— Move along, nothing to see here…just keep your eyes on the bourse please. It will tell you all you need to know…
— The Middle East in Revolution? Market not concerned. Japan facing biggest crisis since WWII? Wasn’t that last week? What about the Portuguese Prime Minister resigning, fuelling speculation that Portugal will need a bailout? Portugal’s tiny – it won’t make a difference…LOOK AT THE SCOREBOARD.
— That’s right, Daily Reckoning readers, the market is absorbing all the punishment thrown at it. Surely that must mean everything is right with the world. After all, a market rallying on bad news is generally a bullish sign.
— But can you take the price action at face value? There is so much intervention, tweaking and fine tuning in the markets these days, it’s hard to know what’s what.
— Consider this article from the FT:
The billions of dollars in yen sold by the world’s most powerful central banks have sent a strong message to speculative investors. Those daring to bet that the Japanese currency will again test Y76.25, the record high against the dollar it hit last week before the G7’s intervention, better have deep pockets.
Before the financial crisis, the low-yielding yen was widely used to fund investments in a wide range of risky assets such as equities, commodities, property and higher-yielding currencies such as the Australian dollar. This sent the yen down to multi-year lows against a raft of currencies.
But the wave of deleveraging that followed the credit crunch saw the yen rally sharply as asset prices tumbled. Investors abandoned carry trades funded in the Japanese currency. The yen has risen more than 30 per cent against the dollar since Lehman Brothers’ collapse in 2008.
All that, though, could be about to change if the belief that central banks have imposed a ceiling on the yen gains traction. And a return of the carry trade would have the potential to lift prices of risky assets – equities and commodities are already well into a bull run – even further, analysts say.
— Central banks to the rescue again? Just like they did after the Long Term Capital Management crisis in 1998, when the dot com bubble burst in 2000, after 9/11, and when the housing market and credit bubble burst?
— Excellent, this should work out well then.
— During the height of the Japanese crisis last week, the powers that be (in this instance, the G7) didn’t like the way the currency markets were heading. So they intervened, halting the yen’s abrupt rise in its tracks.
— Now for the unintended consequence. The intervention has sent a signal to the market that it’s ok to borrow and sell the yen to speculate on ‘risk’ assets. ‘They’ won’t let the yen appreciate too much so the speculative carry traders are protected to some extent.
— If you believe that man can hold back the tide, go ahead and speculate. If you believe man is vain and full of hubris, then be worried.
— Or just buy gold and silver. The precious metals made new highs overnight, something we can’t say about global equity markets. This is the mark of a true bull market.
— But we’re not fooled into thinking that gold and silver are not benefitting from speculative carry trades too. No doubt some easy money has made its way into these markets. More than likely though, these speculative funds are flowing into the paper gold market – gold futures and options, among other paper instruments.
— This is not the real thing, and in time these paper gold (and silver) speculators will get burnt too. That’s because there is not enough physical metal around. Smart investors, big and small, are hoarding precious metals, leaving less physical bullion to flow through the major trading markets in London and New York.
— A class-action lawsuit has just been filed in a New York Federal Court accusing UBS of charging clients for storage of silver metal that was never actually purchased.
— Financial services, money, credit. These things are all based on trust. Without trust they have no real value. This is why fiat currencies are all falling in value against gold and silver – two monetary metals that have gained the trust of mankind over centuries.
— If you want tangible evidence of this, look no further than the performance of the Sprott Silver Fund, a North American silver ETF run by the highly respected (and trusted) Eric Sprott.
— As of yesterday, it traded at a 20 per cent premium to its net asset value. That’s massive. In other words, investors are prepared to pay a 20 per cent premium to the quoted silver price (which is set in the paper markets) to gain ownership of silver that they know and trust is there.
— With central banks pulling the levers of the global economy everywhere, and trust in the system deteriorating, you should be buckling up for a wild ride in the coming months.
For Daily Reckoning Australia