Posted on 11/27/2009 5:41:16 AM PST by danielmryan
FRANKFURT (MarketWatch) -- Gold futures fell on Friday but traded off their lows, as Dubai World's debt woes fueled a sell-off in commodities and stocks, while the U.S. dollar gained against its rivals.
Gold for December delivery tumbled from a high of $1,195 an ounce to an intraday low of $1,130.10 an ounce in electronic trading on Globex. That is a decline of nearly $65, or more than 5%.
In recent trading, gold fell $26.80, or 2.3%, to $1,160.20 an ounce.
(Excerpt) Read more at marketwatch.com ...
It's different this time. Gold will never ever again trade below $1000 per ounce. I read it on the Interwebz so I know it's true.
>> It’s interesting to me that a risk reduction trade like the one this morning would be dollar-positive.
The “dollar is garbage” echo chamber is a FR phenomenon. The rest of the world isn’t spun into quite such a froth as some of us are just yet — as NVDave pointed out, Treasuries are the first place people seek to park their dough WTSHTF, economically speaking. And that will persist, at least for the near term (which I think is measured in years, not weeks).
Put another way: do your REALLY think the Eurozone economy, or Japan’s, is so much better that you would rather hold your capital in their currency? If you’re really brave, I suppose you could park your cash in yuan, or Brazilian reals. After all, they’re “emerging” economies and they’re kicking our ass, right?
It is hard to say for sure what will happen to gold. It seems gummints don’t like high gold prices because it reflects poor confidence in them so they will do what they can to depress prices. Gummint likes stock prices going up so it (if you believe Denninger) is using bailout money to inflate stock prices. The question becomes not just is there confidencein gummint but can gummint DO IT? I suspect that gummints ability to influence these things has just about run out. Like Wiley Coyote, it ran off the cliff some time ago but so far it has been able to stay aloft on the DESIRE to do so. We shall see. These are truly “interesting times”.
I think it was Businessweek that reported on Dubai’s debt woes a month back — amazing that this is only now hitting the collective consciousness.
Dubai may have to give up Emirates airline among other assets as it looks to fund its overbuilding.
Other emirates are reluctant to loan more even against hard assets.
Interestingly enough, an India watcher points out that the Dubai default's impact on gold prices might not be incidental:
Dubai happens to be a major seller / distribution point AND the Middle East in general is a major source of income for expatriate Indians, Pakistanis, Sri Lankans, etc. to buy gold to take / send home.Do you not think the collapse of Dubai and a sharp cutback in spending by Indians might be a negative for gold prices?
>> It is hard to say for sure what will happen to gold.
It’s hard to say what will happen to ANYTHING, economically speaking.
You can study all the evidence until you’re cross-eyed, draw whatever conclusion suits you, and then — no matter what economic outcome you judge most likely and whatever strategy you choose — you can easily find a dozen “experts” who agree with your judgment, and a dozen who don’t.
As you say, these are TRULY interesting (and confusing) times. Best wishes for pulling through them successfully.
FRegards
ok - there is a currency risk on foreign stocks and there is no divident on gold leaving the rest a subject for speculations.
But making decisions based on risk assesment is always about alternatives.
If you invested in stocks of international companies the sell products for a price they can more or less dictate (pharmaceuticals etc.) there’s a relatively low currency risk in comparison to the other economical risks. I’d rather look at the cash flow per stock ratios of these companies then their P/E.
Also with gold you got something highly speculative but it changes it price mainly because the trust in the green back gets thinner.
key phrase: “If you believe Denninger...”
since he’s a paranoid lunatic, I’d reject any hypothesis that requires me to believe Denninger
agree completely
Have you looked at the live price action on gold? The buyers have stepped back in big time. GLD has already shot back to the close on Tuesday.
That’s assuming they pay the obligations of the new paper.
Well, the dollar is going to have problems from the outside view in the long term - I don’t and won’t dispute that. We have passed the point of having any credible message as to how we’re going to contain deficits for the next three years, and absent a huge sea change in DC, I don’t think we have a credible message after the 2012 elections, either.
The unfunded liabilities in entitlement schemes are already showing that they’re reaching their tipping points a decade earlier than projected; for the last five months, Social Security has taken in less money into the “trust fund” than it has disbursed - in other words, the tipping point predicted (variously) in 2014, 2018, 2019, 2023, etc - it is here and now: social security is now having to be made whole by the general fund.
