Is Gold decoupling from the dollar?

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Is Gold decoupling from the dollar?

Most daily commentaries blame the inverse relationship between the gold and the dollar as the main reason for gold's moves, said Phillips and Spina.

gold-chart.jpg

And that "normal linkage" has been decoupled because of "worries over fiat currencies," leading traders to establish gold positions as protection against an unraveling of fiat currencies, said Charles Nedoss, a metals analyst at Olympus Futures. "This can be referred to as the 'fear trade'."

 

 

http://finance.yahoo.com/banking-budgeting/article/108922/gold-breaks-th...

Also

http://www.financialsense.com/editorials/phillips/2010/0226.html

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Re: Is Gold decoupling from the dollar?

Yup. I do believe so. 0 Hedge had a good piece on this last week. Also Sinclair had a good piece on it decoupling from Uncle Buck, equities too. 

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Re: Is Gold decoupling from the dollar?

Kitco's gold index measures how much the price of gold is influenced by USD changes vs. market forces.

http://www.kitco.com/kitco-gold-index.html#RT

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Re: Is Gold decoupling from the dollar?

I'm convinced that the story is broader than just gold-DX decoupling.

I watch metals, treasuries, the dollar index, and S&P futures all day long. For several months, it was so predictable... The DX goes one way, and all the other "risky asset classes" (everything but treasuries) move the opposite way in unison. A purely liquidity-driven, tightly correlated market. Now all the correlations are breaking down. Somtimes metals move with equities, sometimes opposite. Sometimes gold and silver move together in lockstep, at other times like last week they move independently.

I'm convinced something fishy is going on with treasuries (specifically, long bond futures). The instantaneous reaction to the "news" about consumer confidence of equities down, treasuries up basically made sense given that the market has yet to figure out that treasuries are a poor destination for a flight to safety. But the up-move in treasuries was disproportionate to the down-move in equities. Then equities reverted back a bit, while treasuries kept on going to the upside. All on the eve of some of the biggest treasury auctions in history which were facing less than robust investor interest.

This all brings me to a hypothesis: For many months now, the PPT has been propping up both equity and bond markets for the sake of political agenda, using the overnight futures market for leverage. This is why the vast majority of the gains since the march lows have occurred in the overnight futures session, not the normal trading day. But there comes a point when even the gov't can't keep on propping up both treasury and equity markets, and something has to give. I think we are nearing that point.

So I posit that rather than doing their normal prop-up-equities game, the PPT saw the more critical need to prop up treasury markets in advance of last week's auctions. So rather than another doctored set of number, the gov't finally let several bits of data out that they knew would hurt equities but help treasuries: consumer confidence and jobs were the big ones, but there were several other smaller tidbits last week that helped provide cover for upside manipulation of treasury markets. And for the first time, they seem willing to let equities get hurt in order to preseve the more important treasury market.

They're running out of bullets, folks. I think we're getting close to the big money waking up and figuring out that this whole "recovery" has been a sham.

Erik

 

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Re: Is Gold decoupling from the dollar?

So rather than another doctored set of number, the gov't finally let several bits of data out that they knew would hurt equities but help treasuries: consumer confidence and jobs were the big ones,

I thought this was strange too. It seemed uncharacteristic of the MSM.

Erik. What are your thoughts on the EU and the IMF participating in 'quantitive easing'? It seems they have an interest in pushing gold prices down and keeping the dollar up.

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Re: Is Gold decoupling from the dollar?

Erik, to me the biggest move the Fed had to make was to raise interest rates. Seemed it was earlier then they wanted to. All because China didn't want to keep up the buying as Japan continues to do. Then this week China buys half of IMF's gold. It will be interesting if the Fed raises rates again or just continues the tough talk. Jon

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Re: Is Gold decoupling from the dollar?

Erik, et al,

Using your thoughts/rationale...

Then applying...1.) Some basic principles of science (physics) of conservation of mass/energy;  2.) Economic principles of world-wide fiat currencies...even more highly leveraged debt...programmed trading...etc.

