Seeking Alpha

Alex Canahuate

View as an RSS Feed
Latest comments  |  Highest rated
  • Japan's Economic Woes Are Good For Gold [View article]
    I certainly don't disagree with your statements pertaining to China. However, the crux of the piece was to highlight that Japan's economic situation will precipitate protracted, weak-yen policies. I believe this is bullish for gold because Japan's policy bias -- when it comes to yen valuation - will be detrimental to the currency's status as a safe haven. 2012 saw gold trade in tandem with risk assets while currencies like the dollar, franc, and yen continued to benefit from safe haven demand during bouts of risk aversion. While I may not have articulated this as effectively as I had hoped, the implications of Japan's current policy skew will compromise the yen's allure as a safe haven. As the economic tribulations facing these perceived safe haven currencies continue to pile up, gold should once again become a viable alternative. Not necessarily as a short-term parking lot for sidelined cash, but as a medium-to-long term buy and hold as investors wait out the pervasive uncertainty.

    The problem with gold as a safe haven is that the advent of ETPs and other paper gold products have introduced a high degree of institutional cash and the associated volatility into the gold market. This price gyration will naturally cause investors to question the safety of allocating funds to gold amidst a flight to quality - especially with a brief time horizon. From a short-term standpoint, I personally wouldn't recommend gold supplant a cash position, but if one expects to be out of the market for an extended period of time they may want to consider allocating a portion of those funds to gold.
    Jan 23 09:36 AM | 4 Likes Like |Link to Comment
  • Recent Chinese And Japanese Economic Data And The Implications For Precious Metals [View article]
    Thanks very much for your comments and kind words. While I am inclined to agree with your sentiments regarding silver and oil, I think both could come under substantial selling pressure should we experience an across-the-board equity sell off. Silver is especially susceptible to this type of downward bias during widespread equity divestment as a result of institutional positions in silver-backed ETPs like SLV. While the institutional presence in these paper silver products is not as substantive as in the gold market, the relatively smaller silver market makes it particularly vulnerable to the ebb and flow of institutional cash.

    In an environment of spiraling equity losses, many of the leveraged investors will liquidate metals positions (to include silver) to raise the capital to satisfy the inevitable margin calls that result from hemorrhaging stock/risk asset values. It's better to book a gain, or modest loss on the paper silver positions rather than realize a more substantial loss as a result of positions being closed on account of insufficient collateral.

    Regardless of the catalyst, if you anticipate an upcoming correction in global stocks, I would position myself with the assumption that silver will test its lower support levels amidst the ubiquitous selling that occurs. The $26.50 level has held firmly on more than a few occasions, but ultimately silver's ability to stay north of this level depends entirely on where the price is when, or if, such a equity sell off should occur.

    Currently, silver is trading around $32.50, meaning a move to the $26.50 level represents an 18% drop. While this may seem like a sufficient buffer, in an environment characterized by mindless liquidations and paralyzed buyers, the silver price could certainly breach this downside support point and revisit the high teens. Precipitous falls in the silver price, in excess of 20-25%, would not be an anomaly - 2011 had at least two drops of this magnitude.

    So while I agree completely with your thesis regarding the price consolidation and tight trading range for oil and more specifically silver, I would just point out the risks associated with a broad-based shift in sentiment towards a more pronounced risk aversion that will be characterized by cash (i.e. USD) hoarding and slumping commodity/risk asset prices. Given the current state of affairs in the macro environment (i.e. European debt concerns, U.S. fiscal cliff, stalling BRIC growth, etc), the sentiment skew - in my opinion - is towards risk off mode, which could pressure both oil and silver lower in the short-to-medium term.
    Nov 16 09:02 AM | 3 Likes Like |Link to Comment
  • 2012 Election: President Obama And Precious Metals [View article]
    Whether its the Fed, or some other cabal of major financial institutions, a repression of metals prices is a transient concern. Without the implementation of legislation restricting gold ownership or the adoption of other such draconian measures, an artificial depression of prices will ultimately fall victim to the market's natural progression.

