Friday, February 02, 2007

Rigging the Market

EUR/USD 1.2924 Hi 1.2968 Low 1.2912
120.43 Hi 121.21 Low 120.39
AUD/USD 0.7752 Hi 0.7758 Low 0.7724
EUR/JPY 156.65 Hi 157.04 Low 155.50

There are a few ideas in the market right now. The most widely accepted idea is that the JPY will go down forever because interest rate differentials make speculating against the JPY profitable. This idea suggests that JPY selling will continue as more and more speculators come into the market to borrow JPY so that they can speculate profitably on other markets. So there will always be JPY sellers and their speculative activity will always be profitable.

In the event that fabulous new speculative plays do not instantly present themselves new JPY sellers will come into the market anyway to enjoy the YIELD benefits of the carry trade. Where all these new speculators are coming from I have no idea. At any rate there is no end in sight. This is the trade of the century and the trend is your friend. The USD/JPY will just keep rising. Only it isn't right now. Just a better opportunity to buy? I don't think so. Unless you are exceedingly lucky and exceedingly nimble.

For the whole thing to work market volatility must be contained and speculative investments made with borrowed JPY must continue to be profitable. Both of these conditions are big asks. Still that's the received wisdom out there.

And nobody expects the G-7 to do much about JPY weakness and nobody expects the Japanese to repatriate any money. EVER. And the whole market seems to be sitting the same way. So we have an accident waiting to happen.

OIL 59.33
GOLD 654.90

The Financial Times led on Thursday last week with an article suggesting that "an expert panel" recommended that the IMF should sell USD 6.6 bn worth of GOLD and invest the proceeds in higher-yielding assets as part of a strategy to put its finances on a sound, long-term footing". The IMF is reportedly having a hard time financing its activities. The USD 6.6 bn represents pretty much ALL the IMF's GOLD reserves. The only two members of this "expert panel" mentioned in the article were: Alan Greenspan and Jean-Claude Trichet.

Alan Greenspan is also the guy who kindly suggested that flexible interest rate mortgages might be a good idea. This when the FEDS FUNDS rate was at an all time low. Since then, mostly under the direction of Alan Greenspan, the FEDS FUNDS rate has risen 17 consecutive times. Evidently Greenspan's advice was aimed at giving the FED more control over the economy. If you have a flexible rate mortgage rate and the FED moves that impacts your bottom line DIRECTLY. IF you have borrowed fixed you are once removed from what the FED does with interest rates. So whatever Greenspan was aiming at he wasn't aiming to give sound financial advice to Mr. Joe Average. At the very least his advice and his timing were terrible.

And Trichet is the man who has now decided that, rising commodity prices or falling commodity prices, rising inflation or falling inflation, interest rates must keep rising in the EuroZone. Just because. Of course the ECB will wait until after the French Presidential election. Then some tacky econometric justification will be dusted off and used to explain what a whizz-bang institution the ECB really is. And none of you can understand the intricacies of Monetary Policy anyway so just take our word for it: rates have to rise. Trichet doesn't have quite the same kind of transparently dodgy track record as Alan Greenspan but then he works in Europe where a lack of transparency has deeper roots.

Now the IMF would not be the first semi-Government institution to sell GOLD. The Reserve Bank of Australia got the ball rolling and the GOLD bear market started back in the 1990s, much to the consternation of Australia's GOLD miners. The justification was much the same. I wonder if detailed accounts have been published with regard to just how well that little RBA investment strategy has played out? I doubt it.

As far as I am concerned the IMF could close up shop altogether. There is absolutely no evidence that the IMF has ever achieved anything but the pauperization of many Third World and Non Aligned Nations across the globe. Oh and the employment of a whole army of bureaucrats who earn TAX FREE SALARIES, enjoy endless perks and sleep perfectly well despite the fact that they have reduced entire populations to virtual slavery. Another mission accomplished.

But that is not the point. The point is the panel produced this dubious recommendation which was conveniently published on the front page of the Financial Times and then, lo and behold, just as NFP data was released in the States on Friday, a wave of GOLD selling hit the market in tandem with a wave of EUR/USD selling. And now there are dark mutterings of an attempted manipulation of the GOLD price. It would seem that the PPT and other shadowy forces are at work again. Someone has to stop the forces of evil coming up with an alternative to the USD as the global reserve currency. Otherwise whatever would become of the Project for the New American Century? Quite.

The GOLD bulls, however, have not been deterred. Confidence in the Bush Administration is not exactly at an all time high and holding the USD is increasingly looking like a very risky longer term strategy. The game is not over but at least we have a fairly good idea of who the players are.

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