Doesn't this pose an exceptionally high risk of a highly non-linear phenomena (1987 on steroids) that could cripple much of the US, if not world economy?

Then...if agreed...the huge, nearly instant impacts to much of our daily lives?   One Example:  How do banks stay open?

If not so, why?   For several months...analysis keeps drawing me to this inference.

Any enlightening and clarification would be helpful.

 

Nichoman

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Re: Is Gold decoupling from the dollar?

A new ‘China syndrome’

However, in the face of all this the White House seems to be implementing a series of foolish policies, with one action in direct contradiction to another. This is the case in terms of recent Washington behaviour towards China, the largest holder of US Government bonds, at least until this past month.

The Obama White House has recently approved punitive import tariffs on Chinese auto tires. Then it increased friction in relations with its largest creditor by announcing a provocative new arms sale of billions of dollars to Taiwan over strong Chinese protest. In addition, Secretary of State Hillary Clinton has meddled in internal Chinese Internet regulation by openly criticizing China for alleged censorship.

Then, as if to rub salt in a wound, despite further official Chinese protest, US President Obama officially met with the Dalai Lama in a Washington ceremony on February 18. Genuine concern for the well-being of Tibetan monks was not likely the reason. It was to signal heightened US pressure on China. Officially, to date, Beijing has reacted calmly, if firmly. Its real response, however, might be coming in a financial arena, not a political one, something that the ancient Chinese military philosopher, Sun Tzu, would have no doubt suggested.

It appears that the Chinese government has already begun to react to the ill-timed US pressures on China by boycotting US Treasury debt buying. In December the Chinese were net sellers of US Government bonds, selling more than $ 43 billion worth of US debt. Given its huge annual trade surplus from its export earnings, the National Bank of China currently holds reserves of foreign currencies and other assets, including gold, worth $ 2.4 trillion. At least 60% of that is believed to be in US Treasury and other Government-guaranteed debt, perhaps some $1.4 trillion. If China continues to dump US debt onto international financial markets, the dollar will plunge and a full panic will ensue in Wall Street and beyond.

To try to reverse this trend of boycotting US bond purchases by foreign central banks and others was likely the real reason that the Bernanke Fed now suddenly raised a key interest rate, despite the worsening of the domestic economy in real terms. They seem to be engaged in a colossal market game of bluff, trying to convince that “the worst is over.”

That Fed move, as well as recent hedge fund and Wall Street attacks on the Euro in the context of the Greek events, are looking more and more like covert economic warfare for the future survival of the US dollar as world reserve currency. As my latest book, Gods of Money: Wall Street and the Death of the American Century explains, US global power since 1945 has depended on having the dollar as undisputed world reserve currency and the US military as the world’s dominant power. If the dollar falls away, the over-extended military becomes vulnerable as well. 

The Fed is in a desperate situation of trying to avert a full bond market selling panic that would trigger such a financial chain reaction collapse. This is why it raised one rate while leaving the more important Fed Funds rate at zero. It’s a desperate bluff. So far the lemmings in the financial markets appear to have bought the trick. How long that will last is unclear.

As the Greek crisis is resolved and it becomes clear that the situation, however difficult, in Spain and Portugal and Italy are not about default, as their problems are no where near terminal, the prospects for the dollar and euro could change dramatically.

In this situation China’s central bank holds major power to decide the possible outcome. One possible outcome of the growing global impasse is the prospect that the People’s Bank of China will dramatically increase its purchases of gold and silver reserves. That, in turn, could serve China far better than buying more US debt, and serve as a basis to establish a future role of its currency in regional trade and international business independent of the dollar or the euro.

http://www.financialsense.com/editorials/engdahl/2010/0223.html

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Re: Is Gold decoupling from the dollar?

