It was only a year ago that the PRECIOUS METALS were laboring under the continued selling of GOLD and SILVER as the John Paulson hedge funds were liquidating long positions to meet the huge amount of redemptions by long-time investors exiting the decade’s best performing FUNDS. In a repeat, Morgan Stanley announced today that it was redeeming its investors out of Paulson’s two largest funds after another year of questionable performance. In today’s world where one hedge fund can hold massive positions, divestment by disgruntled investors can initiate massive corrections. In 1980, when the Hunt Brothers caused great turmoil in the silver markets, they had a mere BILLION DOLLARS to play with (the Paulson funds control close to $15 billion under management.) As traders and investors it’s our job to be cognizant of all the animals in the jungle. When the elephants retrace their steps from the watering hole, small animals can get crushed (Niederhoffer).
The Paulson redemptions have certainly been disruptive and may continue to be, but as we saw last week the market tipped us off that something was wrong when POST-FOMC the GOLD failed to rally. The GOLD/EURO and GOLD/SWISS spreads broke key support levels, which also provided us with indications that change was taking place. Regardless of the underlying fundamentals, large funds flows can always render the best analysis woefully inadequate. This is why I always caution to have your technicals in place and know when you are wrong so as to keep losses small to live to fight another day. As BOB MARLEY SINGS:
“Emancipate yourselves from mental slavery,
None but ourselves can free our mind”
Redemption song can cause great havoc but once you can get past the dread of being wrong use it to your benefit. The terrain of the financial battlefield is forever in flux. Adjust your plans accordingly.
****From the forgotten continent that is Europe … 1. There’s an article in tomorrow’s Financial Times
about France facing a growing pension deficit. The markets have resigned themselves to the idea that Mario Draghi has secured the fate of the EURO
and removed the threat of EURO
dissolution. Not only has the EURO
rallied to 1.33 but the European debt markets have stabilized and all of the borrowing costs of the beleaguered debtors have narrowed versus the German bunds. The French 10-year notes (OATS)
have performed well as the initial threat of French economic problems has diminished. A piece from Reuters on Monday–”Some Hedge Funds Dump Their Bets Against France”–noted that funds were taking losses on OAT
short positions that failed to materialize. The ECB
‘s actions have forestalled the immediate threat to Europe’s economy … for the moment. The French and Italian BOND FUTURES
will continue to be a barometer of problems in Europe. As an aside, the ITALIAN 10-YEAR NOTES (BTP)
are higher at the close today than previous to the Mario Monti resignation announcement. (NOTE: Something to keep in mind: Before we had the OMT, we had the 3-year LTROs, the first of which was conducted one year ago December 21.)
2. In a release today, the Dutch finance minister said the Dutch economy will experience negative GDP next year, -0.5%. Previously the Dutch had predicted that GDP would grow by 0.75%, but the Dutch austerity budget and economic stress in the euro zone was causing a contraction in the economy. If the EURO keeps rallying, growth will likely slow even more. The U.S. fiscal crisis is taking Europe out of the headlines but the problems for the ECB and Brussels have not diminished. And with the recent efforts by the Japanese to weaken the YEN, the problems for Europe are going to increase as the EUR/YEN cross continues to rally. The German auto industry has experienced great growth as the very strong YEN has been a negative for the Japanese auto industry.
***Tonight the BOJ will announce its interest rate decision and any type of new QE program. This is the BOJ‘s last meeting before Prime Minister Abe takes control of the government. The fact that the YEN has depreciated six percent since the last meeting, BOJ Governor Shirakawa may be less aggressive at this meeting and opt for no change. The market is looking for some new stimulus so inaction by the BOJ may lead to YEN short covering because of the massive short YEN positions in the market. These are the beginning of holiday markets and year-end book squaring … warning that movements can be sharply magnified. The new Japanese prime minister certainly plans to utilize the YEN as an instrument of monetary policy but it will be a matter of how and when.
Presently, verbal intervention has provided the initial thrust to weakening the YEN. We will wait to see what 2013 brings in the way of BOJ policy instruments and certainly the pressure from the Ministry of Finance. In Sapporo Japan, there is a sign that records the words of the American, William S.Clark, to his Japanese students. Mr. Clark was hired by the Japanese to teach agricultural techniques to Japanese farmers in the 1870s. His message, which is on the sign welcoming visitors to Sapporo reads: BOYS, BE AMBITIOUS. No doubt PM Shinzo Abe will admonish the BOJ to do the same.
Tags: BOJ, BPT futures, Eur/Yen, Euro, France, Gold, gold/euro, gold/Swiss, Hunt Brothers, John Paulson, oats, QE, Shinzo Abe, silver, Yen