Quotable

“I’ve learned many things from him [Soros], but perhaps the most significant is that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” – Stanley Druckenmiller

FX Trading – Does any of this sound familiar?

I read with interest the decision by Stanley Druckenmiller to close his global macro hedge fund.  The guy was good—very good.  He quietly went about his business of thinking about how the world works and positioning in front of capital flows—in or out—and got it right most of the time.  It is easier said than done and, in his remarks describing why he was ending it, it was clear he spent much time working and not so much playing precisely because this stuff isn’t easy; and to be as good as he was for so many years … it’s more than luck.  It is hard work being open to what the market is really telling us.  But a deep understanding of global capital flow from the top down seems the key to his success.  We try to mimic that here as it relates to currencies. 

I share that to share this: Last Saturday I visited my outlaws—mother-in-law and father-in- law.  Yes, the aforementioned gold bug father-in-law.  Despite my jabs at his bug status, my father-in-law is a seasoned and savvy investor who has seen most of this stuff before.  He said to me last Saturday: “I get a kick out of these fund managers who show up on CNBC or Bloomberg and tell us they are really long-term bulls, but short-term we are a bit concerned and blah…blah…blah…”, in effect constantly hedging themselves so they can be right both ways.  Nothing new there if you’ve watched these guys; but what is funny, is that I tuned into CNBC yesterday afternoon, for some unknown reason, and they had emerging market analysts telling us how much they loved emerging markets … cash flow, P/E’s, growth, China … the usual stuff.  But the funny part was one of them said exactly—I mean exactly— what my father in law said on Saturday.  

Okay, now to the point.  What is interesting about the emerging market analysts is they actually believe it is their bottom-up analysis and deep insights into balance sheets and annual reports and stuff like that which makes them successful.  And I guess that has to be part of the shtick.  I am sure Druckenmiller never saw it that way.  He likely understood clearly that emerging market investment was about the liquidity flow model, plain and simple. 

S&P 500 Index (black) versus Emerging Market Index (red) Weekly:  It would be easier to find Waldo than it would to finding the decoupling in the series below.  

…..read pages 2-4 HERE

Manipulative selling of gold on the daily London PM fix has failed to suppress the gold price since April 2009, when China announced that it quietly had accumulated a large gold reserve over the previous five years, the Gold Anti-Trust Action Committee (GATA) disclosed today in a statistical study by its board member, Adrian Douglas.

Since April 2009, Douglas finds, ever-increasing dumping of gold in London by central banks and their bullion bank agents has been having less and less effect on the gold price. He concludes that the second “London Gold Pool” — a clandestine one, unlike the first — is imminently facing a collapse identical to the collapse of the first as physical gold demand overwhelms the ability or the desire of the market riggers to provide the necessary metal.

The result of the 1968 failure of the first London Gold Pool to suppress gold was an appreciation of the gold
price from $35 to $850 per ounce. A similar percentage today would carry gold to almost $30,000 per ounce. Douglas says, This is not a price forecast but an indication that when free market forces have been frustrated by market manipulation for a very long time, the equilibrium price can be many multiples of the suppressed price, and the rise is typically rapid when the suppression is overcome. 

Douglas’ study is titled “The Failure of the Second London Gold Pool” and can be found at GATA’s Internet
site HERE or at https://marketforceanalysis.com/articles/latest_article_081810.html

Douglas is publisher of the Market Force Analysis letter
and his study also can be found at the Market Force Analysis Internet site HERE

anada’s economic soundness has garnered renewed interest amongst foreign investors. The country was fortunate to escape the economic crisis unscathed, unlike the rest of the world. It boasts one of the strongest financial systems on the globe, ranking best in the world by the World Economic Forum.

