Thursday, March 01, 2007


"Traders Eye Is On Stock Market"

MarketWatch reports on currencies. "Japan's yen resumed its rally against most major currencies Thursday, touching a 2 1/2-month high versus the dollar, on continued talk of carry-trade unwinding and worries about the outlook for the U.S. economy and global stock markets."

"Meanwhile, the dollar rose against the euro after a report showed the nation's manufacturers increased production in February. A separate report showed the year-over-year increase in the core personal consumption expenditure price index running above the Federal Reserve's target zone, providing further support for the greenback."

"'Yen extends gains across the board as the aftershocks of this week's equity sell-off begin to reverberate from Asia to U.S.,' said Ashraf Laidi, chief foreign-exchange analyst at CMC Markets in New York. 'As volatility lifts up and risk appetite falls, yen becomes the gainer as traders unwind their carry trades, which were used to finance high yielding currencies and equities.'"

"In New York trading, the dollar was quoted at 117.6 yen, compared with 118.38 yen late Wednesday. In intraday trading, the dollar had fallen to a low of 116.94 yen, the weakest seen since Dec. 13. The euro stood at $1.3167, compared with $1.3233."

"The British pound traded at $1.9577, compared with $1.9643. The dollar changed hands at 1.2224 Swiss francs, compared with 1.2186 francs."

"Investors' risk appetite fell sharply in recent sessions on uncertainty over the outlook for the U.S. economy, fears of the potential knock-on impact from sub prime lending market woes and worries over Iran's nuclear plans."

"'Everybody is nervous and wondering when the next shoe will drop,' said David Watt, senior currency strategist at RBC Capital Markets. 'When it first happened, everybody was just stunned and shocked, today is the day when a lot of people are going to wonder okay is this something fundamental or is this shorter-term? Right now, I don't think people are really clear,' he said."

"Lara Rhame, senior currency strategist at Credit Suisse First Boston, said the yen began its rally early Thursday when European shares came under heavy selling pressure. The yen is being traded like the single barometer of global risk appetite, and for that reason, we're seeing yen gains' when equity markets are under pressure,' she said. 'I don't think this necessarily makes a lot of fundamental sense, but that's the way market jitters are materializing right now.'"

"Rodrigo Rato, managing director of the International Monetary Fund, on Thursday reiterated his concerns about the dangers of carry trades, sparking buying activity in the yen."

"Hiroshi Watanabe, Japan's top financial diplomat, said overnight that the unwinding of yen carry trades has not yet started, indicating that currency moves would be bigger when such unwinding begins."

From Bloomberg. "Gold in New York fell for a third straight day after the decline in global equities deepened, forcing some investors to sell the precious metal to cover losses in stock markets. Gold has declined 3.5 percent since a stock sell-off in Chinese shares on Feb. 27 prompted the biggest decline in U.S. equities in four years."

"'Traders have on eye on the stock market,' said Ron Goodis, director of Equidex Brokerage Group Inc. in Closter, New Jersey. 'People who've been riding gold's rally are going to bail. They need to sell the most liquid asset to finance their stock holdings.'"

"Gold futures for April delivery dropped $7.40, or 1.1 percent, to $665.10 an ounce on the Comex division of the New York Mercantile Exchange. Prices dropped 2.5 percent in the previous two sessions and are up 12 percent in the past year."

"Gold may fall as low as $660 before rebounding, said Daniel Vaught, a commodity analyst at A.G. Edwards Inc. in St. Louis. 'The volatility in equities is going to renew safe-haven buying in gold and precious metals,' Vaught said. 'There'll be bottom-pickers.'"

"Silver for May delivery fell 58.5 cents or 4.1 percent, to $13.65 an ounce. Prices are up 41 percent in the past year."

"'Despite the fact that we are long-term bulls of gold, we find it disconcerting that spot gold has seemingly badly failed in the past two or three days to push upward through $685 to $690,' said Dennis Gartman, publisher of the Gartman Letter. It's important that gold has failed to advance under circumstances that might otherwise have been considered quite bullish, Gartman said."

"'Collapsing share prices would seem to be a positive for gold to many, but from our perspective, for the moment it is bearish instead,' he said. 'If Chinese shares continue under pressure, then Chinese buyers shall be reticent about buying gold, and may have little choice but to sell gold to raise cash and capital where needed.'"

"April platinum ended down $11.20 at $1,245.20 an ounce. June palladium fell $2.55 at $354.05 an ounce."

'Collapsing share prices would seem to be a positive for gold to many, but from our perspective, for the moment it is bearish instead,' he said.'

I disagree with this statement. It might seem to be the case, but has not worked out in my observations. I remember the Black Monday crash well. I owned some gold and it was the first real market crash I had experinced, and I expected it to skyrocket.

It was down $10 that day, which was a large daily move at that time.

The bigger question is, has gold failed in a technical sense? That, we should know within a week.
It depends on how much gold was bought on credit. I wouldn't guess the percentage is anywhere near the percentage seen in real estate or stocks. I would think bonds have a low percentage bought on credit.

I would think that the decrease in PMs is the credit vanishing. Beyond that, some may need to sell to turn savings into Fed Reserve notes to pay off debt. Others will be using savings to purchase some PMs for insurance. Time will tell.
The biggest reason is Yen carry trade unwinding, just watch Yen. The last time when gold took a nose dive, it was when BOJ hiked its rate for the first time.

Now, compare the blue chip US stocks expressed in USD to the price of gold expressed in USD, since last Yen unwinding, which one made more advance? Gold.

If you want to hedge against the Yen carry trade, buy FXY.

People who bought gold are too impatient for the big gain. I have 35% of my networth in gold and silver, all bought with cash 2 and half years ago, and I just held on to them without trading in and out. I don't care if it loses $10 or $100 because I know gold won't be worth nothing, certainly not the case when expressed in the falling USD.

Gold won't really take off when there is a systematic failure of the financial system, when massive bailout has to happen and all the foreign-held USD comes home, which I expect to happen in the next 2-3 years, or it may even happen sooner.

If you look back the graph of gold's asend in 1970s, it took nose dive at least 3 times before reaching $800, and didn't crash until the Fed raised rate to 18%. Do you see Bernanke raising rate to even 10%?

See what gold does when the Fed drops rate, which will be inevitable whether Bernanke likes it or not. He will have to drop.
Until recently I had believed fairly firmly in the Inflationist scenarios. The recent market has had me re-thinking things quite a bit while going over scenarios for unwinding this excess liquidity. It looks like the Deflationist have been spot on, at least so far. Just a thought.
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