The role of Gold as a currency and hedging instrument

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Lamenting Laverne
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The role of Gold as a currency and hedging instrument

FORUM ABSTRACT:

Recently I have tried to view Gold in detail through a different lens, that is new to me. I wanted to examine Gold strictly as a currency and Gold traded in the Forex market as a hedging mechanism or as part of structured instruments/contracts created in other markets for hedging purposes. The hedging addendum is motivated by the fact that if Gold is used as an element in structured hedging, then Gold will be impacted greatly by events in other asset classes that might not otherwise seem closely related.

In general, the reason for this new interest is, that "conventional wisdom" is unable to explain what we are seeing at present in the Gold market, and it is not satisfactory for me to just declare "that it is all manipulated".

Since I have sunk a substantial part of my financial future into Gold, I am very keen to remedy the huge mistake of mine, that I clearly do not understand exactly and fully what is driving this market, and therefore I am uncertain about precisely what I have gotten myself into.

I am sure my investment decision is 100% correct for all the fundamental reasons. However, since there are so many moving parts in those allegedly manipulated markets, and they are so big and distributed, it is no small accusation to bring forward.

It is not wise to justify resignation from doing any further homework based on a mantra, that any living person, who has ever looked at a Stock chart and a Gold chart will know to be true, but where no structured investigation of my own had been put together to substantiate the hearsay, and actually prove that this is indeed the case.     

Since I also have a profound need to be able to survive the meantime - until fundamentals begin to assert themselves again - with my sanity intact, I set out to try to find the answer to HOW the control is carried out, and what that would suggest in terms of timeline and what to expect from the market action in the medium term.

With this goal in mind, I decided that there is only one market that is central enough to drive activity in all the others, and that is the Currency Market. The control had to start here - also because Interest Rate Management must be closely connected with currency values - and the continued confidence in the bond markets is what keeps the situation from coming unglued. In addition to this, the Forex market is trading 24 hours and is highly computerized, so from a market management perspective, it is perfect!.

Further, I wanted to understand how the events going in in Japan is influencing the different asset classes, because clearly the relationship between the USD and the YEN is what drives the action right now. So on a more concrete level, I wanted to learn more about which assets, the activity in the currency crosses have an impact on, in which parts of the world.

Based on a few posts I wrote on Main Street, that received some very appreciated positive feed back, I have created this forum, so we can continue the investigation and discussion over time and so we can keep the results compiled in one place.   

I will copy the relevant parts of the Main Street writings into the following posts, to form the basis for the Forum activities, and then we will see where it goes from there.

So in the interest of defining what is on topic - the following guideline applies:

Anything that discusses or attempts to prove how the Market Management is done, especially with regards to the Currency Markets, the Bond Markets and the Precious Metals Markets, and anything that endevours in general to explain with substantiating material, what the heck is going in the markets - with relevance to the Precious Metals ;-)

Disclaimer: Anything I write are my feeble thoughts, ponderings, assumptions and research. I have no facts from any inside source, so please do not read my writings as facts - no matter how convincing they may sound - until unequivocally proven by examples and evaluated method or unless the information comes with identification of trustworthy source.

Edited by admin on 11/08/2014 - 06:30
Lamenting Laverne
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Forum initiation

http://www.tfmetalsreport.com/comment/316174#comment-316174

Laverne: [...I was thinking also, if you really like these thoughts, and would like to share yours on the subject as well, I could make another forum thread, where we could compile the findings in one place. Would that be of interest?...]   

http://www.tfmetalsreport.com/comment/316187#comment-316187

Argentus: [...I think that's a really good idea. This will run and develop lots. Haveing it's own thread will keep it all in one place for easier finding later on. May I suggest that you start it by copying or reposting your original posts to start the new thread off?...]

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General background materials

I include the following posts, because I think that they may provide some background as to how I am thinking about the forum subject, some of the questions that still linger, as well as providing the history of posts to form the basis for ongoing discussion. I do not expect you to read all of it, but I copy the relevant bits to here for possible reference later.

@ Lamenting_Laver... (14. January 2013)

http://www.tfmetalsreport.com/comment/259383#comment-259383

Old Tradesman: [...Yes a percentage will remain! (of what)  But only enough for  import negotiations.  But can the cbs come up with the gold?  No I dont think so!   The big money is backing out of japan as we sit here on our computers (big ties with the dollar)  (first domino)  The derivatives(scam) is over 1.6 quadrillion

the mbs bye back program in the fed reserve is only to hold all properties of the population of the USA as collateral for the dept!  As they did with ss 401s and ira's...]

@ Old Tradesman - Carry Trade (14. January 2013)

http://www.tfmetalsreport.com/comment/259402#comment-259402

Laverne: [...Do you think that the fall in Yen is evidence of the dreaded Yen Carry Trade unwinding? As in borrow dollars at zero interest - convert to yen and buy higher yield Japanese papers, if I understand the mechanism right? 

If so, would it be correct to think that a wholesale carry trade unwind is because big and clever money expects the US interest rates to rise soon? And that the reason that the BOJ needs to go into full steam monetization is not only a desire to go inflationary and weaken the Yen further, but that they need the funds to buy all the papers being sold as part of the unwind to avoid market crash?

I may have completely misunderstood the carry trade mechanism, so I am curious to hear if that is what you mean with "close relationship between US and Japan"?...]

A serious game of chicken (21. February 2013)

http://www.tfmetalsreport.com/comment/274665#comment-274665

Laverne: [... So is the Yen Carry Trade is blowing up? I don't understand, how it works precisely, but if you look at the YEN/USD it had been topping and then falling since July last year with rapid acceleration downwards since Oct/Nov last year. During the same period of time Japanese Government Bonds have had rising yields - indicating that they were under selling pressure. The same applies to the US 10 Year Bond in the same period...]

Holly Molly! (25. February 2013)

http://www.tfmetalsreport.com/comment/276139#comment-276139

Did you guys see the intraday chart for the US 10 Yr?? Unfortunately I don't have one with precise times on it, but it looks something like this:

Up on open from 1.96ish% - pushing, but held flat until 04:00 (Rally in gold with retreat just before 04.00)

04.00-06.00: Buying (intervention?) wins and yields move down  (Gold resumes rally)

06.00-10.00: "FUBB" strong selling all the way up to precisely 2.00% - then capped decisively. (Gold flattens and retreats, attempt rally at 09.00, but is jammed back down double tapping

1585 before breaking loose at 11.00) (DOW is wiggling up from 9.00-just after 10.00. 

