What's Behind the Global Stock Market Melt-down?

By Gary Dorsch
Editor Global Money Trends magazine
May 23. 2006

Do you believe in conspiracy theories? Sometimes they are difficult to refute. Such was the case last week, just after the Euro had soared towards a 12-month high of $1.30, and the British pound, itself ridden with large trade and budget deficits, stood mighty tall at $1.90, with traders setting their sights for $2 for the pound. The US dollar lost 7% in just six weeks against America's main trading partners, and was 28% lower since January 2002, to stand just 1% above its 1995 low.

Then on Sunday May 14th, currency traders in London, picked up an obscure report from the UK's Observer newspaper, that indicated the International Monetary Fund was in behind-the-scenes talks with the EU, Japan, the US, China and other major powers to arrange a series of top-level meetings to tackle imbalances in the global economy, and address the dollar sell-off that was rattling global stock markets.

Fearing a surprise rescue package for the US dollar, London currency traders began to lock in profits from the Euro's six week old rally to just shy of $1.30. As always, the first line of defense in the currency market is jawboning, and finance officials in Europe, Japan, and the US were out in full force, talking the Euro and Japanese yen down, and the US dollar up. Timely jawboning by G-7 finance ministers, helped to keep a lid on the Euro just below $1.30, and rescued the dollar at 109-yen.

G-7 central bankers understand that a weaker US dollar can exert upward pressure on the cost of US imports, which rose 2.1% in April, and account for 17% of Americans purchases. And a sharply higher Euro and Japanese yen against the US dollar, also subtracts from profit margins of European and Japanese exporters, which is unraveling the EuroStoxx-600 and Nikkei-225 stock market rallies. European and Japanese central bankers have worked very hard to inflate their equity markets for the past four years to stimulate consumer demand through the "wealth effect."

G-7 central bankers and finance officials are also alarmed by gold's spectacular surge against all major currencies over the past eight months, a clear signal that global investors have lost confidence in the purchasing power of fiat (paper) currency. A global flight from G-7 government bonds and into gold since September 2005, has lifted bond yields to multi-year highs in Japan and the US, the world's largest debt markets, and in a long delayed reaction, triggered big shake-outs in global stock markets in mid-May.

However, a guardian angel came to the rescue a half-hour before the London a.m. gold fix on May 15th, by unloading a big chunk of the yellow metal, hitting all bids $35 per ounce lower to the $680 level. Within hours of the gold sell-off, dazed gold traders were hearing Japan's finance minister Tanigaki and the ECB's Noyer threatening intervention on behalf of the US dollar, and conducting jawboning exercises about the virtues of currency stability for the global economy.

Then on May 19th, leaving gold bugs on a sour note heading into the weekend, US Treasury Secretary John Snow insisted on CNBC television that the Bush administration still backed a strong dollar. "It's a policy we've made clear, that Japan signed on to, the statement coming out of the G-7 finance ministers' meetings, which said open, competitive markets are the best way to set currency values," Snow said, adding, "I say our policy is the strong dollar."

Gold tumbled as low as $638 per ounce on May 22nd, on concerns that the Bernanke Fed would back up the Treasury's rhetoric about a strong US dollar, by lifting the fed funds rate 0.25% to 5.25% at its June meeting. "I have full confidence that Chairman Bernanke and the Federal Reserve are committed to price-stability and understand that this is their number one priority," Snow added.

Foreign Central Banks Switching out of US Dollars

The United States needs to draw in more than $3 billion every working day just to break even from external deficits, and prevent the US dollar from falling further and keep interest rates from rising too far. The US current account deficit is the broadest measure of trade, including financial transfers along with goods and services, and widened $136.9 billion from 2004 to $804.9 billion in 2005, representing 6.5% of US gross domestic product, up from 5.7% in 2004.

