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Strategies & Market Trends : Currencies and the Global Capital Markets

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To: Paul Berliner who wrote (1232)	2/4/1999 11:20:00 AM
From: Henry Volquardsen	Read Replies (2) of 3536

Good Morning Paul, I think that specific disagreement is on wether gold is still a good indicator of currency debasement. As far as to how much gold is under lease I don't know what certain people suspect is out there. I do however have some knowledge as to what the actual numbers are. About 11% of central bank gold reserves have been leased into the market. This represents @ 1 year's supply (production, scrap etc.) As far as the impact of a rush into gold. The vast majority of the gold under lease is producers. Many of these transactions have a direct lien on production and are not therefore subject to margin calls. Therefore a big rise in price would not need to force margin calls, the leases would just be repaid with production. However if the producers made a decision that they felt prices were beginning to rise they could cover their position and this could contribute to an ongoing price rise. I have seen them do this in the past. But the thing to remember is that this would most likely not be forced liquidation but voluntary so would most likely not have the frothy charachter of a classic short squeeze. Regarding hedge funds. There are some hedge funds that get involved in gold, from both sides. And I have heard speculation a number of times that they are involved in a carry trade similar to the yen carry trade. I know that in fact there are some funds doing that. However I think it is much less than the certain people in the market believe. I base this on some empirical evidenc. In the fall, when the hedge funds came under significant pressure in the wake of the LTCM situation, there were some significant dislocations in markets in which hedge funds had positions. The hedge funds were facing withdrawls and many lenders were forcing them to reduce leverage. In response they were forced to cut the size of all their positions, regardless of wether they still liked the position. They also cut their positions in the most liquid markets they could access. The hedge funds had big positions in credit arbitrage and the yen carry trade. As a result we huge price moves in credit spreads and the yen exchange rate. During the same period the gold markets were relatively quiet, there were no huge price swings. If hedge funds had big positions in gold carry trades I would have expected to see some forced liquidation in this market as well. For this reason I suspect that hedge funds have a smaller position in gold than many people imagine. I would take Sakakibara's comments with a grain of salt. He has been beating the drum on that topic for quite a while. A lot of the Japanese political elite got used to the world telling them how great they were during the 70s and 80s. The revelations that their economy is riddled with structural flaws and that they manage their economy like a herd of deer in the headlights has been emotionally trying for them. Reform of international economic institutions is needed and will occur. But I strongly doubt that gold will play a major part. I believe you will see much more of a move to larger currency blocks. As such the dollarization of much of SOuth America and some of Asia is something I believe we will witness in the years ahead. Henry

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