torsdag den 28. februar 2013
mandag den 25. februar 2013
JPY - 1998 deja vue - Tiger
The Yen "Carry Trade" Unraveling Saga: A Deja-Vu Nightmare and a Cautionary Tale…
Let me tell you a cautionary tale for 2007. The Yen has been weak and has kept on depreciating sharply for the last few months relative to the US dollar. Still mixed and weak economic data are coming out of Japan and short term interest rates there are still 0.25% while they were closer to 5.5% in the US; so the yen is weak and weakening. Massive amounts of carry trades using the yen – and the swiss franc – as the funding currency have been going on for months now leading to sharp increases in leveraged positions by investors who have been shorting the yen to play the carry trade bet.
Then, the yen starts to appreciate again – by a sharp 9% in one month – when a small emerging market economy defaults (Ecuador soon?) and a large hedge fund goes belly up (another Amaranth?). Then, suddenly one piece of good news comes out of Japan (a growth pickup?) and in a matter of 72 hours the yen appreciates by 12%. Then a major global macro hedge fund loses $2 billion dollars in 48 hours on the yen unraveling and decides to close shop; another one loses billions too and decides to restructure its operations. Carry trades unravel rapidly, margin calls are triggered, levered positions go belly up and the entire financial system goes into a seizure. Then the Fed is forced to cut the Fed Funds rate in between meetings by 75bps (in spite of still good US GDP growth) in order to avoid a financial meltdown, a collapse of US financial markets and a global recession.
Readers of this blog may think that the first paragraph above describes very precisely the current situation of the yen and of the global financial system in the last year. Indeed, news reports have been endlessly talking about the yen carry trades driven by low Japanese interest rates. Readers of this blog may also think that the second paragraph above is a typical Roubini "doom & gloom" fear mongering and describing a scenario that is totally unlikely to occur in 2007.
But what I was describing in the first two paragraphs above is not 2006 and a fear mongering scenario for 2007 but rather what actually and exactly happened in August-October 1998. During the Asian crisis the yen weakened all the way to 147 to the US dollar by late August 1998; and the BoJ reduced its policy rate to 0.25% (the same level as today). Then in August 1998 Russia defaulted (this time around it may be Ecuador this month) and this default triggered a seizure of global financial markets as major players with levered position started to get margin calls, had to dump their assets to cover their margin calls and started to cover their yen carry trade shorts. LTCM then was hit by this liquidity seizure and avoided a near default in late September 1998 via a private sector bailout coordinated by the NY Fed.
In the month between the Russia default and the near LTCM default the yen went up from 147 to 134, a 9% appreciation as some of the carry trade were unwound when the hedge funds had to reduce their leveraged positions after the Russia losses. Then, on October 5th a minor piece of good news came out of Japan: the Japanese government came out with a plan to recapitalize its problem banks. This mildly yen-positive news led to an appreciation of the yen that was massive: in a matter of 72 hours the yen went from 134 to the dollar on October 5th to 118 to the dollar on October 8th, a whopping 12% increase. And on the peak day of the yen correction – October 6th – the dollar, the US equity market and the US bond market all fell rapidly on the same day.
The dollar/yen rout was triggered by the rush to the exits of all those who had shorted the yen and played the carry trade. They all massively tried to cover their shorts exacerbating the yen appreciation. Julian Robertson's Tiger Fund lost $2 billion on the unraveling of that carry trade; and allegedly even other large macro hedge funds has massive losses. LTCM lost more money on that yen unraveling that then led to another liquidity seizure in US capital markets. Greenspan then declared that the world was facing a global credit crunch and worries about a world recession mounted; soon after the Fed reduced the Fed Funds rate by 75bps.
So this is what actually happened in 1998 and how the yen carry trades dramatically unraveled in a matter of 72 hours triggered by a real minor piece of news out of Japan.
Then, the relevant question from this 1998 cautionary tale becomes: could the yen carry trade unravel as fast today? The similarities to 1998 are amazing: massive carry trades on yen and other low yielding currencies like the Swiss franc; massive and increasing amounts of leverage as credit derivatives are creating a credit house of cards; complacency and mispricing of risk; rising Values at Risk and loosening of risk management standards; Ecuador on the verge of defaulting (ok Ecuador is not as systemically important as Russia – and Russia's default was a surprise – but Russia in 1998 had a GDP of only $400b, the same as Netherlands).