However, Treasury data showed that central banks only bought a net $1.6 billion of US stocks and bonds in March, the lowest since they were $14.4 billion net sellers in March of 2005. Japan, the largest foreign holder of US government debt, sold a net $18.2 billion in Treasuries in February, but still holds a total of $640.1 billion. China bought a net $1.6 billion in US debt in March and holds $321.4 billion. Middle East oil kingdoms recycled $16.8 billion petro-dollars through British banks, and UK holdings rose in March by $16.8 billion and total $251 billion.

Nowadays, the US dollar is heavily dependent upon its role as the world's reserve currency, used for transactions in internationally traded commodities such as copper, crude oil, and gold. Therefore, foreign central banks must stockpile US dollars, which account for more than two thirds of all central bank reserves worldwide. This special reserve status means that the US dollar is always in demand, whatever the underlying strength of the US economy, or the level of US interest rates.

But the US dollar's counter trend rally from January 2005 to March 2006, that rode on the back of 16 quarter-point rate hikes by the Federal Reserve, started to unravel in April, following news that Sweden's Riksbank has cut its US dollar holdings, from 37% to 20%, with the Euro's share rising to 50 per cent. Kuwait, Qatar and United Arab Emirates also said they were buying Euros. Central banks in China and Japan hold less than 2% of their combined $1.75 trillion of foreign currency reserves in gold, and instead, hold depreciating US bonds.

But it was Russian finance minister Alexei Kudrin, who on April 21st, dropped the biggest bombshell on the US$ at the annual meetings of the World Bank and International Monetary Fund, by openly questioning the dollar's pre-eminence as the world's absolute reserve currency. The Russian central bank raised the Euro's weight in the currency basket against which it targets the ruble, by 5% to 35% on August 1st, 2005, reducing the dollar's share to 65% from 70 percent.

"The US dollar's recent volatility and the US trade deficit cause significant changes in the international situation and that is why we do not understand the US dollar at the moment as the universal or absolute reserve currency. The international community can hardly be satisfied with this instability. Whether it is the US dollar exchange rate or the US trade balance, it definitely causes concerns with regard to the dollar's status as a reserve currency," Kudrin declared.

The EU-25 is dependent on Russia for 25% of its gas and 25% of its oil imports and sales of raw materials to the EU providing most of Russia's foreign currency and over 40% of the revenue for the Russian federal budget. It might only be a matter of time, before Moscow asks for Euros instead of US dollars for Urals oil. Iran's hardliner Mahmoud Ahmadinejad said on May 5th, that the Islamic republic still plans to open an Oil Bourse on the island of Kish within two months, and his close ally Hugo Chavez of Venezuela is also threatening a switch to Euros for oil transactions.

If Russia, Iran, and Venezuela decide to switch to Euros for future oil transactions, it could force the Federal Reserve to hike the fed funds rate to much higher levels to defend the US dollar in the foreign exchange markets. That in turn, could crush the US housing sector and rattle the S&P 500 stock index. Such a conspiracy theory is a dollar bear's dream, but could happen if the US crosses the red line of using military force to shut down the Ayatollah's nuclear weapons program.

In retrospect, the seeds of the latest US dollar crisis were also planted by Federal Reserve chief Ben Bernanke on March 21st, when he signaled that the Fed could live with a weaker dollar to help correct the US current account deficit.

"Although US trade deficits cannot continue to widen forever, these deficits need not engender a precipitous decline in the dollar, nor should such a decline, were it to occur, necessarily disrupt financial markets, production or employment," Bernanke said in a letter to Rep. Brad Sherman, a California Democrat. However, two months later, the US dollar came under heavy speculative attack, sparking fears of higher inflation, and triggering a 4.5% panic ridden shakeout in the S&P 500.

Sliding US dollar Rattles European and Japanese stock markets

Germany, which accounts for a third of the Euro zone economic output, has relied heavily on its strong export performance to power growth as high unemployment and weak consumer spending held back the domestic economy. The German economy expanded by a weaker-than-expected 0.4% in the first quarter of this year, while exports soared 3.2 billion Euros in February to a record high of 72.9 billion Euros, or 18% higher from a year earlier.

