- New Science in old markets -

Platinum, gold and Europe

Yesterday, Platinum futures made a daily-scale top extension after a run-up that was reinforced by the recent violence and strikes in the large deep mines of South Africa. Gold is also rising but not as fast (gold mines are unaffected, so far) and has not extended. The two prices generally go hand-in-hand however, so it is reasonable to expect that there will be at least pause in the gold price rise and possibly a dip  - support should be found at the level of the recent compressions, from about $1630 in the December contract. It is worth pointing out that Platinum has become much more volatile than gold in recent years, as it has the characteristics of both an industrial and a precious metal. Sporadic (and now falling) demand from the car industry has pushed platinum prices below those of gold from time to time, as they are now. Platinum is the more attractive metal in the longer term, as its industrial use as a catalyst in many processes is sure to recover in time. Buy any dip that comes here, in both metals.

Europe, debt and disaster

Every few weeks we are encouraged to think that the European debt problem is near to a solution. If only the Greeks/Spanish/Italians/Portuguese would tighten their belts or the Germans would be less selfish and allow the mutualisation of the whole debt mountain, we could all breathe easy. Completely wrong.

The problem is not German prudence contrasted with Mediterranean profligacy; it is an unplanned but inescapable consequence of currency union. The over-spending that is now so criticised by stern Northern Europeans was widespread before the events of 2007 - even Germany has a debt to GDP ratio that would ring alarm bells if it were most other countries. The difference is that now, Germany benefits from the fixed exchange rate within Europe because it is held down against other currencies by the poor average performance of the whole EU. Similarly, interest rates are held down for Europe as a whole and this benefits Germany too. No rising Deutschmark or interest rate to inhibit success these days.

The domestic price for Germany is some local wage inflation that has crept in and booming property markets in the main prosperous population centres - not yet seen as the problem that it will surely become. The other price is that Germany is now seen as Europe’s paymaster as this prosperity has not spread South – the troubled countries there have not been able to devalue their way back into a competitive state, as they would have done before the Euro and they see that Germany is doing well, even if they can't see why. The same forces that push Germany to ever greater success are holding these other countries back - the exchange rate of the Euro is too high for them to compete within Europe or outside it and the same is true of interest rates which need to be sharply negative to be of any use to Spain and the rest.

This has being apparent since the financial crisis hit in 2007 and the illusory prosperity that was built on debt in some countries then disappeared – see this chart of German vs Spanish equities which diverged sharply as soon as the banks fell into the pit - the world's markets are often mis-directed but this time the new reality started to reflect in this new trend very quickly.

We were able to spot the reasons for this before anyone because of our study of feedback loops. We use them to provide our customary analysis and this familiarity makes us alert to their existence and effects. If a compensating mechanism, such as variable exchange rates, is removed then positive feedback rapidly takes root and the result is a series of self-reinforcing trends, as here. Germany gets richer and the South gets poorer. Perhaps the most important thing about this (still new) situation is that markets cannot really discount the future when feedback takes over - especially if the mechanism is largely unacknowledged. Each successive German success comes as a surprise as does each Southern failure because politics (and the market place) is responding to events as if the old mechanisms still worked. There is no sudden adjustment to this new reality but only these long-lived trends as the markets re-digest each new piece of information, thinking it may be the last.

This has nothing to do with Austerity vs Growth, the current false debate that fails to acknowledge this great new truth – there is no possibility that any deal on debt can alter these long-term trends. For our palliative remedy, see ‘Berlin, Brixton and Barcelona’ on our website.