And now everyone is starting to worry about a shock that would lead to the unraveling of the yen carry trades. As in 1998 every individual investors thought he or she was smart enough to be able to cover its yen shorts before everyone else did and before the yen moved too fast. But of course in equilibrium not everyone can get out of the same position at the same time without sharply moving market prices. When everyone rushes to the doors at the same time in a stampede lots of blood is spilled and the pain is massive; Tiger lost $2 billion in 48 hours; many more losses did occur on those yen carry trade unraveling.
And the lesson of 1998 is that it often takes a very small piece of news to unravel such carry trades. Today the conventional wisdom is that the yen carry trades will continue as long as the BoJ keeps rates at 0.25% or raises them slowly over the next few months; this conventional wisdom also argues that as long as macro news remain weak in Japan expectations of BoJ policy will not change much and the yen will remain weak. But the lesson of 1998 is that unchanged macro outlook and unchanged BoJ policies may still trigger a rapid unraveling of yen carry trade if some minor yen supportive news occurs.
When everyone is short on yen and doing the carry trade they are looking for some extraneous piece of news that becomes a focal point for covering such shorts. Then, any relevant news can become such focal point. And once can think of plenty of news of surprises that would lead investors en masse to start covering their yen shorts today. So, could what happened in 1998 happen again today?
For the detailed RGE Monitor reporting of Carry Trades and their risks see:
Emerging Market Funding Currencies of the Carry Trade
How Long Will Yen Weakness Last?
See also the bi-weekly newsletter that registered users of RGE will receive Friday morning. Registration to this newsletter and a free two week trial is available at this link.
Only fools would argue that this is fear mongering and that this could not happen. The same fools that lost their shirts and billions more in 1998 and that with their reckless behavior triggered a global financial crisis and worries about a global recession in 1998. So only reckless fools such as Michael Lewis can argue that worrying about system financial risk is for "Wimps, Ninnies and Pointless Skeptics"and that "real macho men" take levered risks. The same arrogant Lewis-style "masters of the universe" were cockily playing with massive amounts of leverage in 1998 and are doing it again today.
The same macho men were then and they are now again ridiculing the concerns of the wise folks (Summers, Trichet, Stark, Rattner, Knight, Rhodes, Dallara, etc.) who soberly worry today about systemic risk, leverage, carry trades, the surge in credit derivatives, and the increasing opacity of financial markets. It was then up to those sober policy makers to pick up the pieces of the royal mess that such "masters of the universe" (they were more like weapons of mass destruction) wrecked on the financial markets and on the global economy. So I am happy to be a member of the Club of "Pointless Skeptics".
For details of this October 1998 saga of the unraveling of the Yen carry trades see the following article by David Gaffen from the Street.com. The terms and the parallels to the current situation are scary:
Sorting Out What Happened to the Dollar
By David A. Gaffen
Staff Reporter
10/7/98 7:38 PM ET
It isn't often that dollar/yen, the Treasury market and the U.S. equity market all fall in one day. The dollar posted its greatest one-day decline against the yen since 1973, down from 130.29 yesterday to trade lately at 121.65.
Especially when the only real news events to hang this on were mildly positive moves from Japanese government. The overnight yen rally evolved into a trashing of the dollar as sell programs, trade unwinding and Treasury unloading kicked in during the day.
"Currency-market movements are being dominated by flow adjustment and position adjustment," said Ravi Bulchandani at Morgan Stanley Dean Witter in London. "Risk aversion and a desire to stay very close to home dominate investor sentiment."
Just as equities had their day of capitulation, one of today's results was a capitulation day for Treasury bonds. Bonds were off their highs on the long end, and hedge funds, Japanese banks and Japanese institutions were said to be sellers of on-the-run and off-the-run Treasury bonds, notably 10-year bonds. The repatriated funds were then used as part of a short squeeze in the Japanese yen.
