Dear Jim,
Since the actual carry trade on the dollar determines a "Synthetic Short" on the US dollar, then it is fair to assume that as soon as interest rates, for any reason, start to rise shorts will be closed and the dollar sustained and propped up.
Isn’t that going to put big downward pressure on Gold?
Could you kindly also let us know, in your view, what is going to be Gold’s biggest threat?
Regards,
CIGA Francesco
Dear CIGA Francesco,
This is a popular concept that needs explanation.
1. The size of the carry trade cannot be known. There are no reliable sources of information by which you can validate statements such as "The Mother of All Carry Trades,” made by popular academics. What passes through Libor and what any source of dollar lending does lies in a non transparent private treaty market. None of this in terms of a meaningful percentage can be gauged by reviewing COT (Commitment of Traders) data.
You can therefore assume that any source that says they can size the carry trade is full of bull.
2. The carry trade is not an all on or off arena. Some will close their positions but others convinced that rates will remain relatively low for a period of time will enter transactions. Most
commentators refer to the carry trade as if it was a singular large bull elephant that enters and exits certain trades, bashing and breaking everything in sight.
As an example, on Friday some may have closed carry trade positions while other would have seen it as a point of entrance.
3. Those that participate in the carry trade are well financed (at least at the start) and generally of above average market intelligence. Commentators again see the carry trade as a static long of an asset and short a currency. That is so far from the truth that it is actually STUPID. I am sure some carry traders were sellers as gold approached $1224 and will be again at $1274-$1278.
4. Once getting a lead (profit) in the transaction a wise carry trader will see to hedging the currency and interest cost risks.
5. Much of the carry trade today is done as an OTC derivative transaction in legs (positions) or in whole or combinations thereof.
6. The major factor of the carry trade is that the currency of choice should have negative fundaments and a RELATIVE low interest cost. Note the word RELATIVE. That means if rates begin to rise, the short term interest rate should rise so as to maintain the state of RELATIVE low interest rates for the carry currency in comparison to other currencies.
7. Remember even then the carry trade is not one enormous trader, it is many traders, some entering and others exiting.
To make the statement “synthetic dollar short,” it carries a connotation of a singular unit, unhedged and never changing, that will at some point attempt a singular exit. That simply is not the truth of the matter.
The carry trade is destined to go for years in the US dollar with periods when their will be large positions and at other times smaller positions.
Those who think differently should review the years of carry experience in the Japanese Yen. Recognize that the policies of the US Fed and Treasury are a mirror image of what resulted there for many years
In conclusion, the concept "Synthetic Dollar Short" is glib when describing the carry trade and therefore an unknowable factor by which to trade gold.
Trading gold, which is insurance against the effects of depraved economics, is the proper understanding of what gold is as a currency. Few if any will do as well as those reading here that entered gold under $300 and still maintain that position.
I will advise taking the cost of your position out between gold at $1580 and $1620, letting the balance of your position ride as the price shows its intention of reaching Alf and Martin’s numbers.
Respectfully yours,
Jim |
