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Posts Tagged ‘euro gold’

26
May

TECHNICALS OFFER SOME CONTRARIAN FINDINGS

   Posted by: Mr. Gold    in Uncategorized

Several weeks ago I dwelled on the relative merits of four musketeers – perceived safe havens in the times of market plague. The plague has since spread further, underlying the brittle state of market confidence, easily shaken up by anything from a takeover of a Spanish ‘caja’, to a Korean torpedo, to another regulatory rumor emanating from Berlin or Washington. The Japanese Yen, the German Bund, the US dollar and gold have all benefited from increases in risk aversion. In Yen’s case, this is a story of capital repatriation. The Bund’s triumph is a death toll to the decade of Euro-wide credit enhancement. The dollar and the dollar denominated fixed income market (with the exception of the completely vanished corporate issuance) remain the ‘lato sensu’ greatest pool of liquidity for small and big fish alike.

And gold? Gold’s shine has now adapted to a new reality in the currency market. It is a brand new world of carry trades which increasingly use the Euro – rather than the Yen and the dollar – as the funding currency. To be sure, this was an unlikely scenario until December last year when the Mediterranean ripples reached the shores of financial markets. After all, the Euro’s short term rates remain at 1% – several magnitudes above the Japanese Yen. But with the non-European demand for European bonds slowing to a trickle, the support for the currency has largely evaporated. It did not help that China’s trade surplus dissipated in the first quarter on the massive restocking of soybeans and iron ore. Suddenly, there was no dollar surplus to be redeployed into the Euro. Now, the conservative Japanese investors are beginning to vote down Euro exposure in their fixed income portfolios.

Despite the less attractive yield differential, the Euro’s fall from grace offers more stable returns for carry trades on a volatility-adjusted basis. Sudden spikes in risk aversion are unlikely to force non-European capital into the embrace of the Euro area. The combination of these forces and the continued attractiveness of the dollar and the yen indicate that Euro will remain weak for longer. But it is remarkable how well the gold market has adjusted to this paradigm shift.

When gold scored an all-time high in December 2009, its correlation to Euro – dollar pair was at 0.9. This was a close of a year in which trade-weighted dollar suffered enormously, but budged only marginally against the Euro (around 4%). Fast forward five months and, remarkably, the recent highs in the gold price have been registered at a NEGATIVE correlation to Euro of 0.8. The last time we saw such levels was December 2005, a period of heightened geopolitical risk in the Middle East.

To understand the differences between the December and May highs ($1216/$1239 and EUR808/EUR993, respectively), it is worth digging into the technical analysis. The Bollinger charts show that the bandwidth in USD was below 20 in December, but failed to reach even 11 in May. By contrast, in EUR terms, gold bandwidth was 18 in December and a whopping 23 in May. Such high volatility in Euro-gold means that there is little probability of a sharp breakout from the current levels. There is nothing in the candlestick charts that would undermine this hypothesis.

A 14-day relative strength index (RSI) has sent correct sell signals post the new highs (in both the dollar and the Euro), and the commodity channel index (CMCI) has always registered divergence around the highs. No surprises there and not much difference between the gold investors operating out of these two currencies.

The differences between euro-gold and dollar-gold reappear when we focus on 14-day directional movement (DMI). Here, post the December high, dollar gold was in the negative territory for the whole month and in Euro terms for only 5 days. Remarkably, the pullback last week did not trigger a dominance of negative directional indicator (in either currency).

The most fruitful lessons for the short term are to be gleaned from the stochastics. Such leading indicators perform best in sideways markets. Since December, dollar-gold sent 4 ‘buy signals’ and the first weak ‘buy signal’ appeared already within 12 calendar days of the previous high. In May, this period has been even shorter. However, in Euro terms, stochastics remain in overbought territory. What it could mean is that for all the drama surrounding the Spanish cajas, German short-selling curbs, and the fears that foreign reserve managers begin to scowl at the common currency, Euro could probably offer a strong support above 1.10 level. If this was the case (and keeping in mind Bollinger lessons on the unlikely Euro-gold breakout), it is smarter now for dollar-wealthy investors to start accumulating gold positions through the summer, regardless of what the Euro does. Any sign of inflation or ‘old’ correlation returning would come as a huge surprise from the current levels and gold would offer far more than mere ‘capital preservation’.

