Notes From Underground: Clearing the Air of Bad Assumptions

Last night’s BLOG attempted to make sense out of all the chatter around the gold action of the last few days, and, more importantly, during the last several months. The points I tried to make were:

  1. A reiteration of a theme I have stated over and over again, that the GOLD MARKET WAS/IS A TIRED BULL and that investors were leaving the moorings of great store of value or haven. The GOLD has been the repository of investor and traders confidence in a very unstable, insecure investment climate. The GOLD has risen for 11 straight years and as any market can correct as the financial landscape changes. As investors have gained comfort that the world central banks have for the moment been successful in generating some economic growth, money has left the precious metals in search of more risk-oriented assets with  a yield attached. It is no mistake that it is the large-cap, strong dividend stocks that have led the way. A failure to understand that and react accordingly is just a case of myopia;
  2. I, IN NO WAY INTENDED TO INFER THAT I HAD INTERVIEWED JIM SINCLAIR AND THAT HE PROVIDED ME WITH A PRICE TARGET FOR THE CHINESE. HE DID NOT AND I CERTAINLY DID NOT INTERVIEW HIM. THE ONLY POINT I WAS TRYING TO MAKE WAS THAT I AGREED WITH JIM’S RECENT COMMENTS ABOUT THE NEED FOR CHINESE AND RUSSIAN GOLD PURCHASES TO PROVIDE THE NEEDED BUYING TO STEM THE AVALANCHE OF SELLING FROM FUTURES, OPTIONS and ETFS. When markets correct, be that housing or stocks, it is THEN YOU LEARN THE PAIN OF LEVERAGE. Gold has been a very popular, profitable investment, which means that in today’s world of financial engineering leverage is involved. I wholeheartedly agree with Jim’s analysis that the massive selling can only be absorbed by a massive buyer, be it a desirous procurer or somebody with a massive short wishing to cover.

My insertion of the November 3, 2009 date is the way I write on Notes From Underground. I always analyze significant dates, be it FED meetings, G-7 or G-20 conferences and seminal speeches from significant global actors. Note the October 14/15 blog about the G-20 meeting and the possible impact on the YEN. When the IMF sold a large holding of GOLD to the Indian Central Bank, the Chinese were very unhappy as they had been desirous of making large purchases from centralized authorities. My citing of the price $1045.00 was the price that the India/IMF deal was consummated at, thus putting in a price level where the Chinese MIGHT have interest to be a BUYER. This was NOT JIM’S LEVEL IN ANY WAY. It was my analysis. The point was/is: THE CHINESE ARE ASTUTE TRADERS AND WILL NOT CATCH A FALLING PIANO.

Blog responders noted that the Chinese have not necessarily been very credible investors. I disagree with that. THE CHINESE ARE NOT TO BE CONFUSED WITH THE JAPANESE OF THE 1980s. The Chinese do not chase markets as their buying in the global agriculture markets. When investors have bid up grains and other commodities, the Chinese have cancelled orders, negatively impacting global markets (soybeans being a recent example). The Chinese are also not buying TROPHY ASSETS, but rather purchasing needed natural resources and corporations. The Chinese Sovereign Wealth Funds have bought global economy corporations knowing that they have changed the world’s demand curves. Even if they don’t acquire the oil they will benefit from a rising asset value and high dividend payments (remember that oil is for the most part fungible). Again, the onus is not on Jim Sinclair for this view, but solely belongs to me and the way I look at the world. Will the Chinese be buyers of GOLD? I don’t know, but logic would say that they would continue to diversify away from pure paper assets.

More importantly, the question I will ask again: Why DO CENTRAL BANKS CONTINUE TO HOARD MASSIVE AMOUNTS OF GOLD WHEN DECRY ITS VALUE AS AN ASSET? That was the purpose of the drum I have been beating for the last 30 months—GOLD BACKED BONDS –may as well put some utility to what Keynes and others have referred to as the BARBAROUS RELIC. The purpose of this BLOG has been to enlighten traders and investors to the workings of the global financial system. I do not tout but try to reveal possible profitable areas no matter what your time frame.

I have ranted a bit, but my mail box was filled with all sorts of nonsense in a challenge to my knowledge base. I have provided this BLOG for no charge but merely for the opportunity to share views in a world awash in so much pure economic and financial nonsense. Scroll back and read the blog from the beginning, dealing with the Greek debt crisis in December 2009. It began with the Chinese reneging on an agreement to buy 25 BILLION EUROS of Greek bonds. It’s another fine example of the astute investment decisions made by the Chinese Sovereign Wealth Fund.

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19 Responses to “Notes From Underground: Clearing the Air of Bad Assumptions”

  1. Whitewavetrader Says:

    Great piece, how soon they all forget, and how myopic they all become!

  2. tfp Says:

    Spot on.

  3. Ronald Ferrill Says:

    Well done, sir. I for one regret responding without giving enough thought to my thought. So, maybe just a thoughtless reaction? (by me).
    Please understand that your Blog is one of very few that I look forward to and read completely. I see it as an opportunity to learn and expand my understanding of global economics and markets.

