Monday October 10, 2005 - 11:26:30 GMT
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Black Swan Capital - www.blackswantrading.com
Aussie lagging Gold?
•France's industrial production rose in August at the fastest pace in almost a year. (Bloomberg)
•Key reports due today (Global-View.com):
JPN- Sports Day Holiday
06:00 GMT- GER- Aug Foreign Trade
08:30 GMT- UK- Sep PPI
CDA- Thanksgiving Holiday
US- Columbus Day Holiday
“No country in modern history has moved so swiftly from worldwide adulation to dismissal or even contempt as did Japan, in a process that began more or less as the temple bells were tolling in the new year of 1990. In the 15 years that followed, amid crashing stock- and property markets, mountains of dud debt, scores of corruption scandals, vast government deficits and stagnant economic growth, Japan mutated from being a giver of lessons to a recipient of lectures, all of which offered recipes for its reform and revival. Those lectures, although received politely by a newly self-deprecatory Japanese elite, seemed to be ignored. Now, however, the time for lectures is over. Japan is back. It is being reformed. It is reviving.”
We are seeing a lot of love for gold lately. If Asian central banks do decide to start buying the metal—as a way to hedge their currency reserves, we could see it power much higher from here.
“Gold is a good hedge against currency risk, not inflation. This is important for the Asian central banks, which have large holdings of reserves. Gold is an excellent hedge against GBP and JPY variability, and a pretty good hedge against USD and EUR. But the big four Asian central banks have only a little more than 1% of their reserves in gold. Any increase in their gold holdings would have significant implications for world gold prices,” writes Morgan Stanley’s Stephen Jen. [Our emphasis]
But, there are other views. Here’s one from Bloomberg columnist Matthew Lynn:
“The increase in gold prices probably signals the end of an inflationary period, not the start. The rising price of gold looks like the last gasp of the commodities bull market…Interest rates in the major economies, with the possible exception of the U.K., are going up. There will be less easy money around. Growth is about to slow, reducing the prices of all commodities, including gold.
“The gold rally is likely to be the last for commodities for quite a while. If it goes to $500 an ounce, anyone buying will be in for a rude shock.” [Our emphasis]
We seem to be thinking first and foremost that rising prices or raw materials represent inflation. But Mr. Lynn is saying they are symptoms of inflation. Inflation is the overall debasement of the currency through easy money policy. And if the Fed, ECB, Bank of Canada, and Bank of Japan (maybe) do what they imply they will do, easy money will end.
The problem is that Mr. Lynn could be technically right, but gold could continue to rally on Mr. Jen’s expectation that Asian central banks are warming up to gold.
We are not sure who will be right—we are only worried about doing right. And maybe doing right on the currency side, as it relates to gold, is through the Australian dollar. For now, it appears to be lagging. If it plays catch up to gold, it would be a nice move from this level.
Chart: AUDUSD vs. Gold
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