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Global recession tipping point, gold over sold, oil price shock on the cards. Bank losses continue.

Posted by Adrian on August 19, 2008

The markets at the moment are dysfunctional. The US has been in recession in nominal terms since the end of 2007. A slew of economists argued throughout 2008 up to now that the rest of the world would decouple from a US slowdown. A terrible analysis and poorly throughout, luckily most people with common sense knew that the decoupling theory from the worlds largest economy is a fallacy. The world is now falling into recession, lead by the US.

Still a text book boom bust cycle hasn’t really come in to play, the US has a collapsing housing market (second to the 1930’s Great Depression), the credit markets are probably not even half way becoming normalized (if ever) and inflation is still high. Europe and the UK are sliding into a sharp downturn, which is now indicating that the Eurozone is at the tipping point of a harsh recession.

Japan is in a technical recession, that appears to be becoming a broad consumer based one.

So in reference to traditional deflation bust cycles, the markets are showing an unpredictable dysfunction. In other words they are in the extremely volatile in an unstable way. Any investor will have a hard time making money in these markets. Despite global inflation still higher the commodity markets appear, although not entirely, finishing their bull run. The short selling recently of gold is to say the least a brave bet, this of course effected the gold price from 916 on the 1st August 2008 to 790 as of 17 August 2008; the sell off was intense and ridicules at the same time. Still shorting the commodity markets is audacious and only big institutional players would attempt it, but oil dare not come under the same sell off. As mentioned in Oil lower, volatility market reaction. Oil now showing price instability. Could the mother of all oil shocks be brewing?, anyone shorting oil will have their balance sheet destroyed and I imagine some people also got burnt (short selling) on the oversold gold price (now back into 800 range 18th Aug 2008, back to 788-789 19th Aug 2008 – from lows of 772 15th Aug 2008 ) the price still looks so oversold. I doubt we are going to see a dramatic deflation in all commodities, it all depends on the Federal Reserve rate decisions and the US dollar. With the Fed’s track record, it may be unlikely that there will be a rate increase. But even as commodity prices have declined, they still remain high and volatile. Inflation as mentioned is now flowing over to all consumer goods. If consumer prices on goods start to spiral upward, if not contained even a recessionary economy may have little effect in dampening inflation.

The market hasn’t finishing wiping out balance sheets and smashing ‘zombie’ companies into oblivion. It is still disputable where the cyclical bottom to the US stock market will be, I just think there is so much more trouble out there. The en masse bank failures should due soon, of course the ‘to big to fail’ policy is in place by the Fed, but the smaller to mid size banks could ready to go under in a synchronized way.

Still my concern is an oil shock that may be around the corner, Iran has test fired a satellite carrying rocket and Russia is still pushing further into Georgia.

The gold bugs have cried foul on the recent price drop of gold, which has been senseless selling and risky. With gold under priced – the only relief people have holding positions with gold is to continue holding them. Like oil, gold may spike upward on environmental, geopolitical and economic crisis.

(gold spot chart, note support at 772. click on image from larger graph)

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2 Responses to “Global recession tipping point, gold over sold, oil price shock on the cards. Bank losses continue.”

  1. […] crisis hasn’t even gone half way through and there is still no end in sight. As discussed in Global recession tipping point, gold over sold, oil price shock on the cards. Bank losses continue, the bank failures in the US should be about to occur, most probably all at the same time. Just […]

  2. […] – bookmarked by 3 members originally found by tamala on 2008-10-23 Global recession tipping point, gold over sold, oil price shock on … […]

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