FT Alphaville readers are well versed on the potential downsides of collateral scarcity in western markets. But consider how a collateral scarcity problem might unfold in an emerging market in which the most valued form of collateral isn’t national debt denominated in your own debt but rather a commodity like gold, whose supply is dictated by externalities outside of a government’s control?
The Indian rupee’s plunge continues. As the FT reported on Wednesday, consensus opinion is that the weakness is connected to India’s growing current account deficit and unimpressive attempts thus far to bring it back to reasonable levels. But Bloomberg on Wednesday alluded to another interesting connection: India’s attempts to suppress gold consumption.
Nicholas Colas at Convergex offers some interesting insights on diamond deflation in his Wednesday note. First, he points out that the Cannes diamond heist was not necessarily the most cunning economic crime of all time, since diamond prices are under pressure at the moment — mainly due to a fall in Chinese and Indian demand. Moreover, diamond prices have a lot in common with their base metal counterparts (his emphasis):
There’s a stupid rumour going around in the gold community that the Comex is “bleeding” inventory (especially from the JP Morgan vault) and that this will in some way compromise delivery that causes a default. Kid Dynamite has already done the bulk of the heavy lifting in trying to debunk this story, as has Miguel Perez-Santalla at BullionVault, but we wanted to emphasise some points that go beyond the mechanics and which might be helpful.
In the last few years China has become the single largest producer of gold. It is also, by some measures, the second largest global consumer of the precious metal outright. Given this, some goldbugs are befuddled as to why, despite all this Chinese buying and scenes like this… ….gold prices are still falling like this:
From Ben Traynor’s commentary at BullionVault on Friday: CME Group, which operates the New York Comex exchange on which gold futures are traded, announced yesterday it is increasing margin requirements on gold trading by 25% to $8800 per 100-ounce contract. The new initial margin requirement will come into effect after close of trading today. “That is definitely affecting gold,” says Joyce Liu, investment analyst at Phillip Futures in Singapore. “For those who cannot put out margin calls on time, they will be squeezed out even when they don’t want to get out.” Worth pondering is how all of this now affects the “cash-for-gold” trade.
The voices arguing that digital e-money should be added to the central bank/government toolkit are not only rising in number, they’re getting louder as well. Among the first to argue the point, of course, was Willem Buiter back in 2009, before he took up the position of chief economist at Citi. But there’s also been a strong patter of support from advocates such as Mobino’s Jean-Francois Groff and Slate’s Matt Yglesias (to name a few).
This is is a guest post from Philip Pilkington, a writer and research assistant at Kingston University. Since the beginning of 2013 a fresh sense of optimism has swept through the investment community and through marketland, but is the real economy as content?
FT Alphaville participated in a “Gold Bulls vs Bears” event hosted by the Association of Mining Analysts (AMA) on Wednesday. The motion being discussed was: Is gold’s role as a safe haven asset in the global financial system outdated and redundant and if the ubiquitous QE programs have been successful and the global economic upturn is confirmed, the price of gold will continue to struggle?
The gold market has always been partial to “carry trades”. But in the post 2008 world the nature of the carry-trade has changed. In collateral terms, whereas gold mostly traded on “special” terms before 2008 — because you had to pay to borrow it — meaning it was privy to more of a “stock lending” profile, post 2008 it went fully into “collateral” mode.
The backwardation of gold || The Aussie bank share bubble || Stepping towards numerical QE guidance || ECB Meeting || Chinese renminbi at record high || Shell chief exec to step down next year || Apple avoids potential $9bn tax bill with debt sale || Ad tools boost Facebook || Tablet shipments rise 142% || Google invests in lender || Transocean dividend plans || Goldman under criticism for Malaysia bond deal || IBM Lenovo deal breaks down || Kodak may emerge from bankruptcy in July || Market Update
The conspiracy channels continue to make a big deal about the backwardation of gold — which is a situation in which gold prices for today are higher than for tomorrow. The thinking is that this must indicate rampant demand for physical gold. In reality, since gold is a highly financialised commodity, the backwardation signal doesn’t actually indicate the bullishness they imply it does. Rather, it suggests something entirely different: that interest rates in conventional money markets are turning increasingly negative.
There’s been a lot of speculation about what really drove the volatile gold price move this month. Some are still defiantly searching for conspiracies or under-handed activities by authorities. But it’s probably Nouriel Roubini who has provided one of the best and most logical explanations. In his opinion every bit of the gold move can be explained by shifting inflation expectations.
