Golden “Pet Rock”

Remember all the pain gold and silver endured in the lead up to the much hyped US Fed interest rate hike in December.  Down it kept going as a rate hike meant ‘everything is awesome’ and no one needs the safe haven anymore.  As we (and many) reported, the quote of that time was from a Wall Street type stating owning gold was like owning a “pet rock”.  But as we kept reinforcing, everything was and is far from awesome, and indeed any semblance of awesome was purely courtesy of the central bank stimulus around the world.  The US’s central bank (Fed) raising rates in December was a move in the other direction (because they had to or risk any remaining credibility), so how’s that worked out for them (the vertical line is the day of said rate hike)?

But it is too simplistic to simply blame the rate hike for the market turmoil this year.  We’ve had the much publicised woes in China as their market comes to terms with the always inevitable situation of slowing growth and too much debt, and massive plunge in currency reserves.  Last night’s action that saw (USD) gold soar to a 6 month high and shares plunge again was due to the growing concerns around Euro banks and financial institution failure contagion.  Risk indices are spiking on not just Euro banks but Chinese and US as well.  Europe’s biggest, Deutsche Bank (who in January announced a Eur7 billion loss) crashed 11% last night to its lowest since January 2009 (GFC).  We’ve reported a number of times on the simply gigantic derivative and particularly CDS (credit default swap) exposure they hold ($64 trillion, or nearly 5 times total Euro GDP!!) putting them firmly at the top of the “Next Lehman’s” list… but on a much bigger and globally interconnected way.

Finally, above we mentioned gold hitting a USD 6 month high.  As at the time of writing this, Aussie dollar gold just hit an over 3 year high, up 15.5% this year alone.  Silver on the other hand is still at historic lows, despite being up nearly 14% this year, and at a gold:silver ratio of around 78 is looking to be the bargain of the two.

To take that ‘pet rock’ metaphor where he never intended – consider that rock to be the nucleus of what is certainly looking like an ever growing snowball hurtling down the hill, building and building on the many and various financial issues around the world.  When that snowball hits the cliff at the bottom we all know that only thing that will be left….  Your beloved, very valuable, golden ‘pet rock’.