The gold and silver markets have been perking up lately which happens to have coincided with the Fed’s talk of removing stimulus from the domestic economy. Logically, talk of higher interest rates has spurred interest in portfolio re-allocation towards gold and silver as investors attempt to get a jump on the beginning of a structural shift towards inflation. The result of this is that gold has rallied about 11.5% year to date and silver is up nearly 20%. Much of this rally has been technical in nature, as the markets have moved beyond some key chart points. Technical levels are always important in short-term trading. However, the fundamentals suggest that this rally may be petering out.
People interested in the safety of investing short term cash
in certificates of deposit who are unhappy with yields they’ve been receiving
may want to consider some other options. The total return on CD’s has been
hammered throughout the economic crisis by the compounded effects of the
declining U.S. Dollar and the fiscal stimulus packages designed to lower
interest rates and create inflation. This has created a net negative return for
the people who are most reliant on income generating, principal protected
The fiscal stimulus plans have been designed to keep
interest rates low with the intention that low rates will spur economic growth.
The hope has been that businesses will take advantage of these low rates by
borrowing money and putting it to work increasing their gross revenues and
hiring more workers in the process. However, early on in the economic crisis
when the Federal Reserve Board began printing money and slashing rates, the
money they created was bottlenecked by the banking industry trying to heal
their own balance sheets and make up for their own overextension into the sub
prime real estate lending market. Thus, much of the initial stimulus never made
it to small businesses that might have been willing to borrow early on. The
depth and severity of this crisis has since scared off those same businesses as
it has dragged on and on with no pickup in consumer demand. Now that the money
is finally flowing, businesses have no need to ramp up production.
The official unemployment rate is 3.5% higher now than it
was when the economy collapsed in October of 2008. I have a hard time cheering
about an unemployment rate just because it’s less than 10%. Perhaps a more
telling statistic is that the number of employed people aged 16 and over has
declined by 5.8 million people over the last two years. The fiscal stimulus
package has not been designed to create employment. The effect is a mild opiate
for the masses in the form of increased subsidies and treatment of the economic
symptoms like home and auto loans without establishing a rigorous protocol for
fixing the economy and weaning the public off of its pain medication.
The haphazard way in which the fiscal stimulus has been
doled out has been viewed by the world as U.S. Dollar negative. The U.S. Dollar
Index, which is down approximately 14% since the crisis began, only tells part
of the story. This index is calculated by the value of our Dollar against a
basket of foreign currencies. The Euro Currency, Japanese Yen and the British
Pound dominate that currency basket. These three countries, which total more
than 80% of the U.S. Dollar Index each have their own economic crises to deal
with and are therefore, not reflective of the global value of our currency.
The only real source of global inflation at the moment is in
the emerging countries. China is main headline and rightfully so. China holds
the key to the next wave of developing middle class. Their growing consumer
base will fuel the next round of global economic recovery, along with India,
Brazil and numerous smaller Asian economies. These countries are experiencing
their very own, “Industrial Revolutions.” Their metamorphosis is happening much
faster than the one in our history books and it is their healthy economies that
can provide those seeking principal protected earnings some measure of value.
Those of you invested in domestic money markets and CD’s are
well aware of the deleterious effects of declining interest rates and a falling
Dollar. The compressed yields aren’t enough to offset the waning value of the
principal denominated in U.S. Dollars. Fortunately, the global economy brings
global alternatives. Our firm trades currency futures. We do not have access to
foreign certificates of deposit or, global money market accounts. These ideas
are from my personal finance management and are being passed along because they
are investments that I’m personally entertaining.
A brief survey of domestic six month CD’s provides us with
investment opportunities ranging from a low of 0.05% at Fifth Third Bank to a
high of 0.20% at Chase and PNC Bank. Compare those with the following six-
month foreign currency deposit rates; South African Rand- 3.68%, Norwegian
Krone – 0.6%, Mexican Peso – 2.14% and the Australian Dollar at 3.25%. These
investments are not free money and the risks need to be understood. These risks
include but are not limited to, the currency exchange rate between the U.S.
Dollar and the currency you choose to invest in and also include interest rate
policy shifts within the individual countries. However, as it becomes clearer
and clearer that the United States’ Federal Reserve Board is going to continue
to push for lower rates and flood the market with cheap Dollars via their
second round of Quantitative Easing, it becomes increasingly important to protect
the value of what we have and that means trading shiftless Dollars for global
This blog is published by Andy
Waldock. Andy Waldock is a trader, analyst, broker and asset manager.
Therefore, Andy Waldock may have positions for himself, his family, or, his
clients in any market discussed. The blog is meant for educational purposes and
to develop a dialogue among those with an interest in the commodity markets.
The commodity markets employ a high degree of leverage and may not be suitable
for all investors. There is substantial risk of loss in investing in futures.