Big Ben’s Big Casino

–What if?

–What if the Fed pushes short-term yields so low on U.S. notes and bonds that it forces everyone else to takes heaps of risks and buy stocks and commodities?

–This is the question that kept us tossing and turning Sunday night—but really since Murray mentioned in Friday when we were leaving the office. Murray simply pointed out that by monetizing so much of the debt at the short end of the U.S. yield curve (note and bonds that mature in 10 years or less) the Fed makes those instruments extremely unattractive to anyone who wants a return that beats inflation.

–And in point of fact, yields on 2-, 5-, and 10-year notes are all at or near record lows. Prices go up a bit, but not really enough to make buying U.S. debt a winning trade. That means investors have to go out and buy junk bonds, or corporate bonds, or emerging market bonds. Or equities. Ahh yes. Equities.

–Perhaps that is why the stock market went up on the QE announcement last week. The size of the Fed’s move wasn’t a big surprise. But perhaps the dynamics of its movement—crowding everyone else out of the short-end of the bond market—is setting off the hunt for other assets…and stocks are an easy option. This is why stocks could make new nominal highs without any real improvement in the earnings prospects for major companies (ex financial).

–Meanwhile, in the futures market, gold is knocking on the door of US$1,400. We’re here in Sydney to talk about gold to the Gold Symposium tomorrow. It’s not too late to sign up for the heavy hitting days tomorrow and Wednesday, by the way. The obvious question on everyone’s minds: what the heck is going on?

–The easy thing to do now is make a price forecast. Goldman Sachs did that last week, setting a price target of $1,650 for gold in the medium term. But all the action in the precious metals is pretty bullish right now, including silver, platinum, and palladium. And we mentioned on Friday that some analysts are even saying the base metals will thrive in the QE II trade, with some copper forecasts hitting $12,000 per tonne.

–Reuters reported on Friday that copper hit a 27-month high, just a couple of hundred dollars off its all-time high on the London Metals Exchange. It was a kind of delayed reaction to Wednesday’s Fed news. First, a possible strike at a major mine in Chile clouded the supply picture. But really, it’s as if everyone started to think the same thing at exactly the same time: Inflation!

–To their credit, our colleagues Alex Cowie and Kris Sayce were out front on this story. Alex has been adding copper shares to his Diggers and Drillers recommendations all year. In fact he’s currently back in Africa and on the ground doing a site visit at one of the firm’s he’s recommended, making sure everything is the way they say it is.

–Kris, on the other hand, is getting to be an old hand at playing the money torrent game. As a small cap guy, you wouldn’t think macro-economic policy would figure much in his strategy. But the fact is that each phase of global financial crisis has been met with a money flood from the authorities. That money usually (and first) finds its way into the share market, and it takes the small fry up fastest.

–To your editor, this is the definition of financial gambling. That is, the Fed is turning the entire global stock market into a casino. It’s also probably accelerating the flow of capital out of dollar denominated assets and into other markets with less destructive central bankers and politicians. That said, it could be bullish for tangible assets and thus, junior resources.

“This year,” reports Barron’s, “for the first time ever, China has been investing more overseas in assets like iron, oil and copper than it puts into U.S. government bonds. China in this year’s first half spent $31 billion on hard assets, compared with $23 billion on Treasuries and other U.S. government bonds. Experts say China’s investments in each of these asset classes will total about $55 billion for the full year. But even a tie marks a major turnaround from China’s previous practices.”

–So yes. That seems all very bullish and favourable for Aussies. Almost too good to be true, though. The devaluation of the dollar isn’t likely to be so easy to profit from. And it’s probably going to get a lot more political. More on that this week as we ponder gold.

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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4 Comments on "Big Ben’s Big Casino"

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Here’s one off the wall from Breaking Views

Private sector should lead gold standard adoption
A proposal from the World Bank boss to use gold as a reference point could prove destabilizing. Like the Bretton Woods system, such a government-run peg would break under stress. A better approach would flip the monetary order and use gold as a private means of global exchange.


While other US funny money may be living the slow death the original US funny money that is agricultural subsidies are sailing along just fine thank you.

Ned S

The upcoming G20 meeting has the potential to be interesting. I see Germany called the US policy “clueless”!!! :)

Stephen Greener

In your piece above you say “the Fed makes those instruments (US notes and bonds) extremely unattractive to anyone who wants a return that beats inflation”. Which inflation is that? Surely there is nothing but a miraculous imaginary stock that would counter the dollar currency inflation (classical meaning). Gold has increased its dollar price by 90% in the last two years alone. Why do folks even try to match that with equities or for that matter US notes and bonds. Surely by comparison with gold everything else is on the down escalator – fast!

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