As long as there are no other strong material fundamental circumstances prevailing in any single commodity the dollar/commodity correlation overrides all else. This is especially true for precious metals. We remain bullish of gold although the trade is an overcrowded trade we see further upside given the level of geopolitical and economic uncertainty in the immediate future. We are convinced that the driving force behind gold’s strength is not inflation nor the dollar devaluation but the acceptance that gold has become the world’s third most popular ‘currency’ and that it will move past the euro soon and into second place. The euro will become less attractive to traders, investors and asset managers while their need to hold gold will grow.

We see any short-term weakness in gold as a buying opportunity supported by increasing uncertainty related to the euro-zone and rising inflation in Asia, particularly China.


World equity markets need a reason to rally – they may be getting their wish!

The Australian economy will continue to benefit from Asian growth during 2011 while Europe and the US limp along while dealing with their own problems. I expect a two speed global economy in 2011 with Chinese and Indian growth around 10% and Europe and the US at 2%.

A major structural change is under way in the global economy with emerging economies again set to outperform developed countries. The major risk to the global economy is still Europe, I expect more of the feared risks of sovereign debt to realise during 2011, possibly a major national default or a bank collapse.

Chinese Vice Premier Li Kuqiang has been touring in Europe and particularly Spain promising to purchase Spanish debt, a sign of the continuing expansion of Chinese influence around the globe.

Australia’s future will be reliant on our continued relationship with China, or Asia as a whole. We are well placed in the region and as long as we can maintain strong economic and business relationships with China we will continue to grow. China is at-tempting to engineer a soft landing after inflation has spiked above 5% and heading toward 7%. The inflation spike is directly related to their stimulus spending of 2009/2010 and should be seen as a window of what is to come in the US.

Chinese regulators will keep raising interest rates and imposing controls on property investment and speculation, such as the rumoured property tax. Inflation is now China’s number 1 concern but I cannot see Chinese regulators moving so aggressively as to cause a hard landing or a crash. Chinese politicians are about to handover leadership to a new generation and I don’t see the economy being compromised at this key political turning point.
Last year, India, quietly rose to become Australia’s fourth biggest economic market. India is expected to grow at close to 10% in 2011.

The two-speed global economy will create problems for governments and central banks. The US Federal Reserve is expected to keep rates low for ‘an extended period’, at close to zero, and press ahead with their QEII policy of buying assets in the hope of stimulating the economy.

The US government must start to reign in its massive debt eventually but I think those decisions will not need to be made until into 2012. The QEII program will extend at least until June 2011 and will support positive sentiment over the same period. Fed Chairman Ben Bernanke said he was prepared to consider QEIII if it was needed. They have painted themselves into a corner, now that they have come so far with the stimulative measures they cannot turn back. They will press ahead in the hope that at some stage soon the economy will show signs of stronger recovery, and that may be happening now. We sense growing optimism in the US recovery as each new release of data highlights an economy attempting to recover. The ADP numbers released last week changed a lot of minds about the strength of the US economy and set the stage for the Unemployment Report.

We sense growing optimism in the US recovery as each new release of data highlights an economy attempting to re-cover. The ADP numbers released last week changed a lot of minds about the strength of the US economy and set the stage for the Unemployment Report on Friday night. The ADP report showed that business (mainly small business) added 297,000 jobs in December. That number forced published unemployment ‘ guesstimates’ to be revised downwards. The market was expecting a fall in unemployment to 9.7% from 9.8% leading into the report.

We should note that the correlation between the ADP jobs report and the official employment report is not perfect, so ‘as goes the ADP number, so goes the non-farm’, just not perfectly. The ADP number is much more volatile on a month-to-month basis.

As it turned out U.S. payrolls missed the forecast adding credibility to Federal Reserve Chairman Ben Bernanke comment that it could take ‘four or five more years’ for the labour market to completely mend. Payrolls increased 103,000, less than the median projection of 150,000. The jobless rate fell to 9.4% reflecting the shrinking workforce as Americans stop looking for work.

I still hold the very strong view that there can be no complete recovery in the U.S.A. without jobs; that is not to say that the current level of optimism in the U.S. is misplaced but without jobs the recovery picture will always be incomplete, a bit like a jigsaw with a missing piece.

The European Central Bank is not likely to raise rates from the current 1.00% in the near term and is most likely to come under severe pressure to continue to pump liquidity into the system to support Ireland, Spain, Greece and Portugal. The debt crisis in Europe will spread to Portugal, Spain, Italy and Belgium this year and as a result I expect a banking crisis. The key question in Europe is whether Germany will continue to be the main source of monies to pay for the bailouts. While the German economy is growing strongly and selling its manufactured goods to the Chinese they can afford to underwrite the bailouts but there are a lot of headwinds as Germany attempts to force EU members to get their houses in order.

Sourced & published by Henry Sapiecha

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