    Wouldn’t it be great if you could un-Blog people who just irritate the heck out of you with idiotocracy (a word I made up one evening while in a discussion with a couple of colleagues – seems fitting in the right circumstances and right people).

    Please don’t un-Blog me! I might be an “idiotocrat”, but have a willingness to at least make to court fool.

  4. yra Says:

    ron–let me tell you that your post was a very solid one–the shit doesn’t make it thru.And your posts are and have been very solid–the Tom Lehrer add from Plagirize kept me form Poisining Pigeons In The park—and it is time to classify Gold as Just another Element–but that of course needs a different chart with a longer Periodic

  5. Chicken Says:

    I see three potential price levels on the chart, 1330, 1250, 1130

    I’d be surprised to see 1130, but anything’s possible.

  6. larry Says:

    rock on Yra. don’t know who gave you a hard time, but they should go pay for a blog that is unbiased and just about imparting years of knowledge and market savvy and macro views for the reader.
    you are the man–thanks
    Larry

  7. Marianne Says:

    Yra, I must admit I frowned when I read your post on Sunday:
    “Jim Sinclair has stated that GOLD PRICES will drop until the Chinese and Russians step in to begin unloading paper assets to purchase hard assets.”
    I have read him for a number of years every single day, and DO NOT recall ever having read something like this. What I understood he has been saying is the Chinese and Russians are buying bullion on dips, never a word about ETFs, options, gold futures and other paper gold instruments they need to unload, nor a price target. That in my view is a big difference! Therefore the totally undeserved stinky comments he received following your blog entry. I appreciate the work you do free of charge and on his recommendation read also your blog every time. However, it just goes to show how careful one has to be with phrasing things when so many international people are on the internet, many of whom are no fools at all!
    Best wishes
    Marianne

  8. Alex Says:

    Yra. You’re one of the first sites I visit every day, keep up the great work. If anyone had a pop at you, don’t worry, it’s just how things are on the web if you publish material. Plus, emotions are running high at present in CERTAIN markets…

  9. Vincent Allan Says:

    Thank you Yra for all you do to inform me with your experience.

    Your insights are invaluable and have helped me see the markets with the entire world as the backdrop.

  10. Rob Syp Says:

    At the end of last year sold my 2 krugerrands and stock portfolio. With the grains at the start of the month now oil and gold in the mix making 1.7 in treasuries doesn’t seem like a bad place to park money. On the other hand somebody was (is) short energy and metals and I commend them.

  11. kevinwaspi Says:

    Yra,
    Your experience, insights, and ability to “connect the dots” have you in a rare (and shrinking) subset of market participants. Anyone grousing at you for observations you make, inferences drawn, or thoughts discussed, does not have the patience or wisdom to engage in a discussion on that level. Keep up the fabulous work!
    Kevin

  12. rohrintl Says:

    HI Yra-
    When Gold reacts to mayhem by dropping further from the bottom of a long slide it verifies your view that it was/is a very tired market.

    The wild parts are the degree to which the long term futures trend was already on down acceleration from below 1590 back in February (even if it enterred one of those slow-mo reactions into March), and that youn and I watched this same sort of thing before… out of the late 1970’s into the early 1980’s. Why would anyone be surprised that what goes up must come down? And it’s still got quite a ways to go before it gets to the underlying trend support from the major 1999 low.

    Best regards-
    AR

  13. Mario Says:

    The few who view the world in a manner most can not fathom to understand. That perception has allowed me to learn, earn and return that to many of those around me(as you share with your readers). Glad Eggs pointed me in the right direction. Thanks again Yra

  14. yra Says:

    Marianne–the paper assets I allude to are the fiat currencies that they continue to acculmulate.The Chinese are not unloading options ,etfs or futures,that is the role of other investors but it will take Chinese buying to put some near term support by unlosding the paper assets they continue to accumulate–sorry to confuse.The ideal scenario would be the chinese to swap bonds for gold but at this point that is fantasy but not out of the question.

  15. Chris Says:

    Perhaps a good way of viewing gold is what it costs a company to produce the stuff. If it costs between $1100-$1300 an oz (based on what I have read elsewhere), then maybe a floor in that area is reasonable. Certainly, it would eliminate the miners as one hedger at least (:

  16. yra Says:

    Chris–don’t get caught up on the price of production.Yes,when capitalism is allowed to work a falling price resulting in real losses will curtail production and prices will eventually correct but the pain until that happens can be great.

  17. Chris Says:

    I hear you- not stuck on that concept at all. I agree that with no inflation in sight, gold is vulnerable.

  18. realitythought Says:

    Yra,

    I read your blog all the time. I don’t have anything to say about this current blog, but I definitely want to express my appreciation for your thoughts and insight. I’m not certain what caused the problems. I really just want to say thanks for all your effort.

    Thanks,

    Sam

  19. Andy Says:

    Yra,
    Thanks for posting your thoughts for all to read. I too thought the same thing as Jim Sinclair has been flogging his book and calling for 3500 gold for ages. I mentioned the 1045 number to him back in Jan its the 50% retrenchment of the bull run why not fart and fall back. We should begin to see an up move once the flush is over.
    Just glad its short sleeve season as I lost some linen in thi s latest down draft.
    Thanks,
    Andy

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