Gold is back within striking distance of its all-time high at 1447.40, underpinned by fresh 38-year highs in silver. The ongoing strength in silver has pushed the gold/silver ratio to a 28-year low. While the performance of the white metal is tough to argue with, silver is trading nearly 50% above its 200-day moving average, which warrants a measure of caution. By comparison, gold is a mere 8% above its 200-day MA.
Brent spot crude is presently about 33% above its 200-day MA, driven primarily by ongoing tensions in the Middle East and North Africa. The marked rise in energy prices is putting upward pressure on inflation expectations, which in turn is putting pressure on central banks to tighten policy, even though growth risks persist. Eurozone PPI accelerated to 6.6% y/y in Mar from downwardly revised 5.9% y/y in Feb. An ECB rate hike is pretty much baked into the cake at this point, despite the detrimental impact it would have on the debt saddled PIIGS. While the drive for a permanent EU bailout facility has been anything but smooth, there seems to be an expectation that the stronger EU nations are going to cover the higher refinancing costs in the periphery. However, recent regional elections in both Germany and France suggest that the taxpayers there aren't so keen on that prospect.
Pressure to Tighten Policy
Last Friday's robust jobs report ups the pressure on the Fed to tighten as well, although the likelihood remains much more doubtful in my opinion. A Fed rate hike, while the Fed is still engaged in QE2 makes no sense at all. That doesn't mean I would rule it out completely, but it seems rather unlikely before QE2 winds down at the end of June. It also sort of presupposes that there won't be a QE3, even if it's in the form of reinvestment. The Fed is going to be very wary that removal of accommodations and possibly a rate hike would pull the plug on the stock market's rally and weigh heavily on an already moribund housing market, destroying the wealth effect that the Fed worked so hard to create via ZIRP and QE.
The Options Stink
As the budget and debt ceiling debates continue in Washington, PIMCO's Bill Gross warned in his April Investment Outlook, in an article entitled "Skunked," that our options all pretty much stink. Pick your poison: The burden of ever-more debt or austerity and tax hikes. Neither is a particular appealing option as there will be considerable pain involved, but clearly something must be done. However, our Representatives are squabbling over billions, when we face a multi-trillion dollar problem.
As we butt up against the $14.29 trillion debt ceiling, Gross accurately points out that the "true but unrecorded debt of the U.S. Treasury" is closer to $75 trillion. When the various unfunded mandates are factored in, our debt burden is close to 500% of GDP. Gross quips, "We are out-Greeking the Greeks." The bond giant famously exited the US Treasury market entirely at the end of Feb because "[Treasuries] have little value within the context of a $75 trillion total debt burden." Gross goes on to say that "Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies – inflation, currency devaluation and low to negative real interest rates."
One method to help avoid getting your pocket completely picked is to save a portion of your wealth in something other than the dollar. The traditional alternative to fiat currency based savings is of course physical gold.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.