Just think I need to get this out of the way before the internet falls over itself in laughter over my stupidity…
I mentioned yesterday how I wasn’t quite comfortable in why on earth gold has traded like a risk-asset on the shorter time frames. It appears there is still room for Eureka! moments, and here’s one.
I’ve basically been staring myself blind off the Triennial Central Bank Survey of the foreign exchange market, which outlines that the USD share of total world FX turnover is horribly outsized, and that this therefore is the best indicator of the baseline demand for assets in different scenarios. (Dollar-relative save havens would rally, almost irrespective of other currency movements, in times of uncertainty as the USD turnover is around 60% of all trades.) Now… I perhaps should have looked a bit closer at the nominal share of global GDP instead. It makes things much clearer. Now, we have to adjust for “linkages” a bit here: China pegs to the dollar, so it adds about US$ 6 tn, and one would be hard pressed to not say that the yen is pegged as well… There are a bunch of other countries with dollar pegs, so put total GDP denominated in USD at US$ 21-27 tn, depending on where you draw the line for what is a peg. To measure the euro’s relevance in all of this, I guess I still prefer the higher one since the yen is regarded as safer than the USD.
And voilá! Explained! There is simply a point at which your currency moves so fast that you start removing demand from 25% of the world economy for global assets, and the euro is getting there. The most important thing for the price of gold is therefore USD weakness vs. yen and euro rather than real risk aversion. During 2008-2009, the liquidity freeze was so extreme that gold had particular allure, not as a protection against drops but as a protection against counter party risk, which was much worse in the US (and worldwide) at the time than at the moment in Europe. If there is one thing to thank the politicians for it’s their ability this time to maintain liquidity to pump more good blood into the zombie economy to at least keep it upright. Interpret as you see fit. The run-up during 2010? We were for all intents and purposes doing pretty fine, so the dollar weakened and the QE interventions found their way into the system. This summer was all about dollar weakness and US default risk and downgrades and whatever, which wasn’t exactly dollar-positive.
What am I waiting for now then? Well, some sort of calm in Europe, plus a super committee showdown, followed by more troubles in Europe on the other side of New Years (in this analysis gold negative) followed by a presidential campaign, which could be both destabilizing and a gravy train of promises that shackles the US (and China, and Japan) harder to the printing presses.
Quick note: The euro ended up in free fall at US$ 1.364 one hour ago, gold was the next lemming off the cliff, 20 minutes later… Italian stocks down sharply, and this is all off the euro-destabilizing news that the ECB is not spun into crisis mode just yet and might hold off its unlimited purchases of Italian debt? A currency falling on its central bank failing to print money and leading gold down? Q. E. D. ?