A Bounce In The US Stock Market Today?

A report from the World Bank that opines that the global economy will shrink -2.9% in 2009 and that commodity prices have peaked, has moved speculators into selling commodities, which has led to selling of the commodity price related equities. The global equity market is taking it on the chin.

http://online.wsj.com/article/SB124567829766437051.html

This morning commodity prices and equity markets are unstable, pushed that way by speculators, followed by concerned traders and investors who don’t want their portfolios impacted by another wave of September-October and February-March selling.

So today, prices of crude oil, copper, and other commodities have plummeted. By why, you might ask, is the price of gold dropping so fast? Gold, we know, is not a consumable, so it’s a bit like money. In fact, it’s a lot more like money than money because governments cannot print gold. It is, we know, real money.

So why is the price of gold dropping? Two reasons: (i) the $US Dollar is lifting (for many reasons), and (ii) some investors/traders/speculators still mistakenly believe that gold is a commodity. Of course, the latter point is understandable because that’s a concept promoted by a self-interested group of politicians around the world who would like to borrow and spend and build their power bases with impunity.

But, no, gold is not a commodity. It’s just the price today of real money.

The World Bank report if people care to read it shows how commodity prices crashed in the 1970s when the major global inflation cycle was peaking and interest rates were soaring and legislation was being enacted by governments like the US Congress that arbitrarily set a dual price for oil. Those actions, plus the pullback in demand caused by the economic crisis of the mid-70s, caused the price of oil to peak, and then collapse, starting in 1974.

But, the price of gold did not peak until 1980, and it only did so after the US fiscal and monetary authorities put in place a set of conditions that set the course for many years for a stronger $USD. Ask yourself if that’s the case today. Yes, there has been a short-term cycle that has lifted the price of the dollar a couple pennies. But is that the change Obama offered? I call it chump change, a small shift in market trends and cycles signifying nothing of significance. At least for now, like the period 1974 through 1980, I see all the conditions right in the world for a weaker Dollar, a relative lowering of the standard of living between Americans and the people who populate the emerging economy nations like Brazil, Russia, India and China, among others.

There is a reason, of course, for weakness in America. Those we call the rich, business owners and managers who also happen to be those leaders who have traditionally grown the US economy into the powerhouse it is, have been ripped off by Humungous Bank & Broker (HB&B) and individuals like Bernie Madoff, and now they are retrenching, trying to save the rest of what it’s taken generations to build in their personal and family estates. But these are the people who, similar to those others who explore and develop precious metals, and other essential energy, basic materials and manufacturing, processing and distribution companies, are the wealth creators. It’s certainly not the government, who transfer wealth from haves to have-nots, nor even the consumer sector companies who help people borrow and spend, that are creating real wealth, and surely it’s not the financial brainiacs on Wall Street who engineer so many useless products and services that lead to bonuses that were never earned the hard way by creating real wealth.

So, today, give some thought to the sustainability of lower gold prices. You’ll see, as I do, that without any sustainable reason for plunging prices the market will remain unstable, ie, volatile. Price will plunge and then they will soar, again and again.

The only development that will arrest the rising price of gold will be the production of real wealth that pays an economic return. Gold may be real money, a storehouse of value, but it does not pay a financial return, and that, my friends, is the only fly in the ointment when it comes to gold. In the long run, economic and capital market stability is built on returns on invested capital. The returns on gold will only come from the pace at which governments destroy wealth, and right about now they are doing a pretty good job of that.

In time, hours, days or weeks, possibly months, the price of gold will hit new highs. I am as sure of that as I am that leaders in the US Administration and Congress are part of the problem and not the solution to the massive problems facing Americans today.

Today will see a bounce in the equity market and a lower $USD because, without that, the Interventionists believe there could be a crash. So the Plunge Protection Team has been called. That’s also going to bring the speculators back to gold.

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