Notes From Underground: The King of Hearts

Dateline, the King of Hearts:

Why? Because the inmates are truly running the asylum. We do not criticize this fact for without this there would be no Notes From Underground. Gold sold off for another day as the DOLLAR rally continued. The global community became fearful of Greece and the overvaluation of Dubai equities. In the Middle East, Iran has accused the Saudis in the disappearance of a leading Iranian nuclear engineer.

So as risk gets unwound the perceived beneficiaries of the risk trades are being unwound the fastest. We cautioned that the Chinese warnings late last week about a bubble in GOLD would cause some short-term stress to a very crowded position and we have seen a sizable correction. This is why we always advise that one has to know whether to be a trader or an investor. We at Notes always try to think like investors but use all of our tools to trade so as to always survive another day. We believe though that we are coming to a point where great opportunities will avail themselves. The Chinese have not given up on GOLD but are merely trying to prevent themselves from chasing the “bubble.” In our thought process, all the fears that the talking heads were dwelling on today give more credence to fear of FIAT money. Stress is the global system calls the question able GOLD and the deflation argument–for if the global system fails to grow with all the liquidity thrust upon it, what trick do the model builders running the G20 have up their sleeve? The DOLLAR as a safe haven upsets the designs of the Obama administration as they believe in devaluing the U.S. to rebalance the global financial system.

In the Dec. 8 Financial Times, there was a wonderful opinion piece by Robert Aliber. We have great fondness for Aliber for his books on currencies written in the 1970s were a primer for us at Notes. Aliber said the U.S. should exert all the pressure they can on the Chinese to get them to revalue the YUAN, even going so far to impose Tarriffs on Chinese goods. His argument is based on the impact a similar strategy the Nixon administration invoked to force a revaluation of European and Japanese currencies in the early 1970s.The argument is interesting if you think the world and the roles of the present actors similar to that time. We are skeptical of that as the U.S. position has been terribly shaken by the 40 years of “we are all Keynesians now” mismanagement. If Aliber is wrong in his basic assumption about the Chinese being more dependent on the U.S. market than the U.S. is of them for financing and products, then terrible forces will be unleashed. In this fragile environment are the policy makers willing to play dice with the global financial system? And if they do step up to the crap table, what asset would you like to have in your pocket? Insurance anyone?

Please remember that the British pre-budget report comes out tomorrow so if the sterling comes under pressure from an unsatisfacory report it may lead to more turmoil and force the DOLLAR momentarily higher. Review STERLING support levels!

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