It is all quiet in the Australian market today, which is probably a good thing. Wall Street wobbled again Friday. The Dow lost 1.4% and closed down 171 points. All eyes are on the Fed this week, which meets Tuesday and Wednesday and will reveal its views on the mess that it's helped create, and what it intends to do about it.
Markets expect at least another 25 basis point rate cute, and maybe even 50. Will they get it? And if they don't, will this brief respite of the last few days give way to more selling as the mentality of the bear sets in? More on that in a second.
February gold futures hit US$924.30 in intraday trading on Friday. The immediate cause was a national electricity crisis in South Africa, the world's second-largest gold producer. "Several major mining companies, including AngloGold, Harmony and Gold Fields Ltd., suspended all but emergency operations at some of the world's largest mines because of a national electricity emergency", reports the Associated Press.
"Mining operations in the country were suspended Friday on fears that power interruptions would trap workers underground. Gold Fields said it halted all its South African operations, including in the world's largest gold mine, which produces 7,000 ounces per day...when adjusted for inflation, gold remains well below its all-time highs in 1980. An ounce of gold at $925 then would be worth about $2,360 today."
That's right. $2,360. Only gold bugs are buying gold right now. The real bull market will start when dishwashers, taxi drivers, and Wayne Swan start talking about it. All the advice we have received suggests that by then gold will be a bubble. But not yet.
"De-coupling" was all the rage a few months ago. At the time, it meant that financial markets in Europe and Asia would not follow Wall Street's lead because European and Asian economies were largely immune from a slowdown in the U.S. economy. That turned out to be garbage, at least in financial markets. Yet the sympathetic slide in equity markets worldwide has been enough to cast doubt on long-term metals price forecasts.
Enter Rio Tinto (ASX: RIO). Rio Tinto's executives have been pounding the pavement in China, celebrating the virtues of that country's metals boom. Rio's chief economist Vivek Tulpule told the U.K's Telegraph that a recession in America may help China attract more of the world's capital. This would accelerate what Rio views as China's massive project of industrialization and urbanization.
"I see the future of China as one of continuing fast growth, commodity-intensive growth, with the forces of urbanisation and industrialisation being key," Tulpule said. "When we build our mines and processing facilities, we think about a 10 to 30-year horizon and beyond in the case of very large deposits. This means trends rather than cycles dominate thinking. And when we think about trends, the China growth story is a powerful one with significant underlying momentum."
There's a subtext here too. Rio is telling shareholders and investors that it is more leveraged to the China boom than BHP, meaning that if BHP wants to come back with an offer by February 5th, it had better reflect Rio's bright China prospects, or it will be dismissed with the disdain that the first offer was treated to. Rio closed at $118.50 on Friday, up 10% for the day, but still down 20% from its 52-week high of $149.90.
Dan Denning
The Daily Reckoning Australia
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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.
