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Wednesday January 28, 2009 - 14:48:51 GMT
Black Swan Capital - www.blackswantrading.com

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Bailout fatigue! Gold anyone?

Key News
• Germany is this year set to record its largest post-war deficit. (FT)
• Billionaire investor George Soros, who made $1 billion selling the pound in 1992, said he is no longer betting against the U.K. currency after it reached $1.40. (Bloomberg)

Quotable
 “A healthy male adult bore consumes each year one and a half times his own weight in other people's patience.”

     John Updike

FX Trading – Bailout fatigue!  Gold anyone?

I don’t know about you, but I’m becoming bailout fatigued.  I’m to the point where I want all talking and commenting on the bailout to end.  Sure there are all kinds of technical/logistical considerations.  Sure it all is extremely important.  Sure it is a jobs program to help take the neo-Keynesians off the dole (read funneling that stuff at our “institutions of higher learning”). 

But as John Ross summed up in his missive yesterday; it comes down to either a belief and respect for the invisible hand of the market (private property rights which is the cornerstone of liberty), through the magic of its pricing system most efficiently allocating private capital investment to create real wealth and sustain a vibrant job market.  Or it’s a belief in the powers of government to spend money siphoned off the private sector in order to either stimulate or “direct” or seemingly take control of the market process. 

If anyone has any illusions as to the magnitude of the screwballs at the top of this thing we call government, they only need to view the pork in the package to promote prophylactics as yet another form of, dare I say it, stimulus!  Thank you Nancy! Your firm leadership continues to build confidence throughout our fair land.

So, when we watch this stuff we just can’t help thinking why in the heck isn’t gold trading at $3,000 per ounce instead of the usually gold bug target of $2,000? 

Not that we know anything about the supply and demand dynamics for gold—we don’t.  We don’t know how many mines are operating; we don’t know the average cost of production; and we don’t know how much of total demand jewelry represents.  But we do know that jewelry demand is important.  And we have been hearing for a long time now how the demand from China would soar as the Chinese citizens became increasingly wealthy and bought more gold.  

We were thinking this: What if the demand for jewelry were to fall considerably during a major global recession/depression.  And what if Chinese citizens, those who bought that gold during the good times, are now using it to buy things like food and shelter, as the bad times seem to be upon many Chinese citizens already.   Would this make a dent in the supply vs. demand dynamic for gold? 

And when you think of it, if your average industrial world worker who loses his job and depletes his savings and holds some gold to boot, might he not try to sell some gold in order to gain legal tender he can spend to buy food and shelter? 

In a sarcastic way we once quoted a friend who isn’t a gold bug: “Well, you just can’t shave off a piece of gold and buy a movie ticket—can you?”  No.  In this economy most places still take mostly paper.  

Would any of these musings help explain why gold isn’t at $3,000 bucks in the face of government defacing paper money everywhere?  We wonder. 

We ponder this point not because despite the fact the dollar and gold have tended to move the same way of late, but because each major bull market in the dollar has been met by a bear market in gold since the dollar began floating back in 1971; and vice versa. 


 (Chart unavailable in text format.)

So, if gold surges, our dollar call is likely all wet.  We watch, we listen, and we hope bailout talk is tamed and stimulus plans are delayed so the market can have time to work, as it always has. 

The dollar and gold are both lower this morning on a new bout of risk appetite.  Stay tuned.

Jack Crooks
Black Swan Capital LLC

 

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