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Gold, Dollar "Disruption", And Central Banks' Miscalculated Insanity

Tyler Durden's picture




 

Submitted by Jeffrey Snider via Alhambra Investment Partners,

The main problem with looking at the financial world from a “dollar” funding perspective is that there really is no such monolithic existence. The funding conditions in Russia may be very different than those of Swiss banks; they also may be far too similar. Given the impossibility of direct observation, being left outside and searching for interior clues that bubble out every now and again, that means a broad range of indications are necessary to even think about suggesting hardened opinion.

As a start, the trade-weighted dollar index is helpful in framing the general terms. But I think it’s over-appreciation for the euro in light of that proportion sometimes leaves it susceptible to only that comparison (or the yen). Thus, it may disregard far too much of other “dollar” function where it is less generalized.

ABOOK Jan 2015 Gold USD TradeW

Even still, there does seem to be a bit of a break in “dollar”-driven global discomfort these past two weeks. Whereas December was sharp and dangerous, January in the broader, global sense may be calmer outside of Europe. That may suggest the target of retrenchment has shifted from Russia or Brazil to Switzerland or even Europe in general. As far as the emerging “dollar” proxy, that seems to be the case, as the Brazilian real, for example, has taken a break from disorder these past two weeks as Europe demanded the glaring focus.

ABOOK Jan 2015 Gold Real2

That makes renewed interest in gold that much more difficult to separate. Clearly there is a sustained gold bid these past few weeks, but that it has coincided with what looks to be a break in “risky” dollar behavior clouds the interpretation. I have little doubt that there is a renewed bid for safety underneath the gold price, but I would be more convinced of its robustness if it were evident at the same time as negative price pressures from gold-as-collateral substitution.

ABOOK Jan 2015 Gold Real

This latest upswing dates back to just after October 15, which is a pretty powerful statement itself about both the function of the global “dollar” short as well as how that affected, potentially, perceptions about the need for the ultimate hedge. That the price of gold diverged on December 1 from the real, a “dollar” proxy, strengthens that interpretation still further. We will have to see if it survives another dramatic inclusion of wider, non-European “dollar” disruption, or if it yet again succumbs to this never-ending tie-up with international wholesale desperation.

ABOOK Jan 2015 Gold GOFO

In policy terms, there is nothing about current Fed operations that would suggest a possible explanation for the rise in gold, at least not in the manner typically assigned. The nature of FOMC business these past few months has been one of public activity toward a potential end to ZIRP; a factor which should be largely negative toward gold under convention. However, these “activities” have amounted to the opposite of reassuring expectations for a less ferocious transition toward monetary “normalization.”

The Fed has tested now two distinct programs by which it claimed, each on separate occasions, to be definitive toward the desire to gain “control” over the short-term interbank rate situation. In the space of these past six or seven months (dating back to the outbreak of repo fails in June), both programs have been shown to be almost totally indiscreet, and thus wholly ineffective.

ABOOK Jan 2015 Gold RRP

ABOOK Jan 2015 Gold TDF

I think that may, again, indirectly, be providing some measure of uncertainty bidding under the price of gold during this period. Not only is there significant “dollar” disruption of its own accord, the FOMC has made plain yet once more that it doesn’t know what it is doing. A policy apparatus that is essentially out of control and completely powerless, if not totally oblivious, to highly vital “dollar” function is certainly a case where financial participants might increasingly desire a “worst case” hedge. Like the eurodollar curve, then, the price of gold may be telling us that increasingly financial agents are at least increasingly unsure about the future whether or not the Fed actually gets to “tighten”; it may not matter either way and end up in the same disastrous condition regardless.

ABOOK Jan 2015 Gold Reserves

As I said, the quantity of bank reserves have largely plateaued with the end of QE (the TDF’s effects notwithstanding temporary presentation otherwise) which would seem to provide no backdrop for gold’s bid under convention. Recent strength persists anyway.

