Rallies in Silver, Gold May Be Tied To Debt Concerns [WSJ]
By SPENCER JAKAB
April 3, 2006; Page C4
Judging by the big moves in global financial and commodity markets last week, it would be easy to conclude that a serious fear of inflation had taken hold.
Gold -- the classic hedge against inflation -- hit a 25-year high, while silver surged to a 22-year peak. Then there was the selloff in Treasurys, with the 10-year yield hitting 4.88%, its highest point since before the Federal Reserve started raising interest rates in June 2004. Copper and zinc hit all-time highs, crude-oil futures topped $67 a barrel, up over 10% year-to-date, and the dollar fell against many key counterparts.
"The bets out there in the marketplace are interconnected," said Bart Melek, senior economist at BMO Nesbitt Burns in Toronto.
Investors took profits in many of these markets by Friday, but the confluence of moves -- and the long-running rally in such key commodities as gold, silver and oil -- has begged the question of whether there's a growth or inflation common denominator.
At face value, renewed inflation fears appear to be the most logical explanation. During inflationary periods, hard assets are considered a repository of value while investors demand higher yields in long-term bonds. But some economists see a major shift in global fund flows as the real culprit and say that there is more to come.
"You have these people who think commodity booms are inflationary, [but] I'm not so sure," said Anais Faraj, global strategist at investment bank Nomura in London. "Consumer-price inflation is quite low, wage pressures are quite low."
Instead, he said, the dislocations in these asset classes may be linked to a fear that the tide of cheap financing provided by Asian savers in recent years to net borrowers such as the U.S. may be slowing or even reversing, posing a risk to assets in large debtor nations and meaning potentially more gains for hard assets such as certain commodities.
"What's happening in Japan is that, for the first time in eight years, monetary policy is about to get tighter," he said. "They've really been injecting a tremendous amount of money into the world financial system...and that money's coming home now."
The U.S., with its massive current-account deficit, is now soaking up two-thirds of global savings in order to finance its consumption. Much of this "wall of money," as some traders describe it -- $3 billion each business day -- is parked in Treasurys and other debt securities. Mr. Melek suggested that the flight to gold and other safe-haven investments might be a response to fears that the dollar could come under pressure from reduced foreign willingness to plug the gap.
"Perhaps it could be difficult to fund this puppy, and when people are buying gold, that's what they're hedging against," he said.
There are other reasons to believe that the status quo of brisk capital flows into the U.S. may be at risk. The recent blocking of a deal by a Dubai-based company to operate ports in the U.S. may have sparked fears of a less-friendly environment for foreign direct investment in general and a possible alienation of Middle Easterners plowing petrodollars back to their source.
Mr. Melek noted that hedge funds are talking about increasing their direct exposure to hard assets. This would have a disproportionate effect on commodity prices due to the relative sizes of the markets. U.S. stock and bond markets are worth trillions of dollars while physical commodities are valued in the hundreds of billions. He predicts that gold will hit $700 an ounce in the next 18 months. On Friday the price of gold was $581.80 an ounce.
"The orders of magnitude are vastly different," he said. "Even if you have a small move from other asset classes, it can have a material impact."
Bill Powers, a hedge-fund manager at Powers Asset Management in Chicago, is bullish on energy-related equities. "Clearly, oil and gold, similar to the 1970s, do well together," he said. "If the dollar were to weaken considerably, it would help both of them."
Gains could come disproportionately in areas like agricultural commodities that have benefited less from speculative inflows. |
