Tuesday, December 07, 2010
Bounce-time Baby. We are happy with yesterday's thoughts as today the scramble to de-leverage the stress trades grabbed hold with the world looking just like an old fashioned "risk on"/"bash the Dollar"-fest. Usually at this time of year, TMM are cursing Voldemort and his Death Eater chums for coming in with a massive Euro "buy" programme. The past few weeks they have been somewhat absent from the market, but TMM knows that Voldemort loves to screw speculators, so to come in right now when the market is trying to be bearish Euros would be "very FX".
Commodities are all screaming higher too and though oil took a bashing in the back end yesterday and the soothsayer signals suggest a sell, there appears to be a rampant background chat of $100 around the corner which no doubt will suck in another round of
spivs short term traders. So rather than "Red Adair" it we' d rather let it burn itself out.
But there really hasn’t been much Macro change - it feels more like the positional Micro (though we are sure that the world will be allocating retrospective Macro news headlines to explain it all). Now with everything going just so swimmingly with our bounce view and us being the stupid bored adrenaline junkies that we are, we thought it fun to do the equivalent of going for a swim at Sharm el Sheik and raise the matter of our nemesis. Duck! Incoming Spam Tins!
So TMM have dusted off their trusty Gold-Real Rate charts and found to their surprise that since the QE2
set sail sank, Gold has diverged significantly from real rates. Indeed, while during the May Eurozone turbulence, both Gold and Real Rates moved in unison, excepting a brief QE2-fade trade, Gold has pushed to new highs, while real rates have crept back up to where they sat in late-September. To date, TMM's view has been that Gold is only a bubble if US Treasuries are, because the moves in Gold have been fully consistent with those in the Treasury market. But this is something different, with the Gold vs Real Rates relationship suggesting a 14.5% valuation gap (the largest we have noticed since 2008 - see chart below: white line - Gold, orange line - 10yr World real rates) and increased chatter about Gold being "the true" reserve currency. While we generally try to stay clear of these quasi-religious debates, it's looking increasingly like Gold is getting a bit "frothy" again. Of course, this divergence could just be year-end balance sheet-related as dealers (and leveraged money in general) have been caught long USTs at the wrong levels. TMM are just as wary of putting on large RV trades just before year-end, but it might make sense to begin scaling into long Treasuries vs short Gold betting that this relationship snaps back. The one worry we have, however, is that now that Europe has had its fiscal crisis, the next fiscal domino to fall (Uncle Sam) could play havoc with this trade. But that is probably next year's story.
The Sharm el-Shiekh toe-dipping trade is the GOLD/UST one, but the full immersion, Steve O, Jackass trade is Short XAU/EUR (see chart below). We are going for the latter. Yeee haaaaw!