Month: July 2012

Source: ForexYard

The euro maintained its upward trend against the US dollar on Friday, as a string of positive comments from euro-zone officials last week helped boost risk appetite in the marketplace. Precious metals and commodities were also able to benefit from the risk taking. Both silver and gold, as well as crude oil, recorded gains throughout the second half of the week. This week, traders should anticipate heavy volatility as a batch of euro-zone and American news is scheduled to be released. In addition to a ten-year bond auction out of Italy today, traders will also want to pay attention to Thursday’s ECB Minimum Bid Rate as well as Friday’s all important US Non-Farm Payrolls figure.

Economic News

USD – US Employment Data Set to Impact USD This Week

Risk taking in the marketplace resulted in losses for the safe-haven US dollar on Friday. Additionally, a slowdown in the US economy, highlighted by the US Advance GDP figure, contributed to the greenback’s bearish trend. The USD/CHF dropped over 100 pips during European trading, eventually reaching as low as 0.9694. The pair was able to stage a minor correction during the evening session to close out the week at 0.9750. Against the Japanese yen, the dollar started off the day on a strong note, gaining close to 60 pips to trade as high as 78.66. That being said, the greenback was not able to maintain the bullish trend and ended the week at 78.47.

This week, dollar traders will want to pay attention to a series of news events out of the US. Tuesday’s CB Consumer Confidence, followed by Wednesday’s ADP Non-Farm Employment Change and Thursday’s Unemployment Claims figure could all lead to further dollar losses if they signal a further slowdown in the US economy. Finally, the all important US Non-Farm Payrolls figure will be released on Friday. The indicator is widely considered the most important indicator on the forex calendar and traders should anticipate volatility across the board as a result.

EUR – Euro-Zone News May Result in EUR Losses This Week

The euro was able to maintain its bullish trend on Friday, as risk taking in the marketplace received a boost due to positive comments from euro-zone officials earlier in the week. The EUR/USD climbed close to 150 pips during the first half of the day, eventually reaching as high as 1.2389 before correcting itself to close out the week at 1.2315. Against the Japanese yen, the common-currency advanced close to 165 pips, peaking at 97.32 before turning bearish to finish out the day at 96.65.

This week, traders will want to pay attention to several potentially significant euro-zone indicators. Today, the Italian ten-year bond auction is likely to be the highlight of the trading day. Should demand for Italian bonds come in below expectations, the euro could reverse some of its recent gains. Wednesday’s Spanish Manufacturing PMI, followed by ECB Minimum Bid Rate and Press Conference on Thursday could also generate volatility for the common-currency, especially if they signal a slowdown in the euro-zone economic recovery.

Gold – Gold Extends Upward Trend

Gold extended its upward trend on Friday, as positive signs out of the euro-zone combined with an economic slowdown in the US, boosted appeal for the precious metal. After climbing close to $18 an ounce during the first half of the day to trade as high as $1629.09, gold moved downward to finish out the week at $1622.83.

This week, gold is forecasted to see a fair amount of volatility, as significant euro-zone and American news is scheduled to be released. Traders will want to pay particular attention to the US ADP Non-Farm Employment Change on Wednesday and Friday’s US Non-Farm Payrolls. If either of the indicators signals a further downward trend in the US economic recovery, gold could see gains as a result.

Crude Oil – Crude Oil Gains for 4th Day Straight

Crude oil extended its bullish trend for the fourth day straight on Friday, as positive euro-zone news outweighed disappointing US indicators and resulted in risk taking in the marketplace. Oil advanced as high as $90.38 during afternoon trading, up close to $1 a barrel for the day. The commodity ended up finishing out the week at $90.11.

This week, euro-zone indicators are likely to dictate which direction oil takes. Traders will want to pay close attention to today’s Italian ten-year bond auction, as well as Thursday’s ECB Minimum Bid Rate and Press Conference. If any of the news signals additional economic troubles for the EU, oil could reverse some of its recent gains.

Technical News

EUR/USD

The Williams Percent Range on the weekly chart has crossed into the oversold zone, indicating that this pair could see upward movement in the near future. Furthermore, the Bollinger Bands on the daily chart are narrowing, signaling that a price shift could occur in the near future. Going long may be the smart choice for this pair.