With gold forward rates looking like there is perhaps about to be another “dollar” disruption, it will be interesting to see how gold behaves given this run from the October 15 appearance of open and broad financial difficulties. The behavior of the operational end of the Fed’s exit, I believe, has only served to heighten potential worries about the whole range of problems that already exist (lack of any economic progress chief among them) and so gold has largely joined dollar credit markets in growing unease and even rising fear.

It isn’t really about interest rates or “inflation”, obviously as gold is rising as inflation “expectations” dramatically sink here, so much as gold is insurance against central banks being wrong. That seems to be the common theme all over the world ever since June when the ECB placed its desperation and impotence on full display. Everything that has occurred since then has only confirmed the monetary illusion being exactly that, including the US and its central bank’s place at really the central point of the miscalculated insanity.

 

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Fri, 01/23/2015 - 20:08 | 5698488 knukles
knukles's picture

Gold is insurance against bad shit happening before my survival rate drops to zero

Fri, 01/23/2015 - 20:14 | 5698510 Romney Wordsworth
Romney Wordsworth's picture

I just like to lick mine on Friday nights.

Fri, 01/23/2015 - 20:35 | 5698565 kliguy38
kliguy38's picture

I hope you're talkin' bout your gold

Fri, 01/23/2015 - 20:42 | 5698578 Romney Wordsworth
Romney Wordsworth's picture

what's the difference? But to make it official, I prefer SHE licks mine on Friday Nights

Sat, 01/24/2015 - 09:12 | 5699399 eddiebe
eddiebe's picture

Gee you lucky bastard, I wish I could lick mine.

Fri, 01/23/2015 - 20:17 | 5698519 kaiserhoff
kaiserhoff's picture

Someone once told me, gold is for kings, sliver is for gentlemen.

I told him, he should be careful who he is calling a gentleman.

Fri, 01/23/2015 - 20:21 | 5698520 Tinky
Tinky's picture

In-depth analyses are fine, some more useful than others, but the simple fact remains that the world is awash in fraudulent and inflated paper claims, and when the inevitable collapse unfolds in earnest, demand for real assets and real collateral (of which gold arguably stands alone) will be unlike anything we've previously seen.

Fri, 01/23/2015 - 20:22 | 5698525 kaiserhoff
kaiserhoff's picture

Real assets...,

  like tampons in Venezuela?

 

Fri, 01/23/2015 - 20:23 | 5698533 Tinky
Tinky's picture

That's a bloody good example, mate.

Sat, 01/24/2015 - 03:55 | 5699214 disgruntled hou...
disgruntled housewife's picture

Wicked witty Tinky.

Fri, 01/23/2015 - 20:24 | 5698527 AUD
AUD's picture

There is no argument, nothing stands close to the quality of gold.

Fri, 01/23/2015 - 20:29 | 5698546 BigDuke6
BigDuke6's picture

The point about what’s happening in gold is that analysed in any way you like it is moving higher as a series of events bolster its appeal, including:

The ongoing financial crisis in Europe which is to trigger a fresh round of money printing by the European Central Bank.

Fear that conditions in Europe will deteriorate further after a national election in Greece on Sunday which could be a precursor to a Greek exit from the euro monetary system and possibly the European Union

Last week’s pre-emptive strike against the ECB by the Swiss National Bank which broke a three-year peg linking the Swiss franc to the euro.  The Swiss action drove the value of the franc up sharply, effectively making one of the world’s safe haven investments more expensive, especially for Europeans who also found that a deposit in Switzerland comes with a negative interest rate which has been raised from minus 0.25% to minus 0.75%.

Switzerland’s action heightened interest in gold – while it might not pay interest when held in its physical form it is no more expensive than a Swiss bank deposit.

Continued economic uncertainty, including the latest World Bank global growth downgrade, hurting most forms of investment while boosting the case for gold which thrives in a crisis.

The oil price plunge, which has cut gold mine operating costs, especially in open pit operations, by as much as 12% by lowering the price of diesel and other fuel.

Still dont think its worth buying miners though.

