When Irish Pipes Are Singing

–The Irish boys were singing their hearts out in the pub last night. To be honest it was hard to tell what they were singing. But there was plenty of enthusiasm. The Glasgow Celtic football team is in Australia playing some exhibition matches. And with St Kilda full of young Irish men and women, the sporting spirit was on full display.

–The Irish are in St Kilda at least partly because Ireland’s economy is still reeling from the collapse of that country’s debt/property bubble. The ratings agency Moody’s cut Ireland’s government debt to junk status overnight. It said there’s a “growing possibility” Ireland may need more aid from the European Union by 2013.

–Do you get the sense that the European Union and the IMF are losing their grip on Europe’s sovereign-debt crisis? The deals they’ve reached to help Greece and Ireland are already coming unstuck. And as we showed yesterday, Italy’s sovereign-debt problem dwarfs all the peripheral countries combined.

–The end game is approaching. The ECB can’t stomach a default on sovereign debts because that would wipe out the value of its collateral. It would have to be recapitalised. And where will that money come from? What are the alternatives? Money printing.

–Europe’s finance ministers must be sweating behind closed doors. In public, they are blaming the messenger. The French politician who’s in charge of Europe’s single market (whatever that means) is named Michel Barnier. He says he will unveil “stiff measures” in November to strip the ratings agencies of their powers.

–The ratings agencies aren’t to blame for Europe’s debt woes. And honestly, the ratings agencies haven’t exactly sounded the alarm on risky debt in recent years.  They change ratings only when announcing the obvious is a safe public position to take. No, they are not at fault for the debt problem.

–For the conspiracy minded, you could make an argument that this is all part of the currency war. You could argue that the U.S.-based ratings agencies are ramping up the crisis levels on European debt in order to drive investors to U.S. Treasury bonds and notes. This would drive up U.S. bond prices (good for U.S. banks) and drive down US interest rates (good for US borrowers, including the biggest borrower of them all, the U.S. government).

–The chart below is a US-based index that tracks the yield on 10-year U.S. notes. The lower the index goes, the lower 10-year interest rates go. You can see that in late June 10-year yields went up five days in a row and over three per cent. This rise was in response to America’s own debt-ceiling brinksmanship. Over the last three days, though, the downgrades in Europe and the emergence of Italy as the next big flash point have driven people into U.S. bonds and notes and pushed 10-year yields right back down.

10-year yields chart for US bonds and notes

–The proverb “Any port in a storm” comes to mind when you look at a chart like that. The only possible reason you’d buy U.S. government debt right now—when that country has annual deficits of $1.5 trillion and a total debt of $14 trillion—is that it’s NOT European government debt. It’s a purely relative trade. The U.S. debt is relatively safer than European debt—for now.

–On an absolute basis, U.S. debt is rubbish. This is the problem at the business end of a credit crisis. Most debts are just promises to pay. And when people or governments are broke, they break those promises. Government bonds might traditionally be viewed as safe and low credit risk. But they’re still just a promise to pay.

–Gold, of course, is not a promise to pay. It’s element number 79 on the periodic table. Its physical qualities make it hard to counterfeit or produce on demand. It’s portable, divisible, durable and the same everywhere in the world. These physical properties have made it a reliable medium of exchange for thousands of years. Its intrinsic qualities make it very useful as money.

–In U.S.-dollar terms, August gold futures closed up nearly $20 to $1568.10. That’s a new closing high. Gold rose in dollar terms despite investment flows into U.S. bonds. And in euro terms, gold also made a new high at €1119. What about in Aussie dollars?

–The chart below does not show the gold price in Australian dollars. Instead, what we’ve done is divided the price of the U.S.-listed gold ETF by the price of the U.S.-listed Aussie currency ETF. The gold ETF trades at roughly one-tenth the price of gold. GLD’s current price is US$152.77. The Aussie dollar ETF trades at 106, or the number of U.S. cents it takes to buy an Australian dollar.

–So, what is the chart telling you? Well, the purpose of the comparison is to see how gold has been performing in Aussie-dollar terms. The short answer is: strongly. The Aussie gold price hit an all-time high of $1546 in early 2009. At that time, it took you only 60 U.S. cents to buy an Australian dollar. Since then, the Aussie dollar has appreciated strongly against the U.S. dollar. But the Aussie gold price has held pretty much rock steady and is perched just below its lows.