GPB/USD

A bullish cross appears to be forming on the weekly chart’s MACD/OsMA, signaling that an upward trend could occur in the coming days. That being said, most other technical indicators show this pair range trading. Traders may want to take a wait and see approach for this pair.

USD/JPY

The Bollinger Bands on the daily chart are narrowing, indicating that this pair could see a price shift in the near future. Additionally, the Williams Percent Range on the weekly chart appears close to dropping into oversold territory. Traders will want to monitor the Williams Percent Range. Should it drop below the -80 level, it may be time to open long positions.

USD/CHF

A bearish cross on the weekly chart’s Slow Stochastic indicates that this pair could see downward movement in the coming days. Furthermore, the Williams Percent Range on the same chart has crossed into overbought territory. Going short may be the wise choice today.

The Wild Card

AUD/CHF

The Relative Strength Index on the daily chart has crossed into overbought territory, signaling that a downward correction could occur in the near future. Furthermore, the Slow Stochastic on the same chart has formed a bearish cross. Forex traders may want to open short positions ahead of a possible downward breach.

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

By TraderVox.com

Tradervox.com (Dublin) – The GDP data released on July 27 showed that the world largest economy grew at a slower pace in the second as compared to the first quarter. According to a report released by the US Commerce Department, the country’s GDP, which measures the value of goods and services produced in the US, rose only by 1.5 percent in the second quarter; the report also indicated that household purchases grew slowest in a year. Household purchases account for 70 percent of the GDP. The report blamed the slow pace of growth on Europe’s debt crisis and the pending US tax changes. It also came as the Federal Reserve policy makers prepare to meet this week to discuss on measures that should be taken to spur the economy.

According to Dean Maki, who is the Chief US economist in New York at Barclays Capital, the moderate growth in the economy may persist for longer but the pace of growth might pick up in the second half of the year. Chris Rupkey, the Chief Financial Economist in New York at Bank of Tokyo-Mitsubishi UFJ Ltd agreed with these comments saying that the economy remains on a moderate expansion trend; he also added that the current growth will benefit from oil prices declines and signs of easing in the European debt crisis.

The GDP data released showed that household consumption increased by 1.5 percent in the second quarter, down from 2.4 percent in the Q1. Purchase contributed 1.05 percentage points to the US growth according to the report. There is a general decline in consumer spending in the country as the country enters an election period. The current trend in the US economy adds to concerns that global economies are slowing down. According to Scott Davis, who is a Chief Executive Officer, the uncertainty in the US economy has resulted from the coming election, which is expected to be the closest one in history.

Disclaimer
Tradervox.com is not giving advice nor is qualified or licensed to provide financial advice. You must seek guidance from your personal advisors before acting on this information. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. Opinions expressed at Tradervox.com are those of the individual authors and do not necessarily represent the opinion of Tradervox.com or its management. 

Article provided by TraderVox.com
Tradervox.com is a Forex News Portal that provides real-time news and analysis relating to the Currency Markets.
News and analysis are produced throughout the day by our in-house staff.
Follow us on twitter: www.twitter.com/tradervox

Forex Daily review brought to you by REAL FOREX | www.Real-forex.com

EUR-USD

Weekly chart
Last weekly review
The last weekly candle has checked again whether the 1.2290 level can change its position from a support to resistance, it looks like it did, after the closure of the last candle with strong red color, it is possible to assume that the chance for a continuation of the downtrend is raising. The first target of the price will be between the 1.1800 and the 1.1900 price levels, which is the “Head and Shoulders” pattern target.

Current review for today
The last candle is a reversal candle which is called “Engulfing” (a candle that completely covers its previous), while in addition to that, it closed above the 1.2290 price level which is used as a support level at the moment. Another green candle will approve the reversal of the trend and it is possible to see an ascending move for a correction of the last trend which started around the 1.3500 price level, this correction will probably be in size of between a third and two thirds by Fibonacci retracement. On the other hand, in case the price will go back under the 1.2290 price level, it will be possible to assume that it will continue its movement towards the 1.1877 price level, the “Head and shoulders” pattern target (red lines).

