Gold’s London AM fix this morning was USD 1,765.50, EUR 1,310.40, and GBP 1,144.35 per ounce.
Yesterday’s AM fix was USD 1,792, EUR 1,322.22, and GBP 1,155.23 per ounce.
The FOMC minutes from yesterday’s meeting have led to falls in global stock markets as concerns over U.S. economic growth depress market sentiment further. Asian stocks have been hit hard with the Nikkei down 2% on the day. European markets have suffered further losses with the DAX, FTSE down between 3 and 4%. Gold is down 2% so far and looks technically weak. The Dollar index has risen sharply this morning to 78.328, a nearly 1% gain.
The economic growth consensus for the global landscape has turned sharply negative in the past number of weeks and expectations for growth have been reduced across the board. Monetary policies are now being adjusted accordingly. The FOMC notes indicate that FED will now extend the maturities by swapping near term debt will longer term, thus artificially flattening the yield on debt over the longer term.
When capital is cheap it is misallocated.
These are desperate times, and the pervasiveness of official intervention across the major global economies is in itself causing potentially greater problems for the future. It has been argued that lax monetary policies of the past 10 years led to massive re-distribution and arguable misallocation of credit (housing, equity bubbles, and now bond bubbles), coupled with a disconnected regulatory environment where foreign governments do not operate in lock step to manage risks emanating from globalisation.
It now seems that recent)history is now repeating itself albeit on the other side of the economic cycle. The IMF have argued in their World Economic Outlook Reportand elsewhere that the current exceptionally low interest rates are spurring a hunt for yield at the expense of traditional investment styles. This is causing an aberration in the market where capital is flowing into emerging markets faster than it would otherwise be expected to do so.
A section of the report that is worthy of closer attention, reproduced below, acknowledges the role precious metals may play in response to further political crisis.
Weak policy responses to the crisis and additional risks surround weak policies in the euro area, Japan, and the United States. These give rise to two concerns, including the potential for (1) sudden investor flight from the public debt of systemically important economies and (2) brute force fiscal adjustment or loss of confidence because of a perceived lack of policy room. Under either scenario, major declines in consumer and business confidence are likely, leading to sharp increases in saving rates that undercut activity.
Investors could take flight from government debt of key sovereigns. There are few signs of flight from U.S. or Japanese sovereign debt thus far, and few substitute investments are available. Although sovereign credit default swap (CDS) spreads on U.S. debt have moved up lately and U.S. government debt experienced one rating downgrade, the impact on long-term interest rates of the end of the Federal Reserve’s E2 has been offset by inflows into Treasury securities. Interest rates on Japan’s public debt remain very low, despite adverse shocks to the public finances resulting from the earthquake and tsunami. Nonetheless, without more ambitious fiscal consolidation, a sudden rise in government bond yields remains a distinct possibility as long as public debt ratios are projected to rise over the medium term. Long-term rates on the debt of France, Germany, and a few other economies are also very low. However, this could change if commitments at the national or euro area level are not met. The risks could play out in various ways:
• Investors could increasingly reallocate their portfolios to corporate or emerging market debt: This would be the least disruptive scenario, because it could spur demand, although not without potentially raising problems related to absorptive capacity.
• The term premium could rise as investors turn to short-term public debt: This would make the global economy more susceptible to funding shocks.
• Rates could move higher across the yield curve, with depreciation of the U.S. dollar or the Japanese yen (mild credit risk): This might materialise in the context of a broader sovereign rating downgrade that does not upset the status of the United States as the major provider of low-risk assets or an accelerated reduction in the home bias of Japanese investors.
• A strong increase in credit risk could quickly morph into a liquidity shock, as global investors take flight into precious metals and cash: This could occur if there were major political deadlock on how to move forward with consolidation in the United States or if the euro area crisis were to take a dramatic turn for the worse. The global repercussions of such shocks would likely be very severe.
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