Aussie Dollar and the Implications for Gold

By: Greg Silberman | Tue, Mar 27, 2007
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Article originally submitted to subscribers on 22nd March 2007...

Come and see the ancient metal of Kings at work!

Chart 1- Aussie Gold (top) vs. Aussie Dollar (bottom) - 18-month time lag

The above chart shows why Central Bankers the world over are fearful of Gold.

Gold in Australian Dollars has lead the Australian Dollar by a full 1 to 1½ years.

Now, what's this?

What does it mean? And why the time lags?

Gold not only knows the truth behind Central Bank sponsored inflation (debasement), but insists on broadcasting the message for all to see.

Money Supply in Australia (as measured by M3) has been growing at a year over year rate of 13%. Gold's response has been swift and clear.

The effect on the real economy is less obvious.

Money supply takes time to filter through the system. It is never guaranteed where the fresh money will flow. However, the more money that flows into consumer prices and wages, the more obvious inflation becomes to the public. In order to combat inflationary expectations, Central Bankers are forced to raise interest rates (1 to 1½ years after the initial growth in the money supply).

Right now the futures market is pricing in a 51% chance that the Australian Reserve Bank will raise short-term interest rates in April. Inflation, it seems, has arrived at Australia's shores!

Raising interest rates in a debt laden economy (of which Australia is one) is going to hurt. But raising interest rates in a debt laden economy and in the face of a potential global slowdown is downright dangerous.

Here's what happened to the Australian Stock Market the last time the Aussie Dollar breached major resistance:

Chart 2 - Aus All Ords (top); Aussie Dollar (bottom)

Higher interest rates pushed the Aussie Dollar above previous resistance (red arrow) but also negatively impacted stocks (blue rectangle).

Contrast this with the US Fed who says inflationary pressures remain a concern but there is little potential to raise rates because of the fragile housing market. [The Australian real estate market by contrast could probably handle a rate increase].

The stage is therefore set for stagflation with growth moderating and inflation increasing. Perhaps that's why the Ancient Metal of Kings has defied all naysayer and continues to tip-toe (silently) higher.

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Author: Greg Silberman

Greg Silberman CA(SA), CFA

Greg Silberman

Profession: Research Analyst and Newsletter Editor
Company: Ritterband Investment Management LLC

Career Brief: Greg qualified as the youngest Chartered Accountant and Chartered Financial Analyst (CFA) in South Africa in 1998 at 25 years old. After completing his traineeship with Grant Thornton he moved to London where he worked for JP Morgan Chase in their Fixed Income Swaps Division. Sick of the grey skies and cold weather Greg relocated to Atlanta, Georgia where he spent the next 4 years freelancing as a management consultant. His targeted clients were fast growing mid size US based companies and he worked across many industries including credit cards, health insurance and energy trading. Greg has recently returned from Sydney Australia where he spent the last 2½ years working in Equity Derivative Structuring for Perpetual investments a major Australian Asset Management Company.

Greg has a passion for the markets and has been writing Greg's market newsletter for 2-years. A newsletter focused on metal and energy stocks and recently non-resource small caps listed in the US and Internationally.

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

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