You can see the chart below: 
 

Daily chart
Last weekly review
It is possible to see that there were few attempts to breach the 1.2290 or to check if this level can be used as a resistance after being a support, at this moment it looks that the price did continue downwards while its closest target is the 1.2122 price level, which is the “One in, one out” pattern target (red broken line). Breaking of this level in a proven way will probably lead the price towards its weekly chart target on the 1.1877 price level. Stoppage at this area will indicate that we might see a correction of the last downtrend from the 1.2692 price level in size of between a third and two thirds.

Current review for today
Indeed the price has reached the “One in, one out” pattern target (red broken lines), while at the same time it is possible to notice the creation of the “Wolfe waves” pattern (brown background) and the price has reached its target (crossing of the price with the line connecting between points 1 and 4) on the last 3 trading days, currently the price is located exactly on this target. In addition, the price has corrected the last downtrend which started on the 1.2692 price level by 50%. Breaking of the 1.2050 price level will probably continue the mentioned uptrend and suppose to lead it to a crossing with the upper Bollinger band.

You can see the chart below:

GBP-USD

Weekly chart
Last weekly review
The current candle has closed while it is in the area of the last previous candles, this means that the price is ranging between the 1.5450 and the 1.5770 price levels for six weeks. At the moment the price is located under to Bollinger’s moving average (bearish market) while the breaking of the 1.5450 price level and closure of the candle under this level will indicate that the price will fall at first stage to the 1.5270 support level. On the other hand, breaching of the 1.5780 price levels will probably lead the price to the next resistance on the 1.6170 price level.

Current review for today
The price has reached the upper ranging level at the 1.5778 price level, breaching it will sign the breaching of the “One in, one out” neckline (blue broken line), while the target of this pattern is exactly the next resistance on the 1.6170 price level, on the other hand, stoppage of the price at the current area will probably continue the ranging period between the 1.5454 and the 1.5778 price levels, while only breaking of the lower ranging level is suppose to lead the price the strong support on the 1.5270 price level.

You can see the chart below: 
 

Daily chart
Last weekly review
It is possible to see the range creation between the 1.5400 and the 1.5740 price levels, while the price is located in the middle of this range. Breaching of the 1.5784 price level will probably continue the uptrend towards the 1.5906 price level, this is a 61.8% Fibonacci correction level of the downtrend marked in red broken line. On the other hand, breaking of the 1.5400 price level will probably lead the price towards the last low on the 1.5268 price level.

Current review for today
The price is currently located exactly on the 1.5737 resistance level while it is used as the neckline of the “One in, one out” pattern (blue broken lines) while proven breaking of this level will sign that the price will probably climb at first stage to the pattern target on the 1.6015 price level. On the other hand, stoppage of the price at the current area will probably sign that the price will keep on ranging between the 1.5400 and the 1.5737 price levels.

You can see the chart below: 
 

By MoneyMorning.com.au

The 30^th Olympics began in London this morning. Over 10,000 athletes will be competing for one thing…a gold medal.

Sadly, the gold medals handed out at the Olympics haven’t been solid gold since the Swedish held the event in 1912.

So how much is a gold medal worth? These days, not much. The gold medal hanging around an athlete’s neck will have a face value of $706.

No, we’re not missing any numbers. The low value of the medal is simply because of the minimal gold content. The International Olympic Committee mandates each gold medal have ‘at least’ 1.34% gold. And the host country decides if they want to add anymore.

In this case the Brits have decided to stick with the minimum amount. Not surprising, seeing as former UK Chancellor of the Exchequer (Treasurer), Gordon Brown, sold half of Britain’s gold from 1999-2002, at an average price of USD$275 an ounce…when gold was at a 20-year low. This event has become so infamous among gold bugs that it’s now called the ‘Brown Bottom’!

But anyway, the remainder of the winner’s prize is made of 92.5% silver and about 6.16% copper.

Meaning the 400 gram medal contains a tiny 5.3 grams of gold.

Time to Buy Gold Stocks

Yep, our athletes are working their hardest for just one fifth of an ounce.

However, all the work and effort for 5.3 grams of gold hardly seems worth it. And so, rather than training five hours a day in a swimming pool or running round an athletic track, we’ve found a better way to get access to the precious metal.

Adding a few gold shares to your portfolio.

We know, right now it doesn’t look good for precious metal mining stocks.

