Macro Man likes gold from here

[*T*]

And we never fade Mr Macro in this house...

MM: What's Worth Buying?

While Macro Man traditionally been sceptical of the gold bug argument, he has to concede that it is more attractive now than at any other point in his career. If one takes the not-outlandish view that global short rates will converge at zero, give or take, then the opportunity cost of holding gold becomes very low indeed- particularly in the absence of any other higher-return asset that does not run a susbtantial risk of default.

While Macro Man does not necesssarily subscribe to the view that hyper-inflation is an axiomatic outcome of global QE, he does concede that inflation is an eventual risk should global monetary velocity stage a quicker-than-expected recovery. At the same time, he is amply aware of a small but highly-convicted cadre of punters that believe that global fiat currencies will ultimately be discredited by the time the current financial and economic crisis is resolved.

Just as the Bretton Woods system of fixed exchange rates was the outcome of the Depresssion/WWII, what odds that the outcome of a global effort to beggar-thy-neighbour is a return to the gold standard for major currencies (including the RMB)? Pretty small, in Macro Man's view, but not zero.

More prosaically, if this is a view that is being articulated in the market, then there may be a profitable trading opportunity. It is quite remarkable that gold has completely divorced itself from EUR/USD; after exhibiting an r-squared of 0.32 in 2007 and 2008, gold and the euro have exhibited zero correlation so far this year.

Indeed, the chart of EUR/Gold looks pretty bullish, as it last week closed above the prebious all-time high. While Macro Man has yet to be convinced that gold is a buy and hold from current levels for the long term, he will readily concede that it looks worth buying for at least a tactical punt.

[metalman]

Re: Macro Man likes gold from here

And we never fade Mr Macro in this house...

MM: What's Worth Buying?

guess it's always my role to point out...

While Macro Man traditionally been sceptical of the gold bug argument, he has to concede that it is more attractive now than at any other point in his career.

maybe macroman is just at new at this, but gold was way more attractive during the last deflation ruse in 2001 when it traded at $250. ej's forecast from there to his $2500 peak forecast nets the winner 10x with low vol and risk, while macroman's belated called best case (what's his peak target, any?) will yield you only 2.5x with heaps of vol and risk.

While Macro Man does not necesssarily subscribe to the view that hyper-inflation is an axiomatic outcome of global QE, he does concede that inflation is an eventual risk should global monetary velocity stage a quicker-than-expected recovery. At the same time, he is amply aware of a small but highly-convicted cadre of punters that believe that global fiat currencies will ultimately be discredited by the time the current financial and economic crisis is resolved.

welcome to ka-poom theory circa 1999...

Just as the Bretton Woods system of fixed exchange rates was the outcome of the Depresssion/WWII, what odds that the outcome of a global effort to beggar-thy-neighbour is a return to the gold standard for major currencies (including the RMB)? Pretty small, in Macro Man's view, but not zero.

welcome to the fourth currency...

More prosaically, if this is a view that is being articulated in the market, then there may be a profitable trading opportunity. It is quite remarkable that gold has completely divorced itself from EUR/USD; after exhibiting an r-squared of 0.32 in 2007 and 2008, gold and the euro have exhibited zero correlation so far this year.

that's 'cause the euro is a derivative of the dollar... as hudson explained to us... and gold is becoming, as itulip predicted, a 4th currency... no longer a recipricol of the dollar.

Indeed, the chart of EUR/Gold looks pretty bullish, as it last week closed above the prebious all-time high. While Macro Man has yet to be convinced that gold is a buy and hold from current levels for the long term, he will readily concede that it looks worth buying for at least a tactical punt.

so this guy waits until gold climbs 360% over 8 yrs... and 9% so far this yr... before making a short term trade call? i don't get it.

[oddlots]

Re: Macro Man likes gold from here

that's 'cause the euro is a derivative of the dollar... as hudson explained to us... and gold is becoming, as itulip predicted, a 4th currency... no longer a recipricol of the dollar.

Hey Metalman,

Could you do me a favour and point me to where Hudson discusses this "derivative of the dollar" point specifically? You seem very good at finding stuff here.

Re: Macroman's musings are way above my pay grade (though that never seems to stop me reading him.) I agree with Metalman that this seems like an oddly timed recco. Contrast the chart and comments Inca Kola's Otto posted today:

http://incakolanews.blogspot.com/200...day-is_26.html

[metalman]

Re: Macro Man likes gold from here

Hey Metalman,

Could you do me a favour and point me to where Hudson discusses this "derivative of the dollar" point specifically? You seem very good at finding stuff here.

Re: Macroman's musings are way above my pay grade (though that never seems to stop me reading him.) I agree with Metalman that this seems like an oddly timed recco. Contrast the chart and comments Inca Kola's Otto posted today:

http://incakolanews.blogspot.com/200...day-is_26.html

hudson's made the point repeatedly, most recently here...

your incakola guy is in the same camp as itulip... gold as insurance not for getting rich.

that said... he's off base on the alarms & red flags on sentiment. yes, a few more folks are talking about gold than before. why even the financial press... and why not? gold's practically the only thing that's up for 8 friggin years, for christ's sake. does the belated observation of this fact by the disillusioned disciples of 'buy&hold till wall street has all of my money' mean it's about to go down? silly. superstition. junk psychology. i've heard this crap a dozen times since 2001. 99% of financial blogs are run by a guy with tiny ears, an itty, bitty brain and a huge pie hole channeled into a computer keyboard attached... to our sorrow... to the internets.

[jtabeb]

Re: Macro Man likes gold from here

so this guy waits until gold climbs 360% over 8 yrs... and 9% so far this yr... before making a short term trade call? i don't get it.