10.00-12.00: Steep decline in yields (buying/intervention?) with small tap upwards at 12.00 (Gold rally 11.00-12.00) (DOW falls from 10.00-11.00, attempts rally from 11.00-11.30, but resumes selloff 11.30 to 12.00)

12.00-14.00: Steep decline in yields (buying/intervention?) with bigger tap upwards at 14.00 (Gold flat 12.00-13.00. Resumes rally just before 14.00) (DOW resumes rally 12.00-13.00 but declines lower 13.00- just after 14.00)

14.00-18.00: Steep decline in yields (buying/intervention?)  (Gold rally until just before 16.00, then capping attempt resumes) (DOW attempts rally but stays flat until 15.15, but turns and decline steepens 15.15-16.00) The bond selloff seems to have been tamed. Yields at 1.87%

A rise in bonds from 1.96% to 2.00% in 4 hours and a subsequent decline from 2.00% to 1.87% in 8 hours. IN ONE DAY!

Lets add the USD/YEN cross to look for "coincidences" - a Turdite on the Argentus thread suggested to look at this: 

Contained selling attempts at 5.00 then at precisely at 6.00 the USD/YEN has a bigger red candle at the same time as the bond sell off kicks in. USD/YEN held steady slightly upwards until 10.30ish (Intervention together with the bonds?). Then it follows the wiggles up and down of the DOW - only delayed 1,5ish hours all the way down to just before 16.00, when a rally kicks in after the closing bell on stocks.  

Are what we are seeing here testimony that the PPT does not have funds/power to control the bond market and the gold market and the stock market simultaneous anymore? Did we see a rally in DOW and Gold, while Bonds were selling off and the USD/YEN was under pressure? 

Did we see PPT say then screw gold management and stocks wealth effect - we cannot allow a bond sell off, when stocks and gold is rallying - ergo take some juice out of stocks and try to contain gold interchanging with bond sell off with priority given to stopping bond sell off? Or was this a case of stocks not listening to credit and being late to the party?

I really don't know, but these movements today seem very interlinked to me, and more important they seem to suggest that the PPT was either taking the juice from stocks, or they were overwhelmed by the decline in stocks - not being able to juice both bonds and stocks and USD at the same time. It seemed very significant to me. 

I would love to hear the opinion of those of you who are experienced in looking at these markets over time....

when everyone is done with posting lovely ladies..... (I am just jealous off course ;-)

Questions for you bright lot ;-) (6. April 2013)

http://www.tfmetalsreport.com/comment/291979#comment-291979

Japan as bagholder - Ctob et al (10. April 2013)

http://www.tfmetalsreport.com/comment/293474#comment-293474

A few observations (15. April 2013)

http://www.tfmetalsreport.com/comment/297266#comment-297266

Laverne: [...Commenters have posted information that this current take down was very much related to the YEN. I found a comment from Steve in Virginia on ZH, where he says this is the beginning of a deflationary crash in Japan. I don't know about that - and I don't buy his reasoning, that it is haircuts out of Europe driving this, but he added something else of interest:

"Euro and yen positions are cross- collateralized with gold, other commodity derivatives and national bonds all held against each other ... by banks, insurance companies as well as central banks. All of this is highly leveraged and layered with derivatives: credit default and interest rate swaps, forex swaps and other hedges."

What has been unusual these past weeks, was that the Bond buyers in Japan has started to reject the monetary policy with their feet - interest rates turned upwards. I am wondering if this is the real reason behind the takedown. That the bond bubble is beginning to leak in Japan, and the cross correlations are feeding into PMs and EUR and YEN and completely entangled in CDS and IR derivatives...]

@ Mystery (15. April 2013)

http://www.tfmetalsreport.com/comment/297666#comment-297666

Mystery: [..."Again, I have no idea why this cross or the inverse drives these markets but it absolutely does."...]

Laverne: [...I saw this article on ZH:

http://www.zerohedge.com/news/2013-04-15/all-abe-inspired-gold-jpy-buyers-now-underwater...]

[... If you look at the Interest Rate implied vol chart from ZH - and I understand this as a hedging instrument, may be wrong - this seems to be strongly correlated with YenGold. I mean, where Gold buying is used to bolster value of an insurance product, when bond value goes down due to USD/YEN fluctuations. And Gold is sold from the insurance product, when the bond value increases. A derivative insurance product.

The selloff in both USDGold, YenGold, EURGold and AUDGold starts at exactly 11:00 my time - with the same kind of candle. (I wonder how that can be exactly the same in all those currencies, I checked??)

Anyhoo - my original question/suggestion is that Gold is used in a hedge product / derivative that got stressed by the volatility in bond prices and proceeded to sell off due because hedge payments were needed. In that case our prognosis for Gold is not too good in massive amounts of hedging blowup needs to be unwound, before gold can function on own fundamentals...]

The most important article I have read on gold! (16. April 2013)

http://www.tfmetalsreport.com/comment/298058#comment-298058

Laverne: [...PS: Could this also be why the Gold market seems to follow the USD/Yen cross inverse. That as the Yen started deteriorating signaling a deterioration in bonds coming - and when it came (interest rates turned up in the beginning of April) - we see a flight from 6T USD worth of Japanese bond collateral - which must be backstopped by CB gold leasing in a market, where the phys has been drained to stronger hands since 2008? If so - can anyone explain, why the Yen has strengthened again? Is it because the ripples have already traveled to the US and now the USD will fall signaling the same problem there? I would love some input on that...] 

Most important article (16. April 2013)

http://www.tfmetalsreport.com/comment/298060#comment-298060

Silver66: [... I have been sent this article by three different contacts today. That has not happened before...]

Last comment for now ;-) (23. April 2013)

http://www.tfmetalsreport.com/comment/302512#comment-302512

Laverne: [...If this is the final round, apart from the gold leases potentially not being rolled over, it would also make sense that insiders would dump their paper gold long positions - starting with the entities, who want the market transition now. This could explain the large fall. 

They may have maintained long positions to be able to influence the market in the previous period, to support the market during raids around the Quarter End price fixes - that is to say those CB's that mark to market -  and/or to have the ammo to call the last shot...]

[...It would also make sense to provoke a situation, where the paper market is discredited as price discovery mechanism by making it clear that phys and paper no longer commands the same price...]

