Gold weakness is confirmed by both RSI and MACD. However we need to consider its move in a broader context versus other assets

Gold is outperforming CRB Index and Oil.

Gold is clearly still outperforming S&P and Gold Stocks

The stock markets are down again today. FX market is also falling apart in sympathy. I thought that it is important for this blog to take a deep breathe and have a look at these returns:


Currencies ranked returns:



I spoke with a good friend of mine today talking about the possibility of currencies interventions (see Japan will likely go it alone in FX intervention) . He suggested that even though every one wants stability in the FX market. There are two kinds of intervention. Those who are trying to weaken their currencies and those who are trying to do exactly the opposite. The latter have a much harder task since they need to buy back their currencies using their reserves and there is a limited amount of that (case in point: Asian Crisis). As for Japan to intervene, it is a much easier task since they just need to print a lot more money in the market.

Personally, I think that the Japanese downward spiral is in place. Nikkei is looking at stronger Yen and downgrading the exporter's earnings. Yen is getting stronger because of fear linked to equity unwinds, de-leveraging and carry trade unwinds. Given the uncontrolled FX trading activities from hedge fund to companies (for example Citic Pacific in Hong Kong), we may indeed see more risk aversion from the popular trades. Although I must admit that at 55.82 AUDJPY and 115.61 EURJPY, carry trades are closed to washed out in the market.

Even though we want FX interventions, the question is 1. if it is going to happen, 2. if it is going to be successful. I believe that FX intervention will happen because FX volatility does not induce global trades and it is in all countries' interests to dig out of this recession. However, due to the shrinking FX reserves in a lot of the emerging market (and non-emerging too , look at Korea) from recent interventions, the power to limit moves are shrinking too. On the other hand, as explained earlier, I would not bet again Japan being successful. I think that 85-90 USD/JPY should be well supported.

A stable and well defended Yen is much needed in this market.

This is an article from Reuters (U.S. has plundered world wealth with dollar: China paper dated Oct 24 2008). It says "The front-page commentary in the overseas edition of the People's Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies."

At the moment, US Dollar is still being considered as the reserve currency of the world as well as the main trading currency. Oil and many other goods are priced and traded in US Dollar. So you can imagine that moving away from US Dollar is hard given that there maybe long term contracts between countries and companies written in US Dollar. However, given the present global economical crisis and how many parts of the world view it as a US centric problem. We may get whispers of talk from disgruntled citizens of the world about the end of US Government, economy and the Dollar. For those who have not heard the claims from Hal Turner, please check out his claim on You Tube that the US Government is in works to replace the currency with a new currency called Amero. While that may sound extreme at the moment, we cannot deny that the massive monetary injection to bailout the banks and the economy can only lead to further financial distress. Since we only transferred the problem from banks/ insurers to the taxpayers. Taxpayers are holding onto the remains of the worthless assets (not only US but also true for UK, Europe and many other problem countries) . In effect, our debt holders (Chinese, Japanese Governments in particulars) are lending money to the US to buy risky assets which they do not want to hold in the first place. Somehow since it is a treasury paper, it is now triple A. So this time round, we don't even need the likes of Moody's to turn "junk" into "AAA". How sweet! Of course, the difference is that, the asset side of the balance sheet is non-static unlike those toxic CDO. We are supposed to have "taxes" coming into the asset side of the balance sheet for the US Government. So all in all, if the recession continues, the tax incomes will be lower on a year-on-year basis. The likelihood is that house prices will be lower too and therefore the value of the toxic mortgages. To come out of this recession, Government is likely to spend more to revive the economy. So all in all, it is going to drain more money from the already debt-laden government balance sheet. It cannot be good for the long term credit rating.

We are worried about the present recession and the repercussion of the massive money printing operation. We recommend to diversify into Gold and other real asset since the long term value of the paper money is in question.

Have a look at the Baltic Dry Index. The retracement is massive. No doubt that it is linked to the Chinese/ emerging market demand as well as the oil price. For the past few years, this index has been correlated with Aussie Dollar. We can see both of them collapsing.

A recent lecture by Dr. Marc Faber - an informative review on global economic history and future of investment.

I came across this article by Michael Lewis, very funny. A much needed comic relief for a very tough week on wall street:

http://www.bloomberg.com/apps/news?pid=20601039&sid=a5PEgwA8j68M&refer=columnist_lewis

