Alan Kohler
Green vs gold
The Australian Reserve Bank has put a rocket under the gold price this week.
That’s because a side effect of its rate rise on Tuesday has been to tighten the pressure on the US dollar. A global game is now on to pick the next country to raise rates (Norway, Canada?)…anything but the greenback.
That pressure is only going to increase as Australia hikes again this year and the Obama Administration continues to let the US dollar fall because it’s the only tool they have left (not that there’s much they can do about it anyway).
Huge flows in investment capital are now responding to the fact that the recovery out of last year’s coordinated credit collapse is anything but coordinated. Some countries are still teetering on the brink of bankruptcy (Latvia, Spain) while others are raising interest rates already (Israel, Australia).
Meanwhile America is struggling. David Rubenstein, founder of the Carlyle private equity funds, kicked off yesterday’s World Business Forum with a very gloomy speech, saying that the US remains in recession and even when it comes out “in a month or two”, it will have many long term problems, including “the deficit, inflation, taxes, unemployment, social security/Medicare/Medicaid, savings, interest rates, and energy”.
On the US dollar Rubenstein said: “The dollar is going to be less and less significant to the global economy, and that’s a problem for Americans, since they will have to cut debt and increase taxes to fix the problem.”
Central to the problem is the total failure of debt securitisation markets to recover and the inability of banks to pick up the slack.
The Federal Reserve has bought $US905 billion worth of home mortgages and is still buying, but that can’t go on for long.
Last night the chairman of HSBC, Stephen Green, told the IMF/World Bank meeting in Istanbul that the world’s banks owe the “real world” an apology for what they did. Fair enough, but they’re still in a funk in the US and refusing to lend, even though reserves are at record levels and there is no sign that anyone is prepared to buy mortgage securities.
So the US dollar looks set to keep falling, and the Australian dollar and gold to keep rising, although the unprecedented long positions in gold at the moment suggest that a technical correction may be imminent.
Bullion-based exchange traded funds (ETFs) now hold about 1,300 tonnes of gold and are buying several tonnes every day to keep up with retail investment demand.
There was an interesting comment this morning by the manager of some currency-related mutual funds in the US, Axel Merk, who is betting against the US dollar at the moment. He pointed out that gold is a small market compared to equities and bonds, and that any flight into bullion has a big impact on the price, and could push it to “stratospheric” levels.
Other gold bulls are pointing out that in real terms – inflation adjusted – gold is only about half its 1980 peak (which is $US2079, according to London precious metals research house, GMFS).
And Asian currencies, including the Australian dollar, will also rise with the demise of the greenback.
Another HSBC executive, Stuart Gulliver, told the Istanbul meeting that: “...there's a high possibility that the world turns inside out from what we have known since World War II”.
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