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Last Updated: Sep 25th, 2006 - 11:36:04 |
By John Dizard
Financial Times, London
Friday, December 9, 2005
The dramatic rise in the gold price over the past two weeks caught
even the gold bulls by surprise. Many in the slowly growing ranks of
gold enthusiasts had been expecting a short-term decline in the gold
price, as a punctuation in a long-term rise.
Instead, they were caught by a sudden wave of buying on the Tokyo
futures market. As with the rest of the world gold market, that had
both an immediate and a long-term cause.
The immediate cause was the move by the Japanese investing public
into gold futures as the most highly leveraged vehicle through which
they could sell their currency short. Had there been a liquid
Japanese futures contract available to the public in the US dollar,
it might have taken the strain of the public's willingness to sell
their own currency. Gold markets are small and relatively illiquid,
so the Japanese investing public's selling of its currency had a
disproportionate effect. So, for the past couple of weeks, the gold
price has been run up during the east Asian day, then run down
during the European and American trading hours.
That is the short-term technical explanation. It obscures the larger
trend that is emerging. While the immediate rise in gold has really
been a decline in the yen, the rise in the price of gold is a sign
of the markets' displeasure with all the major developed world
currencies. Right now, the gold rise is pointing out the dilemma for
the Japanese authorities in accommodating both the borrowing
required by the recovery in private sector activity and a need to
keep the enormous public debt refinanced at low interest rates.
In May, it had been the turn of the euro. The failure of the
ratification process for the European Union constitution was
followed by the year's first move up in the gold price. Sceptical
investors believed that it wouldbe impossible for weaker European
governments to impose fiscal discipline without a stronger central
authorityin the currency area. That would,it seemed to the traders,
put pressure on the European Central Bank toadopt an accommodative
monetarypolicy.
Then, in August, came the rapid decline in confidence in the Bush
administration. With the talk of huge new reconstruction spending
after Hurricane Katrina, the open-ended, seemingly futile commitment
to Iraq and the appointment of a White House staff member to the
Federal Reserve chairmanship, the traders waved in gold purchases.
The truth is that all the major currency areas are burdened by debt
and fiscal commitments that cannot be met out of their income. Some
of these commitments will be paid. Some, such as US housing and
consumer loans or European pension promises, will be defaulted on
and some will be inflated away. The gold market has been
anticipating the inflation component of this adjustment.
Furthermore, the chronic developing world debt crisis has now been
turned on its head. No one seems to have told Bono, but the real
debt problem is the developing world's growing holdings of shaky
rich world debt. The developed currencies need to be collectively
devalued relative to those of the rising powers. During the coming
years of the gold bull market, the world monetary system will be
reconfigured with a much larger role for emerging market currencies
and a much more frugal life, relatively speaking, for people in
developed countries.
So it is not that rational investors love gold so much. After all,
it is difficult to store and transport, pays little interest if you
lend it out and cannot be instantly wired from hither to yon. It is
that the alternatives, denominated in the major currencies, are
beginning to look so much worse.
At this point, an intelligent critic would point out that the
technology of finance has made enormous progress since the inflation
and financial crises of the 1970s. There are far better ways to
hedge against a wide range of financial risks than buying gold.
All true. Financial risk analysis is far better understood,
statistical models of credit and interest rate risk are light years
ahead of where they were. Guess what? It doesn't matter. The effect
of advanced financial analysis, data gathering and computation has
been to build ever larger inverted pyramids of debt and promises
teetering on ever smaller bases of tangible assets.
The gold price in the major currencies may soon correct from the
rapid rise of the past two weeks. After that, though, it will
continue a fitful but dramatic increase over the next several years.
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