Fri, 01/23/2015 - 22:03 | 5698777 Renfield
Renfield's picture

Agreed. Gold is a product already in hand; it's "safe", conservative. Buying shares in a mining business is not the same thing. HUGE risk, against many resources / producers (not just gold mines). Volatility, wars, currency events. Times are hostile to productive business.

Fri, 01/23/2015 - 23:13 | 5698926 OhNo
OhNo's picture

I would have to partly dissagree those Aussie gold miners are a bargin now, When SHTF gold mine security will be a big one. AND just made 130% in to weeks so im very happy thankyou RMS {ASX}.

Fri, 01/23/2015 - 20:35 | 5698564 gatorengineer
gatorengineer's picture

Gold is changing from Pricing in Euros to Pricing in dollars...  Nothing more nothing less...  It will either next price in RMB, or launch to the moon.

Fri, 01/23/2015 - 20:50 | 5698602 disabledvet
disabledvet's picture

See below and i agree with this.

 

There are some things that can only be bought for with "paper promises" tho.

 

Gold is an excellent measure of solvency but a poor measure of risk in my view.

 

I can have all the gold in the world but still engage in "risky business."

 

That says to me truth is the most valuable "currency of the realm."

Fri, 01/23/2015 - 21:19 | 5698694 BigDuke6
BigDuke6's picture

The moon scenario is only taken seriously by preppers.

Fri, 01/23/2015 - 20:36 | 5698568 GotNuttin'todo
GotNuttin'todo's picture

Maybe it's just Friday night numbness, but the comments here made a lot more sense than the article.

Fri, 01/23/2015 - 20:56 | 5698628 NoWayJose
NoWayJose's picture

No, you are correct. The article attempts to 'explain' gold. An impossible task.

Fri, 01/23/2015 - 20:55 | 5698632 Sanity Bear
Sanity Bear's picture

Brady over Yellen by at least 11.5 deflation references... it's going to be another blowout.

 

Fri, 01/23/2015 - 20:56 | 5698636 Vylahkinnen
Vylahkinnen's picture

If you speak up now, you will spend time in Sing Sing prison.

Fri, 01/23/2015 - 21:01 | 5698654 Vylahkinnen
Vylahkinnen's picture

March 19, 1831. Wall Street, NY. The first bank robbery in the United States.

Fri, 01/23/2015 - 21:23 | 5698702 Latitude25
Latitude25's picture

Sorry.  Didn't follow the logic of this article but agree with the conclusion.  There seems to be a loss of central bank omnipotence.

Fri, 01/23/2015 - 21:27 | 5698711 Gab Timov
Gab Timov's picture

hedgemony? did someone post that somewhere before? i don't know. i just wanted to make a clever comment somewhere.

Sat, 01/24/2015 - 12:32 | 5699635 frankly scarlet
frankly scarlet's picture

quick take:

the monetary debt/money system needing ever expanding growth to absorb more debt has currently hit the wall so deflationary forces grow.

the banking system fearing deflation and eschewing investment in capital production chooses blowing asset bubbles instead compounded by huge derivative bets forming the financial bedrock on which all the various debt instruments are stacked

gold along with other "insurance" assets become more attracktive as the central banking system twists and turns in keeping it's debt game going by creating huge amounts of derivatives and money by QEing to keep the system from choking to death on it's own" vomit". It is simply the E.Us turn to QE as the other financial economies of the other central banks have been QE'd as far as possible at the present moment. How long can the one world bank keep the juggling act going is anyone's guess but the options must be becoming much more limited with each option taken and used up. Real solutions like a debt jubilee or a citizen's dividend would point an accusatory finger at the banker's monetary system and will not be even contemplated other than as quickly being dismissed as moral hazardry for the masses.

When the economic collapse does come that will be the time to change the monetary system from the current debt/money system to one far more equitable for human kind as a whole and reducing the power of the money elites to orchestrate society with wars and boom bust cyccles. Having some gold and perhaps silver as ready "cash" as insurance against currency collapse is probably a wise decision for the foreseeable future IMHO.

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