"Oct. 24 (Bloomberg) -- The first time I sensed the alarming change in my soul was when I caught myself, five minutes after the market open, reaching for a reefer.
Trust me, I didn't amass legacy wealth (underestimated by Forbes magazine in the high eight figures) by smoking weed during trading hours. Exhaling that first hit I thought and might even have moaned aloud: ``Whoa, dude! Why are you even running a hedge fund?'' The markets were collapsing, and so was my passion.
Bloomberg subscribers have come to know me as a seriously successful hedge-fund manager who tries to serve society in more ways than one. Not only have I made as much money as possible, and proven the natural inferiority of the little rich-kid idiots from Harvard and Yale who went to work for Lehman Brothers Holdings Inc. I have also freely shared my thoughts and opinions with you.
As the trading room filled with smoke, and acquired that only sweet smell I know that is not success, I realized it was time for me to share more. To go deeper. I needed to re-examine honestly who I was, and why.
What could possibly have caused me to doubt my own value? I cannot say. But with my lungs stretching to the bursting point I felt a sudden urge to make the argument for shorting myself. I looked for weaknesses. I found three:
Misplaced Trust
1) I trusted America to do the right thing.
My fund may be an offshore entity, but I trade in U.S. markets. When they move from ``God Bless America'' to ``Take Me Out to the Ballgame'' at Yankee Stadium, I keep my hand over my heart. And I trusted my government to preserve one of man's most basic rights: the right to short Morgan Stanley.
Six weeks ago I was right where I wanted to be: short not only Stanley but also Goldman Sachs Group Inc., in real size. Both were going to zero, and I was going to have another Merry Christmas. Then the Goldman alums at Treasury jump in and force the Securities and Exchange Commission to ban short selling.
The short squeeze forces me to buy back everything at prices that would make a Japanese investor blink. How did I feel? Imagine how it would feel to be Michael Jordan in mid-air, three feet above the rim with no one around you, when the ref blows the whistle. Dunking is now illegal, he says. The league fines you for trying to dunk; the media lambastes you for trying to dunk. Barney Frank subpoenas the dunkers.
I'm not saying I'm the Michael Jordan of hedge-fund managers. Others say that. I'm saying that for the first time in his career the Michael Jordan of hedge-fund managers feels like picking up his ball and going home. Which brings me to...
Love What You Do
2) I hate my job.
When people ask me what it's been like making hundreds of millions of dollars for myself I always try to smile as if to say: ``It's no big deal. Some people are just built to win in the financial markets.''
The truth is nothing comes naturally in the financial markets. Winning is so much harder than you know. It comes with this huge opportunity cost: not winning at something else. For example, I think I could be one of the best ever at finding meaning in life. But I have to put that to one side, to help keep markets efficient. Don't get me wrong. I'm not a whiner and I'm not a quitter. I'm not writing a letter to my investors to tell them why I'm too good for their money and my own Blackberry. No, I'm no Andrew Lahde. (Though he has a point about pot.) I'm just underutilized. Which leads me to...
Wrong Man
3) I was rocked to my core that I -- or one of the few people like me -- wasn't put in charge of the bailout.
If you haven't figured it out by now, America has hired the wrong Paulson. There are two of them, Hank and John. Hank turned Goldman Sachs from an investment bank into a busload of tourists going to a casino, with borrowed money.
Goldman might have been the smartest investment bank but you only needed to see Dick Fuld testify before a congressional committee to know how much that means. No pun intended, but Dick didn't know dick.
Astute observers will note that every time they run across a party of midgets, one is tallest, and his name is usually Goldman. Suffice it to say that while Hank's shop was creating subprime mortgage-backed bonds, John's was shorting them. Hank wound up working for the government, John wound up making $3.7 billion. For himself.
Wake up America! The teacher has just asked the class to send one member to the chalk board to figure out a problem. You just reached past the A student in the front row and plucked the guy in the middle who's working hard for a B-minus. And he's confused!
To be honest, I'm not sure what I'm going to do next with my life. But the more I think about it, the weakness I'm feeling isn't mine. It's yours. "

This is a YTD chart of Gold versus Gold stocks Index. Note that the Gold outstanding exposure of the GLD ETF is close to all time high while Gold price is losing ground. If the outstanding quantity reflects the demand of Gold ownership, the divergence gets more questionable/interesting especially when you consider Gold stocks' massive underperformance.

I just came across this interesting article from GoldMoney.com. Pretty much summarizing the monetary inflation problem. At the moment, we are having to print more money to cover the problem from printing money. The asset deflation from de-leveraging is masking the true problem of monetary inflation. When the market stabilized, the effects of massive monetary injection will reappear in the form of inflation.

Here is an excerpt with my highlights in bold:

"... Gold was not the only thing making new records this past week. US government debt is soaring as it borrows money to pay for the bank bailouts concocted by it in recent weeks.

From September 30, 2007 to the end of this past fiscal year on September 30, 2008, total federal debt grew by $1.0 trillion, from 9,007,653,372,262.48 to $10,024,724,896,912.49, which is an 11.3% annual rate of growth. The federal debt as of October 16, 2008 is now $10,331,139,000,845.92. So in just 16 days since the end of the last fiscal year, the federal debt has grown by an astounding $331.1 billion, which is a 75.5% annual rate of growth. It has taken just 16 days to borrow one-third of what the government borrowed in all of last year.

The following chart is from Ed Steer, a regular contributor to "Casey's Daily Resource Plus" published by Casey Research. This chart of weekly T-bill issuance visually portrays this accelerated growth of federal debt.



The above chart shows T-bills only, and therefore excludes the growth of other federal debt instruments. Also, this $10.3 trillion debt total I refer to above excludes the federal government's unfunded liabilities. When these are added, the total obligations of the federal government are $110 trillion, or at least that's what they were estimated to be last May by Dallas Federal Reserve president Richard Fisher. The federal government's unfunded liabilities, and therefore its total obligations, have obviously grown further since then, and are now some unknown number greater than $110 trillion.