However, the surging Euro fueled concerns that its rise may begin pricing out European exporters and could stall the Euro area's gradual economic recovery. "If we were to have a lasting strong appreciation in the Euro, then of course that would slow our exports. And exports in Germany remain a very important pillar of our economic development," said Wolfgang Franz, president of the ZEW institute.

Similar to the tumultuous experience of the US benchmark S&P 500 index, the surging Euro contributed to a more severe 9% shake-out in the German DAX-30 index from a 5-year high of 6150 to as low as 5600 on May 22nd. Because the Chinese yuan is pegged to the US dollar, the Euro's surge is also subtracting from export profits in yuan. Conversely, a weaker US dollar inflates the profits of S&P 500 companies, which earn 40% of their revenue from abroad.

Jumping to the rescue of the German DAX-30 stock index on Sunday, May 21st, German Deputy Finance Minister Thomas Mirow said, "The whole story is to be seen through the panorama of the US dollar. We do not want to see abrupt changes of exchange rates. So at the level of $1.27 to $1.30, we esteem that there are no acute problems for Germany," he said.

German finance minister Peer Steinbrueck added, "The development of the Euro can be absorbed easily by Germany. Energy imports become cheaper. I can live with the current development." Germany has been the world's top exporter for the last three years, with much of its foreign sales driven by technology companies competing in high-end, high quality markets.

France's Finance Minister Thierry Breton said on May 17th that the French economy could absorb the rise in the Euro's to $1.30 but signaled that further strong gains would not be welcome. "We constantly discuss these risks on exchange rates, notably within the G7. It is true that we must be attentive."

Japanese financial warlords on Red Alert

Millions of words have been written about Japan's ministry of finance and its heavy handed interventionist policies in the foreign exchange and Japanese bond market. The MOF is on 24-hour alert for signs of dollar weakness or lower bond prices that could undermine the benchmark Nikkei-225 stock index.

The US dollar's slide from 118-yen on April 10th, to as low as 109-yen on May 17th, was the catalyst for a 10% slide for the Nikkei-225 from its 5-year highs of 17,600 set in early April to 15850 on May 22nd. A lower US dollar subtracts from earnings of Japanese exporters and multinationals with operations in the US, which is why Japan's financial warlords spend so much time trying to manipulate the yen's value.

"The foreign exchange market should reflect the economic fundamentals and the excessive volatility in forex would have a negative impact on growth in the economy including Japan," said Hiroshi Watanabe, Japan's foreign currency chief. Japan holds a whopping $640 billion of US Treasury bonds, so the US Treasury cannot tell Tokyo to keep its hands off the US dollar, nor can it call China a currency manipulator, while Beijing holds $321 billion of US Treasury debt.

Japan's economy grew at faster than expected 1.9% rate in the first quarter, heading for its longest postwar expansion, as consumers and companies became optimistic for the first time in almost 16 years in April, (contrarian signal?) Wages have risen for six of the past seven months. Unemployment is at a seven-year low of 4.1 percent. But the Nikkei's 10% setback since the start of the second quarter puts the future of Japan's longest economic expansion in doubt.

Bank of Japan chief Toshihiko Fukui commented on May 19th, "The global economy, including the United States and China, continues to expand firmly. Although signs have not become clear yet, there is some upward pressure on prices. Central banks are gradually making an adjustment in their loose monetary policy. It is still uncertain whether such steps could contain inflationary risks. There is also uncertainty on whether there will be a soft landing in the global economy or whether a slowdown will be too much."

The Nikkei-225 fell 1.8% on May 22nd, to close below the psychological 16,000 level for the first time in more than two months. In Singapore, Japanese yen Libor futures for December 2006, rallied 4 basis points to 99.32, for an implied yield of 0.68%, still discounting a hike in the BOJ's overnight loan rate to half-percent by year's end. The BOJ has withdrawn 16 trillion yen ($150 billion) of excess cash from the local banking system since March 9th, when it announced the end of its ultra easy policy.

"The process of drawing down current account deposits is proceeding well," said Fukui on May 19th. "If we go on at this rate, without disrupting markets and if transactions among market participants go smoothly, we will be able to finish the process of absorbing excess funds in the next few weeks. For now, our target is to guide the overnight call rate at around zero percent."

