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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: ild who wrote (53119)7/7/2006 2:43:01 PM
From: Chispas  Read Replies (2) of 116555
 
trotsky - "the current position of the interest rate cycle is precisely what we usually see shortly ( a few weeks, more likely months ) before the gold sector embarks on one of its longer-term decoupling sprees. since short term rates are now very high relative to long term rates, the next MAJOR relevant move will be a steepening of the yield curve. when that happens, gold and especially gold stocks tend to outperform everything else, including commodities.
usually a steepening yield curve is one of the symptoms of a liquidity contraction. note that a major driving force that pressures short term rates higher is demand for speculative credit. when that demand eases, so do short term rates. the liquidity contraction then goes on to expose all sorts of things, such as overvaluation of the stock market and malinvested capital that becomes then subject to liquidation ( think housing at the current time ) . during this period of contraction, the purchasing power of real money ( i.e., gold ) rises.
the other instance of yield curve steepening that can sometimes be observed is when LT rates rise faster than ST ones. this tends to happen when the market thinks inflation is getting out of control ( the market doesn't think so right now as it were ) .
in case 1 ( yield curve steepens on account of short term rates falling faster then long term ones ) , gold stocks tend to vastly outperform bullion, due to their margins getting two boosts at once, rising gold prices AND falling input costs.
in case 2 ( long rates rising even faster than short ones ) , bullion tends to be the better performer, as input costs for the mines rise just as fast as the gold price. this is btw. the worst case scenario for heavy hedgers. ABX has just experienced an intense phase very similar to this scenario and it's probably a good bet that their book-keeping closet contains a number of skeletons by now."

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