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Strategies & Market Trends : Commodities - The Coming Bull Market -- Ignore unavailable to you. Want to Upgrade?

To: craig crawford who wrote (701)	8/18/2001 9:54:42 PM
From: craig crawford	Respond to of 1643

Golden Rays of Hope shemano.com By William P. Kucewicz* Gold's sudden and sustained rise of 4% against the dollar in the past week, coupled with a 1% gain in commodity prices overall, suggests Greenspan & Co. has finally loosened the liquidity spigot. An upturn in the monetary base of nearly 6% from a year ago also leads to this conclusion. The provision of much-needed dollar liquidity, along with lower interest and income-tax rates, portends an imminent Wall Street rally and a U.S. economic recovery that will be stronger than most current forecasts. The prospects for Europe and Japan, too, show glimmers of improvement longer term, with a global reflation apparently at hand. ............................................................................................................................ With a benign U.S. inflation outlook, there can be only two possible explanations for gold's action: An exogenous factor, such as the brewing Israeli-Palestinian conflict, could conceivably cause gold to rise, but a fear of war would evidence itself throughout the global trading day. That gold's key moves took place only during the New York trading day commends the alternative explanation -- namely, a move by the Fed to add dollar liquidity. That this impressive rise in dollar-gold is tied directly to a shift in U.S. monetary policy (likely taken in consultation with other major central banks) is borne out by U.S. money data and events elsewhere. The U.S. monetary base has finally picked up, supporting the rise in bullion and other commodity prices. The Commodity Research Bureau/Bridge Futures Index, which had fallen by some 13% since January, began rebounding last week. Furthermore, not only has the dollar weakened against gold, but it has also depreciated vis-à-vis most of the world's major currencies, falling for eight straight days (including this morning) and registering a five-month low against the euro and a four-month low against the pound. After hitting a two-month low against the yen yesterday, the dollar firmed today on news from Tokyo that policymakers seek a weakening of the Japanese currency. That the dollar has slipped virtually across the board is suggestive of a Fed monetary easing quite apart from the past seven months of interest rate cuts. It would point instead to a Fed decision to add liquidity to the system through open-market operations. The aim is most likely to stave off a worrisome price deflation (as reflected in recent commodity, producer and consumer price declines), accommodate the economic activity likely to flow from the distribution of tax-cut checks and boost the economy in general by providing sufficient liquidity to meet dollar demand. ............................................................................................................................... This doesn't mean that an inflation threat looms. It would take a gold price increase of at least 10% to indicate an excess of liquidity and a future rise in inflation. The current action of dollar-gold instead suggests a return to the status quo ante -- i.e., a reflation -- and a subsequent restoration of price stability. Yields on inflation-indexed securities support this conclusion .............................................................................................................................. That dollar-gold has risen -- and held -- is the most bullish news yet for the U.S. economy and equities. As for bonds, an expected cut in the Fed funds rate next week will better reflect current yields at the short end, which are at multiyear lows. The two-year bond, in fact, is now below its level of 1992-93, when the Fed funds rate was 3% versus today's 3.75%. Eventually, increased private-sector borrowing in conjunction with an economic recovery will tend to push rates up on longer maturities. The likely result will be a movement of funds from the fixed-income market into equities as bondholders take profits and bond prices slip at the longer end.