A new contagion is brewing
Gold could see new mega-highs according to two prominent international bank economists
by Michael J. Kosares
While all eyes have been on Syria, what might turn out to be a much more insidious problem for the world economy has been bubbling below the surface – and for the most part out of the public eye – in what we used to call the “third world.” In the end, what amounts to a new currency and debt debacle in the emerging world could undermine the world’s stock markets, including Wall Street, the value of those country’s currencies as well as the debt denominated in those currencies. The list includes China, India, Brazil, Argentina, Indonesia, South Africa, Russia and Mexico – just to name a few (and we won’t even get into the problems in the southern rim of Europe). Some see the developing situation as a repeat of the 1996-1997 Asian contagion, but it goes beyond the Pacific Rim, as just noted, to include most of the southern hemisphere.
Kevin Lai, who is chief regional economist at Daiwa Securities stated in a recent Financial Times article that “all this QE money has led to a massive credit inflation bubble in Asia. The crime has been committed, we just have the aftermath. During that process, there will be a lot of damage. . .It’s like a margin call. Households will need to sell their assets. There will be a lot of wealth destruction.” Later in the article he adds to those concerns. “The choice is either you protect your currency or you protect domestic growth. You can do only one or the other. There is no easy way out.” The former will lead to inflation; the latter to disinflation or stagflation – whichever term fits your fancy.
To go by one example as to what the overall impact of the unfolding scenario might be on the gold market, we need only look to India where the ongoing collapse of the rupee has pushed gold demand into the upper limits. India’s monetary authorities have reacted to the situation by imposing import controls on the metal in an attempt to keep the populace from fleeing the rupee for gold. Some commentators have gone so far as to suggest the possibility of a gold confiscation in India. Granted India’s affinity to gold is like no other country’s save China, nevertheless it provides clues as to how gold fundamentals might be affected if the contagion spreads. In fact, when you take into consideration that gold has been surging lately in overnight/overseas trading, the recent strength in the market might be attributable more to the global crisis than events in Syria — where the mainstream financial media has focused its attention of late.
Top Society General strategist, Albert Edwards, believes that China may eventually be forced to devalue the remimbi and warns of a currency debacle in the not too distant future similar to the 1997 contagion.
“The emerging markets ‘story’ has once again been exposed as a pyramid of piffle. The EM edifice has come crashing down as their underlying balance of payments weaknesses have been exposed first by the yen’s slide and then by the threat of Fed tightening. China has flipflopped from berating Bernanke for too much QE in 2010 to warning about the negative impact of tapering on emerging markets! It is a mystery to me why anyone, apart from the activists that seem to inhabit western central banks, thinks QE could be the solution to the problems of the global economy. But in temporarily papering over the cracks, they have allowed those cracks to become immeasurably deep crevasses. At the risk of being called a crackpot again, I repeat my forecasts of 450 for the S&P, sub-1% US 10y yields and gold above $10,000.”
So today we have a prediction of $10,000 gold from an economist at one global super-bank (Albert Edwards at SocGen) to go with yesterday’s prediction of $3500 per ounce by an economist at another global super-bank (Tom Fitzpatrick at CitiBank).
“Within the gold dynamic, we believe this recent correction was very similar to what the gold market witnessed from 1974 to 1976 — as the equity markets recovered from the bear market bottom in 1974. In this instance, very recently gold went 14% below the 55-month moving average, exactly as it did back in 1976.
After the low in gold in 1976, the equity market peaked 4 weeks later. So far, following the $1,181 low in gold, the peak in the equity markets has been 5 weeks thereafter. And as we started that historic upward movement in gold, beginning in 1976, this was also when the equity market peaked and went into a corrective phase, and that is when gold really came into its own.
So we believe we are back into that track where gold is the hard currency of choice, and we expect for this trend to accelerate going forward. We still believe that in the next couple of years we will be looking at a gold price of around $3,500. As the gold/silver ratio plummets near 30 (see chart below), this would also suggest a silver price above $100.”
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