The volatile activity was initially triggered by the overnight announcement from Japanese officials concerning reforming the banking system. The Liberal Democratic Party has garnered support from a major opposition party for its proposal to recapitalize crumbling, but solvent, banks. If the plan works, it may help alleviate the country's credit crunch.
While the initial overnight activity in the yen indicates confidence in the Japanese proposals, the balance of the activity was marked by forced selling programs and "yen-carry" trades, sources said.
The decline in the dollar triggered sell programs at what strategists called a key 3.5-year uptrend level around 129.80, a level that chartists use to determine where the historical lows have been.
"The wave of selling was initially based on a yen-positive development," said Robert Lynch, currency strategist at Paribas. "But [the unwinding] was a very significant technical development, turning a modest rally into a rout."
Hedge funds, not unsurprisingly, were the source of a steady unwinding of yen-carry trades that were sold off today. A yen-carry trade involves borrowing yen (at its current low interest rate) to buy U.S. fixed-income instruments, assuming that the dollar will climb against the yen, therefore making it cheaper, and that various fixed-income bonds would appreciate against Treasuries. The rationale here was strong — the cheap rates and favorable dollar activity would translate into big gains for investors. However, the greater the position taken, the greater the losses have been for prominent hedge funds.
These hedge funds, most notably Julian Robertson's Tiger Management (on which TheStreet.com reported in a story today) and Long-Term Capital Management, were big sellers of off-the-run Treasury bonds, which have done poorly against on-the-run Treasury bonds in the current liquidity crisis. Tiger Management did not comment.
The dollar was notably down against the Swiss franc as well, as this currency is the source of similar carry trades. Dollar/Swiss franc was down 0.315 today to 1.308. "People who don't want positions in carry trades unwind them here," said Jamie Coleman, senior foreign exchange analyst at Thomson Global Markets. "With Switzerland, there's a perceived safe haven there."
The 122.5 level was cited as another key support level, where hedge funds were forced to sell long positions in the dollar. Dollar/yen dipped as low as 118, where leveraged buying resumed.
"The last leg down in afternoon was that a number of major hedge funds were stopped out of long positions," said Coleman.
So what of Treasury bonds? Treasury bonds have found a way to move higher no matter what the situation, but not today. Repatriation of assets, selling of Treasury bonds by Japanese institutions (Japan's post office, whose postal savings system makes it the world's largest bank, was rumored to be a big seller of two-year bonds) and buying yen assets killed the bond market, according to sources.
"It really shows that deleveraging cuts both ways," said one market strategist. "How much more could have been left with bond yields below 5%?"
Charts
Published on Zero Hedge (http://www.zerohedge.com)
Is This The Chart That Everyone Is Concerned About?
By Tyler Durden
Created 02/25/2013 - 21:04
[1]We have seen this all before...
...it's never different this time. Of course, you should buy the dip; you invest for the long-term, right? VIX, schmix; Credit, schmedit; Gas prices, schmices; Macro, schmacro...
The last few times that VIX has seen such a flare were extremely significant events...
Credit markets have been flashing red for a month...
and we've seen that before too...
And we've seen what the catalyst for an equity rerating is before...
Macro seems to be sending clear signals too... that we've seen before...
But apart from that...BTFD (or in Abe's case STFR)
Charts: Bloomberg, Capital Context, and Goldman Sachs
Italian Election
High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/8ded4a82-7f7c-11e2-8d96-00144feabdc0.html#ixzz2Ly8fe8rY
February 25, 2013 8:02 pm
Angry Italians deliver austerity warning
Amid the see-sawing results coming out of Rome on Monday, one thing was quickly very clear: against a backdrop of declining wages and pensions and a sharp rise in unemployment, a majority of Italians issued a clear basta to austerity.
In the final weeks of his campaign Mario Monti, the country's technocrat prime minister, tried to soften his austerity message, promising "reasonable" tax cuts and admitting that his policies, although necessary to restore market confidence in Italy, had exacerbated the recession.
ON THIS STORY
- Video Last chance for Italy?