Take the Junior Gold Miners ETF [NYSE: GDXJ] for example, down 22% this year. And the HUI Index [NYSE: HUI] has lost 20%.

As a result, holders of gold mining shares have had a rough ride. And according to Dr Alex Cowie, editor of Diggers & Drillers, there’s one reason for that:

‘Gold stocks have been crunched by disappearing margins thanks to rising production costs and falling gold prices.’

But the crunch may be over for shareholders.

‘Interest in gold stocks is picking up again,’ said Alex, ‘and could be about to start a long and overdue rally.’

As Alex pointed out to his subscribers recently, we ‘…are in a traditionally slow period for gold due to the Indian monsoon season…this could end as soon as next month.’

And the Erste Bank Gold report claims the same thing. However, it also adds a price target for gold over the next twelve months:

‘The foundation for new all-time highs is in place. As far as sentiment is concerned, we definitely see no euphoria with respect to gold… In the short run, seasonality seems to argue in favour of a continued sideways movement, but from August onwards gold should enter its seasonally best phase. USD 2,000 is our next 12M price target. We believe that the parabolic trend phase is still ahead of us, and that our long-term price target of USD 2,300/ounce could be on the conservative side.’

This is the good news investors needed to hear, says Alex. ‘This report comes at a good time. It gives good cause to hang on, just as gold stock investors are reaching ‘the point of maximum despair’ after more than 12 months of terrible performance.’

However, one bullish report does not cause a bull rally.

But there’s been a turnaround in a key gold bugs indicator to suggest one might be about to happen. This could be the next leg up for the gold price.

And the HUI Index may be presenting you with the perfect buying opportunity.

Also known as the ‘Amex Gold Bugs Index’, the last couple of trading days shows a potential ‘double bottom’ forming.

This is a technical term that simply describes the price dropping, then rebounding. Often followed by a decline to either the same or similar level. And then finally, one more rebound. Think of a double bottom as looking like a ‘W’.

When these double bottoms happen, it often hints the start of a new rally.

HUI Index: Is a Double Bottom Happening?

Click here to enlarge

Part of the reason gold bugs use the HUI is because it’s made up of 18 gold related mining stocks, with short term hedging. The constituents all hedge their gold production within 18 months.

Because of this short term outlook, the HUI is useful in spotting short term movements of the gold prices.

And any spike in the gold price should lead to higher prices for gold stocks. Alex says:

‘Gold and silver stocks should and traditionally do outperform gold and silver as metals. That’s because, when gold and silver prices rise, the companies that mine it see an increase in revenue without an increase in costs.’

If this double bottom pans out, it will present a great buying opportunity for gold stocks, and Alex is ready to take advantage of it. He has five gold stocks on his watch list that he considers ‘highly undervalued‘ and any spike in the gold price could see some serious gains for stock holders.

To find out more on why Alex is backing gold stocks, click here.

Shae Smith
Money Weekend

The Most Important Story This Week…

The ongoing financial crisis is hiding the fact that there is another serious problem developing in the world – in food. High food prices sparked riots around the world in 2008 and were also a major reason for the “Arab Spring”. This year the drought in the USA has caused huge spikes in the cost of wheat and corn.

These are symptoms of the growing shortages in supplies in the face of growing demand as the world population rises. Savvy investors are waking up to a huge trend – food production needs to rise in a big way. That means investigating opportunities in agriculture. One of these opportunities is fertilizers that increase crop yields and the companies who produce them. Resource expert Dr. Alex Cowie explains more in Why Potash Stocks Are Set to Gain From a Global Food Warning.

Other Recent Highlights…

Kris Sayce on Don’t Believe ‘the Bull’ on Australian House Prices: “But indebted housing investors needn’t worry – if they believe BIS Shrapnel and academics at two Aussie universities – because help is on the way. In what form? Trains and the end of the resources boom! To find out the latest excuses used to justify a housing boom, read on…”

Dan Denning on The End of Growth Through Currency Wars: “This is just the beginning. If the currency war moves from interest rates and monetary and fiscal policy to cyber weapons, price manipulation and an attack on the financial architecture of the modern world, then a threat exists that is neither fully understood nor appreciated. So what can and should you about this emerging threat?”

