The Dredd Market report has a great update on what's going on with the currencies and consequently the stock market over the last few days. Specifically the PIIGS nations and their effect on the Euro.
In summary, this feeds into our 2010 outlook of increased volatility as the globe faces increased competition for currencies racing to the bottom. On one hand, we have the institutional belief that the only thing that can drive global recovery is devaluation of currency (ie, fight a debt deflation by inflating currency) which improves exports. On the other hand, central banks are becoming nervous about the inflationary outcomes and are withdrawing liquidity. As they do this, their economies will flounder and other countries will gain momentum in their exports, forcing every country to again inflate their currency. This tighten/loosen/compete to weaken currency/react to tame inflation sine wave will cause significant whipsawing of currency markets as slowly but surely, these countries absolutely destroy their currencies. The death of fiat money comes closer and the impact will be increasingly volatile and violent in the markets.The beneficiary of this, of course, will be tangible things--notably gold and silver. Although there is a deflationist contingency out there that believes gold will have to fall as debt crashes, we believe nothing could be further from the truth. The US can ill afford to allow the dollar to rise to astronomical levels without defaulting on its debt, which will effectively make the credit rating of the US "junk." Thus, the US must continue to print money and attempt to weaken the currency in a controlled fashion or national default will make the dollar worth zero in an uncontrolled fashion. In this circumstance, the only money worth holding is money with no liability--hence the reason gold is likely to outperform dramatically.
In the short term, as we stated last night, gold will likely rebound along with the euro. However, gold will probably retest in the intermediate term unless fear of sovereign defaults really grabs investor attention, at which point gold may simply "go to the moon."
To read the full report with charts and detailed analysis click here: http://dreddmarketreport.blogspot.com/2010/01/2010-market-update-and-out...
