Monday October 16, 2006 - 10:29:08 GMT
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Black Swan Capital - www.blackswantrading.com
Gold/$ relationship still in play
â€˘ The Organization of Petroleum Exporting Countries, hoping to forge an elusive deal to cut oil output and halt a slide in crude-oil prices, said it will hold an emergency meeting in Qatar Thursday. (WSJ)
â€˘ Key Reports (WSJ):
8:30a.m. NY Fed Manufacturing Index. Previous: 13.84.
â€śCredit default swaps allow investors in risky assets to, in effect, buy insurance against something bad happening, just as a homeowner transfers the risk to an insurance company writing the homeowner's policy.
"But flood insurance has not reduced the chance of a hurricane. Indeed, flood insurance has increased the chance of a hurricane hitting a populated area by letting people build houses at the shore, seemingly without risk.
"In the same way, credit derivatives don't eliminate credit risk but arguably facilitate it. In so doing, the risk to the entire system has increased.â€ť
Randall Forsyth, Barronâ€™s
FX Trading â€“ Gold/$ relationship still in play
Still makes sense to watch the gold-dollar relationship, as we continue to see the mirror imageâ€”though not of late. Itâ€™s possible that gold and the dollar can rally together; but, not likely.
Gold (red) vs. US $ Index Daily Chart:
Up until recently, it was a green light for all commodities all the time. But, the Economist magazine points out something went wrong. They point to negative carry and herding (in other words, everyone who wanted in is in, so no one left to buy):
â€śâ€¦Much has been made of the exciting long-term returns from benchmarks such as the Goldman Sachs Commodity Index. But the GSCI, which has a heavy weighting in oil, is showing a loss this year.
â€śPart of the reason is that futures prices have moved above spot, or current, prices. Usually, futures prices have tended to be below spot prices. This created a positive â€śroll yieldâ€ť for commodity investors, who could hold on to contracts until they became more valuable. However, the roll yield has now turned negative, so that investors in futures contracts are losing. In the year to date the roll yield has been minus 13.35%, and the annualised yield on the next two months' contracts is minus 38.4%.
â€śInvestors may actually have caused their own difficulties. As they have tried to exploit the positive roll yield, the returns have disappeared.
â€śâ€¦The herd instinct explains why investors are buying commodities several years into a bull run. According to Merrill Lynch, a sign of speculative excess is that the spread between prices of listed commodities (bought by investors) and unlisted products is a record 60%.
Three points on this:
1) The long-term fundamentals that are driving the bull market in commodities still seem well intact.
2) Commodities (metals and energy) can correct much more and still be considered in a long-term bull market.
3) In a negative carry trade world, when liquidity is declining (and it is), no matter how slightly, it puts pressure on holders, especially margined holders.
So, though we donâ€™t believe the long-term bull market in commodities is over, we do think itâ€™s very plausible this correction has further to go. Itâ€™s likely we need to see more signs of capitulation among the punditry on commodities before the correction ends.
Jack Crooks, Black Swan Capital Black Swan Subscription-based Service
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