Maybe it's the smell of spring in the Melbourne air, but the markets suddenly have a lot more comic feel to them. The tragedy lurks. But how can you get too frowny when there is so much to laugh at? And besides, every wrong turn by a policy maker creates some unintended opportunity for investors.
The G-20 finance ministers wrapped up their meeting in London and agreed to attack the bonuses of bankers. This probably feels good. But it doesn't do much to address any of the problems that led to the whole Global Financial Crisis.
One meaningful result of the meeting was the agreement to boost bank capital "once recovery is assured." Specifically, the G-20 finance gurus say something needs to be done about the "quality, consistency, and transparency" of bank capital!
Can we get an Amen brother?
But what do the gurus say should be done? They want to introduce a "leverage ratio." That would limit the size of bank assets relative to equity capital. In other words, banks wouldn't be able to borrow up and inflate the asset side of the balance sheet to dangerous levels. Dangerous levels are where losses on assets wipe out equity capital.
That would be a welcome reform. But we think there's a flaw in the G-20 plan. The flaw is that they want to wait to introduce this reform until "recovery is assured." Yet the other big item of agreement from the meeting-that it's too soon to withdraw government stimulus spending-nearly assures that the recovery will be much delayed.
Government stimulus plans keep alive the illusion that everything is normal. The whole array of stimuli, loan guarantees, and credit facilities perpetuates the zombie credit economy. And this, of course, prevents further write downs in bank collateral that would threaten capital adequacy levels.
You see...it's all a very cleverly worded way of trying to deny that there are any more bad investments to be written off. And in the meantime, spending other people's money is a lot of fun. It's no surprise there's government agreement to keeping borrowing and spending.
For investors, it means gold is going to have a good solid run at US$1,000. It's in the neighbourhood already. But in the lead up to the G-20 leader meeting in Pittsburgh later this month, we wouldn't be surprised to see gold price in a lot more fiat money creation.
This is not quite straightforward for Aussie investors. The Aussie dollar is at a one-year high versus the greenback. Normally, when the Aussie moves against the greenback, the Aussie gold price itself stagnates, even while the US dollar gold price rises.
However, as we noted in an update last week to Diggers and Drillers readers, the Aussie gold price has actually moved up more in percentage terms than the U.S. dollar gold price in the last 30 days. That's unusual, given the relative strength of the Aussie currency. So what does it tell you? And what should you do?
It tells us that gold is gradually picking up speed against all paper currencies. Remember, gold is in this fight for the long haul. It will never be hauled around in wheel barrows to pay for loaves of bread. The strength of paper money lies in the confidence people have in it. And that only lasts as long as politicians manage to preserve that confidence with prudent policies.
There's not much prudence going around lately. We think that explains the recent strength of precious metals. Institutional investors are starting to hedge against both paper money and stock market indexes that have raced well ahead of realistic earnings for this year and next. This is good for gold.
What's even better for Aussie gold investors is that Australia is set to become the world's second largest gold producer, according to Bloomberg. Aussie gold output rose 4% in the June quarter to 57 metric tons, according to Surbiton Associates here in Melbourne. The biggest producing mine was the Super Pit in Kalgoorlie, run by Newmont and Barrick. Newcrest's Telfer mine came in second.
Surbiton reckons that with Newmont's Boddington mine entering into production this quarter, the numbers will grow again. This'll put Australia second behind China in global gold production. For punters, though, we'd reckon that aside from owning the big boys (or trading their chart patterns), the biggest stock market gains will come from the junior producers who can increase production in the next year without blowing out costs.
More on gold and why it's such a stubbornly attractive asset class tomorrow.
Dan Denning
for The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
Related Articles:
- Gold, the Aussie Dollar, the Greenback and You
- The Aussie Dollar as a Measure of Global Risk Appetite
- Why the Price of Gold Goes Up in a Struggling Economy
- US Economy Slows… Again
- Will the Real Inflation Rate Please Stand Up
About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Justin on 7 September 2009:
What it says is that despite the AUD appreciating against the USD, the AUD is still being devalued. So much for the USD 'standard'.
Comment by Ross on 7 September 2009:
APRA just took the bullet they knew was coming. The big 4 Australian banks current raw leverage ratio when run against their global peers is spectacular even after their recent share price ramping. Given the CBA's balance sheet it will be issuing PERLS continuously for years (if unsecured & unguaranteed priced or subordinate issues survive). Notice that Geithner was getting in ahead of the crowd town crying on the capital standards ahead of the meeting but at the same time defining a long tail implementation schedule.