"We will reduce (excess cash) to below 10 trillion yen ($90.10 billion) for sure. I would use figures like 6-7 trillion yen or my previous comment about a level somewhat below 10 trillion yen, but we do not have a specific target in mind," Fukui said. Still, a possible Nikkei-225 meltdown could persuade the BOJ to leave its overnight loan rate at zero percent for a long time.

"We have no preset idea on the specific timing for exiting zero interest rates. It is highly possible that the accommodative financial conditions will be maintained for some time following a period in which the overnight call rate is at effectively zero percent. Through and beyond this stage, the bank will adjust the level of interest rates gradually in light of developments in economic activity and prices," Fukui said.

No doubt, Japan's financial warlords will keep a close eye on the Nikkei-225 and the dollar /yen exchange rate, before lifting rates above zero. Japan's Chief Cabinet Secretary Shinzo Abe said May 19th, that he wanted the BOJ to support the economy by keeping interest rates at zero. "We want them to work together with the government to make sure we depart from deflation. We want them to support the economy sufficiently from the monetary policy side by keeping rates zero."

Global Stock Markets Hooked on the Gold Standard

The big-3 central banks and their finance ministries still have the ability to jawbone foreign exchange rates, or if necessary, execute outright intervention to battle with speculators. However, the most shocking development in the global markets over the past few years was the natural evolution of a worldwide de-facto gold standard that is just starting to impose discipline upon abusive central bankers.

In other words, brazen attempts by central bankers to inflate their equity markets by pumping up their money supply, has been matched by higher gold prices. For instance, the emergence of the gold vigilantes in Europe became evident in September 2005, when the price of gold rose above a four year resistance area of 350 Euros per ounce, and zoomed to as high as 570 Euros on May 11th, 2006.

Interestingly enough, the gold market closely attached itself to the monetized EuroStoxx index, and then outpaced the EuroStoxx to the upside. In other words, the impressive EuroStoxx-600 rally was just an optical illusion in hard money terms, and was more reflective of the ECB's ultra-easy money policy. If the ECB was forced to lift its repo rate above the true rate of inflation, both gold and the EuroStoxx index would begin to unwind some of their speculative froth.

Under the leadership of Jean "Tricky" Trichet and his cohort, Bundesbank chief Axel Weber, the ECB abandoned one of the key pillars of the Euro zone monetary policy, keeping the M3 money supply close to a 4.5% growth rate. Instead, the annual growth in M3 picked up to 8.6% in March, its highest since July 2003 and the third straight monthly rise in the pace of expansion. Loans to the private sector, which further pushes up liquidity, grew 10.8% in the year, the fastest growth since 1992. Mortgage growth topped 12.1%, the highest since 1999.

To prevent strong loan demand from lifting the cost of money, the ECB inflated the M3 money supply, and in the process, also inflated the EuroStoxx-600 market and watched the price of gold soar 74% from 316 Euros to as high as 570 Euros /oz. Although both asset markets rose in tandem to profit from monetary inflation, the EuroStoxx-600 index lost 26% to the price of gold since September 2005.

But loose money policies in expanding economies can usually lead to higher inflation, and Germany's producer price index jumped 0.7% in April, or 6.1% higher from a year ago, its fastest rate of inflation in 24-years.

It is not difficult to figure out why German producer prices are soaring, one just needs to follow exchange traded commodities in the DJ AIG Commodity index. The ECB's primary mission was to inflate the Euro zone stock markets, but a lot of extra cheap money was finding its way into commodities such as crude oil and copper. The ECB waited for more than two years to reverse its half-point repo rate cut in June 2005, always leaning on the side of easy money.

The ECB is aware of the inflation situation, but did not lift a finger to counter the explosive growth in M3 at their monthly meeting in April and May 2006. ECB chief economist Otmar Issing said on March 20th, that inflationary risks are to the upside. Issing indicated that too much cash is circulating in the economy. "In the last quarter M3 money supply growth has moderated but we can't forget what's already happened. A large liquidity build-up has developed and we can't ignore it," he said.