- The World The subversive appeal of Beppe Grillo
- The World Five ways to prepare for the result
- In depth Italy elections 2013
- Risk of instability hangs over Italy poll
ON THIS TOPIC
- Italy braced for political deadlock
- Wolfgang Munchau The case for a grand coalition in Italy
- Berlusconi secures key regional triumph
- Grillo's novices set to take centre stage
IN EUROPE
But that was too little, too late in the face of the populist anti-austerity promises delivered by Silvio Berlusconi and Beppe Grillo.
"The result is the absolute majority of Italians have voted against austerity measures, the euro and Europe," said Enrico Letta, deputy leader of the Democrat party. "This sends a very clear signal to Brussels and Frankfurt."
"We will try our best to avoid chaos in Italy," he added, expressing the hope that the Democrats would emerge after a long night of waiting with a majority in he lower house.
What Italians may also have voted for is a quick return to the polls, potentially after what is likely to be the difficult task of agreeing to change the country's unpopular electoral law.
"If these numbers are confirmed then in the next [few] days there will be an earthquake – not just in Italy but in all Europe," Mr Letta said, warning of a "totally unstable government".
While the make-up of the next parliament could depend on the very last votes counted, projections based on partial results released by the interior ministry suggested the centre-left could emerge with a majority in the lower house but without one in the senate.
The result, dubbed the "catastrophic scenario" by Roberto D'Alimonte, professor of politics at Luiss university, confounded opinion polls and the general consensus among investors that the Democrats would have the numbers to govern in the senate in a coalition with the centrist alliance led by Mr Monti.
But the populist tax-cutting promises by Mr Berlusconi, the former centre-right prime minister, combined with a surge in support for Mr Grillo's anti-establishment Five Star Movement, demonstrated that Italians were ready to take the risk of rejecting harsh austerity measures they see as imposed by a hostile Germany and Brussels.
Mr Monti's decision to shed his neutrality as an appointed technocrat and enter the political fray may have had the effect of denying a fourth election victory for the veteran Mr Berlusconi by prising away some centre-right voters. But his likely result of less than 10 per cent will be seen as a resounding rebuff to his pro-Europe policies.
In depth |
| |
| News and commentary on the campaigning and results of Italy's general election |
"This looks like a recipe for total gridlock," commented Nicholas Spiro, a sovereign debt analyst. "On current projections, financial markets are facing the worst of both worlds in Italy: a full-blown political crisis in the eurozone's third largest economy and a severe setback for the liberal economic agenda championed by Mr Monti."
With the country struggling through its longest postwar recession, doubts will be raised over Italy's ability to deliver the tight budget measures agreed in its fiscal compact with the European Commission and reforms seen as needed to generate growth.
A late surge in the yield on Italy's benchmark bonds on Monday was seen as a foretaste of how markets may also test the resolve of the European Central Bank to defend Italy's ability to repay its 2 trillion euros of public debt.
"There is clearly a risk of a hung parliament, which would be unequivocally a negative result," said Riccardo Barbieri, economist with Mizuho International. He said the best that could be hoped for would be a "grand coalition" of the kind that had supported Mr Monti's technocrat government over the past 15 months.
But in Italy, talk among politicians focused on the likelihood of a minority government that would have to return to the polls, perhaps later this year. Mr Berlusconi has spoken of the possibility of forming a grand coalition with the Democrats, although this has been ruled out by Pier Luigi Bersani, leader of the centre-left.
Daniele Capezzone, spokesman for the centre-right People of Liberty, said the partial results pointed to the "miracle" of Mr Berlusconi, who had staged a remarkable comeback.
But newly elected parliamentarians for the Five Star Movement, none of whom has political experience, said the result confirmed that Italians wanted real change. One of the demands of the movement – which could emerge as the party with most votes after the Democrats – is a halving of the size of parliament and a new electoral law based on proportional representation.
"If new elections are called, Grillo risks doing even better; [in any case], it means uncertainty for months," said Nicola Marinelli, portfolio manager for Glendevon King Asset Management.
Copyright The Financial Times Limited 2013. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.
fredag den 22. februar 2013
Stress Indicators - Still risk-on....barely, but cracks are showing...