[...I am thinking that Greece was originally used by the Banking Cartel to sabotage the efforts of the competing Eurozone, because it was Goldman that "helped" the Greek politicians and banks to morph into a financial nuclear bomb by hiding the true level of debt...]

[...I am wondering if this is why Greece and Cyprus are being hung, quartered and drawn like this - as revenge for jeopardizing the Euro project by opening the back door to sabotage from the competition. If that is true, it could also suggest that maybe some of those funds that were frozen in Cyprus, could have been a part of a Banking Cartel hidden slush fund, and that the amputation of those or maybe just delay in transfer, made Mr. Bernanke think that the game was up...]

[...I mean, if there was nothing special about Cyprus, how do they expect to survive the attacks of hypocrisy for not attacking Luxembourg and Malta??? It simply does not make sense...]

Lamenting Laverne
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Specific background material The interest rate manipulation idea

The hedges are blowing up (10. May 2013)

http://www.tfmetalsreport.com/comment/309408#comment-309408

I wrote a long post yesterday, but was too tired after three days and nights of searching to proof-read it even though I was afraid today would mark the beginning of the bond market crash, so I waited until today, and jeez what do I wake up to. Bernanke talking about ending To Big To Fail in a very nervous voice, and a plus 3% drop in Gold.

Anyway, I think I found something important a couple of days ago. I think I found proof of how the bond market is being manipulated to ensure lower interest rate, and I think I found the reason for the big Gold smash on the 12th and 15th April and again today

I will type it up with details and post it, when I am done. For now I will just tell the short version:

The reason we see a sell off in US 10 year Bonds, while the USD is strengthening, and we see a simultaneous ​sell off in the Japanese 10 year Bonds AND we see a smash in YenGold is because these are all elements in the hedges/constructs that have been used to manipulated the US Bond market to lower yields/higher valuations.

Gold is a part of these hedges and it looks as if they are blowing up as we speak. This is why Gold is being sold - not just because of a stronger USD.

I have found evidence/indicators that the USD/YEN cross has been used for a long long time to RECALIBRATE the USD upwards against Gold, so that the USD would appear stronger to the Bond markets, than it really is. This seemed to be going on before the USD/YEN turned upwards in August 2012.

The unwind of the "Sell USD - Buy Yen" started in August 2012. Abe Shinzo started talking about massive easing only in January 2013 - and it was not confirmed by Kuroda before March 2013. This weakening Yen was already in full motion before that, so that makes me think the Kuroda actions are just an official excuse for what we see. He would get a weaker Yen doing nothing anyway - as these hedges are unwound or start blowing up - if it ran away from them.

It seems disorderly now - certain stocks in Japan were up 14% this morning - and basically I am worried that this is the beginning of the US bond market crash.

And it seems - unfortunately - that there will be no downside limit to Gold until those hedges are gone. Hold on to your hats. I think this is going to be really really ugly - and then hopefully the sun will come up again.

Possible reason for the raid on the 12th and 15th April (10. May 2013)

http://www.tfmetalsreport.com/comment/309565#comment-309565

Follow-up to this post: http://www.tfmetalsreport.com/comment/309408#comment-309408

I haven't read the comments on this and previous threads yet, so apologies if these ideas have already been presented. I am not sure that I have got this right, but as mentioned in the short prelude post, I think that it may be really important. 

The background is that I have been intrigued by the reported relationship between Gold and the volatility in the Japanese 10yr, which indicated to me that Gold was somehow used to hedge interest exposure. 

To avoid confusion, here is what I think is normal. The animal spirit of the market is, that US bonds should fall in valuation, rise in interest rates to reflect the monetary expansion, that has been going on for decades. The USD should fall, and Gold should rise, at least as long as the interest rates do not reflect the underlying monetary expansion. 

Although the world reserve currency enjoys some safe haven inflows, which helps keep a natural lit on rates, when there is trouble in the air, it would at some point become necessary to manage rates down in order to keep price inflation at a target of currently around 2% around the world, because the monetary expansion just kept on going. 

Even if the current bond holders did not run away, all that new cash had to find a home - either in stocks or foreign bonds with higher rates, or the option to be avoided - commods - because that would produce cost push inflation.

Being the largest bond market in the world, it would be good to have an incentive to increasingly nervous bond buyers, who might be able to live with a small fixed coupon, but who would not be able to live with bond valuation losses, when interest rates would start to go up - to keep them in the US bond market, so they would not produce price inflation elsewhere. 

I believe, that the answer was a derivatives contract to insure the bond holder from losses, and hence ensuring that the US bond market would stay well bid to help keep rates down - and maybe even help the rates stay low, by making the USD look stronger, than it really is.

I don't know anything about how an Interest Rate Swap is constructed, but this is how I imagine it is done. (Jim Willie described once that an Interest Rate Swap has an underlying sell of a short US Treasury and a buy of a long US Bond, so I will include that it the example. In reality, I think the bank holds lots of those already, which will be used as stand alone bulk hedge if needed instead). The numbers I use, do not all match real compatible levels. They are just examples:

Customer: Institutional Pension Fund Investor, who buys 1B USD worth of US 10 Year Bonds with a fixed coupon of 1,76%. He must hedge the downside risk to his bond valuation in case the interest rate rises, so he buys a derivatives contract from the bank to cover the risk. He pays a fee to the bank for the privilege.

Bank: Puts the nice fee in an account and leverages that XXX times. The bank already has US 10Yr Bonds on the books, that I think has been hedged with USDGold. The bank spends the leveraged fee money plus free cash from the Fed as follows:

5. December 2012:

1) Sell USD/YEN @ 82,24. (In the period before August 2012 many contracts of this kind over time practically ensured a steady managed decline in USD, and almost assured profit – this changed in August last year). 

2) Buy Japanese 10 Year Bonds of 0,72ish % in an amount that will cover the corresponding valuation loss in the US 10 year bond.

3) Buy YenGold @ 140329,073

4) Buy US 10 Year at 1,76% (If not kept in separate bulk hedge)

5) Buy USDGold @ 1706,336 (If not kept in separate bulk hedge) 

If the future ends up being:

Scenario 1) Interest on US10Yr has gone up. USD/YEN @ 72: Yen up, Interest down and Valuation up on JB10Yr, US Dollar down, YenGold down, if only a function of YEN strength. Banker is happy - sells JB10Yr bond to pay insurance payout to pension fund investor, who has not stampeded out of the US bond market and hence not made things worse, and the banker has gained on Yen exposure, which may or may not be offset by YenGold (If YenGold was only looking at Yen, it should be down, but it is probably buoyed by USDGold, that should be up, because of Dollar weakness. The USDGold gain should cover the unrealized valuation loss on the US 10 year Bond. US Bond not sold, because it is hedged, and no selling pressure should be forced on US bond market. Happy Banker! 

