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NOTE:
Next time, I’ll try to post these types of market updates earlier.
Most
markets continue to trade in a consolidation pattern with gold apparently
well supported above $1,110 and silver finding stability between the $17 and
$18 level. As we’ve noted recently, December tends to be a tricky month
for making money in the markets especially when it comes to gold and silver.
We still expect gold to retest the $1200 level in the short term and perhaps
even attempt a move to new highs before embarking on an extended correction.
The
timing isn’t certain but the bottom for this pullback in gold and
silver might already be in or it could come during the next couple of days.
If so, we would expect a measured rally back toward $1200 in gold and $18.50
in silver by mid-January at the latest. Beyond that we will need to see more
data before hazarding a guess.
One
thing to take note of is the recent subtle shift in market psychology back
toward greater awareness of risk (Dubai debt default,etc.) at the same time
as there is growing confidence that the economy is stabilizing (TARP money is
being repaid, etc.) These are two diametrically-opposed frames of mind
that may contribute to significant cross-currents for the markets during the
next several months as additional economic data comes in and the two sides
fight over who is right. Under these circumstances the U.S. dollar may
continue to see moderate strength especially to the extent that greater
awareness of risk is focused on highly-leveraged markets like Dubai, Greece,
the UK and even China while growing confidence in economic stability is
centered on countries that have already suffered massive asset declines such
as the United States.
An
indication that the cross currents are strengthening is the recent rise in
U.S. interest rates for long-term maturities while short-term rates appear to
be completing a bottoming pattern. Falling U.S. interest rates (specifically
LIBOR) were very good for many trading strategies. Now that interest rates
have hit bottom (of which we can be fairly certain considering they are close
to zer0), these same trading strategies will start facing headwinds. Among
such strategies are FX carry trades that rely on a growing gap between
interest rates to mitigate the risk of sudden currency moves. In effect, we
may have already seen the peak of FX carry trades that are short the U.S.
dollar. Meanwhile, the “dollar carry trade”, where U.S. dollars
are supposedly borrowed at zero percent interest and invested in emerging
economies or countries with high-yield debt, never even got off the ground
despite all the hooplah.
Another
case in point is that gold and silver gained today even as the dollar
continued to hang around the 77 level on the USD index. We believe this price
action could be another early confirmation of the cross currents that are now
in play. In addition, the monetary metals may have benefited the past couple
of days from the apparent progress by
several Gulf states in launching a unified currency by perhaps as early as
2010. While more bluff than true threat, statements such
as the following are always sure to get the gold bugs’ hearts pumping
hard:
“The
US dollar has failed. We need to delink,” said Nahed Taher, chief
executive of Bahrain’s Gulf One Investment Bank.
Never
mind that the quote was mined by a paradigm of unbiased
“journalism”, Ambrose Evans-Pritchard (he who never met an
anti-dollar or anti-U.S. story he didn’t like), while none of the
Gulf-based accounts seem to mention a strong anti-dollar sentiment by council
participants. Indeed, Ambrose Evans-Pritchard just penned a ridiculous
defense of Dubai’s excesses a few days earlier in
which the same Nahed Taher made similar ominous comments about the U.S.
dollar. To demonstrate the utter foolishness of the meme being pushed, I
offer the following:
The
contagion effect has caused credit default swaps (CDSs) gauging risk on
five-year bonds to jump to 177 basis points for Abu Dhabi, 119 for Qatar, and
98 for Saudi Arabia. The Dubai debacle is seen by many in the region as an
“aftershock” of the West’s financial crisis, a result of
Dubai mimicking US debt-leverage. If anything, it is a vindication of Islamic
principles of finance.
“Capitalism
has failed, and the dollar has failed,” said Nahed Taher, chief
executive of Bahrain’s Gulf One Investment Bank.
“Our
sovereign wealth funds must stop investing in bonds in America. We need the
money here and we shouldn’t waste it on the US or Europe,” she
said, speaking at the annual FIKR 8 Arab Thought conference in Kuwait –
a sort of Arab Davos.
Sure,
because the “Islamic principles of finance”, relying as they do
on the autocratic right of the monarchy to steal wealth from the population,
is a better model. Seldom has anything so dumb, self-righteous and
hypocritical ever been said or repeated in writing. This tripe is useful only
in the sense that it provides a rare insight into some of the
“brains” behind a number of investment themes including,
unfortunately, the speculative fervor in gold. We are not sure what to worry
about more, this or Chinese pig farmers speculating on the
“warehousing” of copper. In any case,
the relevance of Dubai isn’t that it could lead the world back into
economic chaos but rather that Dubai provides evidence that excessive
leverage and bubble conditions remain in many parts of the developing (and
even developed) world. Ground zero is China, from where in our view the next
true global contagion is likely to emanate.
Tom Szabo
Silveraxis.com
Also
by Tom
Szabo
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