Shah Gilani on The Real Villain Behind the Curtain in the LIBOR Scandal: “There’s nothing like pulling back the curtain on the fraud that’s centre stage in the LIBOR manipulation scandal and finding the levers are really being pulled by central banks. It’s not about the banks doing what they did. The revelation is this: Central banks are the biggest impediment to free markets and the reason capital markets have become casinos.”

Dr. Alex Cowie on Get Ready to Pin Back Your Ears With Gold Stocks: “Gold stocks are back to GFC valuations. Or putting it another way, they are back to valuations last seen in 1989 – back when gold was $400 / ounce…Yet they just keep falling. This is obviously an unsustainable state of affairs. Nothing stays this cheap forever. Something has to give…but what?”

Gordon Brown’s Bottom and Gold’s Double Bottom

By MoneyMorning.com.au

‘The future of manufacturing is in America, not China,’ declared Vivek Wadhwa in Foreign Policy magazine.

Wadhwa argues that technology is going to save the US. In fact, ‘technical advances will soon lead to the same hollowing out of China’s manufacturing industry that they have to US industry over the past two decades.’

Robotics is the first saviour. It’ll soon be cheaper to build and install robots than to use human labour. As Wadhwa notes, Taiwan-based Foxcomm plans to install one million robots in the next three years. ‘It has found even low-cost Chinese labour to be too expensive and demanding.’

Meanwhile, advances in artificial intelligence, and 3D printing, will enable non-experts to design and personalise products, then “print” them off at home or at local manufacturing hubs.

Combine all this with the magic of ‘America’s ability to innovate’, and the US will be a world leader in manufacturing within the next decade.

It’s all very exciting stuff. But there’s another big trend with the potential to drive all this that Wadhwa doesn’t address. And it’s one you can profit from right now…

Futuristic Technology is Very Exciting, but Cheap Natural Gas is More Important

Robotics, artificial intelligence and 3D printing are all fascinating topics. And we think there are ways to profit from all of these futuristic technologies.

However, while the idea of localised factories driving a creative manufacturing renaissance in the States is attractive, we think there’s a far more down-to-earth reason for companies to do more business in the US.

It all boils down to the shale gas revolution.

In short, at the start of this century, the US was looking at becoming a natural gas importer. Now, thanks to the opening up of shale gas fields, some believe the country has nearly a century’s worth of gas supplies. It’s now looking at exporting the surplus, rather than being forced to import new supplies.

As a result, natural gas prices have plunged. That’s meant big shifts in the US energy mix. Gas now provides nearly a quarter of America’s electricity, up from a fifth in 2006.

Meanwhile, use of coal has dropped. Indeed, as The Economist points out, America’s greenhouse gas emissions have fallen by 450 million tonnes over the past five years, ‘the biggest anywhere in the world.’

Last year, accountancy group PricewaterhouseCoopers argued that by 2025, ‘the manufacturing sector could save $11.5bn in energy costs.’ The group suggested that as many as a million new US manufacturing jobs could result from cheap gas.

Among the biggest beneficiaries are chemicals companies. Why? Because, as The Economist notes, they use gas ‘to make chemicals such as methanol and ammonia, a vital ingredient of fertiliser.’

As a result, petrochemicals have remained cheap, ‘even as oil prices have peaked’. In turn, cheap petrochemicals mean lower costs for all the other businesses who use them, from car manufacturers to agriculture companies.

So you can see that there’s a virtuous circle going on here. The cheap natural gas gives rise to both cheaper energy and cheaper raw materials. As PwC point out, you also have added demand for manufacturers to build products for the gas extraction industries.

Can You Profit From Natural Gas?

This is where it gets more complicated. Cheap natural gas is great news for energy users. But it’s not so good for natural gas producers. An inevitable result of natural gas falling in price as far as it has is that it becomes less attractive to keep looking for it.

Indeed, the number of rigs drilling for natural gas is near a 13-year low, according to oil services firm Baker Hughes. So far this has had little impact on prices, as it will take a while for gas output to be affected, mainly because natural gas is still being produced as a by-product of oil wells.

But in the longer run, if prices don’t support production at economic levels, then production will simply have to fall until prices pick up. This suggests that the natural producers who can survive the hard times might be in the best position to profit when natural gas prices recover.