Scenario 2) Interest on the US10Yr has fallen. No insurance payout is due, because pension fund investor is happy that his portfolio has gained in value. USD/YEN @ 92: Yen down, Interest up and valuation down on JB10Yr, US Dollar up, YenGold up, if only a function of YEN weakness. Interest down and valuation up on the US 10 year Bond and USDGold is down, due to USD strength, but not much, due to inherent animal spirit upward strength under Gold. Loss on currency position is covered by YenGold. Loss on JP10Year is covered by valuation gain on US 10 Year. However, this would mean actual selling to cover loss - and that is not really allowed in the US Bond market.

So how about devising an alternative and hitting two birds with one stone.

The managed descent in the USD (animal spirit strong down) and the managed ascent in Gold (animal spirit strong up) requires periodical smashes of Gold and levitation of the USD to make it look good.

Also, in order to avoid creation of selling pressure on the US Bond market, which will probably bring other derivatives contracts in trouble too, why not try to nudge the JB10Year bond interest downwards, so the Japanese bond loss gets smaller, while preserving relative strength in the USD against USDGold, so the lower US Bond Interest rate is maintained at the same time.

How can that be accomplished, when any strength further in USD relative to Yen will result in higher interest rates on the Japanese Bond? It is a delicate operation, because the animal spirit of the USD/YEN is upwards at least since August last year.

(Interlude: It started probably long before that, as two distinct spikes (4th August 2011 and 31st October 2011) and a gazillion small ones bears witness to. The idea that the animal spirit of the Yen is stronger than the USD for a country that has an aging population, with massive debt, and vaning competitive abilities simply does not fly with me. I would argue that the Yen strength and the “lost decades to deflation” is 100% a product of the US-Fed’s need for an inverse currency to manage the descent of the USD – because Japan was probably was somehow fucked after the 1997 Asian crisis anyway – I haven’t checked the chart for many proof example, but it is likely the operation started on 10. August 1998, when the Yen peaked at 147,63 and the Japanese debt peaked at 345,1% of GDP around the same time  - after a loss in value from 80,43 on 17. April 1995 only 3 short years before . The Yen might have been on the verge of hyperinflation, and the Fed recognized that this could be put to good use. By 1999 there were signs of recovery in Asia. (One proof example can be seen on the weekly chart from the 24. May 1999)

Well – back to the delicate operation. It comes in different variaties, but this is an example that takes two steps:

Step 1) First you smash the bejeus out of YenGold. This will send the USD/YEN down some and signal to the  Japanese Bond market to demand lower interest rates, because of strengthened Yen. The Gold smash immediately spills over into USDGold, which will be smashed further down to regain just enough upward USD momentum for the next step. This first step accomplished the two desired goals - to make Gold look unattractive for relic loving investors and to lower Japanese interest rate expectation. Now comes the delicate part.

Step 2) In order to make the USD/YEN look good and strengthen the USD without sending Japanese interest rates up again, you have to move in baby steps - so no big signals are sent to the Japanese Bond Market. Such a signal would be big move up in USD/YEN.

Here is the key: Ultimate USD weakness or strength is measured in Gold. If the USD/Yen goes up, but Gold does not go down at the same time, would that signal any move down in Yen and hence a signal to increase bond rates?.

Apparently not, because that is exactly what they appear to be doing. After a good move down in USD/YEN - triggered by a sell off in YenGold and sending a lower interest rate signal to the bond market - they hold the USD/YEN steady on the subsequent Gold retracement up on natural forces powered from USDGold, when it should have gone down.

(Look at Daily Chart for USD/YEN, USDGold and YenGold in Netdania Chart station)

For even more pronounced effect – look at this one, where it runs away from them:

4. April: USD/YEN up – USDGold Flat – YenGold Up

5. April: USD/YEN up – USDGold Up – YenGold Up

8. April: USD/YEN gap up – USDGold Flat – YenGold Up

9-10-11 April: Turning flag with normal inverse behaviour and USDGold/YenGold alignment in the algos.

12-15. April: USD/YEN Down – USDGold Down – YenGold Down

16-19. April: USD/YEN Up – USDGold Up – YenGold Up

22 -23. April: Turning flag

24-25. April: USD/YEN Flat – USDGold and YenGold Up

26. April-1.May: Tension release – back to normal - USD/YEN down, USDGold Flat, YenGold Down

There are different variants of this scheme, e.g:

1) Gold smash - while USD/YEN is kept steady during smash (8. May 2012)

2) Gold no move - while USD/YEN is up (14. September 2012) 

I think this is done to re-calibrate the USD against USDGold and it seems to be done by exploiting that YenGold sometimes moves inverse to the Yen, and sometimes alongside USDGold in response to the USD – How convenient!

I am very bad at math, so I cannot figure out the absolute effects of the way these these three elements move relative to each other – floating in space – maybe these moves are netted out – but they are still really weird and has a distinct purpose I am sure. However, I have recognized pieces of a pattern, that I hope the math geeks here will help us understand the absolute impacts.

Another good one to examine in detail is 13. September 2012 to 24. October 2012 (I didn’t compare with YenGold on this one – only USD/YEN and USDGold):

13. September: Gold Up – USD/YEN Flat

14. September: USD/YEN Up – Gold Flat

17. September: Normal inverse moves

18. September: Both up together

19. September: USD/YEN Down (wants to go higher but fails)– USDGold flat

20. September: USD/YEN Down - USDGold flat

21. September: No move – The small crosses – Open = Close seems to signal algo Modus Operandi reversals, I think.

24-26. September: Both down together

27. September: USD/YEN Down – USDGold step up – Tension release

28. September-5. October: USD/YEN Up – USDGold steady to slight up

8-10. October: Both Down

11. October: Both Up

12. October: USD/YEN flat – USDGold Down – Tension release

15. October: USD/YEN Up – Gold gap down (normal inverse, except gap, tension release)

16. October: Both Up

17-18. October: USD/Yen Up – USDGold Flat or steady

19. October: USD/Yen Flat/Steady – USDGold Down – Tension release

22. October: Both Up

23. October: Both Down

24. October: USD/YEN Flat/Steady – USDGold Down – Tension release

There are numerous other examples in the charts, some less clear – but many many of these.

