Gold has crashed.
For Gold bugs and other believers this is very confusing. For those that have put their faith in gold this slump has also been very expensive.
Is this the end of the story for Gold?
The simple answer is no.
The key reason to be a heavy investor in gold is the belief that inflation is real and can only get worse.
Money fundamentalists somehow imagine money is a real tangible thing. Believing that money is real is a point of view and it may be right. To see money as something that should be physical, not the nearly intangible thing that money has become in modern times has, one could say, currency. From this point of view money should be an element that can’t be created or destroyed. Gold of course seems a perfect fit for this old fashioned romantic view point.
Yet money is a concept not a law of physics and Gold is just as arbitrarily money as paper or magnetic patches on your banks hard disk that is these days is the key record and store of wealth.
However all this theorising doesn’t help the gold believer or the gold trader to know what to do next.
What is going to happen?
It is my personal belief that May is the month that the real money rebalances its portfolios. Trillions of dollars of market action, involving hedging and arbitrage takes place until a spate of giant portfolio rebalancing ends.
This year’s rebalancing is towards the dollar. The big money has gone long the dollar because interest rates in the US are going up because the Federal Reserve is going to slow its QE processes and begin to turn around the juggernaut of zero per cent interest rates.
Gold is the anti-dollar, so gold has been hit by this move.
As such, systemically Gold’s crash is a replay of all the equity slumps we have seen in the previous years when May has seen a rebalance from equities to bonds.
This year, long dollar is short gold.
This rebalancing, and I think it’s fine to point fingers at the sovereign wealth funds of the world, causes temporary dislocation because of its giant scale and creates a cycle of correction followed once the rebalancing is complete by a rally driven by a reversion to equilibrium.
As such Gold should rally at the end of the summer. This rally should start in line with previous equity rallies and should run for months.
This is of course pure speculation but an easy one to follow and capture if it starts to come to pass. If the pattern of 2010-2012 equity corrections repeats this year with Gold, May-June turns out to be the low, but volatility isn’t replaced by a consistent rally until August and most likely mid-September.
The west is most likely to take the road of inflation to reset its chronic debt woes and this will see Gold at unprecedented levels. However if the developed world takes the Japanese deflationary route to create massive debt to GDP ratios rather than cut back then Gold will not be a good bet. For Gold to prosper in the short and medium term the west has to throttle back on its public sector and withdraw its support from the burgeoning dependant classes, while pulling the 'go for growth' lever. The reverse just might happen. That is not a high likelihood but it is worth keeping a look out.
The key sign of this would be boosting the capital requirements on banks to force them to hold government debt. Financial repression is one way to kick the can down the road for quite a few years and the Japanese solution would not be good for Gold.
However I believe in the inflation story.
But do not forget Gold as an insurance policy from financial disaster and monetary devaluation. This might seem like a good thing but insurance policies cost money and as such gold is as likely to carry a cost to hold as hold a promise of profit.
Gold is the anti-dollar and in the short term it seems that the dollar is in for a rally.
Japan, Death of a Nation. Part 2.
There is an economic war going on in Japan. It is between the inflationists and the Deflationists. Inflation gives to the young while deflation does the opposite. In a chronically aging country, which is overpopulated, with associated economic and environmental problems, which now has a dramatically falling population dynamic underway, deflation makes sense especially if you are thinking of the needs of old.
It is for the young to carry the old on their backs.
Many would think this the duty of the young.
The counter argument is pretty basic. Defence and retrenchment are not normally good strategies. The retrenching defenders always succumb to the offensive aggressor. The best defence is to be strong and vigorous. To protect the old the young must be strong not weighed down.
As such the best future for Japan is through empowering the young not draining their strength. No parent or grandparent would want otherwise in any event.
This is the ideological battle line between Japan’s decrepit democracy and its overpowering financial government by the long term monetary policy of the Bank of Japan.
For now at least there is a war between these diametrically opposed doctrines, a battle between weak, democracy lead growth and strong, politically independent institutionally reinforced retrenchment.
Earlier this year I wrote an article in Forbes called: (link)
This was the graph. (watch out)
The Nikkei collapsed within 60 point of this line.
To me this correction was bound to happen, because the battle between inflation and reactionary reflation would not be won so easily. Yet the scale of the following crash and the ferocity of the volatility was beyond my expectations.
The reason?
I didn’t think the Japanese Prime minister could/would lose. This turns out to be a naïve and hasty conclusion.
Right now it looks highly likely that he has already lost.
But that is not a foregone conclusion because normally politicians have oceans of resilience. However this strength is not so noticeable in Japan. In Japan democrats capitulate with regularity. However this Nikkei chart line is an important indicator.
It is the battle front between inflationist and deflationist in Japan and it is still too early to call the defeat of Abe even though the counterattack seems so decisive.
If there is to be a battle, this will be the indicator of who is in charge and winning.
Right now it is the deflationists. The deflationary offensive that kicked off when the trend line was reached has been dramatic and massive.
Unless Abenomics rallies from here quickly and fights back convincingly it is all over for the Japanese recovery.
The Nikkei has based for now, so the next decisive move will show if Abenomics is dead or fighting on.
It will take a historic move for Abenomics to fight back. Now mere words will be enough.
In the background a strengthening dollar could ride to Abenomics rescue because the whole process of Japan’s turn around revolves around weakening the yen to an extend that Japanese industry can compete effectively. Even the BOJ can’t fix the dollar yen rate if the US tightens.
So as another Japanese PM’s future hangs in the balance, it is the Nikkei, the 1 yen 1 vote democratic voting system that will predict the outcome at Japans last gasp to escape the suffocation of demographic collapse.
So, 'Ganbatte Abe!'