April 14. Friday’s gold plunge: a bad omen for global finance?

–Interest rates continued to fall Friday as Retail Sales, Consumer Sentiment and PPI all printed lower than expected.  Tens fell 7 bps to 1.72, and of course the curve flattened as well with red/gold pack spread -6 bps to 1.52, nearing the previous Friday’s recent low of 149 (so far this calendar year low has been 142.6).
–The move in USDJPY has dominated many markets since late last year, highly correlated with the rally in SPX (and inversely tied, though much more loosely, to the price of gold. More on that below…)  Late Friday the US Treasury released a report warning Japan with this passage:  “We will continue to press Japan to adhere to the commitments agreed to in the G7 and G20, to remain oriented towards meeting respective domestic objectives using domestic instruments and to refrain from competitive devaluation and targeting its exchange rate for competitive purposes.”  While US and Japan are cooperating on N Korea, currency wars may become a bigger issue.  As it is, the rally in USDJPY appears to be stretched…
–The big mover on the day was gold, which fell $60 to levels last seen in the middle of 2011. Analysts pointed to Draghi’s comments that Cyprus may have to sell €400 million in gold as part of their restructuring, but of course that reason is simply another crack in the dam of world finance. (The Guardian): “If Cyprus can break the gold market, then [there are] many reasons to be worried, with Slovenia, Hungary, Portugal, Spain and Italy in line,” Milko Markov, an investment analyst at SK Hart Management, said. “It is a make-or-break moment for gold … if the market can’t handle the reallocation and Cyprus, then there is really a need for a bear market.”
–Many note that Italy could be next to be forced to tap its over 2000 tonnes of gold reserves (Let’s just call it a round number of $100B at $1500/oz).  But it’s not just Italy that’s of concern.  From the Telegraph quoting Mario Soares as elder statesman:  “Portugal will never be able to pay its debts, however much it impoverishes itself. If you can’t pay, the only solution is not to pay. When Argentina was in crisis it didn’t pay. Did anything happen? No, nothing happened.” [Portugal has 382 tonnes of gold].  And from CNN: “I think this could be a turning point,” said Jonathan Spall, director of precious metals at Barclays Capital. “Central bank stocks of gold which had looked to be ringfenced in the bailout process could now seemingly come in to play.”
–So that’s the key.  Germany, who recall asked to repatriate its own gold holdings from NY and Paris in mid-January, wants other countries to use their gold reserves to pay for their bailouts.  Could that be the last straw for countries considering a euro exit? And Texas last month also announced intentions to bring its physical gold holdings back to its home turf…. crazy?  Or a sign of just how rapidly confidence can fall in official institutions?
–Perhaps the fall in gold, silver, copper, is a reflection of deflationary concerns, which would be understandable given weakening econ data, the levels of Baltic shipping indices, softness in railcar loadings.  But if it’s more about forced selling of sovereign reserves, it may have much more ominous overtones, which also drives a bid into US treasuries.

Links:

TREASURY REPORT http://www.zerohedge.com/contributed/2013-04-13/scariest-50-hours

GOLD HOLDINGS http://en.wikipedia.org/wiki/Gold_reserve#Officially_reported_gold_holdings

THE GUARDIAN http://www.guardian.co.uk/business/2013/apr/12/gold-selloff-cyprus-eurozone-crisis

PORTUGAL:  http://www.telegraph.co.uk/finance/financialcrisis/9990651/Portugals-elder-statesman-calls-for-Argentine-style-default.html

CNN http://edition.cnn.com/2013/04/10/business/cyprus-gold/

BALTIC DRY INDEX  http://www.dryships.com/pages/report.asp

US RAILCARS http://railfax.transmatch.com/

Posted on April 14, 2013 at 4:46 pm by alexmanzara · Permalink
In: Eurodollar Options

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