    Inflation, sovereign solvency concerns, outright distrust of "paper" assets, negative real interest rates...take your pick. Any one of these considerations, or combination of them, could push metals to a point of critical mass that no amount of institutional chicanery can reverse. Unless of course the world's industrialized economies can get their fiscal houses in order before the aforementioned considerations are more widely accepted as real problems by the general public - which is highly unlikely.

    In my opinion, the most significant short-term impediment to higher precious metal prices is their own success. Besides the oft-mentioned "you missed the boat" mentality that is keeping those less familiar with the fundamentals out of the market, 2011's meteoric rise in prices and subsequent correction shook many investors' faith in the "safe haven" status of this asset class. If you superimpose the gold price over the performance of any of the major U.S. stock indices, gold's 2012 correlation with risk assets is plain to see.

    For so long as gold prices follow the directional cues of the broader risk asset complex, the metal's performance as a safe haven asset (which will ultimately drive prices higher per the arguments made above) will remain sidelined. No one can say for sure what the catalyst for a decoupling will be, but I am confident it will take place in due time.

    Until then, whether it's people's hesitance to accept the fundamentals of precious metals or outright manipulation, any artificial or unwarranted price repression provides those who do understand the metals space an opportunity to take positions at attractive and probably fleeting prices.
    Nov 14 09:58 AM | 3 Likes Like |Link to Comment
  • Japan's Economic Woes Are Good For Gold [View article]
    You raise an interesting point, but the Japanese debt held domestically still constitutes an obligation of the government to pay the owner of the associated bond. So whether the bond is held domestically or not, the Japanese government will have to pay interest on it and return the principal upon maturity. That said, regardless of what debt metrics you use, I believe that Abe's weak-yen policies will continue out of necessity and this will erode the yen's status as a safe haven over time.
    Jan 23 09:47 AM | 2 Likes Like |Link to Comment
  • Recent Chinese And Japanese Economic Data And The Implications For Precious Metals [View article]
    Yeah no problem at all. I don't think your impression is irrational in the least. China especially is notorious for doctoring its economic figures. A healthy skepticism is necessary this day in age.

    That said, as gold becomes increasingly publicized and ETFs and similar vehicles provide global investors with unprecedented access to the gold market, volatility and news-driven price action will only increase. Whatever the reasons, short-term downside movement in price does not detract from the set of entrenched fundamentals you listed.
    Nov 20 03:42 PM | 2 Likes Like |Link to Comment
  • 2012 Election: President Obama And Precious Metals [View article]
    Thanks for the comment and stats. I am inclined to agree with you in terms of the typical longevity of commodity bull markets. That said, we are in the proverbial uncharted waters in terms of monetary policy.

    If we rule out sovereign solvency concerns - which are disconcertingly real - I would maintain that this precious metals bull market will last for as long as interest rates in the industrialized world are at rock bottom levels. After all, the bull market in precious metals during the late 70s peaked in 1980 when then-Fed chairman Paul Volcker hiked interest rates above 20%.

    So long as the opportunity cost of holdings precious metals is depressed by low-rate policies, metals have room to run. That being said, interest rates could begin to rise outside the auspices of the Fed should bid action at Treasury auctions dry up due to slumping demand...in that environment, solvency concerns could drive interest rates and precious metal prices higher at the same time. Or, to keep a lid on interest rates, the Fed will monetize even more of the Treasury's debt issuance which will similarly benefit metals. Either way, time will tell...
    Nov 13 01:56 PM | 2 Likes Like |Link to Comment
  • Japan's Economic Woes Are Good For Gold [View article]
    The BOJ's policy statement indicated that its new stimulus program, slated to commence in January 2014, will include 10 trillion yen worth of monthly purchases of T-Bills. However, the problem with the BOJ printing yen to purchase foreign currencies is that countries don't want to be seen overtly depressing the value of their currency and get labeled a "currency manipulator." The phrase "currency wars" was used back in 2010 when the Fed initiated QE2 (Jim Rickards wrote a book on this very topic).

