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Let’s start with the bond market. Virtually everyone at the beginning of the year believed that long-term interest rates had nowhere to go but up from their lowest levels in half a century. The economy and corporate earnings were strong, and it appeared inevitable that the Federal Reserve would finally have to respond at least somewhat to the extraordinary inflationary pressures it has fostered in the recent past by taking some of them away via, at last, raising short-term interest rates. Topping off an environment which was already pointing to higher rates and lower bond prices has been the inexorable rise in the price of crude oil to fresh all-time nominal highs. No matter how the Bureau of Labor Statistics tries to gloss over its implications, higher oil prices still—Fed Chairman Greenspan’s “new economy” notwithstanding—have inflationary implications. In fact, through 2004’s first half, even the substantially understated numbers from the BLS showed U.S. consumer prices rising by a 5% annualized rate during the first half.
After topping out twice around the 4.9% area, though, the yield on the government’s current bellwether 10-year note has plunged lately; it now stand at around 4.25%. Ignoring much of the above, bond traders seemingly are voting now that a weakening economy and the apparent peak in corporate earnings growth demonstrate that interest rates can’t go up much more. They ignore the inflationary pressures of rising oil prices to instead reinforce their belief that this additional “tax” on the economy means that the Fed will neither have the ability or the nerve to raise rates much farther. Combined, this suggests to them that we have already seen what rise we’re going to in long-term market rates; and that, before much longer, we’ll be fretting over recession/deflation anew.
Longer-term, that is certainly where we’re heading to some extent (though whether everything goes down in price or, in the alternative, at least some items such as commodities buck the coming unwinding is yet to be determined.) For the time being, however, gold is begging to differ with some of this hypothesis. Gold traders also see soaring energy costs; they realize to some extent, however, that such an event has always meant higher eventual inflation.
In addition, those tiptoeing back into the yellow metal with increasing conviction seem to recognize something stock traders and the cheerleaders on financial television incredibly continue to dismiss; and that is—terrorist premium or not—high (and rising) energy costs are here to stay. Now, there’s no question that at least some of the rise in oil’s price (and today was a good example, as a barrel of black gold closed at $48.75, up $1.48 on the day) does indeed owe itself to speculators. And I’ll even concede here that, if peace suddenly broke out in the world, oil’s price would likely plunge, as some speculators exit their recent bets.
However, listening to the shills for Greenspan and the Bush Administration, you’d think that under this scenario oil would go back to $25 per barrel and stay there. This is nothing but fantasy. There is nothing “transitory,” to use one of Greenspan’s favorite words, about countries like China and India having embarked on major growth trends not unlike that of the United States at the beginning of our own Industrial Revolution. If and when oil does settle down for a while, it will later be looked back on as nothing but an interlude in what is otherwise a long trend to substantially higher U.S. dollar prices for crude.
I stress U.S. dollar prices because that’s another thing seemingly understood by those re-entering gold that is utterly lost on those again willing to loan money to Uncle Sam for 10 years at 4.22%, as of today’s close....
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