Australian Gold Prices

–How can the Aussie gold price move higher if the U.S. dollar keeps getting weaker? The main idea to keep in mind is that all paper currencies are getting weaker relative to gold. The day of reckoning for the Aussie will come when the hot-money investment flows from carry-trade countries like the US and Japan reverse. When that happens, the Aussie will give up ground, probably to the U.S. dollar and definitely to gold.

–Make those Amazon and eBay purchases in the US while you can!

–The gold price is still producing useful information. It’s telling you the debt problem is a paper money problem too. It’s also telling you that the paper money problem is a gold problem. You’re free to ignore the information communicated by the gold price. But you’ll be poorer for doing so.

–Are the ratings agencies communicating accurate price information about European debt? It’s hard to say. And now the Wall Street Journal is reporting that European banks may be routinely overstating the demand at auctions for European government bonds. Yet earlier in the day, stocks reversed huge early losses at least partly on news that an auction of one-year Italian government bonds went off without a hitch.

–Hmm. So who is conning who? Are the ratings agencies artificially pushing down the Euro to prop up the dollar? Or are the European banks artificially propping up the Euro by lying about the demand for government debt? Or is everybody conning everybody as the world’s financial system totters and creaks?

–The safest bet, in financial markets, is to trust no one and do your own homework. Diggers and Drillers editor Alex Cowie has done his precious metals homework. He’s recommending silver bullion and silver stocks. He’ll tell you more about it later this week.

–In the meantime, we’ll save our comments about Bernie Fraser and the new Climate Change Authority for next week. We just can’t summon up the energy to attack the idea one more time. And you’re probably bored of it by now, which is just what the government is hoping. We’re headed up to Queensland for a small resources conference. We’ll recharge our anti-tyranny batteries and get back to you on Monday. Until then…


Dan Denning
Markets and Money Australia

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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8 Comments on "When Irish Pipes Are Singing"

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David Bode


Good article.
er…… Glasgow is in Scotland


The ratings agencies are the fat ladies. They gorge themselves until the finale descends upon them. Then they sing.


Feeling Glasgow’s embrace after Celtic has played Rangers ….. Ah life!

“You could argue that the U.S.-based ratings agencies are ramping up the crisis levels on European debt in order to drive investors to U.S. Treasury bonds and notes”. You’ve hit the nail square on the head there. The Yanks exported their toxic debt around the world, and now as part of their dumb currency war with China the two of them are exporting inflation around the globe; they (the US Fed and Treasury) manipulate their currency market and stock market, and then these Yank rating agencies with no remaining credibilty have the cheek to continue to operate and see trouble… Read more »
David Bode. Glasgow celtic is a Catholic football club in Scotland that is fully suppported by Irish sports fans and republicans hence they travel to Irish areas abroad for exhibition matches. You will find Irish people will go to to a celtic football match before they would watch any local leagues in Ireland. The celtic v rangers rivalry is a culmination of catholic protestant division, hatred and rivalry. As for the aritcle….I agree with what Dan is saying. Eventually the USD will fail….more kicking the can down the road going on with debt ceiling discussions. Bernanke last night hinted at… Read more »
QE 3 is coming. There is no prospect of the Aussie $ retreating to more normal levels. I predict $1.30 will be reached at some point in the next 3 years. If you repost the ASX, DJIA, and the FTSE100 since 2008 into Australian dollars you will see that the appreciation of our dollar is holding shares back too. There has been no great surge in our stock exchange where there has been in the UK and US. The reason is our dollar. In Aussie dollar terms the ASX is higher than both the DJ and FTSE because all the… Read more »
Comment by Joe on 14 July 2011: QE 3 is coming. There is no prospect of the Aussie $ retreating to more normal levels. I predict $1.30 will be reached at some point in the next 3 years. I agree Joe, In fact I think it will probably go higher than that over a longer term, say $1.50 in 5 years… That being said I also epect a pull back in the short term < 12 months or so. Whilst I appear to some as being a pessimist, I actually am quite bullish on the Australian economy into the future..… Read more »
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