Comment by Don on 7 September 2009:
I just hope that Boddington have got their sums correct on all that cyanide soluble copper. We really don't need another Mt Todd situation - what a debacle that was.
Comment by Richo on 7 September 2009:
I would sell my US stocks except some are so far underwater that I'd be luck to cover the commissions. And the other issue is that many of them are gold or precious metal stocks. Best to hold on to them I guess.
Comment by Dan on 8 September 2009:
I'm pretty sure Gold will outperform stocks in the next few years. I read elsewhere that once it breaks the $1000 mark it will continue a relentless rise as banks lose their desire (and ability) to suppress its price any longer. OTOH I am still wondering who will want all this gold? Will it still rely largely on seasonal buyers (weddings, religious festivals etc) or will a currency appear somewhere, using gold as its standard?
Comment by Holdfast on 8 September 2009:
If you look at the long term charts (Ten Years)gold has been consolidating at the 800 - 1000US mark. it's quite apparent that gold is not just moving sideways but is deffinitely consolidating.
As far as profits go for Australian miners some of the big names donot appear to have a large margin for error, infact some are extracting gold at a very high price and should gold fall they will be in trouble. Having said that as the Aussie dollar increases in value and if the oil price remains low then there could be a fair bit of wealth especially in some of the newer gold Provinces such as the Tanami region.
Newmont might have Callie but some of the juniors have struck large loads and if you don;t believe me just check out Tanami Mining NL.
Anyway, I hope the Aussie miners do well and I hope the chinese continue to encourage their countryman to buy gold and silver acros the counter from their banks. If that trend continues you'll see a massive spike in gold for the long term.
Comment by Greg Atkinson on 8 September 2009:
Dan are you speaking in USD terms or AUD? If you check the demand for gold (World Gold Council) then you will see it is being propped up by investors, not by demand for industrial use of for jewellery. Sounds worrying to me.
Comment by Nick on 8 September 2009:
Need to ask the question. If Gold is increasing, as well as the AUD against the USD- At what point do we Australians realise a profit (considering gold trades in USD and the currency conversion to AUD is implemented when buying in Australia? Furthermore, what happens if you buy gold at $1000 USD and suddenly the USD isnt the standard currency anymore (for whatever reason), say the new standars is the Chinese Yuan? How would the gold price be determined?
Comment by Lachlan on 8 September 2009:
Ooh ooh. Gold nicely consolidated now on uptrend just a few short of $1000. Every DR reader go long now and lets see if we can push it over
Comment by Lachlan on 8 September 2009:
Well done everone!!
Comment by Nick on 8 September 2009:
$1002 dollars!!!
Comment by Lachlan on 8 September 2009:
$1007!!!!
Comment by Holdfast on 8 September 2009:
I don't know about you guys but I'm in for the long haul. I reckon the spec gold stocks with good management, a good wroking mine, bugger all debt are worth holding onto. Bendigo Mining Limited has great staff, they are producing profits, they recently announced a small dividend and they bought anew gold mine in Tasmania. They are low cost.
There's plenty of other spec stocks that have been overlooked too; check out some of the quality managers and operations officers and geoligists. Follow these guys, have a look at their background and then check where they are and what they are doing. It's not too hard to pick a few beauties!
Comment by Lachlan on 8 September 2009:
Love those little Au explorers Holdfast. Long as they're onto some very prospective geology, share price responding well to geologist reports etc, bit of cash to throw around, buy on a low, spread out the dough a little etc. Adrenaline stuff!
Waiting for a bottom in AUD gold but probably after rally has come off a while. Then go Aussie explorers/small caps.
At least thats what my dreams consist of lately.
USDX looks sick. Maybe rally's got a parabolic spike left in it yet but poor US citizen!
Comment by Holdfast on 9 September 2009:
Lachlan, that's good advice! I hope you have a bit of luck. I can remember when Kidston was a spec stock and ending up making it big time. I think I bought in at about $1.20 and sold just before the crash at about $8.20.
There's a few similarities I can see on the NT / WA border especially Tanami (I'm not trying to influence anyone as just because there's gold in the ground doesn't mean it's cheap to get out but......... Management is the key.
USD does look bad, but printing money has always been bad for any country. The world is very dynamic but it does have history that we can access. I'm sure that those who research understand change and how money and commodities are manipulated. There's plenty of trickery in this world as we have seen. But that doesn't mean we can't make a dollar or two. I'm always amazed at some of the comments about how they no this and how they no that.
If we look at facts, we know this. The population is increasing, population increases cause the need for resources. The population cannot reverse unless of war or disease. It's commonsense to use strategies that are fact.