Date: Wed Apr 21 2004 07:51
trotsky (interest rates and gold) ID#377387:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
it seems that Greenboink is preparing the markets for imminent hikes in the FF rate. it's a bit similar to the first Japanese post bubble recovery that also saw the BoJ hike a tad, only to reverse course shortly thereafter ( the hike caused a real estate bubble collapse - another ominous parallel ) .
however, one immediate effect of rate hike threats ( yes, just the threats suffice ) is that the steep yield curve will tend to flatten - simply because market participants are going to anticipate such a flattening and put on the requisite trades. this in turn is bearish for gold, gold stocks, the stock market in general, the mortgage credit bubble and ultimately the dollar carry trade ( i.e., it's bullish for the dollar ) .
longer term it's also bullish for the long end of the bond market, since higher short term rates , by threatening the entire private sector credit bubble edifice, will hasten the arrival of outright deflation. note in this context that in spite of the fact that a modicum of pricing power has returned to some sectors of the economy ( for instance, steel makers simply told the car makers 'pay up, or make do without steel' ) , industrial capacities in the aggregate have not yet readjusted to the post bubble world ( utilization remains at recession levels ) . note that aggregate capacity utilization data are a little bit misleading, as all aggregate economic data are: there are overcapacities only insofar as the malinvestments of the 90's bubble have not yet been liquidated. as the rise in commodity prices shows, there are also industries with not enough capacity, thus we must conclude that misallocation of resources is the determinant factor in the overall capacity utilization figure.
in any case, an actual ( as opposed to just a threatened ) rate hike campaign would serve to hasten the liquidation of these malinvestments and help to redirect the capital thus freed up into more useful endeavors - it would be a salutory event, but it would also result in a bust. this in turn would see the authorities once again engaging in interventionist measures designed to avert, or delay , this restructuring of the production structure ( a bust is considered 'bad' ) .
therefore the situation appears to be bearish for gold short to medium term, but will no doubt return to bullish in the longer term. the tricky part is in identifying the point at which the market acts in anticipation of the long term outlook.
one of the problems is that gold is not yet in a bubble - if it were, it would ignore the interest rate threat for a few months. i suspect however that that will happen at a much later stage, i.e. a few years hence.
Date: Wed Apr 21 2004 08:13
trotsky (gold vs. gold stocks) ID#377387:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
at 392, gold is up about 54% from its 2000 lows. at 198, the HUI index of unhedged gold stocks is up about 466% from its 2000 lows.
in short, it's no contest.
$10,000 invested in the HUI at the '00 lows have grown to $56,571 , which could be converted into 144 1/3 oz. of gold at current prices.
$10,000 invested in the metal at the '00 lows have grown to $15,372 , convertible into 39 1/5 oz. of gold, thus the diffeence between investors who bought the HUI vs. those who bought physical metal in '00 is that the former now own 105 1/10 MORE ounces of gold per $10,000 originally invested than the latter.
i hasten to add that it makes a lot of sense to actually convert at least a portion of the gains from gold stocks into physical gold or certificates representing same ( like e.g. CEF shares, or COMEX warehouse receipts ) , on the grounds that one builds an insurance policy that way - insurance for armageddon basically. |