John Stepek
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in MoneyWeek (UK)

From the Archives…

No Mr. President, Entrepreneurs Did Build That…
20-07-2012 – Kris Sayce

How an Interest Rate Rise Could Trigger a ‘Punch Bowl’ Rally
19-07-2012 – Kris Sayce

When the Going Gets Tough, Entrepreneurs Innovate
18-07-2012 – Kris Sayce

Is This Man the Ultimate Contrarian Indicator for Mining Shares?
17-07-2012 – Dr. Alex Cowie

How Gold Stocks Could Become Your Gilded Lifeboat
16-07-2012 – Dr. Alex Cowie

How You Could Profit Profit From Cheap Natural Gas Prices

Source: ForexYard

The euro took losses during the overnight session, but managed to remain well above its recent lows against the US dollar and Japanese yen. Expectations that the European Central Bank will act to lower Spanish and Italian borrowing costs on Thursday have helped boost the common-currency in recent days. Crude oil and gold remain elevated as well, as risk taking has returned to the marketplace.

Main News for Today

Italian 10-Year Bond Auction
• The main reason behind the euro’s bearish trend last month was rising borrowing costs in Spain and Italy
• If today’s news signals that demand for Italian bonds is low or that borrowing costs have gone up, the euro could reverse some of its recent gains during afternoon trading

Read more forex news on our forex blog

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

By MoneyMorning.com.au

Over the weekend, Great Britain missed out on what some thought was a certain gold medal for champion cyclist, Mark Cavendish.

After Bradley Wiggins won the Tour de France, victory for Britain seemed certain.

It wasn’t to be. Cavendish came in a lowly 29^th.

So how did it all go so terribly wrong for Cavendish before his home crowd?

Simple. Cavendish didn’t have a Plan B.

It’s a problem faced not just by British cyclists. In fact, the failure to have a Plan B is staring the Australian economy square in the chops today.

And it’s a failure that could have a startling impact on the economy and financial markets. Here’s why…

We’ll get back to Plan B shortly. But first, in a speech last week to the Anika Foundation Lunch, Reserve Bank of Australia governor, Glenn Stevens signalled he sees no limit to what it can do to prop-up the Australian economy:

‘We might find that, in an extreme case, the Reserve Bank — along with other central banks — would need to step in with domestic currency liquidity, in lieu of market funding. The vulnerability to this possibility is less than it was four years ago; our capacity to respond is undiminished and, if not actually unlimited, is not subject to any limit that seems likely to bind.’

That, we dare say, includes ramping up the printing presses. And when central banks do that, there are two assets you want to own to help you profit from money printing: gold and…shares.

The following chart shows you the performance of five key assets since the market bottomed in March 2009:

Click to enlarge

The green line is the gold price. The yellow line is the U.S. S&P 500 index. The blue line is the U.K. FTSE 100 index. And the red line is the Aussie S&P/ASX 200 index.

Oh, and the purple line. The line that shows a 30% gain since 2009 is the Aussie gold price.

So for all the talk by the mainstream gold bears about gold being a terrible investment that doesn’t do anything, well, the breaking news is that it’s beating the Aussie stock market by three-and-a-half to one.

And for those same gold bears there’s no getting around it, the Aussie stock index is the worst performing out of the five assets.

But this chart means more than just the percentage gains shown. It shows you that a country that controls its own currency, in effect, can boost asset prices more effectively than those without this control.

Printing Stock Gains

Whether you’re in favour of money printing or not (we most certainly aren’t, for the reasons we’ve given many times, including the terrible inflationary impact for those who don’t know how to protect themselves), the impact on asset prices is certain.

To show you what we mean, look at the following chart:

Click to enlarge

It’s a bit jumbled, but we’ll try to explain it. As we see it, stocks are in three groups.

In the top group you’ve got the U.S., U.K., and German markets. The U.S. and U.K. central banks have printed money like it’s going out of fashion.

The German economy has benefited from this as it has exported its manufactured goods and services to these economies.

Plus Germany has for a long time been the strongest economy in Europe.

The middle group contains Australia (gold line). Australia hasn’t yet needed the RBA to print oodles of new money. Mainly because exports to China have kept money flowing into the economy.

