Gold News

The Fed: A Dog Eating Its Own Tail

One can only imagine what will happen to precious metals if US citizens follow Greeks and take to the streets...

EVENTS WITHIN the Eurozone have done well to take people's attention away from the world's two other big macroeconomic stories – the terrifying growth of US debt and the continued growth of China and India, writes Geoff Candy at MineWeb.

Speaking to Mineweb's Metals Weekly podcast, Michael Power, Investec investment strategist, said of the ongoing crisis: "The sentiment effect is that it probably acts as a bit of a dampener especially to traders who are often coming out of the west. They tend to pay a lot of attention - indeed I would argue too much attention - to the macro data that's coming out of the US and Europe, somewhat underestimating the power of the macro data that continues to come out of Asia."

For commodities investors, the big question would have to be whether or not demand from Asia is able to continue to support growth as the West continues to flounder in a morass of debt. According to Power, for the time being anyway, Asia seems to be doing just that, despite a very little bit of softness raising its head in China.

But, he adds, that the pattern is a well-established one where China does indeed touch the brakes to slow itself down somewhat before accelerating again. And, he says, "If they do have to accelerate, if they've over touched the brakes and things carry on getting even soggier, they have an enormous amount of capability to actually start speeding things up again. They could lower interest rates, lower reserve ratios and even, because their budget is in such good shape, increase fiscal spending. So I'm not too worried about the Asian story."

In light of this, the outlook for precious metals remains good especially when, as Power points out, between them India and China consumed over half of the new mine supply in the first part of this year.

"We are beginning to see them really become very big players and the more people focus on what's happening in the west to the detriment of not really focusing on what's happening in the east, the less they're likely to get the overall picture right."

That said, there is reason to be concerned not just about what is going on in Europe but, also the developing situation in the US.

According to Power, the biggest question in the global economy at the moment, albeit not the most immediate one is what is likely to happen to US debt.

He says, "Someone this morning likened it to a Charlie Chaplinesque cartoon where you see a guy tied to a railway track and the engine is coming from afar and you can hear it coming and they're lying on the track looking at you and saying help me get out of this. I don't think that the Americans have quite realized yet that the debt train is coming and it's big and at some point they're going to need something to do about it."

He adds, "At the moment most members of Congress generally speaking, don't see it as a particular problem – they're in denial. They think: 'We're the United States so we can afford to get away with big numbers'. And when we see now that China is no longer the main owner of US treasury bills, a far more frightening person is – and that is the Federal Reserve itself – you start to realize that this dog isn't just chasing its tail – it's starting to eat its tail. Eventually this is going to end up in tears We've seen with austerity in Greece over the weekend what the electorate thinks of that. Well we ain't seen nothing yet, because the Americans I suspect are going to be even more vocal than their Greek friends."

But, if one looks at what has been happening to precious metals prices during this latest crisis, one can only imagine what will happen if the US takes to the streets.

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Founded in 1999 as part of the Johannesburg-listed MoneyWeb media group, Mineweb is one of the world's leading sources of mining and metals-investment news, comment and analysis. Managed since 2003 by professional mining engineer Lawrence Williams – formerly of Mining Journal, and with more than 30 years' technical and financial experience in the sector – MineWeb provides thorough, international coverage of the natural resources industry.

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