However, the ECB's strategy blew-up when benchmark 10-year German bund yields began to take their cue from rising gold prices, reflecting higher inflation in Europe. Since the last ECB repo rate hike to 2.50% on March 3rd, German bund yields jumped 50 basis points to as high as 4.07 percent, and deflated the monetary bubble in the EuroStoxx-600 index. In the end, the ECB's strategy of inflating equity markets with cheap money might just lead to the Stagflation trap.

Alarmed by the collapse of the Euro relative to gold, Bundesbank chief Weber left open the possibility of a half-point repo rate hike in June. "All options are always open. We are in an environment where we have a very strong liquidity dynamic. It has increased despite the two rate moves, and we have more liquidity than is needed to finance non-inflationary growth. We have to brake the liquidity dynamic and that will play a role in our decisions," he said on May 7th.

However, after witnessing a 550-point mini meltdown in the German DAX-30 index over the past nine trading days, the ECB brain-trust would probably settle on a baby-step quarter-point rate hike to 2.75%, then move to the sidelines for three more months. The German DAX-30 was hovering at five-year highs thanks to forecast-beating corporate profits and an unprecedented rise in takeover activity. But the latest fall of 500-points was its worst week since July 2002.

At the end of the day, it was the failure of the ECB to rein in the explosive M3 money supply growth in a timely fashion, which ultimately led to the Euro's 65% collapse against gold, which then sent German bund yields 60 basis points higher to above 4.0%, which in turn, led to the brutal adjustment in the EuroStoxx-600 index.

When left to their own devices, free of central bank intervention, global markets tend to exaggerate moves and increase volatility in bonds, stocks, currencies and commodities. However, markets do have internal self-correcting mechanisms that can eventually reverse over extended movements or deflate asset bubbles. All too often however, central bankers try to postpone the eventual day of reckoning, through intervention, interest rate adjustments and jawboning exercises, but in the end, there is no place to run or hide. The markets will prevail!

Japanese financial warlords cornered by de-facto gold standard

Under the regimen of the de-facto gold standard, all clandestine attempts by the interrventionsi Japanese ministry of finance to pump up the Nikkei-225 index or to weaken the yen, could be met with sharply higher gold prices. Since the BOJ adopted its ultra easy money policy in March 2001 and pegged its overnight loan rate at zero percent, gold climbed 160% to as high as 80,660-yen on May 11th.

If Tokyo's financial warlords intend to be serious players in combating the "Commodity Super Cycle" with a tighter monetary policy, it must also accept a stronger yen against the US dollar, and a lower Nikkei-225 stock index. Since the BOJ began to withdraw 16 trillion yen ($146 billion) of excess cash from the banking system on May 13th, the US dollar has declined from 118-yen to as low as 109-yen last week, while the Nikkei-225 has surrendered 10% over the past six weeks.

By dismantling of quantitative easing, Japanese bond yields are starting to track the direction of gold and the "Commodity Super Cycle." The recent surge in gold to 80,600 yen on May 11th, pushed JGB yields towards the 2% barrier. And in a natural chain reaction, the surge in JGB yields to 2% triggered a 10% loss for the Nikkei-225, which in turn, knocked gold 10% off its highs to 71,800 yen on May 22nd. A slide in gold prices to 71,800-yen knocked JGB 10-year yields toward 1.83 percent.

Still, Japan's financial warlords are not comfortable with allowing market forces to control interest rates. Vice Finance Minister Koichi Hosokawa said on May 22nd, the Bank of Japan should keep interest rates at zero to support the economy. "We would like the BOJ to support the economy by keeping interest rates at zero so that the economy overcomes deflation completely and does not fall back into deflation again."

The BOJ also buys 1.2 trillion yen ($10.24 billion) in Japanese government bonds outright per month, and that is having a big impact on keeping long-term interest rates down. Economics Minister Kaoru Yosano said it was too early to debate when interest rates should be raised. Any cut in the BOJ's outright JGB buying could help push up long-term interest rates, and would be very bad news for the Nikkei-225.