I think that all these stealth moves up in the USD relative to USDGold has the purpose of bringing interest rates down in both the US Bond market and the Japanese Bond market. The latter to reduce losses on the JB10Year hedge, when US Bond rates fall.

ZH commented after the 12. April that Gold smashes seemed to become worse in periods with higher interest rate volatility in the Japanese Bond market. This makes sense, because the Japanese interest rates naturally rise with a big jump in Yen weakness, which also brings the “Sell USD/Buy Yen” currency position further under water, with risk of margin calls, so the way to bring the situation under control – aka calm the interest rate volatility – is to switch YenGold to inverse Yen – smash YenGold bigtime – return YenGold to USDGold alignment and then return to baby steps stealth strengthening USD against Gold.

Ok – cool – this seems to have been working very well, because the japanese rates have been declining since January 2013 – despite the much discussed Yen weakness – with a massive drop in early April.

Why do I think that it is blowing up / is disorderly now? 

Well first of all – the massive drop in japanese rates that happened in April – was I believe at the time of the Gold smash – signalling that the YenGold smash had sent Yen higher and hence rates lower.

That is logical – but just days before on the 4-5. April, the USD/YEN had a massive spike up – which had not produced a similar spike up in Japanese rates. Any serious bond investor has to look at that and think – WTF???

(Massive USD spike-ups like that have been seen before (aug/oct 2011) – looks like manipulative up-candles, where momentum took over and won – but it could also be USD shorts forced to sell, because their positions are margin called, and hence destroying Fed manipulation moves, that was supposed for have a controlled up flag, while Gold is flat, with subsequent small down ticks in tandem with Gold.)

Back to the Japanese Bond Investor WTF and why disorderly now. If something artificial is keeping the rates down – would I, as a Japanese bond investor, be in risk of being caught on the wrong side of this thing, when that artificial mechanism breaks – as they always do eventually? That was what the massive down move in rates said. Could it be that this Japanese Bond investor decided to get the f*** out.

That would put serious pressure upwards on rates, and hence all the near prices hedges of the Fed/Derivatives constructs, that are already pressured by the spikes in USD that sends their currency positions further under water.

What would indicate a run for the exits? If there was a sell off in 10 Year bonds in BOTH US and japanese markets, would be one. We had that yesterday. Look at the chart in this link – it reveals something else, that is important.

http://briefing.com/investor/markets/bond-market-update/2013/5/9/treasuries-close-on-lows.htm

The yield curve steepened yesterday. That means that the larger selling pressure is in long bonds. It is the long bonds that have been bought in the derivatives babel tower according to JW. Now they are selling off.

Ok – that could be normal – but look at the chart in the link. Yesterday was a big UP day in the USD/YEN pair. That should have resulted in lower yields. At the chart you see that this is exactly what happenes with the US-20yr and US-5yr. Right out of the gate they behave normal – they only turn later, when they take the cue from the 10 Yr.

However, the US 10-Year spikes up – right out of the gate – despite a stronger USD - which tells me this is unplanned/forced/panic selling – and that it therefore is very likely related to the interest rise in Japan and the babel tower of derivatives holding up the US Bond market – and the more than decade long Sell USD-Buy Yen carry trade, that started unwinding in August of 2012.

If true – then this is, as we all have suspected since early this year – big.

Timeline – Announcements of Bernanke not at Jackson Hole in August, and Gold Dollar circulation in October. My bet is that the Treasury will tender the new Gold Dollars for US Gold at a much different exchange rate sometime over the summer and latest by October.

As usual – really sorry for lack of brevity. Now I will go back and read posts and comments.

Oh I forgot... (10. May 2013)

http://www.tfmetalsreport.com/comment/309576#comment-309576

I think that the reason for the big size of the 200$ smack in Gold, was because the YenGold was at the verge of breaching All Time Highs. If it had broken through decisively, there was a risk of Gold taking off to the upside and burying the short USD/Yen positions and the Japanese Bond positions forever. 

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General background materials - continued

Last comment for tonight ;-) (11. May 2013)

http://www.tfmetalsreport.com/comment/309790#comment-309790

SamSchlepps: [...Would oil-gold contracts extend to the benefit of Japan - through the USA. Lamenting .... had earlier comments about the yen-usd-gold relationship and I just wondered if it could be all tied together under the umbrella of the original oil-gold contracts. Protection and oil at x prices for  backing...]

Laverne: [...I was thinking earlier today, that one reason that Japan might agree to "a lost decade of deflation" could be potentially threatening hyperinflation in 1997, but also if the US provided some extra incentives of some kind. The Gold-Oil contract benefit was, in my understanding, to ensure relatively cheap oil in USD as long as the flow of ounces to ME was intact. Based on this Japan would already benefit from the USD/YEN machinations, because the Yen was strengthened up until August 2012, which would make oil cheaper for the Japanese, than if no manipulation of the USD/YEN cross had been allowed.

There may be something else to ponder though. Japan is one of the biggest economies in the world, but they have almost nonexistent official gold reserves. I have been wondering, how that could be. Maybe they have more in secret, or maybe they do not need it, because they have been effectively tied to the USD managed descent, so uninvited speculation against the Yen would be killed in a flash, and hence no need for a big gold reserve. I don't know, but worth some more thoughts.   

You could say that there is a link to the old Oil-Gold agreement and the USD/YEN/Gold relationship in the way that the old agreement probably includes a price of Oil, that is denominated as a ratio of ounces to dollar value against Gold.

If that is true, then it is highly relevant, how fast the USD depreciates against Gold and other currencies. What I tried to describe in the earlier post, was how the USD is re-calibrated against USDGold, by raising the USD value against Yen without a corresponding inverse move down in USDGold and vice versa.

Assuming that the same is not done in other crosses at the same time, and if I understand the mechanism correctly, it means that the USD is falling less fast against Gold than it would naturally, which means that they can deliver fewer ounces for oil to the Arabs...]

[... The real difference and gain is that they are buying time for the USD system. It is also linked in the sense that, if the operation manages to keep interest rates low for longer, then Gold Loan agreements with the mines will be cheaper for mines with small profit margins - hence more gold mined relatively - but then again - Libor was manipulated separately by a group of people, so maybe the cue is not taken from the US Bond market as much...]

