"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Thursday, March 3, 2011

Remember the Carry Trade

Some of you might remember the Yen Carry Trade which fell completely apart back in mid 2008 when the credit crisis erupted. I might add that it also slaughtered many a hedge fund when it did.

Well - guess what? It's back again. You can see it in play by looking at the Euro-Yen cross. This cross is performing very well today especially given the fact of Trichet's hawkish stance on inflation contrasted with the generally held dovish view of the overall Japanese economy.

The Yen is not nearly as weak as it was back during that time frame as it has been the beneficiary of a large amount of safe haven flows as well as being somewhat regarded as a type of proxy for the Asian region as a whole with players buying it because of Japan's position in the Asian economy which is the region leading the globe in growth right now. But interest rates are still very low in Japan and anytime you get a situation where Central Banks are talking tough on inflation in one place and sound dovish in another, and there is an opportunity to borrow a lot of money very cheaply, the potential for a carry trade exists.

This has been a volatile trade dropping sharply lower when sovereign debt woes surrounding some of the EuroZone nations were in the forefront of traders' minds and rising sharply when they were not. There has also been an element associated with the crude oil rise that has added to the volatile mix.

All in all however, this old cross still is a decent indicator of gauging appetite for risk trades. At one time in the past prior to 2009 one could just about gauge what the price of gold had been doing or was going to do based on the performance of this cross. Both tended to move in unison in the same direction. Gold was then part of the risk trade and when the EuroYen cross was rising, so too was the metal. The opposite held true when the cross was falling; so too did the gold price.

It seems as if this cross is still impacting the price of gold although the relationship has now completely reversed. The cross rises and gold drops lower; the cross falls and gold rises. The relationship is not exact but there is a bit of linkage between the two right now.

What this is telling us is that when the cross moves lower and risk trades are out of favor, gold is moving higher on the safe haven or risk aversion play. When the cross is moving higher and risk is back on the table; gold is moving lower as the safe haven trade fades somewhat.

I think the connection is close enough for the immediate time being to keep monitoring the cross. I want to repeat - it is not nearly as direct as it was back then. It is interesting to note however the ever changing perceptions and psychology of the market and how greatly that has changed from 2-3 years ago when this cross was the be-all and end-all of money flows.

By the way, this is not the only carry trade in operation - the Dollar is also on the receiving end of the carry trades due to its ultra low interest rate environment and widely held view that the Fed is on hold for any interest rate hike in the immediate future.

4 Hour Gold Chart

Improving Economic Data putting pressure on Gold

There are several things working against gold in today's trading session.

First is the hawkish tone taken by ECB President Trichet which is being viewed as confirming the theme that the global economy is improving. That is taking some of the safe haven bid out of gold. You can also see the same by observing the sharp drop in the US long bond.

Second is the reduction in jobless claims. The market was not looking for a fall but only a slight increase. The statistic caught traders off guard and fed into the idea that the labor markets might begin improving.

Third is that there is no particular fresh news out of the Middle East or North Africa and that is taking some pressure off of crude oil. It is not much, but some are saying; "At least it ain't goin' up further".

All of this taken together is feeding money into the "risk" trades and resulting in money coming out of gold and back into equities in today's session. You can see the same by monitoring the gold/copper spread which is decidedly in the favor of copper today as it is holding up much better than gold or silver.

For today at least, money flows are favoring copper compared to gold.

4 Hour Silver Chart

A must read article on the US Dollar

Every now and then an article that is so well written and informative comes along that it should be required reading. Following is one such example in the Wall Street Journal.


Long time readers in the hard asset community who have been following my work and that of others will find nothing particularly new here but the fact that it is now being recounted in perhaps the most prestigious US financial newspaper is indicative of how far things have come since we first started sound the alarm bells about the US Dollar so many years ago.

It is my firm conviction that the combination of the runaway spending by the US Federal government in combination with a completely shortsighted and utterly reckless Federal Reserve, both under former Chairman Alan Greenspan and now current Chairman, Ben Bernanke, has destroyed the birthright of future generation of Americans.

The Dollar's role as the global reserve currency did not just happen out of chance; it was the result of our military victory in WWII and the manufacturing powerhouse that was once the US economy. Our fiscal health was solid, we lived within our means and we had a nation of savers. Those halycon days are now long gone.

Instead we have a total Federal debt of over $14 trillion, now at 100% of total GDP. There is no end in sight to continued red ink on our annual Federal budgets. Most of our states are in serious financial trouble and are having extreme difficulty in balancing their budgets and thus far it looks as if our political leaders cannot even manage to shave $100 billion off of a $trillion + budget.

Additionally the Federal Reserve continues its idiocy of printing more dollars into existence in order to prop up the economy further compounding the supply of Dollars at the exact time that demand for those same dollars is decreasing globally.

In short, our leaders have betrayed us all for the sake of short term gain at the expense of long term prosperity. Their betrayal will impact us all but even more so our children and the next generations that will follow. It is they that will suffer the most as their standard of living falls when compared to ours.

There are three things that I can see that the US can do to preserve the Dollar's unique status.

First - get its fiscal house in order. By that I mean seriously cutting spending not talking about some pathetic $4 billion in cuts in order to get a bunch of free spending Democrats to sign off on a 2 week extension to keep the government going.

Second - Stop the madness of the Federal Reserve with its deliberate, willful and purposeful debauchment of the US Dollar through the nefarious QE policy.

Third - tie the Dollar back to gold in some form. It does not need to be a direct convertibility but it does need to be some form of backing. Bernanke seems to scorn such a thing but the fact is it is workable however NOT AT THE CURRENT GOLD PRICE. Because of the sheer size of the US debt load, it would require a significantly higher gold price of MULTIPLES of its current level to accomplish this but it could be done. Bernanke may not want to admit this because in so doing it would expose the failure of the Federal Reserve but egos are no longer relevant at this point in our nation's history.

  • MARCH 2, 2011

  • Why the Dollar's Reign Is Near an End

    For decades the dollar has served as the world's main reserve currency, but, argues Barry Eichengreen, it will soon have to share that role. Here's why—and what it will mean for international markets and companies.

    Euro responding to Trichet's comments

    ECB President Trichet is obviously concerned about rising inflationary pressures across the Eurozone based on his comments early this morning. Contrast that with Fed Chairman Bernanke who spoke of "temporary and relatively modest" price increases.

    There are legitimate fears that the steady and persistent rise in food and metal prices are being passed through at the consumer level across the EU. Germany in particular, whose economy is performing well, is already seeing this. Added to that now comes the potential impact from rising crude oil and energy costs.

    Trichet is trying to walk a very fine line as there are pockets of definite weakness in some of the Eurozone nations which higher interest rates would obviously impact but at least his comments are refreshingly honest and straightforward.

    The market is interpreting his remarks as indicative of a rate hike next month and this is the reason the Euro is moving higher this morning. Technically it is on track to move towards the 142 level. If it does, the Dollar is not going to hold chart support at 76 and will very possibly fall quite rapidly to major chart support near 75 on the USDX. If it fails there, gold and silver are going to move sharply higher.

    We are truly living through remarkable developments.