Monday September 19, 2005 - 11:24:25 GMT
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Black Swan Capital - www.blackswantrading.com
Is it an Inflation Story?
•The Australian Bureau of Agricultural and Resource Economics forecast commodity exports would jump by 18.7 percent to a record A$116.8 billion ($89.9 billion) in the fiscal year to the end of June 2006. (Reuters)
•Key reports due today (WSJ):
1:00p.m. September NAHB Housing Market Index: Previous 67.
“The value of money is settled, like that of other commodities, by supply and demand.”
We keep hearing lately that gold is an inflation story? But wouldn’t we see better price action in some of the key commodities if it was an inflation story?
Charts: (daily) Soybeans, Corn, Cotton, Coffee, Lumber, Pork Bellies
Could it be a “no better place to hide” story instead?
If you are regular reader of Currency Currents, you know we think much of the current account concern is simply a canard. But, we did see these real US funding concerns laid out by Morgan Stanley’s Richard Berner that seem to make a lot of sense:
1.New fiscal stimulus aimed at cushioning Katrina’s blow
2.US corporate external financing needs are rising and an increase in personal saving seems likely to come slowly.
3.Improving growth in Japan and Europe implies that those economies will begin to use more of their own savings at home.
4.I think the US current account gap will widen by early 2006 to 7% of GDP or more.
These funding concerns, real of not, become US dollar concerns.
The euro is acting very well on the German election news.
Sure, the economy does appear to be improving. But, although we suggested last week we may see an end to the zero interest rate policy from the BOJ, officials have been quick to dampen those expectations. And it’s quite likely growth in Japan will embolden domestic institutions and individual investors to increase there risk tolerance and look for better places to achieve higher returns on their yen.
The correlation between the Nikkei, a reflection of an improving Japan, and the yen says $-yen goes higher as the stock market goes higher.
Chart: Nikkei Futures vs. Yen Daily
Bottom line today—if there is such a thing in the investment world:
1)The major players in the currency markets have plenty of warts. It would be no surprise if investors were allocating a bit more into gold on that basis alone.
2)It seems we are seeing a lot more stories about credit derivatives lately. Maybe it’s just coincidental, but maybe it’s a sign of concern in a rather complicated, highly levered, and model-driven market with very narrow exit doors.
3)We haven’t seen inflation rear its ugly head in China—that makes us suspect of the inflation argument. Blowing and going they are, we are told each quarter by party officials. (The amazing consistency of the reported growth numbers is a bit hard to swallow for the average skeptic, but that’s a story for another day.)
If you are riding gold higher, it doesn’t really matter what the story. Better to do right, than be right, as Mr. Livermore tells us.
Chart: Gold Daily
But if the Fed makes the dollar look a little more attractive this week, and indicates it will do the proper mopping-up of US fiscal stimulus, the gold-inflation story might lose some luster.
Black Swan Capital
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