Dryblower watches investors take flight

THE first time Dryblower sensed that a financial market was a living organism was in 1987 when he watched a graph on the wall of the Frankfurt stock exchange plot, by the minute, the key German market index. He saw it again last week when the gold graph sprang to life.
Dryblower watches investors take flight Dryblower watches investors take flight Dryblower watches investors take flight Dryblower watches investors take flight Dryblower watches investors take flight

 

Tim Treadgold

The only difference between then and now is that the German index was merely reflecting the mood of investors in that country. The gold price is reflecting the mood of the world – and it is ugly.

Gold has resumed its role as the bellwether of the global economy and while it might be stretching the point there seems to be a direct (but inverse) connection between the health of the world and the price of gold. The higher gold goes, the sicker the world.

Last week, as the gold price rocketed up from a start of $US1738/ounce at the morning fix in London to around $US1852/oz as trading petered out in New York on Friday evening, other markets were showing signs of a major breakdown.

Fingers pointed at Europe’s inability to fix its debt problems, and at the lack of clear leadership in the US. In Britain, they spent the week reviewing some of the ugliest riots ever seen in a normally placid country which is grappling with obscene levels of debt.

In the week ahead we could see some of Europe’s major banks beg for government assistance, and European leaders finally take decisive action to stop the rot which is threatening the foundations of the EU.

Germany will be the key to the next step in the crisis, a time when the governments of Europe have to decide whether to resort to the printing press, as has happened in the US, or refuse, because memories of the great inflation of the 1920s linger on.

The choice is Hobson’s, or to speak plainly, no choice at all. It will be the printing press or calamity – that’s what the gold price is telling us.

For commodity-exporting and gold-producing countries such as Australia and Canada these are interesting times because, so far, raw material prices have not crashed as might have been expected in a conventional recession.

The difference is China and its “command economy” where demand can be switched on-and-off by government edict. China, for example, has decided to build more railways linking its interior with the coast – and it will happen, meaning that steel consumption in the country will not collapse. It will slow, but not come to an abrupt end.

China, however, cannot save the world. It can only act as a market for commodity exporters and as a cause of pain for western world manufactures.

It is on top of this cocktail of conflicting pressures that gold sits, acting as a thermometer that the world can see rising dangerously as the heat mounts in world financial markets.

Gold is a measure of how difficult the debt problems of the western world have become. It is also a measure of the breakdown of trust that must lie at the heart of every market if it is to function properly.

As the gold price soared last week, signalling trouble ahead, there was a secondary set of signals which revealed the breakdown of trust in man-made pieces of paper.

Two examples illustrate the difference between gold and paper. They were: falling gold-company share prices even as the gold price soared, a sign that investors love the underlying product but do not trust paper; and failure of the share prices of companies which have received takeover bids to match the bid price, another sign that investors do not believe management promises.

On Friday night, as Dryblower watched the gold price with a combined sense of fascination and foreboding, he was also looking at a dozen gold companies with falling share prices. Newcrest, the Australian leader, actually fell by 4% last week as the gold price rose by 6.5%.

Explorers with excellent projects, including Perseus, Adamus, Gold Road, Beadell, and Gryphon, all fell in a week when the gold price was rising sharply.

Meanwhile, over in what might be called the “takeover sector” three companies with bids on the table all traded below the bid price, another measure of how trust and confidence have been replaced by fear of worse to come.

Macarthur Coal has an offer of $15.66 on the table (cash plus a proposed dividend), but ended the week at $15.32. Sundance has received an offer of 50c but closed at 45c, and Meridian received a bid priced at 14c, only to close at 13c.

For the week ahead, the gold graph will be Dryblower’s window on the financial world. And while he loves the metal and all it stands for, he can’t help thinking that he’s in an emergency ward watching a graph plot the pulse and blood pressure of a very sick patient.

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