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Long Nikkei/Short Gold

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    This is well worth the time to read.......

    A couple of quotes from the above article:-

    "In the report we outline a thesis which draws together a complex web of interactions between Japanese equities, the gold market, repo financing, BoJ monetary policy meetings and anomalies in the silver market."

    "At the centre of this, it looks to us like a large, leveraged long/short trade has been built up which is long the Nikkei index and short gold. The more the Nikkei has risen, the more the gold price has been pushed down."

    "We are in a global credit bubble in which the multi-trillion dollar expansion of central bank balance sheets, their imposition of near zero (or even negative) interest rates and control of entire yield curves (directly or indirectly) are at the cutting edge.
    This has encouraged more and more speculation in risk assets which, in many cases, is being enhanced by leverage and without a commensurate sense of heightened risk.
    Japan is the “cutting edge of the cutting edge” of this expanding global credit bubble.
    The “Long Nikkei” side of the trade is profiting from what is starting to look like a reckless and failing Japanese monetary policy which, rather than ending the economic stagnation, has pushed the economy back into recession. Perhaps the most important indicator to monitor is growth in real household income, which has been negative for the past thirteen months.
    Assets on the BoJ’s balance sheet are already equivalent to 60% of Japanese GDP. They are set to grow at an annual rate of 17% of current GDP after the BoJ’s latest increase in its asset purchase programme. One could argue that the more that the BoJ’s policy doesn’t work, the more aggressively it’s applied, the more the Yen falls and the more the Nikkei rises. Prime Minister Shinzo Abe’s special adviser, Koichi Hamada, was honest enough to call it a “mild Ponzi game” in a recent interview with the Daily Telegraph.
    In the meantime, the “Short gold” side of the trade is profiting in a cynical way from structural flaws which are specific to gold and silver markets. In gold, price discovery is overwhelmingly dominated by an extreme ratio of paper gold instruments to physical bullion, estimated by official sources at about 90:1. This flaw in price discovery is being stretched to almost nonsensical levels in the face of strong physical demand.
    If we are correct, the liquidity in the gold market, with well over US$100.0bn of gold instruments traded daily, implies that substantial financial firepower has been required to maintain the intense pressure on the short side of the trade during the last two years. A number of banks and hedge funds are likely to be involved, although it has undoubtedly attracted large numbers of trend followers.
    Gold, and we are specifically referring to physical bullion, is also the only financial asset which has no counter-party risk. That alone should make it increasingly sought as a hedge in a credit bubble driven by monetary stimu-lus undertaken on a rolling basis by central banks.
    In a normally functioning market, i.e. one where supply and demand for the physical good holds sway, the huge movement of gold bullion to China, the world’s largest creditor nation, should have dominated gold market news flow, seen western investors competing with Asia for scarce physical bullion and maybe even raised questions about the existing monetary order. As things stand, most investors could not care less about gold."
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