Notes From Underground: WHERE DID THAT LATE GOLD RALLY COME FROM????

In a relatively quiet trading day, the GOLD market rallied $25 after spending most of the PIT TRADING DAY attempting to break and set up a correction to the recent rally. Shorts ran for cover. WHY? Two stories that gave the rally a rationale:

1. THE FED WAS RUMORED TO BE EXTENDING OPERATION TWIST BEYOND THE JUNE 2012 PERIOD

2. A STORY IN THE NEW YORK TIMES “GROWING AIR OF CONCERN IN GREECE OVER NEW BAILOUT,” by RACHEL DONADIO.

The rumors of the FED extending “OPERATION TWIST” SHOULD NOT HAVE HAD THAT IMPACT FOR IT IS NOT AN ISSUE OF INCREASED LIQUIDITY BUT ONLY DURATION. The impact should have been a flattening in the 5/30 TREASURY SPREAD rather than the GOLD.

The story in the Times was of greater interest as it raised the issue of GREEK BONDHOLDERS BEING ABLE TO SEIZE GREECE’S GOLD RESERVES IF THE GREEK GOVERNMENT DEFAULTS. This is the first time this subject has been discussed but it certainly called into question the use of GOLD as collateral. Greece does not have a great deal of GOLD as its reserves equal 1% of its national debt. The article quotes a Ms. Katseli, former socialist labor minister who “was also upset that Greece’s lenders will have the right to seize the gold reserves in the Bank of Greece under the terms of the new deal, and the future bonds issued will be governed by English Law and in Luxembourg courts, conditions more favorable to creditors.”

The sad fact of this story is that if Greece’s GOLD RESERVES are in play, why didn’t the Greek authorities just issue GOLD-BACKED BONDS and get some leverage? Just imagine investors bidding for GOLD-BACKED GREEK DEBT AND THE IMPACT IT WOULD HAVE ON GREECE’S BORROWING COSTS. IT SEEMS THAT INTERNATIONAL CREDITORS ARE WILLING TO CONSIDER GOLD AS A CURRENCY AND THUS STORE OF VALUE. HEY, IMF! GETTING ANY IDEAS ON HOW TO INCREASE YOUR LENDING POWER?

***The BRITISH POUND was the weak link in the currency realm as the BOE released its minutes and the Monetary Policy Committee (MPC) voted 7-2 on the 50 BILLION increase in the present QE program. The two nay votes were from members who wanted a larger increase of 75 BILLION. This perceived softness sent the POUND weaker on the currency crosses and the GILT markets rallied sending LONG RATES LOWER. The move in the POUND on such a nothing piece of news should be an alert about the impact of next week’s ECB release on the LTRO. Mr. Draghi, proceed with caution as the global markets await the size of the LTRO. The BOE and the FED have done the work to smooth the way for an aggressive ECB … the world waits.

***TODAY‘s 2/10 EURO YIELD CURVES: It seems that the ECB has begun buying Portuguese debt as the 2/10 curve in Portugal has been jumping wildly from inversion to positively sloped. Early in the day the curve was negative 30 BASIS POINTS but by day’s end it was 58 points positive. The ability of the ECB to affect the yield curves should not be underestimated and it is why the Italian bond futures are so volatile. CENTRAL BANK INTERVENTION IN THE DEBT MARKETS HAVE UNDERMINED THE MEANING OF VALUE … caveat emptor.

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4 Responses to “Notes From Underground: WHERE DID THAT LATE GOLD RALLY COME FROM????”

  1. dm Says:

    yra,

    nice to see you utter the word “gold”. unless you think the bull market recently ended, i don’t understand why a trader, not to mention one who has a seat on the cme, would not be focused on the gold market, as it seems to have the best trend going. seems like you’d have to work a lot harder to figure out what’s going to happen in the currency and interest-rate markets.

  2. Mayank Says:

    Hi Yra,

    Again, great post. From your previous posts you have mentioned depreciation in yen and rally in Japanese equities($ is up 4.41% against the yen YTD and Nikkei is up 13% YTD). I also believe that should be the outcome. Though what factors do you still see for yen to appreciate against the dollar this year, other then the ongoing debacle in Europe. Also, you have mentioned Japan’s central bank to be more active but do you see them to be if not more but as aggressive as the fed and the ECB.

  3. yra Says:

    Mayank—I think the BOJ/MOF have awoken to the way that the FED and ECB have been able to orchestrate massive douses of liquidity into the system and thus prevent the appreciation of their currencies;and of course for the moment the SWISS are the poster child of “positive” intervention,which is why the GOLD/EURO,GOLD/CHF and GOLD/YEN are moving towards all time highs in the previous 2 currencies[swiss and euro versus GOLD]—yes I think the BOJ will become aggressive but with the shutdown of nuclear power in Japan and the increase in oil imports may well prevent the BOJ from being as aggressive as their counterparts—but the rise in the nikkei is limiting the pain!

  4. yra Says:

    Mayank—also just read Peter tasker in today’s FT and he expounds on the theme in my response to your post—Peter Tasker a good read in today’s FT

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