Gold News

Zero Rates "Not Low Enough"

Japan just said that 0.1% was too much to be charging in interest on Yen...

you hear is the sound of paper money flooding into the world's asset markets. Whereas that whooshing sound you hear is the late, great US Dollar falling against real goods and other paper currencies, writes Dan Denning in his Daily Reckoning Australia.

Our aim today is to see if everything else is really that strong, or if the Dollar is really that weak, or if any of those trends might reverse themselves in a tradeable way – and soon.

Meantime, it's a great day if you're a commodity bull, especially an Aussie resource speculator. Tin for delivery in three months closed at a record high on the London Metals Exchange at $25,800 a tonne. The last time it was that high was in May of 2008. "Shrinking Stockpiles, Supply Disruptions," reports Bloomberg, after LME tin stockpiles fell 53% for the year so far, and exports from Indonesia (a leading producer) fell too

It's not just tin either. Copper hit a 26-month high at US$3.76 per pound, and Silver Prices stand at a 30-year high. Oil made a five-month closing high of $82.83 per barrel...and gold matched the 2% gain in the S&P 500 and the Dow by climbing nearly 2% itself to trade at $1,342.60.

Huzzah for asset prices! But what was the catalyst for this explosion of higher commodity and share prices? Why, weaker money for everyone, of course!

The Bank of Japan beat the Fed to the punch this week when it announced it was lowering its benchmark interest rate to a range between 0.1% and zero. That's not much of a range. But the previous target was 0.1%, and apparently that wasn't low enough. The real mover, however, behindthe commodities explosion was the Bank of Japan's decision to spend an extra $60 billion or so on financial assets, as well as slashing the cost of borrowing to zero.

The Bank of Japan said it would buy government bonds, corporate bonds, real estate investment trusts, exchange traded funds... you name it. And it will be the first time the BoJ attempts to inject liquidity into the economy by buying REITs and ETFs. But you have to wonder if the reflationary effects of this latest move will be any more effective that all the moves Japan has been trying for the last twenty years – namely, trying to get people to spend money they don't want to spend.

When you reach 100 years old, we can imagine that you dramatically simplify your lifestyle. Your animal spirits aren't what they used to be at that age. And this will be the 40th consecutive year that the number of people over the age of 100 in Japan has grown. That is a demographic reality unaffected by tinkering with monetary policy. However it's also true that what the Bank of Japan is really trying to do is cap the latest strength in the Yen versus the US Dollar. A weaker Yen keeps Japanese exports competitive.

Trouble is, everyone is trying to stay weaker relative to everyone else...which doesn't sound like a formula for economic strength anywhere. We may have underestimated how serious things have become with this currency war. It really is a race to the bottom. And it's deceptive because it's driving commodity prices and stocks higher, giving you the illusion of strength.

That doesn't mean stocks and commodities couldn't go higher from here. Wall Street reacted with bloodlust to comments from William Dudley, president of the New York Federal Reserve Bank and the vice chairmen of the Federal Open Market Committee that artificially and destructively sets the price of money in America. Dudley would like the Fed to join the Bank of Japan in a tandem act of Pan Pacific Queasing...

"Viewed through the lens of the Federal Reserve's dual mandate – the pursuit of the highest level of employment consistent with price stability, the current situation is wholly unsatisfactory. Given the outlook that the upturn appears likely to strengthen only gradually, it will likely be several years before employment and inflation return to levels consistent with the Federal Reserve's dual mandate."

Harrumph! This business of falling asset prices – which by the way affects the viability of the balance sheets of the member banks of the Fed (especially the money-centre banks in New York City) – is just no good. It must stop. Purchasing power must be destroyed through systematic debasement of the currency. And somebody should do something about all the problems. Like print money and buy this crap on our balance sheet from us now.

Dudley also warned that:

"The longer this situation prevails and the US economy is stuck with the current level of slack and disinflationary pressure, the greater the likelihood that a further shock could push us still further from our dual mandate objectives and closer to outright deflation...

"Further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long."

Here comes the deflation bogeyman again. The Fed trots it out every time it's preparing the monetary battle-space for more carpet bombing. You can't say you haven't been warned, though.

Commodity prices are screaming bloody murder about the quantitative easing ahead. So are stocks. In fact, the whole moment feels pretty shrill. Everything can't go higher and higher forever while bond yields go lower. If we're reaching a short-term zenith in sentiment, the counterintuitive play is to expect a greenback rally, a gold correction, and falling stock prices.

But instead of relying on Fingerspitzengefühl, we asked Slipstream Trader Murray Dawes, a man who's good with charts and the language of the market, what he thinks about the market.

"The currency markets are front running the Fed. Pure and simple. Since Bernanke came out and hinted that QEII was around the corner the worlds currency markets have gone into overdrive. The Euro has bolted from below $1.28 to above $1.38 in the last month. The Aussie Dollar has also been flying and a quick look at other commodity currencies and emerging markets sees the same story.

"The proverbial race to the bottom in currencies is happening before our eyes and commodities have also launched into orbit as a result. Who knows what will happen once the Fed announces how much money it's going to print? But we may be on the verge of some huge moves in currencies that will go beyond anyone's expectations.

"Looking at the technical picture needs to take this distorted market into account. Trends could reverse on a dime depending on the decisions of Ben Bernanke. Capital is exiting the US and looking for a high yield home and now that Japan has also decided to play the same game we may be about to embark on some serious inflation of hard assets and commodity currencies while the US Dollar plummets.

"A quick look at the Euro shows a currency in strong uptrend. The dotted line in the middle of the chart is the Point of Control (POC) of the past two years trading. Think of it as the gravitational point around which prices are being generated. Now that the Euro has shot back up through the $1.35 POC we can create targets up towards the top of the distribution at $1.47.

"The 35 day Moving Average is also about to cross over with the 200 day moving average thus taking the Euro back into long term uptrend. The daily RSI is above 70 which is a signal of an overbought market, but it must be remembered that a market can remain in overbought territory for extended periods of time when it is trending. "

"Therefore all you can really say is that there is potential for a short term pullback in the Euro towards either the 10 day MA or perhaps the 35 day MA but that it remains in strong uptrend and will probably see further rises from here."

"Of course this can all change in a moment if the ECB decides that a strong Euro is not in its interests and that it feels left behind in all the money printing fun. It appears unlikely at the moment but if they were to announce some QE of their own we may see the trend slow down."

"It appears the world is on the edge of an all-out currency war. I have a feeling it is all going to end in tears but in the meantime it will pay to trade with the trends because they may continue for far longer than anyone expects."

Murray normally reserves that level of analysis for his paid-up subscribers. But if we pester him enough, he usually sends us something good. If you want to find out more about how Murray uses the above "big picture" analysis to trade Aussie stocks, read up on the Slipstream Trader here.

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Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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