortunes blamed for fuelling anxiety among American workers.
- The Journal says that the wealthiest 1% of Americans earned 21.2% of all income in 2005, according to new data from the Internal Revenue Service. That is up sharply from 19% in 2004, and surpasses the previous high of 20.8% set in 2000, at the peak of the previous bull market in stocks. The bottom 50% earned 12.8% of all income, down from 13.4% in 2004 and a bit less than their 13% share in 2000.
- Income inequality on a par with the 19th Century is not healthy for a society or an economy. Especially an economy which is extremely reliant on the consumer spending of the dwindling middle classes.
Increasingly it looks like we are witnessing a crack up boom (more on 'Crack Up Boom' below) where the huge credit creation of recent years and today is leading to the wholesale mark up in the price of many assets. The value of these assets is rising in terms of the U.S. dollar but declining in terms of other fiat currencies and especially in terms of gold. Thus the Dow Jones above 14,000 and near record highs is of no great significance when it is falling in terms of euro and gold.
It is important to note that the best performing stock market in the world this year has been the Zimbabwean stock market. The Zimbabwe Industrial Index (ZII) returned 912% in 2006 and has returned in excess of 600% so far this year. This is due to the insane policies of the despot Mugabe. Credit to the government recorded an annual growth of 6 553.5%, from $81.5 billion in July 2006 to $5.4 trillion in July
2007. £1 (1 British pound) is now worth over 1,000,000 Zimbabwean dollars. The IMF predicts inflation of 100,000% by the end of the year.
Better to exchange paper money of no intrinsic value and with a disappearing value for stocks, tangible assets and gold that may at least have a call on some corporate assets and/or profits.
The same thing happened in Weimar Germany. Stock market performance is generally not a good way to gauge the health of the wider economy. Especially when the currency in which the stock market is quoted is experiencing serious depreciation. The health and stability of a nation's currency is of far more importance than the performance of its stock market.
Forex and Gold
The USD has recovered marginally from yesterday's sell off and is trading at 1.4177 and 2.027 against the
EUR and the GBP respectively.
This morning the U.S. dollar is up to 78.26 (from 78.04 yesterday). Support is at its all time record low at 77.657. Should support fail at this level the dollar will likely sell of aggressively to 75.00.
The U.S. dollar might be destined to disappear, replaced by a regional currency called the Amero, reports the Tokyo correspondent for the Singapore Business Times today. "Truth is said to be stranger than fiction sometimes, and what I hear about the future of the U.S. dollar may sound like pure fiction, but the sources from whence the reports spring are, as they say, 'usually reliable' ones, and so they do have a ring of truth to them," writes Anthony Rowley. Rowley says the slide of the U.S. dollar in relation to other foreign currencies makes such a transition more likely. "And, looking at the size of U.S. debt to all those foreign central banks and private investors who obligingly finance the American current account deficit, similar conclusions might be drawn," he writes.
(The Amero - North American Currency - Steve Previs, Jefferies International, CNBC Worldwide - http://www.youtube.com/watch?v=6hiPrsc9g98&mode=related&search=
North American Union on CNN - http://www.youtube.com/watch?v=T74VA3xU0EA&mode=related&search= )
Spot silver was trading at $13.79/13.81 (1200 GMT) and it is again trading in unison with gold and remains slightly stronger.
Platinum was trading at $1402/1407 (1200 GMT). Platinum hit a new all time record high at $1,413 on concerns regarding supplies from South Africa and continuing strong global demand.
Spot palladium was trading at $378/383 an ounce (1200 GMT).
Oil prices continue to hover near record highs. Light, sweet crude for November delivery fell 33 cents to $82.75 a barrel by midday in Europe in electronic trading on the New York Mercantile Exchange, as markets moved into the correction mode. The contract had jumped $1.78 to settle at $83.08 a barrel Thursday.
The Crack Up Boom
Ludwig von Mises (1881-1973 ) was a notable and highly respected economist and a major influence on the modern libertarian movement. He has been called the "uncontested dean of the Austrian School of economics". The Ludwig von Mises Institute is named after him. The Ludwig von Mises Institute is a libertarian academic organization engaged in research and scholarship in the fields of economics, philosophy and political economy. It generally advances a view of government and economics expressed by Ludwig von Mises. The Institute is funded entirely through private donations and does not consider itself a traditional think tank. While it has working relationships with individuals such as U.S. Representative Ron Paul and organizations, it does not seek to implement public policy and has no formal affiliation with any political party (including the Libertarian Party), nor does it receive funding from any. The Institute also has a formal policy of not accepting contract work from corporations or other organizations.
Von Mises believed that significant credit expansion created business cycles. He continually warned of the dangers in inflation which can lead to hyperinflation and of the importance of governments and central banks not resorting to massive credit creation and the printing presses in order to prolong an artificially induced economic boom.
"The course of a progressing inflation is this: At the beginning the inflow of additional money makes the prices of some commodities and services rise; other prices rise later. The price rise affects the various commodities and services, as has been shown, at different dates and to a different extent. This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.
But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things that are used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them. It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German Mark in 1923. It happened with the dollar in 1973. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last."
Ludwig von Mises, The Theory of Money and Credit
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