A View from the Trenches, November 30th, 2009: "A chart is worth more than a thousand words"
Please, click here to read this article in pdf format: www.sibileau.com
Today’s letter is very brief and is the continuation of Friday’s,
which at the same time, constitutes another good test of our Thesis No.
2 on gold, postulated on April 21st, 2009. Why is today’s letter so
short? Because it has an attached chart that I think is worth more than
a thousand words.
As we wrote on Friday, Dubai’s crisis is starting to
look contained, delimited and unique by its political background. Of
course, given the impact on financial institutions locally and in
Europe mostly, one cannot ignore it. But, as we wrote too, according to
our thesis, if central banks step in to coordinate action against
potential contagion in the foreign exchange markets, gold loses its
chances to become a reserve asset.
Thus, on Thursday night, the news that the Bank of Japan was
considering intervention (according to some analysts it did not carry
it fully out, to avoid adding confusion to the situation in Dubai), as
the chart below shows, brought gold to its knees overnight, after it
had held admirably well on Thursday. Also shown (at the bottom of
chart), is the 3-month Libor – Overnight Index Swap spread, which a
benchmark of the liquidity conditions in the USD market. On Friday,
this spread opened almost unchanged. Thus, in Europe equity markets
ended up correcting Thursday’s sell off and even as the S&P500
Index was down to 1,083 intraday, the VIX Index managed to contract
intraday, closing at 24.74 or 5+% higher than Monday’s open. What is
the conclusion? Well, I hope it will be obvious by now how much control
central banks retain yet…
Martin Sibileau
The comments expressed in this
website and daily letters are my own personal opinions only and do not
necessarily reflect the positions or opinions of my employer or its
affiliates. All comments are based upon my current knowledge and my own
personal experiences. You should conduct independent research to verify
the validity of any statements made in this website before basing any
decisions upon those statements. In addition, any views or opinions
expressed by visitors to this website are theirs and do not necessarily
reflect mine. My comments provide general information only. Neither the
information nor any opinion expressed constitutes a solicitation, an
offer or an invitation to make an offer, to buy or sell any securities
or other financial instrument or any derivative related to such
securities or instruments (e.g., options, futures, warrants, and
contracts for differences). My comments are not intended to provide
personal investment advice and they do not take into account the
specific investment objectives, financial situation and the particular
needs of any specific person.