Date: Thu Jan 06 2005 12:31
trotsky (the Vet) ID#248269:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
asks: "Gold is now trading lower than this time last year and the USD is also a lot lower. Where did that oft repeated inverse relationship break down?"
the answer is of course that it didn't 'break down', but that it involves leads and lags. if one overlays a three year chart of the DXY with a three year chart of the USD PoG, the inverse correlation is rather obvious, as are the frequent lead/lag periods. statistically it's one of the most reliable and pronounced inverse correlations in the markets for the past 35 years ( over 90% for the entire period ) .
Date: Thu Jan 06 2005 12:22
trotsky (siempre, 10:26) ID#248269:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
even the permabulls must surely see that something doesn't quite add up here.
it's an example of selective data focus, not dissimilar to the 'visible inventories' ploy.
for instance, SSRI alone reports about 2.2 billion ounces in silver resources. these are NOT proven reserves, and yet we can be pretty sure that they are present in the earth's crust.
iow, the discrepancy between what exists below ground and proven reserves reported by miners has to do with the economics of resource extraction. it makes e.g. no sense for SSRI to prove reserves it isn't planning to extract in the near future.
furthermore, looking at the USGS report, a proven reserve base of 570,000 tons vs. annual production of 19,000 tons doesn't exactly strike me as giving cause for alarm. we're looking at reserves representing 30 years worth of production. so well before the remaining below ground silver ( not to forget, resources are continually upgraded to reserve status as extraction proceeds ) becomes a real concern, most of us will already inhabit the next world.
Date: Thu Jan 06 2005 11:59
trotsky (crude oil) ID#248269:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
getting frisky. remember, the small specs are still net short crude - with big specs holding only a very small net long position. iow it's long commercial hedgers vs. short small speculators. at nearly 20,000 contracts net, this small spec short position is actually very large historically - more near term strength is likely.
speculators are also slightly net short all the other energy futures. per se this isn't meaningful but it is somewhat surprising considering energy has been in a pretty convincing bull market.
Date: Thu Jan 06 2005 11:42
trotsky (Caper, 8:55) ID#248269:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
"The only debate among currency traders and strategists appears to be about how much further it has to fall, which currencies are likely to benefit most in 2005, and when."
if that's true, it can only go up.
i suspect it isn't entirely true though. lots of people calling for a bottom as far as i can tell.
Date: Thu Jan 06 2005 11:39
trotsky (Caper, 8:53) ID#248269:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
"Pessimists may worry about worst-case scenarios, but economic disasters, unlike natural disasters, can be prevented through better planning and management."
i'm not so sure about that. if economies could be improved via careful central 'planning' the Soviet Union would have been a utopia. all indications in fact are that 'planning' is the very last thing economies need. it's what got us into the mess in the first place.
Date: Thu Jan 06 2005 11:23
trotsky (the Rand) ID#248269:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
here is why the Rand is set to weaken further, and probably a lot more than anyone now thinks possible:
1. SA's trade balance. Sotuh Africa has now a persistent large trade deficit since qu.1 of 04. this is highly unusual - SA's economy has been a net exporter for at least 5 decades ( with occasional exceptions, like now ) .
2. the SA yield curve. after having spent the better part of 2002 and 2003 in deeply inverted territory ( at one point the negative spread between the repo rate and 10-yr. yields was close to 400 basis points ) , the curve has widened dramatically , by almost 500 bps. to its current positive 100 bp. spread. the inverted curve is a sign of extremely tight monetary policy and has been a decisive factor in producing Rand strength. this prop has been kicked away.
3. credit and money supply growth. after plunging close to 2% annualized in qu. 1 '04, credit growth in SA has resumed at a brisk pace. it is now close to 10% annualized, and the rate of change of this growth rate is quite steep. this has also brought annualized broad money supply growth to its highest level in 2 years at about 16% currently. more importantly, the trajectory is now UP, whereas two years ago the trend in the rate-of-change measures was down. with money supply growing at 16%, and the rate of growth on an accelerating trajectory, there is obviously no shortage of Rands.
4. SARB forex reserves. while the country's trade and current accounts have gone into deficit, the SARB's reserves have grown in almost parabolic fashion, more than doubling since early '04. there can only be one reason why its reserves have grown so much concurrently with a negative balance of payments: there must have been a huge influx of 'hot money' by hedge funds and other emerging market investors. by definition these are vulnerable positions, and since the Rand is not exactly a liquid currency, the coming outflow of these 'hot money' funds is going to exacerbate any potential decline.
5. interest rate spreads and inflation. since mid 2004, the spread between SA and US rates at the very short end ( SA's repo rate vs. the US FF rate ) has narrowed markedly, by 175 bps. while the spread remains quite large in absolute terms, it used to be even larger in the past. this spread is at least in part a risk premium SA must offer foreign investors. while one can't say for sure where exactly the threshold for the premium portion of the spread is, it is clear that a narrowing spread is not favoring the Rand.
inflation: after having been in a strong down trend throughout 2003, PPI has recently reversed sharply from a negative 2.5% annualized to a positive 2% - a swing of 450 bps. CPI inflation has been far tamer, but has bottomed in the 3.8% region and has begun to head back up too. this reduces the real yield on SA debt securities further. again, it is unknowable where the real yield threshold is that causes hot money flows to reverse. but a threshold does exist.
6. the movements in the USD gold price , as well as other commodity prices ( e.g. coal and platinum group metals are also big export earners for the SA economy ) also influence perceptions about the Rand, but they are clearly not the main drivers. rather, since pricing of these commodities is in dollars, periods of dollar weakness tend to coincide with periods of commodity price strength. however, points 1. to 5. are more pertinent to the motivations of the emerging market funds that have driven the Rand to unsustainable levels. the emerging Rand negative trends in these backdrop conditions could result in a period of pronounced Rand weakness regardless of commodity price trends. of course, one must add that these weakening currency fundamentals are also emerging elsewhere - so the dollar is likely to not only strengthen vs. the Rand. thus a bout of Rand weakness could once again coincide with weakness in USD based commodity prices as well - but the cause-effect relationship is complex, and there will be leads and lags. it is those lead/lag periods when SA's mining industry is able to make money.
Date: Thu Jan 06 2005 10:42
trotsky (mugwump@mogambo&casey) ID#248269:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
this kind of talk is the very last thing you want to hear as a bull.
as an aside, gold is worth what the market says it's worth - not some pipe dream number made up by overly enthusiastic analysts.
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