Though many remain wary, stocks and commodities are continuing to rise on hopes that European leaders are at last arriving at a plan to address the eurozone’s sovereign debt problems. Gold and silver prices continue to benefit from “risk on” trades by hedge funds – with concurrent weakness in the US dollar helping to drive all commodity prices higher. Notably, Brent crude oil for November delivery settled at $86.80 a barrel on Friday, up by 3.2%.
Aside from hopes that the gloom may be lifting from the European economic scene, US economic data continues to surprise to the upside. One useful measure of this outperformance is the Citigroup Economic Surprise Index – a quantitative measure of actual economic data contrasted with econometric forecasts of what that data will be. As Robert Wenzel points out at his blog, since mid-August this measure has turned upward – meaning that establishment economists have been continually underestimating the strength of the recovery in the US economy.
As Wenzel points out, this upturn is a consequence of the aggressive money printing orchestrated by the Bernanke Federal Reserve. As one reader wisely points out in the comments section of this blog, governments and central banks have enormous powers to keep the existing financial system “on the road” – contrary to those who are expecting an imminent financial collapse.
This links nicely with comments from Jim Rickards in his latest King World News interview, who talks about the power the US government has to control the market in US Treasuries. As Rickards points out, foreigners may be selling Uncle Sam’s debt at a hasty pace – but the US government has an ace up its sleeve: making US banks buy US debt. Rickards notes that back in the 1950s, government bonds made up 40% of US banks’ balance sheets. Today, it’s around 5%. Thus, there is ample room for forcing banks to fund the US deficit (which, as reported last Friday, now stands at $1.3 trillion – up on last year’s number and the second-highest ever after the $1.42 trillion recorded in 2009).
Gold has broken above resistance at $1,680 per ounce, though silver still remains under its $32.50 resistance level. Good news from Europe will be particularly bullish for silver, and should see the gold/silver ratio fall – that is, silver should again start to outperform gold.
