“Risk on” trades returned with a vengeance yesterday, with the news from America of faster than expected manufacturing expansion, increased factory hiring and increasing auto sales allaying fears of a “double-dip recession”. News that German chancellor Angela Merkel will back plans to recapitalise European banks has also contributed to the rise in optimism, though Moody’s downgrade of Italian banks and Italy’s sovereign credit rating has underscored the seriousness of the crisis facing the eurozone.
The Dow Jones tacked on 1.2%, with some predicting that the market bottom on Tuesday could mark a key reversal day, and the start of a bullish period for stocks. Certainly given all of the money printing by the Federal Reserve over the last few years, there’s more than enough ammunition to send stock prices higher – along with commodities, precious metals and eventually producer and then consumer goods. In fact yesterday also saw Cleveland Fed vice-president Joseph Haubrich remark that inflation in America is now running at a “sustained clip” – though of course assuring that this inflation will be “temporary”.
As Jesse’s Café Americain notes, gold and silver are for the moment defined by hedge fund computers as “risk” trades – in contrast to the summer, when gold prices were boosted by safe-haven bids. In the short-term, the dollar-price of gold is being buffeted by weakness in the euro. However, escalating inflation in America, and/or more quantitative easing from the Fed in response to a strengthening dollar (which will hurt US exports) will certainly boost gold – possibly to over $2,000 within a short period of time.
With US government debt now standing at close to $15 trillion – increasing by $162 billion in just three days – long-term the picture remains as bullish as ever for precious metals. The US government debt-to-GDP ratio now stands at 98.9%.