Stock market bears were handed ample fodder yesterday:
- Comments from Nobel Prize winning economist Joseph Stiglitz on how Europe is at risk of a "double dip" recession due to ill-timed government budget cuts. Professor Stiglitz has been supposedly advising Greek officials nearly every day since their debt crisis erupted this spring -- ignore this insider's words at your own risk.
- The safe haven Japanese yen rallied to a 15-year high versus the U.S. dollar at 83.59, well beyond the psychologically important 85 level. The yen also hit a nine-year high versus the euro at 105.43. If the yen appreciates further towards 80 vs. the Dollar, the Bank of Japan will probably be forced to intervene with or (more likely) without G-7 coordinated action.
- While the yen is rallying the Japanese stocks are in a bear market, with the Nikkei down over 20% and under the psychologically important 9,000 level.
- Another safe haven currency, the Swiss franc, just rallied to an all-time high against the euro at 1.30 as once again it appears money is flowing out of the EU and into Switzerland.
- Unless you've been hiding under a rock -- understandable if you've got a lot of equity tied up in the value of your home -- you probably already saw that July home sales figures were abysmal and indicate room for a much further decline in housing prices. Further significant declines in housing -- some estimating another 10-30% down -- may trigger a significant increase in strategic defaults.
- Money continues to pour into bonds as the yield on the U.S. 10-year note punched all the way up to 2.47%, the lowest level since the stock market was pricing in financial armageddon in March 2009.
What does this all mean?
First, the bullish case for gold has certainly been strengthened. A double dip recession in Europe will put the euro under renewed pressure. If history is any guide, expect the Bank of Japan to intervene to try and devalue the yen if it continues to appreciate to aid its export driven economy. China appears determined to keep the value of its currency suppressed to also drive exports. A world in which every major country wants a cheap currency to aid export led growth is a very bullish world for gold.
I would also expect increased market volatility in the weeks to come. There are several ETFs available to play or hedge volatility.