    Since it is generally accepted that a weaker currency is a boon for exporters, most industrialized nations want weak currencies as a means of exporting their way back to prosperity. However, if everyone adopts these weak-currency policies you get an actual currency war, with tit-for-tat policy decisions as one nation adopts new measures in response to another nation's. Already, certain individuals (like Jens Weidmann of the Bundesbank) are concerned Japan may be starting the next round of currency wars, and so with this in mind the Japanese have to be careful that their weak-yen policies don't raise the ire of the rest of the world.
    Jan 23 01:32 PM | 1 Like Like |Link to Comment
  • Impact Of A Proposed Tax Hike On India's Gold Imports [View article]
    Thanks for your comment. I agree completely regarding your assessment about the varying shades of negative impact associated with a trade/current account deficit. The IMF piece I link to in the article above goes on at length discussing the various ways one can measure/interpret current accounts.

    The points you make regarding imported gold are certainly accurate. More importantly, with a huge swathe of India's population without access to banks or traditional financial services, what other option do they have? This is a cultural reality that cannot be changed overnight via policy/tax manipulation.

    However, I can also appreciate the Indian government's interest in trying to utilize this ultimately unproductive hoard of gold under mattresses and in closets across India. I cannot deny, as you said, that gold is an important store of wealth for Indian families - and to that effect, provides a liquid asset in times of need. That said, the gold merely sitting, collecting dust, could be more productively utilized within the Indian financial system (assuming of course the infrastructure was in place to facilitate such - which at the moment it is not).

    So while I don't mean to submit that gold imports are bad, I will maintain that this capital allocated towards physically hoarded gold could be more productively utilized within the Indian economy if only the financial framework and cultural biases were appropriately positioned.

    However, as I indicate in the piece, the Indian government is a long way from incorporating the necessary changes to wean its population off its dependence on gold. As such, I personally don't anticipate any paradigm shifts in Indian gold demand in the short-to-medium term. If anything, the Indian government will adopt import taxes and other myopic, short-term approaches to what will prove to be a protracted campaign against physical gold.

    I don't disagree that India could penalize other imports, but no other import that I am aware of (besides oil) comes close to representing the percentage of the trade deficit that gold does. And if the rupee slides lower and gold continues to move higher, gold imports as a percentage of India's trade deficit will continue to balloon. Given the very real possibility of this development, the Indian government seems to be labeling gold as enemy number one and I doubt it can be persuaded to change course in favor of another policy crusade in the short-to-medium term (despite the cultural and structural obstacles that in my opinion will make the government's success near-impossible in that time frame).
    Jan 7 09:47 AM | 1 Like Like |Link to Comment
  • Recent Chinese And Japanese Economic Data And The Implications For Precious Metals [View article]
    Filipo,

    you make an interesting allusion to the goldsmiths of the 17th century. Mark Skousan's book "The Economics of a Gold Standard" does a good job of covering the development of the goldsmith services and its evolution towards fractional reserve banking and the fiat currency system. The only difference is that many ETFs provide no delivery of any kind, so any concerns of a "run" are nonexistent. Shareholders liquidating shares would simply mean a rebalancing of the ETFs outstanding metals contracts (if they are indeed operating in this fashion) as opposed to a more difficult re-orientation of physical supply. So I can certainly appreciate your point and it's interesting to think about. I have also read that certain ETF structures, like GLD, are designed to be difficult to audit. This could facilitate whatever balance sheet chicanery they may or may not be perpetrating.
    Dec 10 10:24 AM | 1 Like Like |Link to Comment
  • Consumer Spending, Fed Policy And The Implications For Gold [View article]
    Thanks for your comment. I hesitate to make specific price prognostications due to the many ambiguous variables (especially any governmental response to gold prices in excess of $2,000/oz.). However, the outlook for gold remains bright and the Fed will ensure it stays that way for the foreseeable future...

