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It was a bit of record-breaking day yesterday.
Gold touched $1,000 an ounce, a nominal (excluding inflation, in other words) record. Crude oil hit $111 a barrel, a record even if you do adjust for inflation.
Why the ongoing surge in key commodity prices? Well, it’s down to the dollar, which also broke a series of records, though on the way down, rather than the way up.
The US currency hit a record low of more than $1.56 against the euro; it also nearly hit $1 to a Swiss franc (a classic safe haven currency) for the first time in history, according to The Telegraph. Meanwhile, it fell below 100 yen for the first time in 12 years.
So why the collapse – and what’s next?
The dollar took a dive yesterday. February retail sales fell by 0.6%. This comes hot on the heels of terrible unemployment data at the end of last week – the
Another big worry was problems at the Carlyle Capital Corp fund. The group has defaulted on around $16.6bn of debt, and it looks like its creditors are likely to seize its remaining assets leaving investors with very little, if anything. The private equity firm had invested in AAA-mortgage-backed debt issued by Freddie Mac and Fannie Mae, which was seen as at the safe end of mortgage debt. The fact that the fund has been driven to the wall now has investors worried that a flood of mortgage-backed securities will hit the market, driving prices down further, and leading to more write-downs.
The Federal Reserve and the
Mr Paulson is also looking at ways to improve regulation over mortgage lending standards. A bit late for that now, Hank.
The other tactic is to toss money randomly at the problem. Earlier this week, the markets surged as the Fed decided it would take a wider range of dodgy mortgage-backed collateral in exchange for up to $200bn of 28-day loans.
With markets already expecting that the Fed will cut interest rates by at least 50 basis points at its next meeting on March 18th, it’s no surprise that the dollar has fallen off a cliff.
And in turn that’s boosted gold. Now that it’s reached the heady heights of $1,000 an ounce, many people will be tempted to take profits. But the yellow metal may yet have further to go. In inflation-adjusted terms, it would still have to hit $2,500 an ounce to set a new record in real terms. And the forces driving it higher don’t look set to go away any time soon.
Those living in fear of the plunging dollar are piling into the euro for now. But as David Bloom at HSBC points out, they are focusing on the relatively strong German economy and ignoring the fact that countries like
Peter Hambro of Peter Hambro Mining adds that “We’re living through a period of competitive devaluations across the world. Everybody is trying to stimulate their economy by driving down their own currencies.”
That leaves gold in pole position as the strongest currency in the world. You can learn more about investing in gold here. Also, if gold looks a little too heady for you at these levels, my colleague Dominic has turned his attention to some very cheap-looking mining stocks in the latest issue of MoneyWeek, out today. If you’re not already a subscriber, you can get your first three issues free by clicking here: 3-week free trial.
Oh, and just before we turn to the markets – I realise a lot of you have been looking for more information on Stephen Bland’s new investment newsletter (Stephen wrote a cover story for us on his high-yield portfolio strategy earlier this year – if you missed it, you can read it here: The lazy investors’ guide to making money.
The good news is that Stephen’s newsletter is about to launch – you can learn more about it here: The Dividend Letter
Turning to the wider markets…
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Nikkei slumps on stronger yen
On the Continent, the Paris CAC-40 was down 66 points at 4,630. And in
Prudential profits up 8%
Crude oil futures had fallen back from yesterday’s record and were trading at £109.95 this morning. And in
Spot gold was close to the $1,000 mark hit by gold futures yesterday, last trading at $996.90, just below Thursday’s high of $999.50.
Turning to forex, sterling had eased to 2.0294 against the dollar this morning and was at 1.3028 against the euro. And the dollar was languishing at 0.6417 against the euro and 100.53 against the Japanese yen.
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