We thought the following from TD Securities’ Richard Gilhooly on Tuesday was a rather insightful way of looking at the whole BoJ effect (our emphasis): While it remains a contentious point and as yet unproven, Japan’s devaluation and soaring Nikkei vs slumping DAX or Bovespa has all the hallmarks of a competitive devaluation. While competing factions debate the Monetary expansion/QQE, versus beggar-thy-neighbour interpretation, one positive aspect of the Japanese Yen collapse and fear of exported deflation has been collapsing commodity prices with weak growth in export countries (China, Germany, S Korea) and a stronger USD helping a supply story (crude inventories at 22yr highs) and weak demand send commodities into a bear market.
Following their absolutely stellar advice to short gold on April 10, Goldman Sachs announces on Tuesday it is now time to take profit on that position: We have closed our recommendation to short COMEX Gold, as prices moved above the stop at $1,400/toz. We have exited the trade significantly below our original target of $1,450/toz, for a potential gain of 10.4%. The move since initiation was surprisingly rapid, likely exacerbated by the break of well-flagged technical support levels. Our bias is to expect further declines in gold prices on the combination of continued ETF outflows as conviction in holding gold continues to wane as well as our economists’ forecast for a reacceleration in US growth later this year.
Here’s an interesting thought. Could the gold sell-off be related to a squeeze on collateral brought on by a series of very different bank crises in Europe, starting with the SNS Reaal nationalisation and Anglo Irish emergency assistance operation and culminating with the Cyprus crisis? It’s a theory being considered by Jeffrey Snider, chief investment strategist, at Alhambra Investment Partners. The basic point being, when you haven’t got anything to repo and funding becomes tight, gold is likely to sell-off in anticipation of further banking and asset problems.
Some deep thoughts from Goldman Sachs, by way of Jeffrey Currie and team, on the drivers of the current commodity sell-off (and no, their short gold advice from last week isn’t listed as one of them): The sharp sell-off in gold was triggered by growing fears that the central bank of Cyprus would sell its gold reserves, potentially reflecting a larger monetization of gold reserves across other European central banks. The decline in prices was exacerbated by the breach of key technical price support level at $1,530/toz and then at the $1,434/toz 200-week moving average, creating the largest one day decline. Spillover from gold and renewed European and EM macroeconomic concerns also created sharp sell-offs in crude oil and base metals, that were mostly front-end driven, crushing spreads (the carry), as longer-dated prices remained remarkably stable.
Gold producers tumble || The S&P’s peak || Brent crude falls below $100 || Cargill calls for transparency in commodities || Energy Future Holdings’ creditors reject pre-packaged bankruptcy || Ergen trumps SoftBank with $25bn Sprint bid || Former Rochdale Securities trader pleads guilty to conspiracy and wire fraud || Greece on track to receive aid tranche || Gold’s fall sharpest since ’80s
No respite for gold producers in the southern hemisphere on Tuesday morning… And no dead cat bounce splat for the gold price. And to spell out why this is such an issue for the gold miners, we present the following thoughts from Citigroup.
Asian stocks rose for a fourth day and the yen neared 100 to the dollar. The MSCI Asia Pacific Index gained 1.1 percent, the Nikkei rose 1.2% and the Hang Seng rose 0.8% but the Kospi was just 0.1% higher after the Bank of Korea kept borrowing costs steady. (Bloomberg) China’s forex reserves and credit grow sharply: China is once again facing heavy capital inflows after its forex reserves rose $130bn to $3.44tn in the first quarter, helping to fuel a surge in credit growth amid concerns about the level of debt in the economy. It’s the biggest quarterly increase since the second quarter of 2011 and marks a sharp reversal from last year when money exited China. Total new financing in the economy grew 58% to Rmb6.2tn ($1tn) compared to the same period in 2012, faster than consensus expectations. (Financial Times)(Bloomberg)
A new era for gold? || Senate Whale report highlights || Goldman & JPM rebuked by Fed || Kuroda approved as BoJ governor || Japan to join Pacific trade deal talks || Greece & lenders fall out over firings || Samsung launches S4 || US sanctions magnate shipping Iranian oil || Boeing defends Dreamliner || Markets update
Here follows a thoughtful commentary on the changes going on in gold market from BNY Mellon’s Neil Mellor, including the point that central bank purchases are in many ways helping to stabilise what might otherwise be a much more substantial slump. Our emphasis throughout…