Gimme Shelter

Today we witnessed a virtual meltdown in the US equities markets with the Dow Jones industrial average currently trading off about 300 points plus on the day. At the same time we are witnessing the US dollar under pressure.

With rock-bottom low inflation in the U.S. and China as well as deflation in the eurozone, jitters are overwhelming the marketplace. This raises demand for haven investments, gold if not chief among them, then very high up on the list.

The U.S. bond market is probably best reflective of these conditions, the price of all bonds rising as yields continue to fall, the 10-year U.S. treasury note sliding close to a 2.00% yield.

The dollar, long acting as a haven, took a hit today, falling significantly in the early part of the day. This gave gold the upsurge we are looking for in our current trade. But we expect the dollar to regain strength once the reappraisal of the U.S. economy occurs versus China, Japan and Europe.

This indicates that gold will struggle a bit to find direction. The worst feature of the current economic landscape is that there seems to be little central banks can do without abandoning completely supply side economics. Perhaps it is time to rely more heavily on Keynes?

The main thing that banks and corporations must be either persuaded or forced to do is to lend money again. They have been the chief beneficiaries of the economic policies worldwide since the recession began six years ago. They must loosen lending policies.

However, given the events of the last few years, and the hawk-eye that regulatory bodies have turned upon the commercial and investment banks, this will be hard to accomplish unless the central banks start charging significantly for reserves held in government hands. Lack of liquidity is the greatest danger to all the major economies.

Another viewpoint says that this slowdown is only a passing story and that a hard but short-lived retrenchment had to be expected.

We're not optimistic (which makes us feel bullish about gold). A huge demographic shift is in gear in the western world. The more credit-worthy Baby Boomer generation is passing into retirement, or at least semi-retirement; their purchasing power is strong, but their needs are shrinking.

Members of Gen X, the generation sandwiched between Boomers and Millennials, while hitting their prime earning years make up a significantly smaller cadre. They are also marginally less rich than Boomers.

Millennials - the 20-and-30-somethings are struggling to get on their feet. Jobs are still scarce, especially well-paid ones. They are considered to be the least creditworthy, not because of irresponsibility, but because of conditions largely beyond their control.

Some plan has to be put in place to put the young folks onto the path to prosperity.

As always, wishing you good trading,