Market Jitters Make Precious Metals Popular Investments

“Today’s close will be important to watch. Traders using programs are more worried about the market’s closing levels than intraday lows. If the ASX/200 closes lower today, it could be the signal for another sell-off, since the index is just now outside its long-term upward trend channel,” Gabriel said this morning before we’d even finished our coffee.

The editorial team spent the first hour of the day digesting the same data you probably saw yourself this morning. Gold up in New York. The Dow down by 246 points. The futures pointing to a lower opening on the local market. What tune is this market dancing to? The credit bubble blues or the rebound rumba?

Trend-following investors have a problem. The dominant trend-a bear market in credit-simply doesn’t add up to higher stock prices. That’s why investors ignored the first wave of aftershocks in August and bought on reflex. They acted as if nothing was wrong and spent their money accordingly.

Now, with financial stocks hemorrhaging capital, the market is rethinking and re-pricing things. It will look for some sign of a turn around this week when Citigroup, JP Morgan, Intel, and General Electric all report earnings. Financials, industrials, technology…surely one of those sectors can rise to the challenge and lead the market higher. But don’t count on it.

Our guess is that precious metals are becoming popular as an investment theme. The StreetTRacks Gold ETF (NYSE:GLD), now has US$18 billion in assets under management. Its gold vault is bulging with 641 tonnes of bullion. That makes it a larger holder of gold bullion than the governments of China and Russia. The emergence of commodity-related ETFs has unlocked retail investment demand for commodities themselves (as opposed to commodity producers).

John Spence at says, “The stunning rally in precious metals appears to know no boundaries as gold futures continued an inexorable rise, with prices touching the vaunted mark of $900 an ounce on Friday for the first time”.

Nothing is inexorable. But gold would seem to have some of its best days ahead of it. So far it’s been mostly gold bugs and institutional investors hedging against the stupidity of central bankers and the inflation they breed. When the punters fall in love with gold, watch out.

Citigroup (NYSE: C) is looking for another US$8-11 billion to shore up its capital, according to the Wall Street Journal. The Journal says prospective investors include Saudi billionaire Prince Alwaleed bin Tallal and the China Development Bank, one of China’s three state-funded policy banks.

Wall Street’s capitalists are being slowly taken over-on very favourable terms-by foreign investors. It’s hard to imagine that foreign ownership of American (or Australian) financial institutions could be any worse for shareholders than what has happened in the last ten years.

The real question is whether the Sovereign Wealth Funds are throwing good money after bad. It may turn out these cashed-up funds end up buying valuable pieces of future cash-flow at bargain basement prices. Or they could be lavishing money on a liquidity black hole. Either way, it’s a bit ironic that the capitalists are seeking a bail out from the Statists and former communists.

Dan Denning
Markets and Money

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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Your final sentence is that “[I]t’s a bit ironic that the capitalists are seeking a bail out from the Statists and former communists.” However, the sentence contains falsehoods: America’s economy is hardly capitalistic (unless you mean state or corporate capitalism). The American economy is “owned” by the corporations and the state; the so-called consumers are merely debtors (everything they buy is on credit) and slaves to those who lend them the money. And these slaves have no real knowledge of who they owe for anything: who “owns” the house or car or credit card? It could be that some people… Read more »
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