The answer...
The question was:
Given the massive global liquidity pump, fiat presses
running 24x7, the dollar at near all time lows, exploding
US deficits, increasing geopolitical risk, and obvious
ramping inflation... why have gold stocks so vastly
underperformed the broad market for the last year?
There's an old saying that states:
"What giveth today -- taketh tomorrow."
What gave gold it's parabolic run up - post the Katraina/Rita hurricanes, was the Yen carry trade and the massive global liquidity punch bowl.
And what ended gold's run last May and what has continued to cap it's run here - has been the coordinated action of global central bankers in the slow drain of that punch bowl, and in the rebalancing of the global economy.
After the double whammy collapse of the US internet & technology bubble in March 2000 and the market crash from the September 11th attacks of 2001... global central bankers responded with massive interest rate cuts and a flood of liquidity into a sea of willing speculators.
And speculate they did.
A Bloomberg article earlier this year quoted J.P. Morgan's numbers, which pegged the Yen carry trade at a staggering ¥40 trillion, or $331 billion...which is larger than Australia's GDP.
bloomberg.com
In addition to the Yen carry trade - margin interest in US markets has now surpassed the mania level at the March 2000 peak of the NASDAQ bubble.
The Wall Street Jounal in this February 20, 2007 article said that "margin totaled $285.61 billion in January, up from $275.38 billion in December and passing the previous peak of $278.53 billion that was set in March 2000, as the Nasdaq Composite Index reached it's apex."
blogs.wsj.com
And much of that speculative, leveraged and borrowed money went into commodities and gold.
HSBC estimated that in 2006 institutions held some US $100 billion in commodity indexes -- compared to US $10 billion held at the end of 2003.
Last spring we saw yet another chapter of markets and the madness of crowds unfold...
Commodities, especially gold, were the recipient of that flood of liquidity and massive speculation. And they were going parabolic.
But, the U.S. Fed was on its way to 17 consecutive interest rate hikes. And Japan announced the end of it's zero interest rate policy.
What soon resulted was a massive correction in May, which saw a $172 collapse in the gold price from $722 per oz - down to $550. And the HUI gold stock index collapsed 131 points and over 30% - from 401 down to 270 (with 94 of those points occuring in less than a single week).
The mistake?
Ignoring Japan's comments about interst rates and doubting the new level of cooperation among global central bankers to slowly drain the punch bowl.
What blind-sided gold bugs was Bank of Japan Governor Toshihiko Fukui who orchestrated the most dramatic draw-down of money supply in modern history, slashing Japanese monetary reserves by 20 trillion Yen ($175 billion in US Dollars) in less than 11 weeks.
And we just had another warning shot fired across the bow of speculators - with yet another contraction in the Yen carry trade and the resulting 10% one day collpase of Chinese stocks and a 516 point intra-day meltdown for the Dow.
The coming June meeting of the BOJ may return "interesting times" to the speculators.
European and global central bankers are pressuring the Japanese to hike interest rates and allow the Yen to rise.
Greenspan has warned about asset bubble corrections being inevitable.
The New York Fed just issued a statement saying that Hedge Funds now have more narrowly focused-highly leveraged bets than they did in 1998. CNBC mentioned it briefly this evening.
And in case you've forgotten what happened in 1998...the Yen surged over 20% in less than 2 months as Yen-carry trade speculators rushed for the exits amidst the Russian debt default and the collapse of LTCM.
Remember - margin leverage today... right here, right now in the US market, is higher than at the peak of the Nasdaq bubble in March 2000. And there is now upwards of $300 Billion+ levered in the Yen carry trade. Many say that number is way too conservative and peg the number as "at least" twice that...$600 Billion+.
This recent run in the DOW has produced more up days and more new highs for the DOW than any period in market history - eclipsing the levels leading up to the crash of 1929.
What leverage and speculation giveth - leverage and speculation soon taketh.
So it is written - so it shall be done.
History...
You have two choices.
Learn from it - or, be destined to repeat it.
Leverage is the most dangerous of all double-edged swords...
and remember, it always cuts most swiftly - on the way down.
"Quieting" gold - will be part and parcel of this new cooperation between global central banks.
Shame on you - if you don't anticipate and expect it. And pity you - if you don't factor in the amount of leverage on the long side in gold from the Yen carry trade.
SOTB |
