Adam Katz

U.S. Dollar Strength and Implications for Gold

Thanks for pointing that out tb1975. My apoligies to everyone.

“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”

Just to clarify to everyone, I am referring to the trading of gold here, not the physical ownership. Over the next few months I will feel more comfortable trading gold bullishly against exporting currencies. The US has not produced anything for a while, so when we see extreme trade deflation, those countries which have been producing get hit hardest. When economic numbers come out over the next few months, we will see more evidence of trade deflation and job losses as a result. These exporting economies will purposely devalue their currency long before the USD will crash. That being said, in an absolute sense the USD is weakening from the Fed action, but other currencies are weakening MORE - thus on a relative basis the USD is strengthening and will likely continue to do so against exporting currencies.

From TradeTheNews:

Treasury nominee Geithner reaffirmed the US Goverment's opposition to currency manipulation, and view that trading partners should operate flexible currencies, under the Obama Adminstration

Gold's Role Reversal

Smarty Pants,

I was expecting a quick response from you!

The truth is I am sincerely neutral. If I was living in the U.S I would convert a lot of my cash into gold, but as a Canadian I still find gold expensive in CDN dollars. I'm definitely not looking to go long with leverage like I did last time gold was at $700.

What I can tell you is that in my time working as a trader I have learned to put aside my personal beliefs and to not try to fight the market. There may very well be gold buying hysteria down the road (whether I think it's fundamentally just or not) and as a trader I hope to catch on to a piece of that. Mark my words though, at some point gold will have a 50% drop as the frenzy comes to an abrupt halt and the bubble bursts - but that may very well be from $2000 down to $1000.

As Jeremy Grantham calls it, it is the curse of the value manager. You get in too early and out too early as market swings will usually swing past fair value. I do think gold is overvalued relative to other real assets at the present time, but that doesn't mean that it won't be higher in the future.

Gold Bugs Beware

Smarty Pants,

I really don't care to take this argument further as the mechanics of the GLD ETF are not significant enough to spend so much energy on. As I said I consider it to be a very minimal risk in the price.

All I will say is that there has to be a buyer for every seller in the secondary market, but as the prospectus states there are Authorized dealers who essentually act as market makers.

Gold Bugs Beware

mr. g,

Good point. I was a strong believer that gold would outperform silver & oil several months ago... Now I just think that the relationship has gone too far. In the long term, the increase in price of factors of production (energy) and consumption (agriculture) will outpace the increases in a cash equivalent. There are alternative safe havens to gold but no alternative to filling up my tank.

Also, those who dollar cost average are subject to economic conditions. Unemployment rising means less new money going into investments and more investments being liquidated to cover expenses - especially in a negative savings economy.

Gold Bugs Beware

Buyers don't have to equal sellers with ETF's.If there are net sellers, then the dealers make a market and redeem the shares with the parent.

www.kitco.com/reports/...

Gold Bugs Beware

Smarty Pants,

The title of that section is entitled IMF and Central Banks. The IMF doesn't print money and may have to shore up their reserves by selling gold. I heard this from an excellent analyst who used to work for the IMF. It's unlikely, but if they get stretched far enough they may have to.

According to Nouriel Roubini, the Fed is likely to try anything else before turning the printing presses on. Anything includes selling some gold in my opinion.

www.plusev.ca/nouriel-.../

Gold Bugs Beware

Smarty Pants,

I'm not referring to a squeeze on the shares. Secondary trading doesn't result in any change in their gold reserves (ie if me and you exchange shares). However, if in the day there are more sellers than buyers, then the dealers will return the shares to parent and physical gold will be sold. Just how when dealers go to them with additional demand they buy additional physical gold for the fund.

I found the article: www.kitco.com/ind/nadl...

Gold Bugs Beware

mr.g,

I do take goldbugs into account (I'm not a fan of gold bugs). The truth is that being a gold bug is such a weak investment strategy that although they are fairly large in numbers (and very loud), they don't collectively have enough capital to really affect the market. What happens with jewelery demand and industrial use is far more important. At present the amount of fund liquidation far exceeds the dollar cost averaging going on. Take a look at the gold COT's.

Marp,

That kind of simplistic analysis is exactly why the gold space gets crowded and overvalued. All goldbugs do is preach value (with regards to inflation), yet don't care what price they're buying gold at. Take a look at this chart and tell me that there's no basis risk in that strategy www.plusev.ca/gold-usd.../. Gold has strengthened far more than the dollar has weakened.

Moses,

I agree with that strategy.. I think that gold stocks will beat gold price out of the gate when the time comes. Energy costs come down 2/3rds and if gold only comes down 1/2 then theres lots of extra cushion on their margins.