    That said, I would say that if we saw $5,000/oz gold, such a move would very likely drag silver along for the ride. Especially considering that the bulk of Americans have yet to take any position in precious metals - so if gold reaches $5,000 many of the middle-to-lower income investors that would eventually enter the market would probably prefer to purchase silver as the perception will be they're getting more "bang for their buck."

    An additional consideration is that given the comparatively smaller volumes in the silver market, a large influx of capital could effect a more dramatic price spike than a similar cash inflow into the gold market. Given that much of the upper echelon of investors have taken their positions (in gold, silver, and the like), the subsequent deluge of investment following a gold price surge of this magnitude would probably represent medium-to-small investors that can be reasonably expected to prefer silver. So I would think its safe to say that silver would benefit from such a parabolic rise in the gold price.
    Dec 7 09:24 AM | 1 Like Like |Link to Comment
  • Recent Chinese And Japanese Economic Data And The Implications For Precious Metals [View article]
    I appreciate your kind words. It is utterly ridiculous for markets and euro sentiments to be cheered by the fact that Greece plans to buyback some of its bonds for 32-34% of their face value...any private creditor participants are probably only doing so for fear or receiving none of their money back down the road. In my opinion, a successful buyback program with full participation is actually an incredibly bearish development as it indicates that these participants would prefer to receive a little more than 30% of their money back rather than hold the bonds until maturity. Such turnout at Greece's buyback gives a pretty clear view into the creditor sentiments regarding Greece's ability to stay above water. If there was broader confidence that Greece can navigate the waters of borderline insolvency, I think that would result in low participation as creditors figured they would get the bulk of their funds back upon maturity of the bonds in question. However, despite euphoria in the aftermath of the Greek announcement, it does appear the euro has met some solid resistance at 1.315 so it will be interesting to see if the "positive" sentiments regarding the success of Greece's upcoming bond buyback will give the euro strength to push past this level.

    I hadn't seen the news about European banks trying to delay Basel III implementation, thanks for the link. I have seen the seeking alpha article on Basel III allowing gold as tier one capital, and while I will admit I have not searched as thoroughly as possible, at first glance I could not find any content from the BIS, Basel Committee, or similar institution corroborating this development. The only media outlets to pickup that story have been newsletters and gold bloggers...but I would love to see such a statement "straight from the horses mouth."

    Assuming gold will indeed become categorized as tier one capital, I don't necessarily believe banks will be scrambling for the metal. I do think that banks will more aggressively pursue metal deposit accounts because they can hypothecate and rehypothecate client metal. That said, I don't know if banks would want their internal reserves held in gold given the inherent volatility in the gold market. Substantial spikes and precipitous falls that gold prices are inclined to have would dramatically complicate maintaining a static balance of reserves. While gold may not benefit from a deluge of new bank demand, gold will still benefit from this development given the additional credence it provides to the "gold is money" mantra.

    I think you're right regarding the frustration of taxpayers being relatively incapable of stopping this progression of events given politicians' ability to scare them into thinking "this is what's best." That said, this creates an incredibly conducive environment for despots and demagogues. Greece's Golden Dawn is just one of a number of emerging nationalist parties across Europe that are realizing better and better turnouts at parliamentary votes...Golden Dawn's success, and the success of sympathetic parties, almost forced a Greek default when Greece's parliament could not form a coalition government. As things get worse...what happens when this style of party is capable of forming its own majority?

