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Politics : High Tolerance Plasticity

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To: Archie Meeties who wrote (1687)	3/15/2001 2:15:38 PM
From: russwinter	Read Replies (1) of 23153

<Gold's failure to mount a meaningful rally in the wake of the Japan banking crisis.> One needs to look at the gold's role in the YEN carry trade for insights on this. Gold in Yen terms is in backwardization and has been to a degree for several years. Gold being in backwardization to any currency has only happened once before in history: during the 1720 Mississippi Bubble. Right now you can purchase gold on the TOCOM one year out at about 1% less than spot yen gold. If you were to look at open interest in Yen gold, you would see that virtually all of it is one year out. Therefore if you hold Yen and are interested in buying gold, your incentive is to defer your purchase and collect that 1%. Really when you look at the structure of gold pricing you see this a lot: supply accelerated near term, and demand deferred (for as long as they can get away with it, or until the market runs out of liquidity. I see many signs that the later is happening.) tocom.or.jp The other trade this encourages is the carry trade: Gold in the nearby month is sold on the COMEX and then you hedge a year later by buying the Yen gold and scalp the one percent. The year free ride is used to buy treasuries, probably now the three month yielding 4.4%. Add your 1% backwardization and you have 5.4%. Since these hedge funds are also betting continually against the Yen they often do not hedge back into dollars and thus save that cost. If the Yen continues to perform poorly they clean up on all accounts. tocqueville.com I no longer attempt to predict when this rather old strategy unravels. Who knows? I think sooner rather than later. I can only say that a ton of leveraged money is involved in it, and like most overplayed strategies it will be hard to get out the exit.

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