Many of us have pondered the same question(s) over and over:

1. Why does China continue to throw good money after bad by continuing to buy U.S. treasury debt?

The answer to that question is pretty obvious: They almost certainly wish they could get out of their entire position, since it's clear that they'll never get paid back in real terms. But three factors stop them from selling their present holdings:

   a. Significant selling would panic the market, cause a huge sell-off, and mean the value of China's remaining holdings would deteriorate markedly as soon as the TIC data revealed that they were selling in a big way. Their holdings are too large to sell off completely in a single TIC cycle without spooking the market with excessive daily volume. The recent very small sale of short-dated bills may have been a test to see how the market would respond to further selling.

   b. China needs to buy U.S. treasuries in order to maintain its currency peg to the USD

   c. Setting aside economic concerns entirely, China derives a lot of political power from holding these purse strings, and may be well served to hold their U.S. T-bonds at a financial loss for the sake of the negotiating power they derive from retaining the ability to threaten to dump them in the future.

(b) and (c) are big and serious issues worthy of careful consideration, but most investors have primarily pondered (a), leading them to the next obvious question:

2. So, if China is going to wait to dump its U.S. Treasury holdings for an opportunity to do so without crashing the market and loosing the value of most of their holdings, how might that scenario develop?

I certainly have pondered that question long and hard. But just the other day I was struck with an epiphane: Perhaps China is waiting for the next big equity crash?

Consider their predicament: They can't sell off their massive $2T of holdings because there aren't anything close to $2T worth of buyers. So if they started selling en masse, their sales would crash the market before they'd dumped the first 10% of their holdings. But if you subscribe to the view that recent stock market strength is based on a phony recovery and that this is just a big bear market rally, then you would expect that sooner or later there will be another really big downside shock to U.S. equity markets. When the next big move down in equities occurs, there will be a massive flight to quality, creating nearly unlimited liquidity in treasury markets. The vast majority of institutional idiots still perceive U.S. Treasuries as the "safest investment on earth", and they continue to implement the "safety trade" by dumping other assets and buying treasuries.

So if I were China, ignoring (b) and (c) for sake of argument, I would wait for a big equity market panic and the ensuing safety trade. Then I'd just sell all the treasury holdings the market will tolerate without the price slipping down. In a massive flight to safety, that $2T of treasury buyers would suddenly be there just when [China] needed them. They could dump all their holdings in a month, and by the time the next TIC report was released, they'd be fully liquidated.

The risk would then be transferred from China to the instituions engaged in the safety trade, and when they tried to move back into "risk assets" again, it would be them rather than China who would be blamed for tanking the treasury market and creating an irrecoverable fiscal/monetary crisis for the United States. Interest rates would baloon into the high teens within weeks, the equity markets would be crashed, and America would basically be cooked. And China would have gotten its money and walked away just before the final hurrah.

So I'm going to start paying close attention to historical norms for how much treasury prices increase in a flight to safety away from equities, and watch the price relationship very closely when equities sell off again, which I'm convinced they will. If we see equities tank but treasuries stay flat (rather than rising sharply as one would expect in a flight to safety), that will tell me that China is using the equity crash as an opportunity to divest itself of its treasury holdings. When that happens, it means America's days of living beyond its means on borrowed foreign capital are over.

Of course a big equity sell-off doesn't mean China will use the opportunity to dump its treasuries. (b) and (c) above are still very important factors. But it seems to me that an equity market crash is what would give China its exit opportunity, and I'll be watching closely to see whether they take advantage of it.

Erik

 

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Re: Is Gold decoupling from the dollar?

Erik,

Thanks for your thoughtful analysis. It certainly makes some sense.

 

Ken

 

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Pipe Dream.

Decoupling is a goldbug pipe dream.

For how many years now have we seen PMs move in lock step with equities? 8 years? Sure, there is a lag in the correlation, but its well established.The irony of the situation is this: In this "anything-but-the-dollar market", when you buy gold you are really buying the stock market.

The safety that you seek in buying gold is an illusion. In times of crisis, the safe investment is the polar opposite of the exhausted groupthink trade. To expect gold to magically decouple from every other financial asset at an opportune moment is just too convenient to be a market reality. 