Yes you do, you get it (and quite a bit earlier than MACROMAN, did).

It's called early adopter syndrome, and while it is a bad thing if you are buying a new TV it's a great thing if you are buying an investment.

Smile Metal, you are, have , and will do well.

[metalman]

Re: Macro Man likes gold from here

Yes you do, you get it (and quite a bit earlier than MACROMAN, did).

It's called early adopter syndrome, and while it is a bad thing if you are buying a new TV it's a great thing if you are buying an investment.

Smile Metal, you are, have , and will do well.

fair nuff, but i'm suspicious of guys who are this late adopting anything. what's it say about their judgment in general?

and why is he calling gold a short term trade? does macroman worry that central banks are about to raise interest rates? ooooo! i'm scared. :cool:

[jk]

Re: Macro Man likes gold from here

macroman is a macro TRADER. that's what he does. he tries to find little inefficiencies he can fade for advantage. don't look to him for long term calls. he does provide colorful commentary on the financial scene, however. i read him almost daily.

[metalman]

Re: Macro Man likes gold from here

macroman is a macro TRADER. that's what he does. he tries to find little inefficiencies he can fade for advantage. don't look to him for long term calls. he does provide colorful commentary on the financial scene, however. i read him almost daily.

thanks. you making $$$ on his trades? if so, i'll follow him, too

[oddlots]

Re: Macro Man likes gold from here

hudson's made the point repeatedly, most recently here...

Thanks for the reference. Read the piece again. To save others some time here's the portion referring to Euro as a "derivative" of the dollar:

MH: Right, so the real question we’re moving towards is whether other countries will have a currency of their own or not? I don’t see any sign of that yet. Or even a discussion of that yet. That’s what amazes me. Nobody is talking about the real issue, just like during the recent U.S. election.

EJ: So nobody is talking about creating a new currency?

MH: Do you know of any, apart from the “nutters”?

EJ: By “nutters” I assume you are taking about the one-world currency conspiracy theorists. One branch has the world going to a single central bank based on the IMF, with the IMF playing a key role.

MH: The reason that’s impossible in principle is that any currency is based on the power to tax – and taxes have to be passed by a legislature. “No taxation without representation.” The Euro doesn’t have the power to tax because there is no European parliament with authority over its nations. America is large enough so that it does have the power to tax and hence to have a currency. But Europe does not; it’s fragmented.

So the idea of the IMF offering a world currency is really about making the dollar deficit the world currency. That means backing world monetary expansion with American military spending abroad, America consumer spending (the chronic trade deficit), and the free lunch of the American takeover of foreign industry. That is not a model of stability for a world monetary system.

EJ: China recently floated a trial balloon about the idea of making the yuan a hard currency. What do you hear?

MH: That would require political changes that have not yet occurred. I know they are thinking about it. It’s almost as if you’re getting physicists together to create a new means of production.

EJ: Yes. People vastly underestimate how difficult that is to do, to create a global currency. For one thing, the Chinese would need to create a bond market that can compete with Japan’s and the USA’s. Can you imagine the difficulty?

MH: Yes. You need enough scale to get a critical mass. The question is, in what financial form would other countries hold Chinese currency – or that of any other key-currency nation?

EJ: There’s no European bond market. People forget that. That’s one of the reasons why the euro is not a currency. There are German bonds in euros, and there are French bonds in euros, but no central systemic European bond market.

MH: That’s right. And the neoliberals have blocked nations from running a budget deficit of more than 3% of GDP, so that prevents Europe from doing what America has done and create enough Treasury debt to absorb the balance-of-payments deficits the economy is running. It’s as if the Europeans haven’t even sat down to look at the basic balance-sheet relations of domestic money creation, tax policy and the balance of payments. In think that even in this country over the last forty years, the classes I taught at the New School in balance-of-payments accounting were the only graduate economic courses in this area that remains arcane to most economists and especially to politicians and journalists. They seem to be lost in a pre-scientific, non-quantitative frame of mind.

The Euro was mis-structured from the outset. Once you have something mis-structured, the costs of retrofitting – of undoing something and doing it right – is too expensive. That is why this bailout is going to be so expensive. How are we going to undo the $7.7 trillion that’s been wasted?

EJ: Playing devil’s advocate here, doesn’t that still put the dollar in a favored position, despite the problems here?

MH: Yes. It’s favorable politically and diplomatically, because other countries are still leaving it up to the dollar, to U.S. diplomats to define the coming world. U.S. diplomats always put American national interests first and other countries don’t put their national interest first. That’s an asymmetry we’ve had since World War II in the global financial system.
________

I've always wondered why Hudson never refers to gold as, in any way, a solution to the problem of dollar hegemony? It would seem to me that increasing gold reserves in US trade partners would be a sort of safety valve, a way of leaving the party without directly insulting the host. One of the things that makes me sanguine about gold's prospects is that I think this puts a bid under gold going forward for some time for exactly the reasons cited above i.e., that creating a real alternative currency is almost impossible. Is it foolish of me to think that gold has some value as a way of partially opting out of the dollar system? Why does Hudson seem to see no value - from his libertarian mindset - in gold either at the level of the state or the individual?

[bpr]

Re: Macro Man likes gold from here

Thanks, Oddlots and Metal. I didn't really understand that the first time around and now, while I'm sure I'm still missing part of it, the terminology "derivative of the dollar" clarifies it quite a bit.

[*T*]

Re: Macro Man likes gold from here

thanks. you making $$$ on his trades? if so, i'll follow him, too

Apart from finding him interesting I find he helps identify the current themes around which the market is trading. This makes his work extremely valuable as a timing tool.

Though I'm primarily a buy-and-holder, I can still benefit from buying at sweet spots.