Wednesday February 3, 2010 - 15:51:53 GMT
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Black Swan Capital - www.blackswantrading.com
The Gold Club (or religion of gold)
Greek debt markets have come under fresh assault from hot money funds after a commission of experts in Athens told the country's parliament that it had uncovered â‚¬40bn (ÂŁ35bn) of "hidden debts" during an investigation into past manipulation by the financial authorities.(Telegraph)
German Bund vs. Greek 10-yr bond Spread: Well above the credit crunch high. [Chart not available in text format.]
â€śI refuse to join any club that would have me as a member.â€ť
FX Trading â€“ The Gold Club (or religion of gold)
My father in law wrote yesterday to give me grief about my recent gold forecast/guess as laid out in a recent Currency Currents. So happy he was with the recent bounce off the support level in the yellow metal (see weekly gold chart below). [Chart not available in text format.]
Iâ€™m used to the well-deserved harangues from him. But I think he is way too complacent about his position. I have concluded that most who like gold do not like it for its investment qualityâ€”it is pure and simple a religion. Thus, negative talk about oneâ€™s religion cannot be tolerated.
Nothing seems to deter gold believers. I expect my father in law will ride it all the way down. (Okay, I know what youâ€™re thinking, gold has already put in a big correction, down from its high; it canâ€™t go much lower is the complacent consensus complaint when we say that.) I am not talking about the corrective-move type of stuff; Iâ€™m talking about the type of hit gold takes when the US dollar enters a multi-year bull market.
Empirical evidence that every major bull market in the dollar has been met by a big sell off in gold, since currencies began floating back in 1971, wonâ€™t deter my father in law, and I know it wonâ€™t deter those who worship at the altar of GOLD. [There is an economic reason why this occurs; gold is priced in the world reserve currencyâ€”the US dollar. It must maintain global purchasing power when the world reserve currency falls in value relative to other currencies. Thus, the dollar gold price moves lower when the world reserve currency increases in value relative to other currencies. It is this way it is and has to be in a world still dominated by the dollar, with no alternative on the horizon.]
In the chart below, gold is represented by the red line and the US$ index the black line. [Chart not available in text format.]
This slide is a bit oldâ€¦and was done just before gold broke out and surged to its new high on the back drop of plenty of liquidity flowing back into the market, pushing all other risky asset higher i.e. liquidity-driven risk asset classesâ€”gold is now a risk appetite asset given the way it is acting. It is not acting as a safe haven. [Chart not available in text format.]
Now a recent update with a near-term chartâ€¦ [Chart not available in text format.]
You will also notice in the above chart that gold and the dollar did move in unison for a whileâ€”during the heat of the credit crunch. Can it do that again? Yes. But if the buck is really in a long-term bull market move, as we suspect, gold eventually is toast.
We are now firmly ensconced in a situation where the entire Eurozone could be engulfed by the growing fiscal crisis among several key core countries that make up the single currencyâ€”Greece is the catalysts, other dominoes are teetering. That looks to me like a major global risk event that might suggest money is moving to a safe haven.
Well, based on the chart, that safe haven doesnâ€™t appear to be gold, but does seem to have something to do with the rise in the US dollarâ€¦ [Chart not available in text format.]
With the pendulum swing quickly away from a quasi-free market approach to economics, and to one that favors collectivism and finding scapegoats in the private sector, there is not a chance in Godâ€™s green earth (a cooling earth indeed) we will be moving to a gold standard any time soon.
So, when my father in law tells me gold is an insurance policy, I just donâ€™t get it. An insurance policy for what I ask (rhetorically)? Itâ€™s now moving tightly in line with stocks. So if stocks break, gold ainâ€™t no insurance for that if the same correlations hold; as we suspect they will.
Real estate is likely dead for a long time; no correlation there in a deflationary world with goldâ€”they are not moving together. If youâ€™ve diversified into other commodities, gold is moving tightly with that basket too.
Liquidity is the motherâ€™s milk of the stock marketâ€”and over the longer term it seems liquidity will drain out of the global asset markets; we think that is what the improvement in the US current account and the US dollar is telling us. Regulatory burdens and government taking a bigger piece of the private pie also represents a hit to liquidity.
Being an adherent to the Groucho Marx School of group think i.e. anyone who would want me as a member of their club I wouldnâ€™t want to join. Gold bugs sure donâ€™t want me in the clubâ€”which means I can to talk negatively and hopefully somewhat objectively about their religion.
Please rememberâ€”if you are a gold bug, and you hate this piece, please send all cards, letters, and assorted hate mail to David Newman.
Black Swan Capital LLC
David Newman here â€¦
First, Iâ€™m not going to give out my home addressâ€¦LOL
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