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28
Apr

ANGST OVER EURO(PE)

   Posted by: Mr. Gold    in Uncategorized

Debt restructuring anyone? Of some 300bn Euro worth of Greek bond holdings, most exposure is concentrated among holders in the UK, Ireland, France and the German speaking economies. As much as 5% of Irish bank assets are exposed to what is now commonly considered toxic waste. In Belgium, Spain and – importantly – in Germany, the exposure nears 3%. This clearly isn’t just a “Greek problem”.

The political unpopularity of the bailout has made the motley EU-crew’s decision-making tortuous and ultimately dangerous for scalding costs of servicing Greek paper. No wonder that the structurally overvalued Euro began to experience irresistible gravity since early December. The seemingly open-ended character of the Greek crisis and the uncertainty of the end-game have exposed the common currency to headwinds redolent of the infant Euro early this century. Meanwhile, China’s ravenous appetite for dollar-denominated materials swamped its unexpectedly poor export data and wiped out the mercantilist economy’s trade surplus in the first quarter. As a result, Euro could not even count on the blip in the form of PBOC/SAFE unloading of surplus dollars – which used to accompany increased renminbi sterilization momentum and usually correlated positively with Euro’s strength.

This should have been a nightmare scenario for gold. But it is not.

Over the last two months (42 trading days), USD gold appreciated on 24 days, five more than the EUR-USD pair. Early this week, gold gained 1.3%, even though Euro slid further 0.7%. On average, gold outperformed Euro by 0.16% daily. Gold’s amazing resilience seems to bear out the hypothesis of a somewhat asymmetric relationship between the Euro and (the dollar-denominated) gold. While a strong Euro usually bolsters the gold prices, a weak Euro does not damage the yellow metal. Of the four worst gold days during the same period, one of the pullbacks was registered on a strong Euro day. It could be that recurrent profit taking is responsible for these fluctuations, although such behavior has only been document in Japan, were 27-year high prices have this month enticed many holders to realize their yen profits en masse.

Yet the Euro’s 3% loss to the dollar over the same period overstates the level of dollar’s strength. The trade-weighted DXY dollar index has appreciated by 2.4%. This gap is already closing. The draconian changes to the regulations governing China’s residential real estate have already depressed the value of mainland-exposed realtors in Shanghai, Hong Kong and Singapore. The fall of this index has historically been a good leading indicator of turns in industrial commodity prices and eventually in commodity currencies. As a consequence, DXY could strengthen even further, especially if the US administration continues to sail forth on the recent sense of mission. Would broader dollar strength spell trouble for gold?

Not necessarily. Even if DXY has appreciated 2.4%, gold in USD outperformed it by another 1.25%. This arguably pales to the run enjoyed by gold-exposed Euro investors, who have seen the value of “their” bullion jump by 5.38% in the last forty two days. More importantly, the momentum for Euro-denominated investors is strengthening amidst fluctuating EUR-gold correlation. The momentum for USD-denominated prices has ebbed, although not to the point to trigger “Japanese”-style selling behavior.

All this points to further Euro woes down the road and the absolute necessity to protect European private wealth from further erosion. Looking for further domino pieces, some observers are pointing towards Portugal’s high levels of private debt and the country’s uncompetitive private sector. Not surprisingly, the country’s 2-yr yields jumped over 20% within just one trading day this week. As usually, the rating agencies reacted belatedly. As even tiny Slovakia has to buck up to bail out the crumbling Colossus of Rhodes, the willingness to provide further succor to profligate neighbors may be running thinner by the day.

Athens has pledged to raise taxes, which in normal circumstances is deflationary – unless introduced against the background of severe deficits. The weakening Euro could go some way to alleviate the pressure on Mediterranean exporters, provided they are capable of gaining market share outside of the Eurozone, and especially in the key emerging markets. Such renaissance of global competitiveness seems all but guaranteed and we now may be trapped in recurrent Euro-scares, regardless of periodic bailout efforts. Pity the bondholders who sooner or later will have to face debt restructuring. Meanwhile, any sources of physical gold demand, whether Indian, East Asian or Western, will reflect more strongly in Euro terms than in US dollars. Since the beginning of the year, gold notched 9 all-time high records in Euro terms. For as long as investors are willing to condone the $0.5bn per day servicing costs of the US public debt (costs which are bound to quadruple this decade), Euro-denominated gold holders will have more fun.

For now.

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