Fresh off a one-day sabbatical to discover the number of underground diamond drilling rigs available for lease in Australia, we’ve come back to the markets just in time to see Ben Bernanke have his nose rubbed in the dirt.
The US Fed’s quarter point rate cut, while expected, was still surprising enough to send oil north of US$94 and gold to the threshold of US$800. As the supply of dollars increases, the things priced in dollars increase too. It is easier to print money than it is to mine gold or pump oil.
Do you feel sorry for Ben Bernanke? It’s like Bernanke is the geeky kid on the school playground, memorising his multiplication tables before reading his favourite comic book as a reward. Along comes Jim Cramer, looking like Nelson from the Simpsons, to rough up gentle Ben a bit and steal his milk money. Isn’t that what Wall Street has effectively done?
The credit crisis had knocked about 6% off the Dow by the time the Fed intervened and lowered the discount and Fed funds rate by half a point each. Instead of letting Wall Street take its lumps for epically bad risk management and lending practices, the Fed caved. And you know what happens if you don’t stand up to a bully. Once established, the cycle of intimidation is hard to stop.
Yesterday’s quarter point cut won’t bail out the staggering US housing market. And it certainly isn’t going to do any favours for the US dollar, which is making new lows against everything else. But then, we knew this for a long time. America’s fiscal and monetary habits were unsustainable. A current account deficit nearly 8% of GDP is brought into balance by either lower consumption or a falling currency. We’re going to get a bit of both.
The gold price continues to do nothing special in Australian dollar terms. There will come a point when gold rises against all currencies—including commodity currencies like the Canadian and Australian dollars. You’ll know we’ve reached that point when people aren’t talking about how to unload the US dollar but actually start doing it. That’s when gold, in Aussie dollar terms, will probably make its biggest move of the cycle.
Markets and Money