Australia | Jun 15 2006
By Greg Peel
The world supposedly is glued to inflation indicators in the US, but when the US CPI came out at 0.3% in April it triggered a wave of selling, and now May has come out at 0.3% as well and the Dow has rallied 100 points. The simple reason is that rhetoric from the Fed could not be any worse, and the bad news has been accounted for. Time to bargain hunt.
A case of sell the rumour, buy the fact. What was feared has happened, so let’s get back to business.
The joke is that if the US sneezes, Australia catches a cold. The reality is that the Australian market has outperformed the US in the last year or so due to its commodity driven index. Along the way Australia has shrugged off hiccups in the Dow as being unrelated to movements in gold, metals and oil.
Thus it was heartening to see the Australian market rally yesterday, in the face of commodity carnage. History often shows the last great shake-out is the best chance to get in, and that is how it played out as the likes of BHP Billiton (BHP) and Rio Tinto (RIO) rebounded.
Copper was up 2.4% overnight in London, and zinc was up 1.4%. Not huge gains compared to recent losses but gains nevertheless, and given Chinese industrial production figures came out as a 17.9% rise in May, the biggest gain in two years, yesterday’s mayhem started to look like overkill.
Gold slipped slightly lower again in London overnight, having attempted a weak rally in New York. While the bears are gathering for a cocktail party, other analysts reiterate their belief that panic selling across the commodity spectrum has got us to this point, and it will soon be time for gold to de-couple once more from its commodity connections and reinstate "as a liquid, capital-preserving, trans-national currency" (Jon Nadler, Kitco.com). In the meantime, the prudent buyers are still standing aside until the dust settles.
It was interesting to see Lihir Gold (LHG) probably the most highly gold price-leveraged stock on the ASX, rally yesterday.
Another fillip to consider for gold is that as the price passed through these levels on the way up, traditional jewellery demand from China, India, Turkey and the Middle East dried up. The fathers of blushing brides will have to make good on their IOUs. Demand should underpin gold at these levels.
And it can’t be forgotten that a lot of gold traders are presently sunning themselves on Long Island or St Tropez, or simply engrossed in the World Cup. A perfect time for the sort of trading vacuum we’ve seen.
On a less encouraging note, there is a lot of hysteria around the financial blogs at the moment concerning the end of the yen carry trade and the potential subsequent fall of financial civilisation as we know it. Is this justified? FN Arena will publish a feature on this topic today.
All points to a good day ahead on the ASX. Happy hunting. Is the correction over? Volatility will not disappear overnight.