On substantial revaluation of Gold to start fresh:

[... However, bond rates are partially set as a function of the strength of the currency, and that would be improved, if the Gold value part of the currency issuers (CBs) assets increased relative to "lesser" loan assets and sovereign bonds, and a re-pricing of Gold would mean that the liabilities side of the ledger would instantly have a larger equity portion relative to funding debt and deposits...]

@ Kcap - out on a limb here (24. May 2013)

http://www.tfmetalsreport.com/comment/315705#comment-315705

Laverne: [...Another tidbit is that as of yesterday the major currencies were all perfectly aligned in relation to Gold - at a ratio of 0,0720. Only exception was TRY that had a ratio of 0,0721. I would expect that these ratios must be in perfect harmony at as high a level as possible, before bank holiday weekend. I am waiting for the close today to see if TRY has been aligned too, or if new differences have been introduced. If they are all aligned - then the chances of a lock down has grown massively, in my mind, considering all the other going ons with multiple halts of bond trading in Japan and stock markets drops, that indicate big drops on the way, and yesterday a day with massive Gold buying against selling everywhere else...]

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Specific background materials - The Currency Ratio 2 Gold idea

Stop you guys...;-D (24. May 2013)

http://www.tfmetalsreport.com/comment/315773#comment-315773

Laverne:

(Silver) You make me nervous ;-) I am sure I have found absolutely obvious-to-others-stuff and made grave mistakes at it at well, and that I should go back to baking sponge cakes instead tout suite... Btw - I just checked and the values are more different than yesterday - so no soup for me. 

Anyways, after finding those funny looking patterns in the USD/YEN cross sometime back, where it seemed YenGold was actively used to recalibrate the USD, I wanted to look at Gold strictly as a currency and hedging instrument in order to see if that could explain all those take downs.

On the back of my long-to-be unfinished Whatdoyado? posts, that tried to explain the world happenings using Oil and Gold events as timeline, it had become clear to me that whenever market management was needed for something, they would introduce a new paper vehicle to use in the controlling efforts. Then one day Xty made a comment that she had noticed that a new Gold cross with Turkish Lira, so I got real curious to see what that cross had been doing during the recent mega smash on the 12/15th April.

It turns out that the XAU/TRY only started trading on the 7. May 2012 according to Netdania, and it turns out that this cross seemed to have been the most out of whack and was brought into the most perfect alignment with XAU/USD during the raid, while the USD/TRY was essentially flat. This was the classic tell tell of a currency calibration maneuver for me.   

Chart 1: XAU/USD - XAU/TRY

Chart 2: USD/TRY - XAU/TRY

So I decided that given the epic size of the raid, and the near perfect alignment of the XAU/TRY to XAU/USD that was a result, that I could now rely on USD/TRY to be calibrated to perfection. Being a math moron, I need absolutes to be able to understand anything. The relative stuff just fluffs away from me. So assuming that USD/TRY was a fixed perfection on the close of the 6. May, when I started looking at this, I went through the other major XAU crosses to see how they lined up. They all all looked more or less like this, with the same kind of gap at the last close:

The only difference was YenGold that looked like this:

That made sense, since I had convinced myself that there is an animal spirit updraft in the USD/Yen had been suppressed since the Asian crisis in 1997 and used for a managed decent of the USD against the Yen up until the fall 2012, where the Yen started weakening dramatically against the USD, and hence the YenGold rose very quickly. Other than that I cannot explain exactly, why it made sense to compare XAU/CURR with USD/TRY, but the similarity between all the crosses led me to start thinking about my ratio, because I thought it is natural that all the currencies are linked somehow with each other and with Gold at the same time.

So I made this small spreadsheet:

The formular for Currency Ratio 2 Gold is "1 USD Exchange Rate" / "XAU Exchange Rate" * 100. The AUD, EUR and GBP has been inverted, so all exchange rates express the number of currency units needed for one USD, so they can be compared more easily.

I thought it was interesting to see so equal ratios, and I wondered if that had always been like this, or if meddling with that ratio (bringing the fiats in balance with Gold - and bringing the fiats in different relationship with the USD) might have something to do with all the Gold smashes over time. I also thought that it would have to be a pre-requisite for a currency reset, that this ratio would match on top of all sorts of other plans that must be ready of course.

So I went back to the beginning of the Gold Bull Market, and this is what I found:

Notice how the ratio is pretty different between the currencies with a notable outlier in the GBP. After the first run up, the ratio for GBP has been brought in line - sorta - with the other currencies.

Up to the 24-01-2000 the work is perfected with ratio alignment, and although it does not reach the original level from 1999 again, the currencies are now synchronized. Up to the 10-03-2000, which is the dot com burst, where Gold seemed to want to run up, but was kept in check - the exercise seems to be strengthening the USD against all currencies - except Yen, which as already explained above was strengthened to manage the decent of the USD...I think.

So to recap - step 1: lift all fiats against gold - step 2: lift the USD against its fiat peers.

But then something odd happens. The XAU/CURR crosses only starts trading after 24-03-2005. Before that a Yearly calibration seems to be happening in March. Above table shows the result after "calibration". Now the ratios are no longer aligned, but the ratios for all  currencies are overall higher than last "nice sync", so they appear stronger in relation to Gold than before (If I have not confused my own rationale).

Also now it seems the tension has been released in the Yen, and the three European counterparties GBP, EUR and CHF has risen, while the resource currencies have fallen further against the USD. Cannot explain that yet, and haven't checked if that is a pattern.  

I have many more examples, but should probably post in a new comment, because this one is getting long. So I will end with saying that in the examples there is a clear tendency to have low ratios just before smashes - aka all fiat less strong against Gold, and USD have fallen markedly against the other fiats. After the smash plus wiggles up and down, the fiat complex is always stronger against Gold and the USD is always stronger against the other fiats. 

So interim conclusion according to this approach is that Gold smashes are conducted to save all fiats and particularly the USD from embarrassment. More examples later.

Currency tables continued (24. May 2013)

http://www.tfmetalsreport.com/comment/315812#comment-315812

Laverne:

Above I wrote "The XAU/CURR crosses only starts trading after 24-03-2005". This is wrong - sorry. It was the USD/TRY that started trading on this date. The XAU/CURR started trading on the 22-12-2003.

Onwards. The first table shows the situation one week before the new XAU/CURR crosses starts trading according to Netdania data. They do have one different price per day before that, so maybe the price was determined in a different way before that.