    I agree that historically gold and dollar moved inversely as one was a hedge against the other. That said, I think we are slowly moving away from that dynamic and don't know when we can expect a more traditional inverse trading pattern between the two. In the advent of Greek concerns in 2010, we saw strong gold and strong dollar as a result of safe haven demand. However, the rally and subsequent fall in gold prices we saw in 2011 seems to have dented many investors' perceptions regarding gold as a safe haven. Increasingly, gold moves to the ebb and flow of the broader risk asset complex. However, as ridiculous as it is given the fiscal concerns in the U.S., I think we will see strong dollar/strong gold again as European concerns take center stage (assuming US politicians can just kick the fiscal can down the road - and as we have seen...that's about the only thing they are good for).
    Dec 5 09:11 AM | 1 Like Like |Link to Comment
  • Gold Confiscation - An Unlikely Scenario [View article]
    I appreciate the comment. With regards to IRAs and 401K's, they are conceivably regarded by the government as a rainy day fund. As I have pointed out in different comment threads, an understated yet very real concern is the refinancing risk that faces the US government going forward. With an average maturity on its total outstanding marketable debt of approximately 65 months (a little over 5 years), the US government has trillions worth of debt coming due in the short-to-medium term and as such is incredibly susceptible to rising interest rates - hence the Fed holding interest rates at record lows for the foreseeable future (using a convenient scapegoat of unemployment as the rationale...). Should investors demand rising yields on US Treasury issuance, the cost of servicing our debt would spiral to represent an unsustainable percentage of annual tax receipts. Assuming we saw a collapse in investor demand for Treasuries (for any one of a multitude of reasons), to sustain the government's deficit spending, newly issued debt would either need to be monetized via more quantitative easing, or the government will have to utilize an until-now untapped cash reserve (i.e. retirement funds). I am certainly no fear monger and don't purport that such distasteful measures are on the immediate docket, but I do think you made an astute point regarding a tempting cash pile that becomes ever-more tantalizing to an increasingly indebted government.
    Nov 25 08:52 PM | 1 Like Like |Link to Comment
  • Gold Confiscation - An Unlikely Scenario [View article]
    You raise a very valid point. Within the context of a global reserve currency - or some other manifestation of an SDR - prohibitions on speculative positions in gold is very reasonable to expect (assuming gold plays a role in the SDR's valuation). That said, political machinations regarding a confiscation of personally held bullion would not necessarily fall under the auspices of broader prohibitive measures regarding speculative gold investments.

    Another consideration regarding the introduction of some global reserve currency is the time frame in which such structural changes could be effected. Europe's monetary union took a decade of deliberation before its inception. How long can we expect similar proceedings to take on a global scale?

    Even if we assume a global reserve currency is "in the works," the infrastructural and procedural requirements necessary to allow a global adoption of a new currency are staggering. Not to mention the fact that the dollar is used in the preponderance of global transactions, and commandeers the lion's share of business and national reserves, the extrication of the global economy from dollar-dependence is not realistic in the short-term. That being said, the long-term trajectory of the dollar is disconcertingly established to the downside, which could inevitably necessitate the very measures you cite. Case in point, the bilateral agreements many countries, namely China, have negotiated to allow for cross border transactions to be settled in domestic currencies without need to use the dollar.

    I don't disagree with your statements, but I do believe the very real dynamics you describe can be interpreted in a slightly different context - at least in the short-to-medium term.

    As you indicate, the fact that China is the world's largest gold producer and simultaneously the second largest gold importer (and is positioned to outstrip India as early as this year or next) speaks to a well-established policy regarding its reserves management. This reality is a stark example of a broader trend in emerging market central banks - which represent the majority of substantive central bank gold purchases in recent years.

    If we can accept that the observable change in net central bank gold demand - from multiple decades of net liquidations to the current dynamic of net purchases - is driven by the central banks in emerging markets, it is also safe to assume that said demand could simply be a product of reserve diversification and a prudent reallocation of dollar-heavy portfolios.

    You're absolutely right that central bank gold demand augurs certain trends in these banks' policy skew. However, considering the fact that most purchases are done by central banks with significantly smaller gold positions (relative to gold's percentage of overall reserve allocation) than their counterparts in the developed world, it is not unreasonable to think these acquisitions were completed to accomplish much-needed diversification rather than surreptitious maneuvering for an imminent introduction of a new global currency (which ultimately could be, or even likely will be, the case further down the road).