This week's Stress Indicators – We have added a few new charts:
Gasoline prices have historically been a big factor for consumption in the US – YTD we are way above the "normal" rise in the US (Before summer driving starts…)
US Real Rates – with the focus on FOMC and their in my opinion slightly mis-interpreted January Minutes focus will be on real rates as indication for policy changes. We have seen some "bottoming", but nothing to scare anyone yet. The chart does show how aggressively FOMC has been in terms of lowering "cost of capital" with little to show for it except higher stock market prices.
I would also like to point out that the Abe-nomics experiment is running out of steam if inflation is really the target (Personally I think he is more concerned about the 23rd Election to the House of Concillors)
Finally, the star performing sector since the Prince of Italy, Draghi promised to safe us all, banking is seeing some worse levels in CDS…..
Med venlig hilsen | Best regards
Steen Jakobsen | Chief Economist
Saxo Bank A/S | Philip Heymans Allé 15 | DK-2900 Hellerup
Phone: +45 39 77 40 00 | Direct: +45 39 77 62 23 | Mobile: +45 51 54 50 00
Please visit our website at www.saxobank.com
torsdag den 21. februar 2013
Rumor: Latest un-official poll --- Bersani (32%) - Berlusconi(30), Grillo(18%), Monti(10%)
Out of London…….if true it could be nasty weekend…… Germany vs. Italy ….. 292 now --- 300 recent high….. tech level 305 … Keep an eye tomorrow….
Med venlig hilsen | Best regards
Steen Jakobsen | Chief Economist
Saxo Bank A/S | Philip Heymans Allé 15 | DK-2900 Hellerup
Phone: +45 39 77 40 00 | Direct: +45 39 77 62 23 | Mobile: +45 51 54 50 00
Please visit our website at www.saxobank.com
This email may contain confidential and/or privileged information.
If you are not the intended recipient (or have received this email
by mistake), please notify the sender immediately and destroy this
email. Any unauthorised copying, disclosure or distribution of the
material in this email is strictly prohibited.
Email transmission security and error-free status cannot be guaranteed
as information could be intercepted, corrupted, destroyed, delayed,
incomplete, or contain viruses. The sender therefore does not accept
liability for any errors or omissions in the contents of this message
which may arise as a result of email transmission.
February 18, 2013 4:54 pm
Fears at Fed of rate payouts to banks
US Federal Reserve officials fear a backlash from paying billions of dollars to commercial banks when the time comes to raise interest rates.
The growth of the Fed’s balance sheet means it could pay $50bn-$75bn a year in interest on bank reserves at the same time as it makes losses and has to stop sending money to the Treasury.
Officials at the US central bank fear it could create a public-relations nightmare after the Fed was lambasted for rescuing banks during the financial crisis. It is one factor prompting some inside the Fed to reconsider the eventual “exit strategy” from easy monetary policy.
In an interview with the Financial Times, James Bullard, president of the St Louis Fed, said: “If you think of the profitability of the biggest banks, if you’re going to talk about paying them something of the order of $50bn – well that’s more than the entire profits of the largest banks.”
Mr Bullard said that neither interest paid to banks nor possible losses on exit made any difference to the substance of monetary policy.
“I think it’s more just a question of the optics, and how you’re going to play the optics,” he added, referring to the perception of losses by the central bank. “And since it shouldn’t matter in a monetary policy sense you might as well play the optics in a better way than the one we’ve got planned.”
All banks hold reserves at the Fed. The central bank has boosted its balance sheet to more than $3tn as it buys assets to drive down long-term interest rates through its programme of quantitative easing.
It pays for the assets by creating bank reserves, which now amount to more than $1.6tn. The Fed could add another $1tn if it keeps buying assets for another year.
At the moment it only pays 0.25 per cent interest on those reserves. But according to its exit strategy, published in June 2011, the Fed plans to raise interest rates before it sells assets. Interest of 2 per cent on $2.5tn of reserves would run to $50bn a year.
That interest should not turn into profits for the banks. They will have to pass the revenues on by paying more interest to their depositors. But it could still add to a populist backlash in recent years against the Fed and the big banks.
