In very short time, I expect severe price correction in all world markets( both emerging and developed), in commodities including precious metals virtually in everything except dollar and China.
I had warned you on 6th January that Gold will correct up to $1250, it is already down $125 from its high of $1435. I continue to expect Gold to test $1250 and silver $25, this correction may accelerate further.
Why do I expect such move?
There are many reasons.
Chief of them is Gold & dollar’s movement. Yes, often Gold sets trend for world markets. If you can see world markets through lenses of Gold’s movement coupled with currency directions, probably you would be ahead of curve.
Dollar to Go up
Dollar index is at very crucial juncture. As I pen this article it is trading at 77.76 very very crucial point. I see dollar to sharply shoot up from here to the level of 81 first and subsequently 88.
If dollar continuous to trend down and closes below 75.60 for daily and weekly closes then my forecasts will be dead wrong and dead opposite movements will take place in markets.
But, I do not see it happening.
There are multiple forces working towards that.
First Europe crisis is not over and is expected to come back again on the screen. As like US, Europe ,too, has not solved the crisis yet but have added more problems to it.
Second, Commodities have run up sharply in last 1 year close to the price levels of 2007. Yes, there are genuine fundamentals behind that but sharp run requires sharp correction and consolidation for healthy long term run. But, neither World growth has reached to pre crisis level not consumption to support run away prices. Consumers of developed markets are still mired into debt and recent run up in commodity prices have worsened situation further for them. Egypt is classic example.
And in spite of incessant efforts of Mr. Bernanke to keep rates low, in recent times short term rates and mortgage rates have spiked up substantially.
Third nearly 1/3 of subprime loans are coming due to 1st quarter of 2011 for expiration of ARM. That will once again increase delinquencies and foreclosures in US.
And, we know from our previous experiences, World goes to dollar when uncertainty arises.
Yes, this trend is too about to change but not during this crisis.
When dollar goes up coupled with markets coming down, it leads to sharp correction in commodities. It is viewed as slow down in economy and thus lower consumption and lower demand of commodities in the world.
All most all emerging markets have been fighting against inflation i.e. against high prices of commodities and latest entrant is European Union. Inflation rose to 2.4% in January quite above to 2.0% comfortable level of European central bank.
Almost all emerging markets are fighting hard against higher commodity prices(Inflation) via hiking interest rates and reserve ratios, reducing fiscal deficits, putting caps on capital inflow etc..etc..
For emerging markets inflation stability in No. 1 priority and as I had indicated in my last column, Govt in EM would rather prefer to give up 0.5 %—1% GDP growth to control inflation. Because they have ample experiences on hands, How out of control inflation leads to social unrest, civil wars and finally political changes???
I think, world and especially Govts in emerging markets have learned lesions from ongoing Egypt mess. China has been censoring Egypt news in Chinese media out of fear of parallel movement in China. Though no one expects it to happen in China. But, Govt is cautious and do not want to take risk.
Hence, I expect continued hard battle against demand and supply factors of commodity prices to curb inflation.
I suggest to come out completely from commodity positions.
In 2010, people have almost forgotten that we had huge pull back in 2008. In my letters in year 2008 and in following years, I have been continuously saying that Crisis is not over yet.
Markets have been propped up by artificial liquidity pumping widening balance sheets of Central banks and Govts across the world.
Banks are still leveraged, foreclosures are still looming large, many Govts debt to GDP ratio has reached 85-100 escalating sovereign debt crisis. Even in 2010, 157 banks failed in US alone. Not a good data when indices were zooming up.
Japan downgraded and US warned
Recently, Standard & Poor’s downgraded Japan Thursday because it expects the country’s "fiscal deficits to remain high in the next few years" as it continues to deal with problems like debt, deflation and an aging population
Moody’s said a lack of US government action on its budget deficit and tax cuts has increased the chances of a negative outlook on the country’s rating. Moody’s report came shortly after the IMF warned of growing budget deficits in both the US and Japan, which was downgraded by financial market intelligence Standard and Poor’s.
Emerging markets too are facing large problem of How to withdraw stimulus without hurting economic growth?
I think, no such solution exist. Stimulus is a liquidity, Govt injected to help sustain economic growth and Indeed, that liquidity helped market to cover up.
But, let be very clear that stimulus was required because sudden collapse of markets across the world stopped liquidity flow. Companies stopped expansion, put current projects on hold and laid of people across the world.
Now the question is, Have we reached to project expansion, new investments, private consumption and Foreign investment to pre crisis level? Which was sufficient to carry economic growth forward without Govt intervention. Answer is heck no.
By no parameter, we have reached to 2007 level except to commodity prices which has worsened the situation further.
Hence, none of the stimulus withdrawal would be without consequences.
All above and many other factors are converging now in 2011 and I have no doubt that it should lead to higher volatility and sharp correction in markets. I shall continue to discuss other factors in next article.