    The true motivation of the piece was to dispel the pervasive concerns regarding a "re-imagined" FDR confiscation. Confiscation via regulation - especially in the speculative realm - is perfectly feasible. In that vein, unfavorable tax treatment and a larger degree of oversight in general could similarly be utilized to decrease gold's allure as a core/insurance investment. However, these plausible scenarios do not necessarily jive with the fear of an imminent grab of all physical bullion in the U.S.
    Nov 25 08:36 PM | 1 Like Like |Link to Comment
  • Recent Chinese And Japanese Economic Data And The Implications For Precious Metals [View article]
    No problem, and you raise a great point with regards to supply. From a gold standpoint, current valuations are almost entirely dependent on the continuity of investment demand. Rising gold surpluses and slowing demand from the traditional sources (industry, jewelry, etc.) mean gold prices are increasingly reliant on investment demand. For reasons intermittently discussed throughout this comment thread, investment demand has some strong underlying investment fundamentals - however, a collapse in gold investment demand would depress prices substantially (until prices were low enough to increase demand from more conventional sources).

    That being said, as you point out, much of the growth in gold production is in emerging economies. Oftentimes mining sectors in these regions are incredibly susceptible to short-term squeezes in credit availability. As lending to companies operating in these regions is done so judiciously, any shocks to the global financial system could cause an abrupt evaporation of the short maturity debt instruments that many of these companies rely on for financing. Should this occur, the capital intensive mining operations in these regions could realize production stoppages until access to financing returns.

    Silver on the other hand is largely produced as a byproduct of base metal mines. So stalling global growth and falling base metal prices could precipitate a rash of base metal mine closings as mining companies wait for prices to stabilize. The result is dwindling silver production despite static, or rising silver investment demand.

    Central banks certainly are the shadow figures in the gold market. While many gold bugs argue that the major shift in central bank gold reserve management (i.e. the end of multiple decades of net liquidations and the beginning of a new era of net purchases by central banks - mainly led by emerging markets) will remain a major factor underlying gold prices going forward. While there is some merit to this argument, especially since many central bank reserves are unduly exposed to the dollar so it makes sense that many will begin diversifying, you raise a very good point regarding possible liquidations by indebted European central banks. Should these entities sell large quantities of gold into a market lacking sufficient demand to absorb the influx of supply, prices will move lower.

    With this in mind, central bank operations could feasibly act to support or depress gold prices in short order depending on how these European central banks proceed. However, institutional gold sales do not always have to pressure prices lower. If one of the European central banks drops gold tonnage onto the market, and it is immediately snapped up by another central bank or similar institution (i.e. when the IMF sold 200+ tons in 2010, the Indian central bank purchased the majority of it immediately and prices shot significantly higher), we could actually see a rally in prices because an immediate purchase following the liquidation indicates the purchaser believes gold is still a good value at the prevailing levels.

    Nov 19 03:06 PM | 1 Like Like |Link to Comment
  • Recent Chinese And Japanese Economic Data And The Implications For Precious Metals [View article]
    Thanks for your comment. I couldn't agree more. Investor indecision is going to be the enemy of most asset classes.

    Gold's recent correlation with risk assets is a transient dynamic in my opinion. Many investors tried to jump on the gravy train in 2011 when gold rallied from the $1500s to over $1900. However, when the inevitable correction came, many people who purchased gold for the wrong reasons became distrustful of the "safe haven" qualities provided by gold. But the fact remains that assets immune from the counter-party risk that characterizes most conventional investments will be increasingly attractive going forward.

    Who can say when investors will be re-enamored of gold and the broader metals complex, but in my opinion it is just a matter of time. Especially with the Fed and other central banks promising record low interest rates for the foreseeable future, the opportunity cost of holding non-interest bearing assets like gold will remain depressed. This reality, combined with the uncertainty and political/economic tension cited by filipo above will ultimately form the core argument advocating at least a portion of everyone's portfolio be invested in precious metals.
    Nov 16 03:02 PM | 1 Like Like |Link to Comment
COMMENTS STATS
35 Comments
25 Likes