In short, the US federal government is staggering under the world's heaviest debt load. To meet its obligations and promises, the Federal Reserve will continue to create "unlimited" amounts of dollars.

...

The gold standard is long gone so it no longer acts as a "silent watchdog to prevent unlimited public spending". Because it is no longer prevented, unlimited public spending is what we are now getting. In addition to the countless ways the federal government spends - or wastes, as many would no doubt add - the dollars flowing through its accounts, it is now spending unlimited dollars to bail out banks worldwide, a reality which I think makes clear the dollar's bleak future.

To achieve this unlimited public spending, central banks are creating an unlimited amount of dollars, which will in time mean that there is no limit as to how high the gold price will reach. The new record high in the gold price against the currencies mentioned above will soon be joined by new record highs in gold against the US dollar, euro and every other national currency around the globe.

While the gold standard - what Rep. Buffett called a "silent watchdog" - is gone, gold itself is a watchdog too, and not a silent one. Gold cannot prevent "prevent unlimited public spending" like the gold standard, but a rising gold price - like a barking dog - can warn of danger. ...."

You can find the full text here: GoldMoney 18 October 2008 — GoldMoney Alert from James Turk - Gold's New Record

There seems to be a divergence of prices of paper gold and physical gold. Author has yet to go to his gold dealer to verify but according to other contributors to this blog and other reputable websites, there seem to be a big shortage in the physical gold market. Part of the explanation is because of the lack of coin minting in the recent years, and the other part is demand from the "safe haven" trade + retails.

Here are a few good links:

Jim Sinclair - Oct 19 2008 - The Bullion Market Versus The Paper Gold Market - An Explanation

SeekingAlpha - Oct 15 2008 - Countdown of manipulated gold price running out

Guardian UK - Oct 13 2008 - How to buy Gold?

Gold is outperforming stocks:

Gold is outperforming EUR/USD:

Gold stocks look cheap to Gold Prices:

Gold starts to outperform OIL:

So Banks used to make a lot of money by packaging "worthless" assets into a "special purpose vehicle" and funding it with short term money. As long as it is rated AAA, it will get funded easily (at least they hoped).... Anyway, that's the old story. Now, let's think what we are seeing now. All the governments in the world are buying 1. banks preferred shares 2. distressed mortgages 3. single companies CDs and 4. other "assets". They are going to fund it with Treasury bills. and so far they are still rated AAA. Do you guys see the same parallel with the exception we are hopefully not creating a new "Govt-backed SIV" every week and these funds are not planned to be tranche-ed out so each countries' tax-payers will hold the same slice (rather than from different credit tranche). The tax-payers of the world are playing the biggest carry game without them knowing at the moment.

My early thoughts are there can be 2 outcomes:

1. the asset value holds or goes up -> reduce Treasury funding needs. -> carry is King!

2. the asset value diminishes -> while the rating agency may question the credit quality of this special SIV, the overall country credit rating will depends on the economic cycle. -> say we hit recession/depression -> then we will hit the triple whammy, asset value down + credit rating in question + currency downfall. -> interest rate will go up massively to cover the debt and credit drop -> further hits recession and depression.... carry blows the bubble again.

A friend of mine wrote to me:

"Maybe.

The key issue is did we avoid a complete run on the bank? So far, yes. As we enter into recession, will we continue to trust the banking system? My guess is yes. I think we are in for a deep recession. It will be painful, with unemployment maybe even doubling, real estate continuing to go down for another couple of years, lending limited, etc. But, savings will go up, and they’ll go into the banking system. OPEC countries will be screwed as oil continues to hover lower and their spending habits catch up with them. Asia will be the big winner. It will continue the biggest wealth transfer in history from west to east. Asia doesn’t need us as much as we need them.

I’m not happy about any of the plans. The govn’t as buyer seems to me like they’ll have to distribute down the line. If all goes well, govn’t will unload overvalued securities to investors (tax payers). If all goes poorly, govn’t will be screwed. But at least it helps us avoid immediate ruin."

My response was:

"Run on bank is a different issue to what I am trying to point out- ie G7's are saving the banks/SIV with bigger sovereign SIV, in other words moving from what deemed to be AAA to what is still AAA (but for how long). Basically, possible runs on bank (BTW if one makes a run at a bank now, this person is now implicitly putting no faith in his Govt (for example in US, we have the new FDIC guarantees. Other countries have similar guarantees). Recession and other negative events you have pointed out will eventually hurt the asset valuation of these SIV, therefore will lead to downgrade of Govt credit. Our Govt is as good as its taxpayers' future income. And in the end, if credits of these Govts go down, there will be a run on the currencies and therefore the banks (re Iceland ). Only Asia and Japan seems to come out of this without bailing out with a sovereign SIV... But in the long run, we are just using a different wrapper to lengthen this SIV game. The "best thing" is that you don't need to have a secondary market to transfer risk of this new SIV, since every taxpayer already owns a piece of it. "