The Great Crash of 2012?

2012-MAY-11

Deflation fears are once again becoming the dominant emotion in the minds of traders, with banking difficulties on both sides of the Atlantic and continuing weakness in precious metals and commodities. News that the China Investment Corporation – China’s biggest sovereign wealth fund – no longer wants to buy European sovereign debt has only added to the sense of unease.

The euro continued losing ground against the dollar yesterday, and though it has rallied this morning, looks like it could test the $1.29 mark sooner rather than later. Corn, copper and Brent crude also sustained further losses, with news of a boost in OPEC production adding to the downward pressure on oil prices.

At King World News, Dan Norcini highlights the importance of the 10-Year Treasury Note as a bellwether asset as far as inflation/deflation expectations are concerned. Dan warns that a weekly close below a 1.8% yield on this instrument could be signalling that a “deflationary tsunami” is about to engulf the global economy. Coupled with Marc Faber’s warning on Bloomberg that a 1987-style stock market crash could occur soon in the event of no further stimulus from the Federal Reserve, and it seems like heading to the storm shelter may not be a bad idea.

As Faber points out, the new quantitative easing from the Fed would need to be “massive” in order to restore confidence. This is the nature of money printing: the more you do it, the bigger the doses have to get in order to achieve the same simulative “high”. Similar to drinkers who get used to two beers a night, so start drinking three-a-night instead.

What will this mean for precious metals? In the short-term, further price declines could occur alongside falls in the euro, stocks, and industrial commodities, though there’ll be strong buying support for gold around $1,550. But given all that governments stand to lose from a deflation tsunami, it’s almost inconceivable to imagine that if faced with this situation, central banks will not resort to extraordinary efforts to reflate the system. Gold and silver will confound their sceptics.