Markets exist for one reason: To separate a fool from his money. To think that somehow you can avoid this agenda by buying gold just proves the point.

 

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Re: Is Gold decoupling from the dollar?

Started in 2003-2004. I like my dream Money mouth Jag: You are one of my favorite reads on this blog, but with all respect, I don't think many are on board. Gold is global. Paulson could barely get people in his hedge fund as interested in bullion as he is. WTSHTF then everyone will pile on. If they don't go to a gold standard it will then be time to pull the chord. IMHO. I hate gold, but Uncle Buck is a marked man. The Anticurrency aka Bernanke has arrived.

 

 

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Re: Is Gold decoupling from the dollar?

Two correlating news articles:

China sells 35 Billion worth of U.S. Bonds in December of 09: http://www.telegraph.co.uk/finance/currency/7300770/Concerns-grow-over-C...

Confirms intention to buy 191.3 tons of Gold from the IMF: http://english.pravda.ru/business/finance/25-02-2010/112369-china_gold-0

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Re: Is Gold decoupling from the dollar?

So what do the Chinese do with $2 Trillion?

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Re: Is Gold decoupling from the dollar?

Hi Johnson

Welcome to CM

So what do the Chinese do with $2 Trillion?

Buy more gold and silver.

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Re: Is Gold decoupling from the dollar?

Clearly some of it will probably be used for that purpose.  Or in taking delivery on forward contracts previousl;y written and planned for.

 

There should be plenty US$ left over...

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Re: Is Gold decoupling from the dollar?

here are 3 possible scenarios to consider - and my best guess as to the result:

1)  The economy bleeds with no shocks for a long time.  The printing presses slow, but the amount already printed enters the market (makes it from reserves to the masses).  This causes either inflation or stagflation, and the buying power of the dollar goes down and gold goes up relatively.  This is what has happened for most of the last decade - gold going up, dollar going down....for the most part.

2)  There is an economic shock similar to what we have seen in the last couple years (no bank holidays, but massive corrections in all asset classes).  In this case, deflation takes hold as it did in the previous waves.  Stocks, gold, oil, housing all plummet in value.  US Dollar and treasuries spike up. 

3)  There is an economic shock bigger than we have seen.  Bank holiday.  Lets say the system collapses.  In this case, dollars become extremely rare (they are locked up at the bank, and reserves are at all time highs still and none of the printed money is in the hands of the masses).  In this case, massive deflation takes hold.  In the short term, markets move just like #2 above, but perhaps more extreme.  Dollars are worth more than ever, as well as food and whiskey.  Worst case, the government has to overhaul the system.  They will do whats either best for those in power, or best for the masses.  This means a move, at least short term, to socialism/communism - where everone gets rations.  Gold is useless in this system - people want food, oil, shelter, booze.  Gold is useless.  Also, gold is worth a fraction of what the dollar is relative to pre crisis - - why?  Because 99% of the masses still "get" the dollar - and have been programmed to use it their whole lives.  Trading gold will seem insane to 99% of people out there.  They will laugh at you for trying to give you a coin they have never seen before for some bread.

So, my take is that unless we are in for a slow, contained, calm bleed, that the dollar is better than gold.  In shock and panic, the dollar has rallied hard vs everything else.  Overall money supply is in sharp contraction now.  Fewer dollars out there.  I think the probability of no shock or panic in the coming years is quite low vs a slow bleed. 

 

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Re: Is Gold decoupling from the dollar?

Well Rickets,,

I'll take my chances on my PM's.  History shows that you're wrong.

Good luck!

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Re: Is Gold decoupling from the dollar?
rickets wrote:

here are 3 possible scenarios to consider - and my best guess as to the result:

1)  The economy bleeds with no shocks for a long time.  The printing presses slow, but the amount already printed enters the market (makes it from reserves to the masses).  This causes either inflation or stagflation, and the buying power of the dollar goes down and gold goes up relatively.  This is what has happened for most of the last decade - gold going up, dollar going down....for the most part.