This is just to have a starting point for the next sequence, but notice that the ratio has fallen quite a bit since the 0,35xx in March 2000. The next table looks at the situation around the first smash (Bear Stearns?) in 2008: 

Up til this point the ratio has dropped quite much again, and the EUR is sticking out a bit. Over the next year Gold corrects significantly, and the result is a clearly risen ratio plus the USD has strengthened quite significantly against its fiat peers.

Moving on the the great run-up in Gold in August 2011. Here we see that the ratio has dropped like crazy. After the first big smash down, the peers have weakened a good some - but not like crazy, and the ratio has been improved, but not very much when compared to earlier levels. On the 03-10-2011 they could have pulled the plug, but I guess the ratio was too low, and other needed measures were not yet in place. Maybe more gold needed to be transferred east.

During the next run-up the USD weakens against all peers except for the odd Yen out again - and all fiat falls against Gold. Then by December 2011 and the end of the next Gold correction, the ratios have come up a little, and the peers have weakened a bit again, but it seems like the big Gold moves yield less results on the re-calibration effort than earlier. Again Yen is the inverse odd one out, because it strengthens when the other currencies fall. 

More of the same above. Notice TRY has entered the fray weakening with the peers on the rundown. 

In this table we see the changed behavior in the Yen by the first of October, where it strengthens together with fiat peers. Notice also how the rundown up to the 31-12-2012 fails to produce a higher or equal ratio than on last rundown, and also fails to produce weakness in AUD, CHF, EUR and TRY. Are we seeing a new currency block emerge?

Also - it was on the 18. October 2012 that the Cypriot bankers started deleting files on their hard-drives, so something happened behind the scenes in October. One thing, I found, was that the first draft of the bail-out deal was released, but was that all? And what did they delete? And what is with the sudden emergence of the Turkish Gold Cross?. 

So up to the grand smash they managed to raise the ratio a bit, while having success weakening the peers a little against the USD in the rundown to pause. Then after the grand smash, when the ratio should have risen significantly and the fiat peers should have weakened significantly given the size of the move in Gold, what do we find? A very moderately risen ratio and STRONGER CAD, GBP and TRY (if only ever so slightly), EUR (more pronounced). CHF has "only" lost 100 pips - on a 200$ smash????.

OK - I know that it is one month later, and I should go back and revisit the result straight after the  smash. I will probably do that, but it seems like the half life of the biggest 2 day smash we have seen is very short.  

Which bring  us up to this past week. The ratio has risen and the peers have weakened ever so slightly.

Then yesterday moving back to an already used ratio of 0,0720 in the same week (can be totally coincidental and may have happened many times, but just not present in my samples) right before a long weekend, made me think if they were having a second go, at a predefined desired level. With only one currency to correct TRY at 0,0721, and one day to go, it looked interesting from the "must be in balance before reset weekend" perspective.

As you can see today, that idea did not hold water. Anyway, here you have the examples to ponder, if it is of interest.

@ Kcap - thanks for the kind words. I don't want to sound fakely/overly apologetic, but this stuff is really out of my peabrain comfort zone, so if I sound like I don't want to stand by my own stuff, it is simply because I am only barely understanding the implications and deductions myself, and like most other people, I would like not to make a complete a** of myself ;-)

But it sure feels like there is something to be found here with this kind of approach, and that is why I am writing it down for you guys - so we can pool our brain power to inch a little closer to a little more clarity.

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Beginning of the current discussion

From here on, I will carry over the posts in the discussion as is. No edits [...] to condense only to the concrete subject - except for my own Munknee reply, which is somewhat off topic. That also means that I am obliged to reproduce - shamelessly - all the wonderful praise - but I can certainly live with that ;-)))))))

Lamenting Laver (24. May 2013)

http://www.tfmetalsreport.com/comment/315819#comment-315819

Redwood:

You've done a lot of work.  Thank you.

So the basic premises are the following.  Correct me if I'm wrong.

1. most major currencies must hold a uniform ratio to gold

2. gold is manipulated so the above can take place.

3. the reason(s) to maintain a uniform ratio to gold would be to weaken the currencies against the USD? Is that correct?

4. the lower gold is maintained the lower other currencies are against the USD.

Correct/add/clarify if I am missing something.

@ Redwood (24. May 2013)

http://www.tfmetalsreport.com/comment/315830#comment-315830

Laverne:

Thanks for asking, and trying to follow. I am desperate for some brain power assistance ;-)

1) Yes, I think so, at least before a worldwide currency reset. At the beginning I thought it HAD to be equal ratios, because if the ratios are not very similar, there would be arbitrage opportunities by e.g. selling USD and buying another currency and buying Gold in that currency, but this is where my brain is insufficient, because how come then was there the bigger differences in the 1999'ies? And is a difference in ratio indeed an arbitrage opportunity? I don't understand that fully - intuition says yes, but I can't explain that logically yet.

2) I think it is done a) To bring sync to the ratio, when it gets too differentiated, b) to lift all fiats against Gold and c) to use the big moves somehow to redistribute strength between the fiats - most notably lifting the USD up in relation to the other fiats. How it is done exactly, is not clear yet, but I pointed to some examples that I think can be the modus operandi in the Yen/USD/YenGold post. My problem is that I do not fully understand the exact outcome of what they are doing with those moves - I just have a hunch-feeling that this is where it is going. Math genius is desperately sought to help decipher. But it seemed to entail switching currency gold behavior like e.g. YenGold trading inverse to Yen at some point, and then switching YenGold back to trade more or less in sync with USDGold.  

I also have the problem, that proving this requires many examples over time with many data points, so it is a big job to find all the goodies, after identifying the pattern of the initial hunch - if that makes sense.

3) No - the theory is that the the frequent raids and different crisis that produces raids, (with so called flight to USD safety) will create opportunities to lift the USD versus other fiats, and to lift all fiats against Gold. I am not sure that the existence of a reasonably uniform ratio does that in itself.

4) Generally yes, as described above, but some of the re-calibration appears to happen also on Gold up-moves after a raid, so a permanent low in Gold is not necessarily enough. If we imagine a fixed price in Gold with no free market at all, then the ratios would change out of sync in accordance with the amount of money supply expansion, because the exchange rates would reflect higher strength for less-printing currencies. Since the Fed is not only privileged to print, but also obliged to print because the fed is the ultimate lender/liquidity provider due to USD reserve status, I guess that the USD is doomed to fall against the others over time, which would ultimately result in very different ratios between the fiats, if the Gold price is completely fixed.

I am sorry for not being able to be more articulate - does the above make sense?

