Japan & the paper gold price

Unbeatable

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I don't understand all this fully, so anyone who does and can improve or correct me please go ahead.

Until this evening though I had heard about the 'Japan Carry Trade' I didn't understand how it massively effects almost every market in the world.

I was thinking that the people might be selling gold shares because either they wanted to manipulate the price of gold down or that some people were switching from paper to physical. However I finally took the time to watch this great video someone else posted here that explains how the Japan carry trade could be to blame.


Japans interest rates are incredibly low, so the Japan carry trade is where you borrow in Yen and buy something with a higher yield or return somewhere else and pocket the difference. But now that Kuroda announced his commitment to 2% inflation with a massive QE programme (It's the equivalent of FED printing $240 Billion a month!) It means that you not only get the yield difference with the Yen carry trade but you also get to pay back your loan in weaker (inflated) Yen. You can also lever up the Yen trade 20/30-1 and so it has a Massive impact on every market around the world.

Withing a few days of this being announced you saw every market react quite significantly.
How did this effect gold? Well gold is one of the few investments out there that has no yield and so can't benefit from this BOJ announcement so traders left it on mass to take advantage of the carry trade and gold plummeted. (@ 12:36 on the video.)

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So now we have two wonderful perfect storms approaching for gold. When either one occurs gold will go to the moon.

1. People investing in GLD shares don't get any advantage from Yen Carry Trade as it has no yield so they sold on mass. However physical buyers aren't concerned about yield they're concerned about hedging their risk against future inflation, defaults, confiscations etc. etc. So they see lower prices as a buying opportunity so they did the opposite and bought on mass! If there is no more physical to sell them, then the disconnect between the paper price & physical finally occurs.


2. If you watch the video or also guys like Kyle Bass you'll see how Japan has to fail in the very very near future.
The interest on their debt already takes up a huge amount of their tax revenue and now that they've entered the dead man zone (In the last few years, interest rates have been dropping (red line) yet their interest payments are rising steeply (Black dotted line also @ 18:53 on video) They have to fail soon regardless - it's game over. If you watch the video you'll see how inflation will bring that day of reckoning even closer and soon the BOJ will lose control of rates etc. and the Japan Carry Trade will be off.

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Other effects of the BOJ experiment, the Yen & Rates volatility

Traders and hedge funds do hold things like gold and silver as insurance. However the Yen has been so volatile lately and if it moves suddenly against them they may have to make margin payments on their hugely levered positions.

ZH -
Not a moment after someone was slammed with a massive margin call following the hit of 102 USDJPY stops as we noted moments ago, was that same someone(s) forced to dump a whole lot of silver in thin, no volume trading taking out the entire bid stack on what can only be described as "get me the hell out and pay me anything" liquidation
.

http://www.zerohedge.com/news/2013-05-19/silver-plunges-yen-stop-surge-triggers-margin-liquidation

The Yen drops suddenly



Followed shortly by silver

 
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Aubuy

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I wouldn't worry about it. The Fed will just start buying Japanese bonds next. Problem solved. :wave:
 

pmbug

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Nice summary Unbeatable. Risk is woefully underestimated IMO (by the yield chasers). But who cares about risk in this bail-out, bail-in world where the taxpayer gives everyone parachutes.

...
The interest on their debt already takes up a huge amount of their tax revenue and now that they've entered the dead man zone (In the last few years, interest rates have been dropping (red line) yet their interest payments are rising steeply (Black dotted line also @ 18:53 on video) They have to fail soon regardless - it's game over. If you watch the video you'll see how inflation will bring that day of reckoning even closer and soon the BOJ will lose control of rates etc. and the Japan Carry Trade will be off.
...
Keep your eye on the ball...

http://www.pmbug.com/forum/f4/japan-not-out-done-global-qe-watch-1559/index2.html#post21802
 

DCFusor

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I saw this on ZH too, and agree with most of it. By completely other analysis, I come to the same conclusion. The recent bounce off what I analyze as a "real" support low was a dead-cat phenomenon, and if we hold that support long enough, we're in for a resumption of the rise...whether it's Japan losing control and the carry trade falling off, or other factors. Just looking at history, Doug's dumb "watch for gold to cross the 50 sma with both going up and back up the truck" plan is still the one I use - and it works. Whether you short at other times is up to you and mostly for people braver than I. The 50 is still going down to catch up with gold's fall right now, but before long it will catch up and we can see that setup again. You don't get every possible nickel of profit doing that, but golly, you never ever miss the main part of a move up either - and the risk is FAR lower (speaking as a trader). The fact my cost basis for my stack of phys PMs is higher than current prices bothers me not...and may not be the case for very much longer, either.