But it still hasn’t been perfect for the Australian economy. While the resources sector has boomed, the rest of the economy has struggled. This morning’s news that Ford Australia will likely close its local car-making business comes barely a few months after the Aussie government fed it a multimillion dollar taxpayer funded bailout.

And it’s hot on the heels of a number of high profile business collapses.

Then you’ve got the bottom group. This includes economies in the euro such as France and Spain that could do with more money printing (again, we’re not saying we believe in money printing, we’re just saying that in the short-term at least, it does have a positive impact on stock prices).

And as we reported last week, the bottom-dwelling euro nations may get what they wish for. European Central Bank president, Mario Draghi has vowed to do whatever it takes to make sure the euro doesn’t fail.

That can only mean more central bank stimulus.

It helps explain Friday’s 3.9% rise for the Spanish IBEX index, and the 2.3% gain for the French CAC40 index.

But what about Australia? Right now, the idea of the RBA printing money seems unlikely. But it’s not completely off the table as the quote from Glenn Stevens above shows…

No Plan B for the Australian Economy

You can hardly pick up an Aussie paper without reading about how great things are here. Why the Australian economy is different to the Northern Hemisphere economies. And why we’ll muddle through even if things go a bit wrong.

But where’s the Australian economy’s Plan B? Plan A is to sell lots of stuff to China…lots of resources.

What if that plan doesn’t last as long as the mainstream hopes? Already Ken Henry’s claim that the resources boom would last until 2050 is looking a bit shaky.

So what happens next?

In the Olympic road race competition, Mark Cavendish’s problem was that his British team only had a Plan A. That was to hope none of their competitors would break away from the main group. So that when they approached the finish line after 260 km of racing, Cavendish could use his burst of speed to beat the rest.

It turns out everyone else figured that was Britain’s plan. So it wasn’t surprising that nearly 40 riders broke away from the group by the half-way point.

In bike racing it’s common for the main group to catch up with the breakaway group. But not in this case. The British team couldn’t rein them in because no-one else in the main group would help.

(Nearly every country was represented in the breakaway group, so if the riders in the main group helped to catch them, they knew that Cavendish would win, potentially robbing one of their own countryman of a win.)

In other words, Britain didn’t have a Plan B.

If Plan A didn’t work, there was nothing to fall back on. That’s the position Australian economy finds itself in now. There’s no Plan B for after the resources boom ends. That’s bad news for the Aussie economy in the long term.

But in the short term, if North America and Europe is anything to go by, it’s almost certain the RBA will follow the carefully laid out plan used by other central banks. That is, printing money.

As bad as the long-term economic and stock market consequences may be (look at Japan’s economy), in the short term we’ve seen that it can and does boost stock markets.

That’s why we don’t suggest you completely abandon the stock market.

The Aussie market has gotten a boost this morning from Europe’s potential money printing plan (up over 1% as we write). But when the inevitable happens and the RBA has to print in order to protect the Australian economy as the resources boom ends, you can be almost certain Aussie stocks will soar higher.

And when that happens, you don’t want to be left with a portfolio of no stocks.

Cheers,
Kris.

Related Articles

Market Pullback Exposes Five Stocks to Buy

Why You Should Stick With Gold Through the Eurozone Crisis

China’s Big Move Could be a Game-Changer for Gold

How No ‘Plan B’ For The Australian Economy Could Boost Aussie Stocks

By MoneyMorning.com.au

Never, ever fall in love with an investment. No matter how much money it’s made you.

If you had bought technology stocks in the early 1990s, then by the end of the decade you’d have made a fortune – on paper. By that point, parting with those companies would have felt very painful. But if you had kept holding for just a little longer, you’d have seen your paper fortune evaporate.

The same thing happened with the property bubble in the early ’00s. Lots of erstwhile real estate barons ended up bankrupt.

So what about investing in gold? Since the start of the century, it’s been one of the best-performing assets on the planet. It’s made early investors a lot of money, and it’s an investment we’ve been very keen on.

But as anyone who bought in 1980 will know, while gold might be a good store of value over the very long run, it can endure some pretty awful bear markets too.

And while we think it’s worth having a portion of your portfolio in gold consistently as insurance, you don’t want to have the lion’s share of your wealth invested in it when the next down-cycle comes.