So for investors in long term US debt (ie, longer than 2 year paper or especially in 10-year notes), there is a very real issue here. There’s only one likely outcome for foreign paper holders, and that will be devaluation of the USD.
There’s a little wrinkle in the worldwide economic situation, tho, which causes informed speculators to question the “dollar is going to die” scenarios: other countries are starting to devalue their currencies - and quickly. Too many countries are waking up to the prospect that a declining US dollar will hit them in their export-based budgets - and hard - and they’re devaluing their currencies to counter the falling dollar.
It is interesting that you mention Japan’s economy. There are news stories out (from Bloomberg, so I won’t post them here) about Japan mentioning a possible large sale of the yen to reduce its value vs. the USD. The Japanese are talking with EU-zone banks on bringing down the value of the yen. Why is this coming about?
In part, because Japan depends on exporting to the US consumer. A strong yen makes Japanese goods go up in price (no big mystery there), but it also devalues the large wad of US debt that they already hold - two huge pains in the rump for the price of one!
Well, the debt devaluation can be managed (to some extent) by manipulating your own currency. Oh, and since Japan is dependent upon exports to the US, they have a happy coincidence in seeing their exports remain competitive.
This isn’t going to be a one-off situation. Nooooooo. All countries that export to the US are in the same boat.
Consider Vietnam’s actions on Wednesday:
http://online.wsj.com/article/SB125928712852165885.html
If we’re now starting to see competitive currency devaluations, trade wars won’t be long behind.
Oh, and BTW — this week, Japan reported that their consumer prices fell by 2.2%, reinforcing the threat of deflation. The Japanese government is scratching their heads, wondering “WTF can we do now?” that they haven’t done before, with little success. Trouble is, manipulating the yen vs. the dollar is one of those things - last done in 2004 (if my memory serves). And yet, their economy is still in a go-nowhere funk.
Iduhnoh... it seems $60 billion in bad debt is just chump change these days!
absolutely. If holders think they may not get paid off on the new paper the exchange will be unsuccessful. Quicker it resolves the probability of a good outcome rises.
Excellent information-rich post. Thank you. I hope you don’t mind if I pepper you with questions as I digest it. If you do, I guess you can always just ignore me. :-)
>> Too many countries are waking up to the prospect that a declining US dollar will hit them in their export-based budgets - and hard - and they’re devaluing their currencies to counter the falling dollar.
It’s clear to me how China would revalue its currency, because it’s a more-or-less hard peg. Of course, they’ll go up against the dollar and others, not down. It’s also vaguely clear to me how ONE country might devalue its currency against everyone else’s.
But when “everyone’s doing it”, how is it done? What is the mechanism by which “the world” will devalue their currencies? That part I don’t get. I’m not disputing that it will happen, just seeking to understand HOW.
This morning's plummet looks like a one-day panic.
I wouldn’t even call it a panic. At open, it lost about a day and a half’s trading day’s gains, and the buyers stepped right back in to pick up the slack. As I have watched the gold price recently, it seems to me that every time gold tries to correct, the buyers seem to rush in. But what do I know, I’m just an observer like everyone else.
Some speculators had bought the Dubai bond earlier this year at a massive discount in expectation of a huge profit that will not now transpire. By Monday, it will become apparent that this is much ado about nothing of significance - a junk bond which defaults.
Further, Over all Dubai GDP was 37 billion in 2005, at 15% growth this would be around 55 billion by 2008. Now 16% of that number comes from real estate developments. that is around 9 billion. I am puzzled where the 50-80 billion numbers came from. Dubai income from its "little" oil alone is $20 million/day. At this time, I see no fear of a default (they want to delay payment to Dec 14). What I see is probably a tactical move that was overblown out of proportions. Markets hate uncertainty, once more clarity is available into this situation, markets will surge on the same "bad" news it declined.
What is particularly interesting isthat dubai is such an issue but California's budget crisis was a non event. Considering their relative GDP's and Debt outstanding, I'd hate to see what happens if Ca. defaults...UAE economy about 1/10th the size of California
In the late 70’s, gold hit a high of $800. It then went on a two decade slide that saw it hit $250. It is now at $1200. This is the kind of roller coaster move that leads gold to be characterized as high risk. While the value will never go to zero, you can lose a great deal of money if you buy at the high, and end up having to sell at a loss a short time later, or holding the asset for decades while other assets skyrocket.
I don’t have the means, but I’d sure love to see an overlay of the two graphs.
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