Further, no way "they" can keep this down at production prices without reducing the supply significantly...this can't last.
 

Unbeatable

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Thanks PMBug, That's definitely the thread I should have posted in, I thought I'd seen the video posted here before! Feel free to move this if you like!

I guess till yesterday my eyes had just been glazing over Japan related stuff because even though I knew it would be a huge deal when they finally collapsed, I hadn't realised how much of an effect they could be having on Western yields/rates and PM's atm!
 

pmbug

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Thanks PMBug, That's definitely the thread I should have posted in, I thought I'd seen the video posted here before! Feel free to move this if you like! ...
I think the video was posted a couple of times already in the forum, but I suspect many didn't dedicate 20+ minutes to watching it because it didn't generate much discussion. You did a nice job exposing the important points, so I think it appropriate to highlight with it's own thread. :cheers:
 

rblong2us

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I couldnt quite bring myself to watch this one Bug. The buildup sounded a bit dull and technical.

I read most of the comments though (-:

Would you be prepared to summarise ?
 

pmbug

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Haven't watched it yet myself either. I read through the post/description and it was enough of an executive summary. I'd probably put a higher priority on dissecting it if I were trading paper PMs and wanting to understand the market winds.
 

pmbug

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the new normal the role of gold is nothing more than a funding "currency" to allow the BOJ to sell Yen against it (on a borrowed basis, which is also why the LBMA halted reporting its GOFO data as of the end of February, as it would not be pleasant for the central bank cartel to demonstrate just how much institutional gold shortfall there developed following major BOJ interventions). So for all those who are curious what it looks like when the BOJ "enters the house", here it is...

Gold and USDJPY... peculiarly linked once again...
More: http://www.zerohedge.com/news/2015-02-17/bank-japan-managing-us-stocks-today

...
Major upward moves in the Nikkei and coincident weakness in the gold price can, in most cases, be closely tied to BoJ policy meetings for the past more than two years. This is especially true when BoJ meetings have included announcements of more aggressive monetary policy in support of “Abenomics.” We cover examples of such price moves which followed BoJ meetings in January 2013, April 2013, October 2013, May 2014, August 2014 and October 2014.

A number of unpleasant ironies are immediately apparent:
  • It is helping to drive up equity prices in the country with the most rapidly expanding credit bubble and credit bubbles don’t tend to have happy endings;
  • It is simultaneously driving down the price of the ultimate safe-haven asset and thereby silencing price signals relating to market and financial system risk;
  • It appears to be a leveraged trade, obtaining the leverage via ultra-low rates in the repo market. The latter is a source of systemic risk which is known to regulators but remains unaddressed; and
  • The logical conclusion is that risk across the world’s financial system is even more under-priced than market participants realise and many believe it is woefully under-priced.
...
More: http://www.gata.org/files/FulcanelliReport-Mylchreest-Nikkei-Gold.pdf
 

pmbug

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The Bank of Japan maintained unprecedented monetary stimulus, as Governor Haruhiko Kuroda aims to stoke a recovery from recession and counter a slowdown in inflation.

The central bank will boost the monetary base at an annual pace of 80 trillion yen ($670 billion), it said in a statement on Wednesday in Tokyo ...

Stimulus Forecasts

Twenty-six of 35 economists forecast the BOJ will expand stimulus by the end of October, according to a Bloomberg News survey Feb. 5-10. ...
http://www.bloomberg.com/news/artic...ord-stimulus-as-japan-crawls-out-of-recession

Looks like gold will stay on sale for a while.
 

Golsil

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PMBug... you mentioned that "Gold will stay on sale for a while". Seems like that to me as well. How much, if any, will it fall before it actually goes bonkers? I'll base any further purchases on your wisdom of an excellent answer. lol..
 

pmbug

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I don't know and don't make me responsible for your choices! As always, I've recommended folks to dollar cost average at whatever budget they are comfortable with for a long term strategy.

If the info in this thread is correct (and it seems like it is), I wouldn't expect much change in the gold price until either the situation in Japan improves (no more monetary easing required) or something dramatic happens on the world stage. I don't have a crystal ball.
 
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