Monday, January 31, 2011

Gold Headed South
Joe El Rady

I've never been a fan of gold. First, it's not a true commodity as it has no intrinsic value. You can't eat it. You can't put it in the tank of car. Its value stems from scarcity and "store of value" which, quite frankly, renders it no better than FIAT currency, except for the inability to manufacture more. Furthermore, all the gold ever mined would buy you five Apples, five Exxons and all of the farmland in the US (and then some... a trillion dollars more, I think)... that seems silly, I'd rather own Apple, Exxon, and all of the farmland in the US.

Nevertheless, the specter of approaching inflation, real or imagined, drove the price higher. Don't get me wrong, you can always make money by analyzing and tracking market psychology. Regardless, soaring commodity prices, rising real estate values, and increasing wage demands in emerging economies have caused inflation, which, in turn, has caused rising interest rates, making gold look less and less interesting to investors. (Margin requirements have also been tightened, making it harder for investors to take wildly speculative positions). All of these factors have forced a reversal in gold prices.

Adding to the dampened demand caused by the above mentioned factors, the rise in prices has elicited massive selling by consumers of gold jewelry and coins. This has fattened wholesalers' inventories.

Given all of the above, for now, gold will fall. In the longer term, given market psychology and impending cost push inflation, prices will almost certainly rise.

Yen Headed South
Joe El Rady

Imagine for a moment, the world's worst managed economy: the bleakest outlook, lowest yielding currency and a debt to GDP ratio (not kidding about this) approaching 200% of GDP... ahh... Japan! Now imagined for a moment that this country boasts the world's strongest bond and currency markets, even given its government's attempts to sink them (the Japanese government must keep the yen under control in order to maintain export levels). No more imagining necessary, this is an unsustainable situation.

I'm not reacting, knee-jerk style, to S&P's recent downgrade of Japanese sovereign debt from AA to AA-. If you know me well, you've heard me declare many times about the unsustainable fiscal situation in Japan. But I've never felt as much immediacy and dread as I do now.

The clock continues to tick and I can feel a serious punishment coming to Japan from global bond market investors. With all the attention focused on Europe's shortcomings, investors seem to have forgotten Japan's disaster in the making. Really, the clock ticks faster and faster towards a time when Japans ridiculous 1.2% ten year bond yields will be history. For my part, I'm considering shorting the Yen.