As I write this BP is trying to plug the leak from its well on the floor of the Gulf of Mexico. When all is said and done the magnitude of crude oil that has been pumped into the Gulf will dwarf that of the Exxon Valdez. It’s been a season of man-made disasters.
The latest from Europe? Don’t buy the Euro yet. It is cracking hard and look for any rallies as opportunities to sell. Great news for exporters and the German economy will benefit. But, look out below as far as the currency is concerned. The European Central Bank (ECB) is well behind the curve on this one. The Euro is NOT a single currency, but a consortium of 16 countries that are trying to make believe that they have lots in common.
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As we have seen, this is furthest from the truth. The Euro zone has a few major players, the Netherlands, Germany, Austria and maybe France. The rest are marginal at best. Greece, as we have learned, lied about its fiscal and financial position. Nothing-new here. The country has the least capable tax regime with tax cheats rampant. Italy is second on that list. Portugal is still just emerging after decades of socialist rule with few revenue generating assets beyond real estate. Spain while a major force with strong potential took a wrong turn in the past decade and promoted real estate speculation a la the US. Spain could potentially be the biggest domino to fall in this crisis as it is sitting on billions in bad loans and hundreds of thousands of empty residential units that are still not declared on the books of its banks.
The US has always had two things going for it. Since its inception the country has made mistakes, but it has addressed the issues with shock and awe when they became clear. No other country in the world can do this. Why? Because the US is the world’s reserve currency and it can borrow money at will. You see my friends; you can NEVER default on your debt when you are the bank that prints the money that your debt is denominated in.
The Markets React…or Do They?
As we go to press the market is “only” off about 10%. Not bad considering the magnitude of events occurring worldwide. Thailand in crisis, Europe on the rocks, deficit spending out of control in the US. These are all massive walls of worry and that usually spells good news for the markets in a perverse way. The signal that shows that there might be a rally at hand is the movement of the Volatility Index or VIX. It has pulled back sharply after soaring just as sharply. The VIX has failed to move substantially higher which is signaling that this move lower was not the “great crash” that investors were fearing.
Several US stocks soared this past week in the face of a down market. The ones that standout are the Airline stocks and transports in general. They moved higher based on lower oil prices. If the transportation index continues higher, then the other averages will follow. While this spells short-term relief for investors in general. However, these are only short-term predictions.
While the US dollar has remained the strongest of the weak, as measured in terms of gold, it has moved lower. So have the Euro and the yen. Gold is signaling that things are NOT going well for the longer term. Gold is actually becoming a disappointing performer regardless of how much it has moved in the past months and regardless of the fact that it recently set a new high.
It should be higher, much, much higher. In fact, if gold was truly an inflation hedge, it should be trading at close to $2,400 today based only on the rate of inflation since gold was trading at $870 in the early eighties. So, while gold is holding its own during this cycle, it has much further to run.
In the short term, once this crisis will “appear” to abate, gold might pull back. It’s a BUYING opportunity.
I mentioned some weeks ago that the frequency of financial crises in the world is increasing. From crashes that used to occur once every twenty or thirty years, we are now seeing significant moves once every two to three years. If this trend continues, and there is no reason to believe that it won’t, gold will be the major beneficiary as it provides a store of value and a psychological haven.
Europe is the key today. Will Asia be tomorrow crisis? Or South America? There are few model economies in the world today and those that may have provided a safer bet like Australia or Canada are either too small or too politically unpredictable. Australia’s regime passed a new heavy tax on the mining industry, something that may bring its resource dependent economy to a standstill if implemented in its current form. Canada, while the most fiscally responsible, also faces the prospect of a slow down if the US double dips and the price of resources like oil fall due to lower global growth. These past couple of weeks the Canadian dollar fell by more than 7% as oil prices collapsed.
Meanwhile in Asia there are mini crises that could threaten the economic and political stability in the region. The Koreas are at it again. China, while hot, has a real estate bubble that could wipe out billions in newfound wealth. And, if the problems in Thailand resurge, it could have consequences for its neighbors. And, who knows what will come out of that powder keg that all are ignoring right now: the Middle East.
The world today is on the edge. Whether is goes over or pulls back is anyone’s guess at this point. I cannot remember anytime in history when so many problems of magnitude existed at the same time. If that is not a bullish case for owning a piece of the yellow metal, I don’t know what is. Gold, unlike just about every other non-resource asset class, will NEVER go to zero!
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