Gold’s suffered something of a lull in recent months. Combined with the fact that central banks – never great market timers – became net buyers last year for the first time in decades, it’s worth asking if their interest in the yellow metal is a sign to the rest of us to get out.

Central Bankers Have a Poor Investment Record

Central bankers have generally made a hash of managing the global economy. Rather than reining in over-exuberance during the bubble years, they fuelled it, by cutting interest rates at the first hint of any slowdown.

This knack for doing the wrong thing at the wrong time extends to their investment decisions too. As Ronald-Peter Stoeferle of Erste Group Research puts it in one of his recent mammoth reports on gold, ‘central banks tend to be civil servants with an extremely pro-cyclical investment behaviour’.

In other words, they’re very good at buying at the top and selling at the bottom. They are a classic “contrary indicator”. The obvious example is Britain’s decision to sell gold in 1999.

Clearly this was driven by then-chancellor Gordon Brown, so it’s not all down to the Bank of England. But in any case, the sale meant that the UK missed out on the gold bull of the next 13 years.

Indeed, the decision was so badly handled that it led to claims that Brown was acting to protect several major banks from a disastrous decision to short gold. GATA (the Gold Anti-Trust Action Committee) argue that this is still going on.

The LIBOR scandal means that we can’t rule anything out. However, for now the evidence points to cock-up rather than conspiracy. Indeed, at the time, The Economist called the BoE’s gold sale, ‘sensible portfolio diversification’.

Moreover, The Economist also pointed out that ‘Britain’s sales are not unusual; nor are the amounts particularly large. Canada, Belgium and the Netherlands have each sold more than the 415 tonnes Britain plans to dispose of.’ Even Switzerland began selling gold, a process that has led to their gold reserves falling by 60%.

In short, the BoE wasn’t the only central bank to get its gold timing badly wrong.

Which Central Banks
Have Been Piling into the Gold Market?

So that raises the question: should we be worried now that central banks are starting to buy gold again? As Stoeferle notes, net purchases in 2011 were the highest seen since 1964.

However, we’re not so sure we need to be worried yet. As Stoeferle points out, the majority of the gold has been bought by central banks in developing economies, such as Mexico, Russia and Turkey. At this stage, such central banks are generally just “catching up” with developed markets.

For example, troubled peripheral eurozone nations Portugal and Greece have 90% and 80% respectively of their central bank reserves in gold. The US isn’t far behind. China and Saudi Arabia, on the other hand, have less than 10% of reserves in gold.

“Compared with the industrialised nations, the majority of central banks in emerging nations remain clearly underweighted in gold.” That means they need more to hedge their huge exposure to the US dollar. It’s also worth noting that China and Russia have been net buyers in the last decade, so it’s not as though their behaviour has suddenly changed.

However, if developed economy central banks started buying gold again, that would be more worrying. Indeed, says Stoeferle, given the BoE’s track record, if it ‘were to announce purchases, we would… regard this as a warning signal for the gold price’.

The good news is that this hasn’t happened yet. And it may be some time before it does. Most developed-world central banks are more preoccupied with money printing and setting negative interest rates in order to inflate away some of their debt burdens. Given these policies, we think gold could see more significant gains before its time in the sun is over.

Matthew Partridge
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in Money Morning (UK)

From the Archives…

Get Ready to Pin Back Your Ears With Gold Stocks
27-07-2012 – Dr. Alex Cowie

The Upcoming Interest Rates Shock You Should Prepare For
26-07-2012 – Kris Sayce

Don’t Believe ‘the Bull’ on Australian House Prices
25-07-2012 – Kris Sayce

Why the Melbourne Property Market Could Be Set For Two Years of Pain
24-07-2012 – Dr. Alex Cowie

The End of Growth Through Currency Wars
23-07-2012 – Dan Denning

Central Banks Are Buying Gold – Is This a Sign to Sell?

AUDUSD breaks above 1.0443 previous high resistance, and continues its upward movement from 0.9581 (Jun 1 low). Further rise could be expected over the next several days, and the target would be at the upper line of the price channel on 4-hour chart. Support is at 1.0400, only break below this level could signal completion of the short term uptrend from 1.0176.

Forex Signals

By Central Bank News