27/07/2011 - 09:15

Analysis: gold signals deep trouble ahead

27/07/2011 - 09:15


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Champagne corks will be popping in Kalgoorlie next week as delegates gather for the annual Diggers and Dealers forum – but not anywhere else.

Always a little different, Kalgoorlie will be hosting 2200 men and women who make their living from mining, one of a handful of industries benefitting from the collapse of confidence in money.

Gold is the most obvious sign of the stampede out of paper money into hard commodities that are beyond the reach of near-bankrupt governments.

Copper is a second example of the remarkable change underway in the financial world. Wool, which is also trading at record levels, might even be a third example of investors buying assets that can be safely stored, retaining their value during periods of great economic uncertainty.

What’s driving the rush out of conventional financial assets into gold (and other commodities) is fear that the U.S. Government is about to default on its debts, an event with the potential to plunge the world into a far deeper recession than that seen in 2008-09.

The worst aspect of what’s happening is that most of us can see the slow-motion train-wreck in the U.S., and even measure the daily changes taking place, while remaining uncertain about how the game will end.

In Australia, the looming U.S. default can be measured in the rising price of our dollar, which is actually more a case of the falling value of the U.S. dollar.

Whichever way you look at it an exchange rate approaching $US1.10 was unthinkable a year ago, and unimaginable three years ago, but suddenly a reality which is tearing the heart out of most export industries.

Manufacturers, inbound tourism operators, and universities which rely on foreign students, are being devastated by the soaring Australian dollar which has made them uncompetitive when compared with what’s available in other countries.

Uncertainty about the value of the currency is being compounded by uncertainty about Australia’s multiple changes to its tax structure, especially the long-term effects of the proposed carbon tax, which is why national retail sales have collapsed, and the savings rate has soared.

Australians have not stopped eating, but they are certainly thinking twice about buying new clothes, cars and houses.

The latest data from the Reserve Bank shows a spectacular rebound in savings with roughly 11% of all income become squirreled away for troubled times.

A higher savings rate would normally be welcomed, but because the change from borrowing to saving is occurring so quickly retailers are being wiped out, houses price are falling, and jobs in the non-mining states starting to dry up.

On Monday, the future of Australia was on display at one of the country’s most obscure locations, the landing strip used by fly-in, fly-out workers at the Cloudbreak mine of Fortescue Metals Group.

Sitting on a bench waiting for a lift to work was a 20-something man which a big black suitcase, who had made the journey to Cloudbreak from Melbourne. He wasn’t

alone. “Four of us decided to try working in the mines because there’s nothing for us in Melbourne,” he said. “And there are more of our mates coming over”.

That one young man, with a smile that was part delight at the prospect of earning high wages, and part anxiety about the challenge ahead, told the story of an Australia entering tricky times.

The mining boom, good news as it is for WA and Queensland, is not doing much for the rest of the country which is being clobbered by the dollar, and watching anxiously to see what happens next.

Sadly, the next is likely to be more of the same with a U.S. default, technical or real, likely to drive that country’s currency lower (helping its export industries) and drive our currency and commodity prices higher.

That’s why the celebrations in Kalgoorlie will be an isolated event because while the miners, especially those producing gold, are enjoying record profits the rest of the country is fretting


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