One possible answer to the Fed’s larger balance sheet is to sell assets earlier in the exit process. Mr Bullard said that the Fed could consider creating accounting reserves now for any losses it expects in the future.
The Fed remits all of its earnings to the Treasury and has paid across $291bn in the last four years. But some of those gains will be reversed when it sells assets bought at today’s low interest rates at a time when rates are higher.
One banker argued that was the real danger. “It’s a little bit worrying for the politicians to get addicted to that level of income. The windfall profit has been a stunning number – that will go away over time.”
Bankers also noted that the exit strategy was uncertain and the Fed could increase interest rates on excess reserves more slowly than benchmark rates. They added that more reserves should be shifted out of the Fed and lent out as the economy improves.
Still, the eventual tightening could lead to substantial amounts being transferred to commercial banks from the Fed, given the amounts of cash they have parked there.Wells Fargo has $97.1bn sitting at the Fed, the largest amount of any bank, ahead ofJPMorgan Chase at $88.6bn and Goldman Sachs at $58.7bn, according to an FT analysis of SNL data.
Foreign banks also have a striking amount of cash at the Fed, potentially aggravating the Fed’s PR problem. Analysts at Stone & McCarthy noted recently that there had been a steep increase in foreign banks placing reserves at the Fed and suggested that “US banks may have distaste for the opportunistic arbitrage”, between lower market rates and the interest on reserves, whereas overseas institutions “might not feel encumbered in the same fashion”.
Canada’s TD Bank, Germany’s Deutsche Bank and Switzerland’s UBS each have more than $12bn at the Fed.
Copyright The Financial Times Limited 2013. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.
This email may contain confidential and/or privileged information.
If you are not the intended recipient (or have received this email
by mistake), please notify the sender immediately and destroy this
email. Any unauthorised copying, disclosure or distribution of the
material in this email is strictly prohibited.
Email transmission security and error-free status cannot be guaranteed
as information could be intercepted, corrupted, destroyed, delayed,
incomplete, or contain viruses. The sender therefore does not accept
liability for any errors or omissions in the contents of this message
which may arise as a result of email transmission.
When choked gold responds to hedging demand (and Soros)
Izabella Kaminska Feb 20 19:58 13 comments
Ay ay ay! Gold is approaching a death cross and all sorts of other commodities are looking nasty too.
So what gives?
We have two observations.
First, this whole thing about Soros selling GLD is making us sigh a bit. Headlines like“Soros dumps gold as prices sink” are not only misleading but missing the point entirely. What’s even more frustrating is that most of the time the Soros stories refer directly to the issue at hand: the sales date back to the fourth quarter of 2012.
These disclosures thus must not be taken at face value. This is, if anything, expert exploitation of the hedge fund disclosure system, based on the expectation that the filings themselves cause people to react too late rather than too soon.
Anyone who has access to a data terminal, however, can tell you what’s really going on. Soros Fund Management has been using GLD as a market mis-signalling vehicle.
Note the following chart. It shows the gold spot price above and GLD assets under management below (we’ve highlighted the critical Soros points):
You needn’t be a rocket scientist to spot the obvious trend.
GLD additions in the third quarter of 2012 very likely influenced a rise in the price of spot gold. Those additions were were very likely Soros’s 1.32m shares. Gold then peaked around the beginning of October, but it wasn’t until November that the Soros “buying” filing was released. This disclosure helped gold recover somewhat. But only a little bit.
Yet notice what was going on in the meantime on the GLD asset front.
We now know that Soros cut that position almost by half in the fourth quarter and that out of the original 1.32m, the fund retains only 600,000 shares. And yet in the time period in question, GLD assets actually went up slightly. They certainly did not move down.
The most logical explanation: while everyone was responding to the “Soros buying” news with err… GLD purchases, the Soros fund itself was selling into the buying momentum, and in so doing getting a better price than it could ever otherwise hope to achieve. The overall effect was one where GLD assets under management stayed neutral.
Simply speaking, the filing itself stimulated a false demand, which the fund happily took advantage of. A classic trading play, beautifully executed, if nothing else.