IMO the only way they are going to stop the presses is to rob your (and everyone else's) 401K's and IRA's. We take in 2.2 trillion and we blow 2x that, 4x that if you use GAAP. Slowing the press right now means immediate default. Bernanke is in the basement of the Fed counterfeiting our deficit, which if you look at the TICs and analyze the bond sales you shall see there aren't enough buyers.

Maybe if there was a equity crash people would fly to perceived safety, what I consider the last bubble. Short of any of that I don't see #1.

rickets wrote:

2)  There is an economic shock similar to what we have seen in the last couple years (no bank holidays, but massive corrections in all asset classes).  In this case, deflation takes hold as it did in the previous waves.  Stocks, gold, oil, housing all plummet in value.  US Dollar and treasuries spike up. 

You might want to look at the above chart I posted. Basically this sounds like Oct/Nov 2008 - Gold went up after getting winded (think it took a 100 dollar an ounce shot in the gut) and hasn't looked back since.

rickets wrote:

3)  There is an economic shock bigger than we have seen.  Bank holiday.  Lets say the system collapses.  In this case, dollars become extremely rare (they are locked up at the bank, and reserves are at all time highs still and none of the printed money is in the hands of the masses).  In this case, massive deflation takes hold.  In the short term, markets move just like #2 above, but perhaps more extreme.  Dollars are worth more than ever, as well as food and whiskey.  Worst case, the government has to overhaul the system.  They will do whats either best for those in power, or best for the masses.  This means a move, at least short term, to socialism/communism - where everone gets rations.  Gold is useless in this system - people want food, oil, shelter, booze.  Gold is useless.  Also, gold is worth a fraction of what the dollar is relative to pre crisis - - why?  Because 99% of the masses still "get" the dollar - and have been programmed to use it their whole lives.  Trading gold will seem insane to 99% of people out there.  They will laugh at you for trying to give you a coin they have never seen before for some bread.

So, my take is that unless we are in for a slow, contained, calm bleed, that the dollar is better than gold.  In shock and panic, the dollar has rallied hard vs everything else.  Overall money supply is in sharp contraction now.  Fewer dollars out there.  I think the probability of no shock or panic in the coming years is quite low vs a slow bleed. 

 

I'd read some on Zimbabwe, Google panning for gold for food +Zimbabwe. Also, you might want to listen to Dines on King World News, iDoctor posted it on yesterday's DD in the comment section, he explains Korea and their recent devaluation. 

That's my take - time will be our judge, best luck.

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Re: Is Gold decoupling from the dollar?
ErikTownsend wrote:

Perhaps China is waiting for the next big equity crash?

...

So if I were China, ignoring (b) and (c) for sake of argument, I would wait for a big equity market panic and the ensuing safety trade. Then I'd just sell all the treasury holdings the market will tolerate without the price slipping down. In a massive flight to safety, that $2T of treasury buyers would suddenly be there just when [China] needed them. They could dump all their holdings in a month, and by the time the next TIC report was released, they'd be fully liquidated.

...

Of course a big equity sell-off doesn't mean China will use the opportunity to dump its treasuries. (b) and (c) above are still very important factors. But it seems to me that an equity market crash is what would give China its exit opportunity, and I'll be watching closely to see whether they take advantage of it.

This makes a LOT of sense.  Which is useful to me, and also a scary scenario.  Like so much of life these days...  [grin]

Thanks, Erik.

Viva -- Sager

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Re: Is Gold decoupling from the dollar?
rickets wrote:

Gold is useless in this system - people want food, oil, shelter, booze.  Gold is useless.  Also, gold is worth a fraction of what the dollar is relative to pre crisis - - why?  Because 99% of the masses still "get" the dollar - and have been programmed to use it their whole lives.  Trading gold will seem insane to 99% of people out there.  They will laugh at you for trying to give you a coin they have never seen before for some bread.

If there a significant historical precedent for gold being useless in a major economic crisis?  If so, it's news to me.   

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