All That Glitters: Stimulus Packages and the Price of Gold
The US has gained Senate approval for the $US787 billion economic stimulus package, however markets immediately sold off due to concerns about the lack of detail in the proposal. The stimulus plan consists of: $US212bn in tax relief, $US308bn in spending and $US276bn in Aid.
The current bill for US bailouts and stimulus packages now stands at $US1.2 trillion dollars, with an expectation that this will balloon to over $US2 trillion.
To give you some idea of what a trillion dollars is, think of it this way. For those of you who believe in the birth of Christ: if you spent a million dollars a day for every day since that date, you would still not have spent a trillion dollars.
Asian counties have joined the party with fiscal stimulus packages for: Singapore $US14bn, Taiwan $US27bn, Korea $US66bn, Japan $US147bn and China $US582bn.
Australia is not immune to the largesse, as our market is digesting the K Rudd Government’s passing of the $42bn stimulus package and what it means to our economy.
Bleak Future For Paper Monies:
The problem with all of these stimulus and bailout packages is that the current generation is placing a huge debt burden on future generations. These stimulus packages will ultimately cause inflation and possibly hyper inflation, thereby deflating the value of paper money.
The US dollar (USD) has been benefiting from being seen as the world’s reserve currency and it has had a stellar run since August last year. However, at some point it too will be subject to deflating in value, as all of the asset classes in the US economy are under pressure, including real estate, financials and autos to name but a few.
The Euro and the Pound are suffering from flailing economies with contracting GDPs and rising unemployment, resulting in their currencies being sold off accordingly.
The Japanese Yen has seen the unwinding of the carry trade, which had kept a lid on the Yen since the 1980s. The Yen is now stronger against all currency majors and their exporters are suffering a double whammy i.e. strong domestic currency and contracting GDP (down an annualised 12.7%).
The Canadian and Aussie dollars are hostage to the retreat in the commodities.
It Is All Relative:
MDS Financial has reviewed the performance of Gold (in USD) versus the ASX200.
Since the start of 2008 gold has outperformed with gold up 9% in USD while the ASX200 was down over 44% (see the chart below). You can see gold was sold off steadily 2008, once it peaked early in the year at just above $US1000.
Even if we start measuring the relative performances of the ASX200 and gold six months ago (say start of August ‘08) gold has risen 12% while the ASX200 is down 26%. (See below)
What is in Store for Gold?
Now if we move the starting reference point to the start of November ‘08 when governments first started talking about “stimulus” and bailout packages and markets began to rebound. Gold has risen 30% while the ASX is down 12% (despite a 20% rally from mid-November into the start of this year).
Conclusion
Gold will continue to shine this year with a high likelihood of retesting the $US1000 level it reached last year. Trade the rising Gold channel which has been in place since the start of November ‘08. You can trade this theme through CFDs in Spot and Mini Gold Contracts. Alternatively trade through the gold stocks on the ASX including Newcrest and Lihir in the large caps, or through the many smaller caps likely to shine including: Sino Gold, Oceana Gold and Dominion Mining.
To take advantage of weakening currencies and strengthening gold stay tuned to MDS Financial – Research as we highlight when it is the best time to step into the trade.
For more information please visit us at:
http://blog.mdsfinancial.com.au
MDS Financial provides share market advice, analysis, data, online trading and research. Please visit our blog at http://blog.mdsfinancial.com.au or our website http://www.mdsfinancial.com.au
Michael Hevern is a senior finance analyst for MDS Financial, and produces a daily finance market wrap which can be viewed :here.
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