DOOM AND GLOOM IS GOOD FOR MORTGAGE RATES (AND GOLD.)
Linda says:
The financial headlines have moved from the business pages to the FRONT PAGE.
But every worrying headline that you read, tends to benefit mortgage holders and precious metals.
If the US economy is on the brink of recession, other countries may be also in trouble. Four economies already showing signs of a slowdown are Japan, Britain, Spain and Singapore. Pressure is now mounting for interest rate cuts from central bankers in countries other than the United States. Even where the central bank is threatening to raise interest rates, as in Australia, more shock headlines and stock market wobbles hold a glimmer of hope for embattled mortgage holders.
The worse the news gets, the less likely that any central bank will actually dare raise mortgage rates. Those bankers still talking tough, may actually be forced eventually, to cut rates to stimulate their economies. Thus, the ill wind that is blowing on the stock markets and credit markets of the world, may be a blessing for mortgage holders, who are being already hit by rising food and oil prices.
Negative comments on world growth are coming from multiple sources, including top bankers and brokers. Mr Strauss- Kahn, the new head of the IMF has called for both lower interest rates and government stimulatory policies, from many countries in addition to the United States. Warnings on further banking problems spreading from sub-prime loans, to credit card and consumer loans, has come from John Thain, the new head of Merrill Lynch.
There has not been good press recently, for the entire banking industry. How some “rogue trader” can have liabilities that equal the capitalisation of the bank itself is amazing and downright scary. If it can happen in Paris, it unfortunately can probably happen in your bank. No wonder gold bullion looks good and solid by contrast. As opposed to some concocted derivative strategy, that might just blow your money up somewhere in cyberspace.
What is becoming readily apparent is that the volume of complex financial products is out of control. How many gung-ho traders are out there playing games, and taking colossal risks while sitting at a computer screen??? Unfortunately, your savings and investments might be a casualty; it is unlikely that problems are confined to Societe Generale.
Warren Buffet has called these derivatives “financial weapons of mass destruction.”
The size of these markets is far larger than the GDP of the worlds’ economies. By contrast, the supply of gold is finite and mining output is actually falling. And you can’t just print it or manufacture it out of thin air, as paper currencies can be and are.
In South Africa itself, production of gold has been cut since a major crisis in electricity supply hit the gold and other mines. Since the electricity supply is unreliable, miners can’t go down to the mines because they can’t guarantee power supply to the lifts to get them out again.
Several countries are now experiencing ” negative real interest rates”, meaning the bank rates of interest are less than the rate of inflation. Countries affected include the United States and the Persian Gulf countries. Thus, you are guaranteed to lose by leaving money in a bank deposit, in these countries.
A traditional inflation hedge such as gold looks good by contrast. Wealthy Arabs (and Chinese) are choosing to shift some of their assets, which were based in US dollars, into gold.
Supply problems will only accentuate the rush
February 12th, 2008 at 9:27 pm
Gold certainly has been the constant exceptional performer for the past five years. The fact that the Fed has taken the 15-blade scalpel to interest rates in the hope softening or delaying a recession will only hasten the demise of the dollar.
The fact that there is no realistic other world reserve currency will only cement gold as a future exceptional performer for the next five years.