Aborted correction?

November 12th, 2009

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Eleven days ago, when we wrote Stronger signs of a coming major correction, it looks as if the long-awaited major correction was on its way. It turned out that it was a very shallow correction. Gold prices, on the other hand, are hitting record highs in US dollar terms. Commodity prices are in a much weaker up-trend than gold prices. Even silver, gold’s sister, are not as strong as gold.

Indeed, this is a very trying period for investors. In the US, with short-term interest rates at zero, it has become very difficult to value your investments. If cash is yielding nothing (and losing value due to price inflation), how different is it from gold, which also yields nothing? In fact, with gold prices in such a strong up-trend, it is doing much better than cash. In fact, anything is better than cash (US dollar) right now and it has become a very crowded trade, with speculators shorting it into a gigantic bubbly carry trade (Return (and potential crash) of the great Aussie carry trade).

Today, China is hinting that it is allowing the yuan to appreciate (see China hints at resumption of yuan appreciation). Speculators who are already betting on a yuan appreciation will be well rewarded. Very likely, more latecomer speculators will try to squeeze its way into this carry trade too as this sure-profit trade looks too tempting to miss.

Meanwhile, there is a danger ahead- peak oil. As this recent news article reported,

The world is much closer to running out of oil than official estimates admit, says a whistleblower at the International Energy Agency who claims it has been deliberately underplaying a looming shortage for fear of triggering panic buying.

Assuming that the world is past its peak oil production and what follows is a downward sloping decline, it can only mean one thing- more price inflation ahead.

And this will break the global economy once again. Meanwhile, be alert for a currency crisis.