Recent Market Activity: Gold, USD, China and Japan's Sovereign CDS

It's been raining cats and dogs for most of the last week (though sadly not during this turgid display, which might have excused the unappetizing fare on offer), so Macro Man has domestic pets on the mind.

After a brief respite last week, it feels like every man, woman, cat and and dog in the world has put in a bid for gold, taking the shiny metal/only "real" currency/barbarous relic (delete as appropriate) to fresh all time highs. Or at least, fresh nominal highs.

While gold is starting to get a bit of that "Nasdaq 1999" feel about it, Macro Man is well aware of the quasi-religious fervour of some of its adherents. And if we want to devise a measuring target, looking at the "real" price of gold (or at least, the price of gold deflated by headline CPI) isn't a bad place to start. As the chart below (click to enlarge) suggests, the nominal price would nearly have to double to approach the early 80's "real" highs, though the metal's subsequent collapse suggests, post hoc, that such levels were, shall we say, bubblicious.

Meanwhile, in currency land, China and America are starting to fight like cats and dogs: a bit of barking and hissing with no real violence. The APEC meeting produced no substantive results, other than a cunningly-timed story in the FT in which China bemoans America's monetary policy settings. Leaving aside the fact that no one forces China to get to the dollar or to set deposit rates at farcically low levels; perhaps we should just revisit the chart of aggreagate money supply growth over the past year-and-a-bit (click to enlarge)?
Moving along from cats and dogs to flamingos, Japan has hosted the latest painful goolie-squeeze of popular trades. Shorting "Japan, Inc." has been a popular theme over the last couple of months on the deteriorating fiscal situation and underlying demographic challenges. At one point last week, Japan's sovereign CDS premium was wider than that of Spain. (As a reminder, only one of those countries has $1 trillion of FX reserves.)

Anyhow, the worm turned towards the end of last week, and even a well-above consensus print on Q3 GDP (1.2% q/q, non-annualized versus an expected 0.7%) derailed the squeeze in JGBs.
Four or five weeks to build a position and profit, a few days to lose it all. Such are the joys of portfolio management in a position-driven market. It almost makes arguing (or raining) like cats and dogs seem enjoyable by comparison...

Comments

[Mad Hedge F...:]

wsh Paul Tudor Jones nicely summed up the fundamental argument in favor of gold. The yellow metal is accumulated, and not consumed, and is the ultimate store of value. Gold does particularly well during times of excessive monetization, inflation, and instability of the banking system, as we are seeing now. Central banks, which have been consistent sellers for the last 20 years, are about to flip to net buyers. If non G7 central banks, like China, want to increase their gold holdings from the current 20% of reserves to the 35% weighting now owned by the G7, it will require 1.3 billion ounces of new purchases, or 20% of the total world supply. Certainly they are getting fed up with their ever depreciating dollar holdings. Witness last week’s Bank of India purchase of 200 metric tonnes. ETF’s now own $50 billion worth of the barbaric relic, about 3% of the world total, making them the sixth largest holder in the world, and retail demand for these gold proxies is expected to explode in coming years. Private investors, mutual funds, and pension funds are all underweight gold. This is all happening in the face of declining production from traditional gold suppliers like South Africa. It all adds up to a whole lot of new gold buyers and a shrinking body of sellers. Paul didn’t give any specific price targets other than “up.” Long time readers of this letter know I have been banging the table about gold all year. Time to salt away more American eagles for those college funds and grandkids.

Nov 16 11:56 AM

[Joe Bruin:]

Gold crashed in the 80's for a good reason. His name is Paul Volcker. He gave tough medicine which eventually healed the nation. As the nation healed there was less uncertainty which eroded the allure of gold.

Nov 16 06:28 PM

[JudeJin:]

gold crashed not because of volcker.
there were many reasons:
1. burst of oil bubble
2. gold finished its bull run, reached its theoretical value according to gold standard.
3. china began to export deflation
4. IT revolution
5. rising stocks and declining gold mega trend.

volcker won't be effective now. some other volcker will be effective only when gold will have finished its bull run.

Nov 16 10:51 PM