Flight to Safety
What’s truly staggering about the weekend losses in Silver is that it had already retracted most of them by Monday AM. Indeed, if you were not up Sunday night looking at the futures, you would have thought Silver was just opening sharply lower (about 5%) completely unaware that the precious metal was down some 16% over the weekend. What does this tell us? That unless we get a MAJOR Crisis in the near-future, the US Dollar will collapse and inflation hedges will explode even higher.
Silver Undergoes 10% Correction As Dollar Poundage Resumes; Dollar-Backed Swiss Franc Now Flight To SafetySubmitted by Tyler Durden on 04/26/2011 04:25 -0400
And so the proverbial correction in silver may have well been completed in the span of 24 hours. As the attached chart shows from its Sunday night peaks to its Monday night bottom silver has dropped over 10%, what some call a mini bear market (which takes it to those depressionary lows seen on Thursday of last week). Is the climb now set tp resume, although not so much due to anything else (and there is plenty else) but because the USD pounding is back in full brokeback style. The EURUSD is about to break above the Sunday night heights in the mid 1.46s and while weak hands are vacating gold and silver, everyone is scrambling to load up in CHF. We wonder how long until those same people realize that Hildebrand is just as mortal as any other central banker with a balance sheet behind him, and as recently as 12 months ago underwent a failed campaign to halt the surge of the CHF in the process contaminating his assets with some seriously ugly currency assets (if one may call $220 billion of dollars on the left side of your balance sheet assets and thus implicitly "supporting" the SNB liability - the Swiss Franc) whose eventual unwind will not be too kind on the Swiss currency.
PBoC Governor Says Chinese Foreign Reserve Stockpile Is Excessive, As SAFE Issues Another Warning At US Treatment Of Creditors... And DollarsSubmitted by Tyler Durden on 04/20/2011 08:32 -0400
One of the key news from the past week was that Chinese FX reserves passed a record $3 trillion for the first time, a surge of $200 billion in the first quarter alone. And with the bulk of that in dollar, it is not surprising that the recently collapse in the dollar has forced more posturing out of both the PBoC and SAFE (the State Administration of Foreign Exchange). In comments published Tuesday, Zhou Xiaochuan, governor of the People's Bank of China said that China's huge stockpile of foreign exchange
reserves have become excessive and the government
must diversify investments using the reserves. "Foreign exchange reserves have exceeded our
country's rational demand, and too much accumulation has caused
excessive liquidity in our markets, adding to the pressure of the
central bank's sterilization." That this is a not so subtle hint aimed at the dollar was confirmed earlier today by SAFE which said that the US government should take responsible measures
to protect the interests of investor. "U.S. Treasuries reflect the credit of the US government and are an important investment product for domestic and international institutional investors," the ministry said in a statement carried today on SAFE's website. "We hope the U.S. government takes responsible measures to protect investor interests." Alas, with the US administration solely focused on making confetti out of the US currency, we hope that China is not holding its breath too long. On the other hand, should the DXY take out its 2009 lows, all bets will surely be off and only another market collapse will be able to generate a potential flight to safety in the dollar. In the meantime, both gold and silver continue to benefit, and the only thing that appears to be able to drag down precious metals at this point is a wholesale margin call invoking cross asset liquidation.
Gold Breaches Nominal High Of $1,500/oz; Inflation Adjusted High Of $2,400/oz Remains Long Term TargetSubmitted by Tyler Durden on 04/20/2011 07:44 -0400
Gold has breached the $1500 level and reached new record nominal highs at $1,505.65/oz. Since yesterday it has gradually risen in all currencies and is approaching record nominal highs in all major currencies. $2,400/oz is the inflation adjusted (CPI) high of 1980 and given the very uncertain macroeconomic climate of today and concerns about the dollar and all major currencies, arguably even more uncertain than the 1970’s, the real high remains a very viable target. It is important to remember that while gold has risen some 6 times in 11 years ($250 to $1500) it rose by 24 times in 9 years in the 1970’s – from 1971 to January 1980 ($35 to $850). This puts the recent reasonably gradual increase in gold prices in perspective and should give gold bears and top callers pause for thought.
Once again retail is getting duped into believing that all is well in the market by daily blasts of just how low the VIX has plunged. And it has: it is down to levels not seen in years. But as everyone who has done even a little work in option vol, the only index that matters these days, at least for equities now that precious metals and certain currencies (CHF) are the true flight to safety, is the SKEW. As we have disclosed many times in the past, SKEW is how the pros play vol, while VIX is what is left for the peasantry and CNBC. Basically, VIX shows riskiness as implied by ATM options, while SKEW demonstrates the difference between ATM and OTM options. And as the chart below shows, there is a rather dramatic difference when looking between the VIX and SKEW indices. In essence what is happening is that everyone is selling ATM short-dated vol and buying mid-term Out of the Money vol as expressed by the SKEW, in a confirmation that the protection cost in the wings is actually much higher than one would assume.
Following the S&P news, oddly enough, one is not seeing a flight to safety away from US paper and into Greek. In fact, observing the absolutely record 20% yield print on the 2 Year Greek bond, one may be excused to speculate that the inverse is happening. Also, with the cash price of the 2 Year now at 20% and the prices of longer duration bonds in the 60s, there is now no reason to actually restructure the country: bonds have it pretty much fully priced in. After all, the Santorini liquidation value should be worth at least 20-30 cents on the bond dollar, er, euro.
