Let The Fireworks Begin

— “Very little has changed in the last week,” writes Slipstream Trader Murray Dawes.   “European bonds continue to implode and the Equity market is continuing to ignore it at their peril.  When credit markets and equity markets diverge it is uncanny how often the credit markets are right and the equity market is wrong.  It is only a matter of days before we see the S+P 500 testing 1200-1220.  Below there is where the fireworks will begin.”

–Murray’s latest market update is now up over on YouTube . His written summary concludes, “If the S&P 500 manages to rally strongly above 1320ish then I have to reassess my view. We are seeing the selling pressure where I expect to see it so I am comfortable remaining strongly bearish at the moment.” To watch Murray’s market assessment in full, go here

–Your editor just flew in from Sydney where we spent two full days talking about gold. There’s a lot to recap. But in the interests of getting the Markets and Money out in a timely manner today we’ll give the short version: gold is going higher.

–Of course that’s exactly the sentiment you’d expect at a gold conference. It was the unanimity of the sentiment that caught us off guard. We felt pretty sure of our position too. But the fact that everyone felt so sure struck us as…worrisome.

–It’s not that any of the arguments were faulty. On a supply/demand basis the argument for gold is bullish. Central banks are becoming net buyers. Europe’s sovereign bond markets are within a whisker of a major crisis. And the whole dollar standard system in place for the last 40 years is in jeopardy.

–But one thing we’ve learned in nearly 15 years of watching and writing about the markets is that Mr. Market will always challenge your conviction. If the gold bulls see that victory of the field of monetary battle is in their grasp—that market forces are remonetising gold and marking down the value of sovereign credits—this is just the moment when you need to watch for treachery.

–We don’t know what form it will take or when it will come. But that it will come…we’re as certain of that as anything. The interventionits, central bankers, and politicians of the world all have a huge stake in the preservation and expansion of the current system. And with nothing but chaos to replace it, they’re not going to give up their privileged position voluntarily, or without a fight, if it comes to that.

–But let’s not talk of fighting. Australia’s Prime Minister is playing host to the American President today. We had hoped to meet with President Obama on his Australian visit and remind him to stress those qualities which make a nation fair, free, and prosperous. But he must have lost our mobile number.

–Had we caught up for a beer and a burger, we would have no doubt agreed that sound money, low taxes, private property, free trade, and the rule of law are the simple rules that allow a complex market economy to grow, flourish, and enrich everyone. It’s the kind of system that can even accommodate a huge number of parasites who are interested in siphoning off wealth in order to spread it around.

–Speaking of adversarial relationships, we had a great conversation last night with a wine grower from the Hunter Valley over coal seam gas (CSG). As you know we’ve written extensively about how the birth of the US shale gas industry has already changed the world’s geopolitical energy landscape.

–Shale gas and CSG are not the same. Shale gas is produced from gas bearing shale formations that typically exist much further underground than the stranded coal seams that are mined for their gas. But both energy sources share the same production method: horizontal drilling with hydraulic fracking.

–We asked the Hunter Valley wine maker if the story was really as contentious as it’s made out to be in the papers and on the TV. He said yes, but not for the same reasons. He said what concerned local wine makers and farmers is how the whole process of exploration and production is supposed to work.

–He added that several of the exploration companies have obtained permission for exploration in a deceptive way, by having college aged kids dressed like farmers to knock on doors and ask if they can “look around.”

–This doesn’t sound like a very sound legal way to obtain permission to explore for gas. But the whole issue seems to have been complicated by the influx of new players in the CSG field trying to capitalise on the rush. It’s pitting the companies against the communities, unnecessarily it seems to us.

–Meanwhile, yesterday’s Financial Review reports that BHP Billiton couldn’t be more excited about the future of shale gas. Mike Yeager, the leader of BHP’s petroleum unit, says shale gas is, “going to be a game changer across the world and for BHP to not be part of this is irresponsible we think.”

–But BHP’s shale strategy has nothing to do with Australia. Its two major acquisitions in the shale space last year were Chesapeake Energy’s Fayetteville shale gas assets and the $15 billion takeover of Petrohawk Energy. BHP reckons that US based shale gas will add 90 million barrels of oil equivalent to its annual production.

–Aussie shareholders (and how many superfunds in Australia don’t own BHP?) would be happy that BHP is supplementing its coal and iron ore earnings with oil and gas earnings. But we’re more interested in the question of if the shale gas industry in Australia will follow in America’s footsteps. You can get our research on the subject here. Until tomorrow….

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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$3 trillion of grease across the whole US banking sector lubing the wheels of EU debt becomes a disclosure of $5 trillion across just 2 US banks. http://www.bloomberg.com/news/2011-11-16/jpmorgan-joins-goldman-keeping-investors-in-dark-on-italy-derivatives-risk.html The USD liquidity off smoke collateral is the central plank that once marked to market is kicked aside creating a liquidity implosion that leads to either a Weimar era styled inflation or a deflationary depression. When they tried on taking a 50% haircut on Greece for the private EU banks wwithout triggering a CDS event you knew that any CDS default trigger from private Dubai businesses, to Iceland private banks, and any… Read more »

Here is a chart showing a long run half century history of ore boom and bust made look like just normal cyclical blips by the post 2000 boom. Of coarse they weren’t just blips and those cyclical price changes look alot different when you chart only to 2000 and go back earlier in time.


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