Federal Reserve must choose between the US Dollar and Home prices

The Federal Reserve will do what it takes to maintain its credibility, which is central to preserving the integrity of the US dollar, said Dallas Federal Reserve chief Richard Fisher on April 11th. Alluding to the Fed's dual role of insuring inflation doesn't "raise its ugly head" while still promoting the fastest possible growth, Fisher said, "We seek to get it right. And the answer to your question is we will do what gets it right."

Fisher said the US dollar is "a faith-based currency, the currency of the world and we must maintain its integrity. I will spend every ounce of energy doing that. I have no doubt that my colleagues will do exactly the same," said Fisher, who is not a voting member of the Fed's policy committee. But since Fischer made his pledge to back a strong US dollar, the greenback plunged by as much as 7% against a basket of key currencies, heightening concern among America's biggest financiers.

About half of the $805 billion US current-account deficit last year was financed by foreign central banks, with those of oil-exporting nations playing a major role. OPEC plus non-OPEC oil exporters deposited a combined $82 billion US dollars into BIS reporting banks in the third quarter of 2005, the largest-ever quarterly placement.

OPEC holdings of Treasury notes and bonds stood at $84.9 billion in February 2006, up from $52.7 billion in July, and an even bigger chunk of petrodollars are recycled through London via British banks. British holdings of US Treasury notes and bonds have soared more than $100 billion since June 2005 to $251 billion.

To protect the US dollar's status as a world reserve currency for oil exporters, the Bernanke Fed is under pressure to lift the fed funds rate by a quarter-point to 5.25% in June. Failure to do so, could spark a renewed assault against the US dollar, and re-ignite inflation fears, lifting gold prices and US bond yields. However, a tighter Fed money policy could also deflate the US housing bubble, the greatest source of savings for many US households, and risk an economic slowdown or recession.

Fed chief Bernanke told Congress that his March 24th decision to stop reporting the M3 money supply measure was designed to save the US taxpayer's money. However, the yield on the US Treasury's 10-year note has surged 40 basis points higher, since the Fed abandoned M3 reporting. Without the transparency of M3 reporting to monitor the Fed's money printing operations, traders sold US bonds and turned to gold in April, as a safe haven from the US central bank.

Asked if the rising price of gold, increasing bond yields, a falling US dollar meant that the Fed chief Bernanke had a credibility problem, US President Bush told CNBC television on May 5th, "No. This guy's sound, he's smart, he's capable. You might remember, when I first nominated him, he was well received by most accounts as being a sound thinker who will be independent from the politics of Washington."

But deep seated doubts about Bernanke's future handling of the M3 money supply convinced the gold vigilantes to bid the yellow metal $260 higher to as high as $730 /oz, which in turn, persuaded the US bond vigilantes to jack-up 10-year Treasury yields by 80 basis points towards 4.19 percent, the highest in four years. Uncertainty over the status of the US housing bubble under the duress of 5% plus Treasury yields, in the background of a plunging US dollar, led to a violent nine-day shakeout in the S&P 500 index in mid-May.

Can Central bankers derail the "Commodity Super Cycle" and gold?

It would probably take a sustained global stock market sell-off of 10% or more to knock the "Commodity Super Cycle" and gold off their four year upward trajectory. Evidence of a slowdown in the booming Chinese and Indian economies, caught in the downdraft of a global economic slowdown, and signs that G-7 central banks are tightening their money supplies in a meaningful way, are also pre-requisites for calling an interim top in commodity indexes.

The catalyst for a sustained global stock market decline might be weaker US housing market. "In combination with rising interest rates, affordability is becoming much more difficult and therefore as you would expect some cooling in (housing) markets," said Fed chief Bernanke on May 18th. Up to 40% of US home loans were of non-traditional types such as adjustable rate and no-money-down mortgages in 2005, Bernanke noted. "Some people will soon be faced with adjustable rate loans re-pricing under less favorable conditions," added Chicago Fed chief Michael Moskow.