Surging Oil And Deepening Inflation - Gold & Silver Rise To Record Nominal Highs At $1,459 And $39.50Submitted by Tyler Durden on 04/06/2011 07:37 -0400
In trading in London this morning, gold reached a new record nominal high ($1,459.07) and silver a new 31 year nominal high ($39.50) as investors bought the precious metals to hedge deepening sovereign debt risk (in the EU but also in the US with the threat of a federal budget shutdown), geopolitical risk and deepening inflation. Brent crude reached $123.00 a barrel this morning and looks set to challenge the high seen in July 2008 of $145.49. Anemic economic growth, extremely loose monetary policies, sovereign debt risk, geopolitical risk and surging oil and commodity prices is a recipe for stagflation which would see the precious metals replicate their performance of the 1970’s when gold rose 24 times in value (from $35 to $850) and silver by over 32 times (from $1.55 to $50). Silver over $100/oz is not as outlandish as once thought with dealers in Hong Kong mooting that possibility. Strong demand for silver is being seen in Asia (see news). Inflation has taken hold in much of the developing world and is taking hold in developed world markets now. Despite very significant price increases in vital commodities, particularly the essentials of food and energy, there remains much denial about the threat of inflation and indeed the threat of stagflation.
The “RISK OFF” trade could deliver a huge flight to safety for Treasury bonds. Is shorting short dated bond puts the best play?
The death of the yen carry trade? Sounds like mass hysteria to me...
Finally, we have a true liquidation flight to safety. We expect the Fed will come to market with an announcement before market opens tomorrow.
All corporate earnings forecasts have just been rendered meaningless. We could be putting in a 50 year double top on the yen here. Taking a bite out of global economic growth. Flipping from a +2% GDP growth rate to -3% in two minutes. International trade takes a major hit. The looming electronics parts shortage. The death toll could go to six figures. Don’t rush out and short Japanese insurance companies. (FXY), (YCS), (EWJ).
The massive earthquake and tsunami that has rocked Japan is being digested by markets and the economic ramifications and uncertainty is leading to risk aversion. Tokyo gold futures rose on the news with the most active gold contract on the Tokyo Commodity Exchange, February 2012 inching 0.22% higher to 118,000 yen prior to giving up those gains. Gold is marginally lower in dollars but higher in euros, Swiss francs and British pounds. After the falls on Wall Street yesterday the Nikkei was already under pressure when news of the quake broke at the end of the trading day. The Nikkei fell 1.7% today and is down over 4.11% for the week. The Japanese yen was sold in the immediate aftermath of the quake. Counter-intuitively it then recovered and is the strongest currency in the world today (see table). Market participants appear to be seriously underestimating the risk posed by the megaquake to the Japanese economy and assets. Alternatively, there may have been intervention by the Japanese authorities in order to maintain confidence and protect the value of their currency and bonds. The Bank of Japan, like the Federal Reserve, regularly intervenes in foreign exchange markets and has even intervened in equity markets by buying ETFs linked to the Nikkei and the Topix. Considering the sharp selloff seen in equity markets in recent days, gold’s resilience is impressive. Gold is down nearly 1% for the week and a lower weekly close could see the short term momentum change and a period of correction and consolidation.
After an attempt by the BTFD brigade to restore balance to the central planning force just after mid day was thwarted by developments out of Saudi Arabia, the upward bias gave up the ghost and correlation trading took over, with complete flight to safety overtaking all novel factors, and the market closed below key technical support levels, including both the 50 and 55 DMA. In fact the market closed below the 55 DMA for the first time since September 1, 2010. The stunningly resilient Euro also plunged, as all capital flew to the 10 Year. The last time we had an open to close move as large as today's was August 11 2010, when the market was spooked by the then downgrade of the economy by Jan Hatzius. As a reminder, the only thing that saved the market in August, and why stocks took off and never looked back at the end of August, was because the Fed announced QE Lite in mid August, and then leaked QE 2. What will have it this time, nobody knows.
Flight to safety into US Treasuries is back: today's $13 billion 30 Year bond priced at 4.569%, the first drop in issuance yield since September 2010, but the stunner was the Bid To Cover, which at 3.02 (compared to last month's 2.51) was the highest ever. The said, Primary Dealers did come in and buy more than half the auction or 53% to be precise with the knowledge they will promptly flip it back to the Fed in the next few months (we will find out when after the new POMO schedule is posted at 2 PM today). Indirects were 40.7%, higher than the LTM average of 37.7%, and Direct Bidders filled out the take down at 6.4%. Altogether a strong auction if one can make that statement in an environment when the PDs are well aware there is no auction purchasing risk at all courtesy of Brian Sack.
As Credit Suisse points out, today the Gold/Copper ratio is up by over 4% to 3.32, which happens to be the biggest one day move since June 29, and confirms that not only the copper run may be over, but that derisking and the flight to safety trade is truly back on. Although one hardly needed to see this chart to come to that conclusion: even as the market continues to expect an announcement from Bernanke that CTRL-P Central (f/k/a the Marriner Eccles building) will start printing crude any minute, the wait may end up being quite protracted. And while gold has not been touched yet, and in fact continues to trade at all time highs, we wish to repeat our warning that should the crunch in the S&P continue (even if it is modest by historic amounts), it is very likely we may see liquidations in HF precious metals holdings considering the HF margin debt position is at virtually all time highs, meaning the toxic spiral of plunging prices and broad deleveraging in advance of margin calls, will lead to a sell off in anything and everything that is not nailed down.