The fund was essentially happy for the original GLD purchase to have a market impact because it knew that by the time the purchase was disclosed an excellent exit point would be provided.
In short, this was more likely nothing more than expert exploitation of the filing and GLD asset management disclosure.
Which leads us to our second observation.
Where does this leave the gold market now?
As we know, Soros is left holding 600m shares. First thing is to consider: why?
The obvious answer is that the fund still believes there’s upside potential for gold.
We, however, are more cynical minded. It might be that the fund wasn’t able to liquidate the entire position profitably in time but has done so by now. Alternatively, perhaps the fund took the opportunity in the fourth quarter, or even earlier this year, to fully hedge that remaining share with commodity derivatives — positions which would never be publicly discernible. If that is the case, there’s no reason why the fund isn’t already profiting from the sell filing disclosure impact.
The truth is there are masses of possibilities and we will never truly know until the next filing date.
The point we’re trying to make is that none of these hedge fund filings should ever really be taken at face value. These funds have “hedge” in their name for a reason. At best, what we see are just small parts of extremely smart trading plays, many of which specifically exploit expected market behavior patterns related to communications and disclosure. At worst they’re one part of a cleverly hedged position. To run a fully-exposed market long position would be market suicide.
From a spot price point of view, meanwhile, until gold falls through $1,530-ish, there’s still a good chance it will return to its recent range bound trading pattern:
That said, it’s also true that by now anyone who was ever going to take an unhedged long position in gold has probably done so. That means by the time we get to $1,530 (if we do) there’s a good chance a sizeable chunk of the market will be tempted to take profits and that means liquidation.
The better the stock market performs and the more long-term yields rise, the greater the chances of that happening.
Meanwhile, one good place to look to when it comes to gauging just how spooky things are likely to get in gold, is the gold mining equity sector.
Remember, the big trend for gold-miners post crisis was the unwinding of their hedging programmes. This was, of course, intended to limit opportunity costs associated with further upside gains in the yellow metal.
The irony is that the diminished size of their hedging programmes now leaves them exposed to exactly the opposite trend: a fall in the price of gold.
Some miners, of course, did start re-hedging around 2011 — which was about the time the gold price started to flat-line and peak. And that pattern has notablycontinued in 2012.
But it’s unclear how easy those hedges will be to roll, or what sort of duration they are.
If you consider that gold really isn’t a consumption commodity but a “rebury it just as quickly as it’s produced” commodity, then you will appreciate that the key factor determining prices is how quickly new gold supply can be reburied and at what rate. Lacking that, how easily and affordably the sales can be hedged.
Now, if we presume all longs are already exhausted and that the price of gold has essentially been choked since 2011 (when hedging desire returned to the market) all yet-to-be produced gold supplies can now only be hedged at the cost of guess what, the spot price.
The more demand for hedging, the more likely the spot price is to fall, because no counterparty or bank in their right mind would provide such a hedge without an equivalent market short to balance it. Borrowing from central banks and selling into the spot market used to be the way to achieve that. But nowadays, it’s possibly much easier just to short via GLD instead.
Either way, at this point, the greater the demand for market hedges, the greater the physical shorting (or naked selling) is likely to be. And that means the greater the spot price correction.
For now, we’ll leave you with one last chart to keep you pondering, the GDX Gold miners ETF vs the S&P 500:
Something definitely seems to be happening.
Related links:
The end of RoRo, or is it? – FT Alphaville
Capping the gold price – FT Alphaville
What’s bugging gold? – FT Alphaville
This entry was posted by Izabella Kaminska on Wednesday February 20th, 2013 19:58. Tagged with GLD, Gold, Soros Fund Management.
This email may contain confidential and/or privileged information.
If you are not the intended recipient (or have received this email
by mistake), please notify the sender immediately and destroy this
email. Any unauthorised copying, disclosure or distribution of the
material in this email is strictly prohibited.
Email transmission security and error-free status cannot be guaranteed
as information could be intercepted, corrupted, destroyed, delayed,
incomplete, or contain viruses. The sender therefore does not accept
liability for any errors or omissions in the contents of this message
which may arise as a result of email transmission.
Abonner på:
Opslag (Atom)