While it appears that the Canadian economy remained unscathed throughout the financial crisis of 2007-2008, further deterioration of public finances combined with declining exports while commodity prices remain high may put further pressure on the Canadian economy. With the global economic recovery in doubt, Canada’s resilient economy is beginning to mimic that of the United States in 2006-2007:

• Unemployment is now moving upwards, 170,000 full-time jobs were shed in June
• High reliance on exports to the United States, United Kingdom, and Japan
• Foreigners continue to divest of Canadian securities
• Canada’s trade balance is now negative
• Public finances, including federal and provincial, are in terrible condition
• Unfunded liabilities continue to grow in Medicare, CPP, and OAS
• Home sales have begun to fall off a cliff, down 30% since implementing HST

…..read it all HERE

The dollar denominated copper price benefited from a Euro recovery beginning in mid July.  Other base metals also gained from the falling Dollar.  Traders had become more cautious about gold after its long uptick, but some greater comfort with the economy after Europe managed to push back from the brink also helped the brief move into base metals.   However, internal fundamentals are also playing a role copper’s price move.

Warehouse stocks of copper listed at the LME [London Metals Exchange] have continued to decline from February highs.  This decline did slow somewhat when the red metal’s price gain bumped up against the $7500/tonne ($3.40/lb) level in late July.  In Shanghai the July turnover of copper was off by 40% from a year ago and by 7% relative to June, but warehoused copper listings had declined there earlier in the month and have staid at that lower level.  An early August decline brought Comex listed warehouse stocks of copper below 100,000 tonnes.  Since mid March when a surge of copper into the Shanghai listing peeked, the aggregate warehoused copper stocks in the three markets has declined by over 20%.  This was despite projections for a small surplus of new supply.    

The consolidation in copper’s price after it touched $3.40/pound in July leaves it well below the $3.60 post-Crunch peak in April.  Since this is very much a traders’ market there may be some further play in copper on a technical basis.  Copper’s price does look strong compared to pre-Crunch pricing relative to warehouse stocks that were then significantly less than half their current levels.  That still makes us cautious about chasing after the copper price at this level even though, or perhaps because, it is getting more popular in the general press.  We certainly consider that optimism warranted for the medium term, but want to see further decline in its warehouse stocks before expecting copper to tack into the headwinds of a worried economy.  

Copper’s recent popularity has contrasted with gold which seems to be finding more naysayers with each little price dip.  It’s true that Indian retail buying of the yellow metal, which was fully a quarter of gold’s demand for decades, still looks very limp compared to past years.   The current lack of inflation in many economies is also being pinned as a reason to avoid gold.  There is irony in how these two currently tie to each other and to past cycles.

Gold has lost its retail allure in India partly because the price gains for it have been matched by high consumer inflation that has been acerbated by poor harvests on the subcontinent.  A bout of disinflation could help gold demand in India by generating some spare Rupees that could be spent during traditional gold buying for festivals and weddings.  It’s possible that India is simply less interested in the yellow metal as its economy strengthens.  However, gold’s weak retail market has been buffered by a greater investment demand for it in India, and elsewhere.

In the industrialized world the low interest rate environment is being helped by weak consumer inflation.  Inflation is weak because consumer demand has withered in large measure due to concerns about the economic system remaining whole (a far more potent check on inflation than adjusting money supply, as the Japanese could tell you).  Gold investment has grown hugely over the past few years because it is durable, and neutral to the performance of specific economies.  Weak consumer inflation and gold’s price gains due booming investment demand both result from the same pool of concern. 

In a short run warehousing cycle the price of gold and consumer prices generally do rise in tandem, as the cycle matures.  We are however in a secular cycle and gold is being bought as an alternate store of wealth / insurance policy in the industrialized world.  It will take a lot more economic strengthening, and a lot less sovereign debt, before markets push away from the insurance role that gold is playing in wealthy economies.  The yellow metal never stopped playing its insurance role in India and other places were the financial system historically isn’t trusted, but the amount of gold taken up in these less wealthy economies is still very sensitive to price and domestic budgets.  Day to day gold trading may be influenced by assumptions about an historic relationship to inflation, but history can’t be read as a guidebook during this rapid eastward shift of the global economy.  

If you are trying to gauge global inflation we suggest you keep an eye on the red metal rather than the yellow at any rate.  We are entering a long period in which individual supply/demand fundamentals rather than economic stats will focus metal pricing, but Dr. Copper’s price changes will still reflect the broader demand shifts that will have an impact on inflation.  Copper’s supply side is tighter than most other commodities, and trading the metal is after all the origin of all the sophisticated strategies of our moneyed economy.  Keeping on top of the copper market’s internal fundamentals will continue to be very useful to understanding the larger message copper’s price augers.      

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