The end of excessive monetary stimulation by the big-3 central banks, the Fed, the ECB and the BOJ, and fears that mounting inflationary pressures worldwide may require more aggressive rate tightening has unsettled global financial markets in recent weeks. Morgan Stanley's All-World stock market index has fallen about 8% fallen from its early May peak. Buoyant commodities also have gone into retreat.

The global stock market melt-down has whipped up fears of a global economic slowdown and weaker demand for the stars of the "Commodity Super Cycle." Crude fell below horizontal support at $69 per barrel and extended losses to $67,40 /bl. gold lost $70 per ounce to $645 /oz from a week ago. The Dow Jones AIG Index of 19-commodities fell 7% over the five days, the most since December 1980.

Commodity related stocks were also hard hit. Alcoa fell 8% over the five days to $31.98 /share, Phelps Dodge, the world's largest publicly traded copper miner, lost 13% to $83.06; Australia's Rio Tinto fell 11% to $US 212.02/ share, and Newmont Mining (NEM), the second largest gold miner, lost 9% to $51.07.

International Monetary Fund chief Rodrigo Rato said on May 22nd, that the latest market adjustments, demonstrate the risks from inflation and global imbalances, referring to the huge US current account deficit and China's virtually fixed exchange rate. "Some have suggested global imbalances are not a serious threat. Last week, shows that is not the case. The markets are very aware of global risks. One of them is inflation, and another is how to resolve global imbalances in a measured manner."

Undoubtedly, bargain hunters could emerge from the sidelines to pick up battered blue chip stocks after a brutal correction. If correct, bargain hunting rallies in global stock market indexes could also be accompanied by gold rallies and a battalion of other commodities markets. That in turn, would exert upward pressure on inflation and global bond yields. It is going to be a lot tougher to make money in the global stock markets in the months ahead, under the regimen of a de-facto gold standard.

Has gold seen its highs at $730 per ounce?

Gold is a proven itself to be a more viable hedge against monetary inflation than blue chip stocks, and has greatly outperformed global stock market indexes for the past four years. However, gold and other commodities are not immune from big melt-downs in global stock markets. One needs to go back to 2002 and the first quarter of 2003 to recall similar stock market declines.

Within the context of a four-year bull market, gold exhibited wide swings and big corrections along the way. For many years, European central bankers dumped their gold to break the psychological link between gold prices and bond yields. On September 21st, 2003, the Dutch central bank indicated that it had sold 1,000 tons of gold and had 700 tons remaining for sale. "We have sold more than 50% of our gold reserves, which is a signal of how we see gold," said Dutch Central Bank Governor Nout Wellink. The Dutch raised 10 billion Euros from the gold sales.

Are the big-3 central banks ready to tighten their money supply to combat inflation? Can the bank of Japan lift its overnight loan rate above the ridiculously low level of zero percent, over the objections of the ruling LDP party? Is Jean "Tricky" Trichet about to lift the ECB's repo rate by three-quarter points to 3.25% as futures markets predict? Is Fed chief Ben Bernanke prepared to deflate the US housing bubble with rate hikes beyond the neutral rate of 5.00%?

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Gary Dorsch
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Mr Dorsch worked on the trading floor of the Chicago Mercantile Exchange for nine years as the chief Financial Futures Analyst for three clearing firms, Oppenheimer Rouse Futures Inc, GH Miller and Company, and a commodity fund at the LNS Financial Group. As a transactional broker for Charles Schwab's Global Investment Services department, Mr Dorsch handled thousands of customer trades in 45 stock exchanges around the world, including Australia, Canada, Japan, Hong Kong, the Euro zone, London, Toronto, South Africa, Mexico, and New Zealand, and Canadian oil trusts, ADRs and Exchange Traded Funds.

He wrote a weekly newsletter from 2000 thru September 2005 called,"Foreign Currency Trends" for Charles Schwab's Global Investment department, featuring inter-market technical analysis, to understand the dynamic inter relationships between the foreign exchange, global bond and stock markets, and key industrial commodities.

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