Friday, August 12, 2011

Rest Easy Amidst Volatility

The guy behind us at a rugby game in New Zealand last week was volatile. A bit of booze mixed with a touch of excitement and anticipation meant his voice went higher and his language lower.

So it is with the game going on in the markets this week. The market is looking like a drunken rugby fan. How anyone can trade in this sort of volatility is amazing. The Dow Jones has had its wildest week since 2008. On Monday, down 634, Tuesday, up 429, Wednesday, down 519 and Thursday, up 423. A combined loss this week so far of 301 points. Ever been on a roller coaster?

It seems that any bit of good news or bad news is acted upon with unreasonable gusto. On Monday the market dropped on news of the S&P downgrade of US debt. During the week, drops and rises have been caused by European debt woes. Capital ratios in French banks have been questioned (ie not enough money to pay depositors back) based on their exposure to Italian debt. Banks across the globe started to feel the heat as well. Societe Generale shares plunged 15%, Bank of America's shares also sank to dangerous lows. This a bank that is one of the largest in the world.

Today we get news of a better than expected job numbers in the US. Up goes the Dow Jones in a totally irrational way.

In gold, the Comex raised margins on futures contracts. This primarily affects speculators who will need to put down more money on their contracts, hopefully discouraging high margin speculation (buying contracts with debt). As a result, gold prices have decreased as much as $40 an ounce today. Good to see a pullback, it was getting a bit parabolic. Never a good sign in a previously healthy and steady uptrend.

Gold is going higher because of the monetary easing that is now under way. All the talk of QE3 coming is a red herring. Printing by the forest-load (or bits and bytes load) is already here. The ECB (European Central Bank) bought Italian and Spanish bonds and stated it will “significantly” increase the supply of liquidity to banks. The Federal Reserve will come out with a similar plan soon. Although they won't call it QE3, but some other fancy name. Anyway, they are already giving out free money as interest rates they charge banks will be zero forever it seems.

Where does this money come from? You guessed it; thin air. Who pays it back? Well, you may get upset if this information was released. You might peacefully riot; legitimately.

With all this continuing volatility the last word on gold must come from Alex Stanczyk of The Anglo Far-East Company:
“By every nominal metric that can be applied, gold is not in a bubble, bonds and paper money are. A recent interview with a "financial professional" on one of the top networks has the interviewer asking the question "you have been saying gold is in a bubble for several years now, do you think it’s time to admit you were wrong and that is still going to go up?" The answer was a very telling "No, at some point this call will be correct" - but more importantly what he said next tells me that mainstream financial professionals still do not get it. He went on to say "there is nothing you can measure gold against that provides any justification as to why its rising like this". This gentleman has obviously never bothered to look at the size of western nation debt, nor the growth of monetary supply.

Fear not if you hold gold, and do not be frightened into selling."
Have a good weekend and rest easy.

Gold in New Zealand dollars: $2132.72 per oz
Previous all time high: $2243.75 per oz

Silver in New Zealand dollars: $46.62 per oz
Previous all time high: $59.19
per oz

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The Anglo-Far East Company
The Original Private Gold and Silver Bullion Custodiann
Your reference: an-001
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