Archived IMT (2008.10.08)

Markets erase all of their post-coordinated cut rally, while USDJPY dips below 99.80 and cable drops below $1.7450. Stocks sell off aggressively in line with yesterday's warning about margin deleveraging. The rate cuts are in line with our long-held expectations for the global reflationary trade to emerge as the cost of money (interest rates) is reduced to the benefit of gold prices and the expense of oil. The gold to oil ratio rises to 11.5 (gold at 920 oil at 80) from 6.5 earlier this summer. Recall the 38-year monthly average stands at 13, therefore further rebound in the ratio is in line with prolonged gold gains towards $1100 per ounce before year-end. I warned on Sep 18 in this site that further increases in gold relative to oil are a typical characteristic of contractionary economic conditions. The mean-reversion process will ensue, sending gold above $1000.