I will come back tomorrow and check, if you have more questions - but I am too tired to think clearly now, I am afraid ;-)

Lamenting Laver (25. May 2013)

http://www.tfmetalsreport.com/comment/315895#comment-315895

Redwood:

You explain yourself perfectly, no worries.  I am interested in this and I think Ivars has some important contributing info, so I will check some time today or tomorrow and try to respond.  Thank you.

@ Lamenting_Laverne_and_the_Scoundrel_Suctioncups (25. May 2013)

http://www.tfmetalsreport.com/comment/315975#comment-315975

Argentus Maximus:

@Lamenting_Laverne_and_the_Scoundrel_Suctioncups

Amazing work! A big thanks to you.

It seems to me that you have documented the cartel via their FX management and listed the team member central banks/governments for everyone to see, including a surprise member or two.

Based on my first (far too quick to get it all) reading of what you posted we have a Fed-ECB-CHF-AUS-Turkish Central Bank defacto exchange rate mechanism using gold as the trading range middle, (a GERM!) and all must be manipulated together, and all brought down simultaneously in a group by team members if covert printing to infinity is to succeed for the longest possible period before currency rejection triggers elevated inflation.

Now we must create a currency index of these currencies and look at crosses with alternate hard assets and FX from the rest of the world.

I've saved your posts for reading again in more detail.

@ Argentus - Thanks (25. May 2013)

http://www.tfmetalsreport.com/comment/315991#comment-315991

Laverne:  

I cannot begin to say how excited I am by your response. Thank you so much!.

I am so brand new to all this chart stuff and I constantly get confused by even the basics of how the crosses are flip-flopped etc. so I am basically just stumbling my way forward, because I am stubborn, and I could really need other more experienced eyes to take another look.

Also - It was you (along with Mystery and Ilya) who got the curiosity ball rolling with your fantastic forum writings, that was like a whole new world opening up to me ;-)

If you understand, what I am trying to get to - which I barely do myself - it is more intuition than logic, that drives this thing for me - please please help me by reading below posts as well.

I know they are long, and you probably have little time, but I found some examples in the USD/YEN/YenGold charts, that feels important. I would like you to trace a few, and see if you agree with me that this could be a mechanism for USD levitation and also bond market rate management.

You can find them here:

http://www.tfmetalsreport.com/comment/309408#comment-309408

http://www.tfmetalsreport.com/comment/309565#comment-309565

http://www.tfmetalsreport.com/comment/309576#comment-309576

http://www.tfmetalsreport.com/comment/309790#comment-309790

I know, I am taking your whole arm, when you reached out a finger, but I would so appreciate your comment on these links as well. Especially comment 309565.

About cartel composition: My feeling is that up until August 2012, we had one cartel with FED and BOJ and another with ECB and CHF. For a long time they cooperated, but seemingly not anymore. It could be that AUD and GBP has changed camps along the way from Fed to ECB/CHF camp and possibly that BOJ jumped ship early last year. (I recall a story about 2000 US troops suddenly installed in Australia - could be a coincidence). The UK also announced a Yuan swap facility earlier on indicating that they may become the direct line into Europe for the Yuan, when they are ready to open that cross. I have noticed that in at least one example, when the EUR traded counterintuitively - the GBP was doing the same - indicating partnership in the "standing ground" business (19-05-2013). I am wondering, if we will see a GBP-EUR peg one day soon.

Turkey has traditionally been an ally of the US, but has also allegedly recently been a Gold hub for Iran, so I am wondering, if Turkey has been brought into the ECB/CHF camp too. The Greek and Cypriot drama also leaves some speculation as to exactly who these bankers were involved with, and why they started deleting files on their hard drives. Clearly Russia was annoyed, but they stayed put - kept quiet, which indicates something much bigger was at work. We know Greece and Cyprus are closely related, and we know that elements in Greece acted as a Trojan horse in the EUR by hiding the debt aided by Goldman. We also know that Greece and Turkey are not exactly best buddies. Was that exploited somehow?

All total speculation of course - so far. Maybe we can find the answers together in this community.     

Thanks again ;-D

@ Lamenting_Laver (25. May 2013)

http://www.tfmetalsreport.com/comment/316014#comment-316014

Ilya Repin:

Argentus notified my about your recent posts and suggested i should read it. And i must say i'm glad he did that, glad that i now have a copy of it on my hardrive and very appreciative of you sharing your discovery and putting it all together so well for everyone here..

This is truly excellent detective work. i think you are being a little too modest about this and not giving yourself enough credit. Your statement "it is more intuition than logic, that drives this thing for me" really shows the true power and value of intuition, as it is able to peer around corners and reach higher than mere logic can do. You are clearly a spiritual and gifted person. Who needs logic when you can make these kind of discoveries? Ratio to Gold? who had ever thought of investigating this. Certainly i hadn't.

I have to say that is one of the most fascinating writings i have read in some time. I will not refer to it as a "post" as it is really much more. You have stumbled upon something rather important (i thank your intuition for that).

We all know that Gold is (should be) the pricing mechanism for all assets and services, and that the FED and USD have usurped that privileged role for their/its own benefit. We all know that Commodities and Gold are traded in USD, and so in order to buy on the international market Sovereigns must first purchase USD to make the transactions, and that due to this artificial demand created by dictate, the USD maintains its inflated value.. As if you can buy "things" in your own currency why would anyone need Dollars? they wouldn't, as a result all those USD created over the past 100 years would have no where to go but back the the US mainland, and subsequently US asset prices. Of course this would result in huge inflation but it would be isolated to the US. The rest of the world would in fact experience deflation and elevated living standards as a result.

But really, I had never given it any more thought than that and had certainly never gone to the trouble of keeping a record of Ratios between FX cross' and that of the respective XAU cross'.

Your work is much more interesting than any written analysis of this concept.

really it is truly fascinating.

Please do not stop researching this as i think you are in fact the best Lady for the job. I will be looking at this more but am many miles behind you.

In fact, when you make similar posts, if you could PM them to me that would really be very much appreciated?

Ok now im going to read that again and find AM to chat about it.

Very best wishes to you and thanks once again.

Ilya Repin

@ Ilya, Redwood and Kcap (25. May 2013)

http://www.tfmetalsreport.com/comment/316043#comment-316043

Laverne:

@ Ilya: You just blew me away! Thank you!. Better than I could ever ever hope for. It seemed significant to me and now you and others just confirmed that. I will keep you posted on new stuff. If and when appropriate sometime later, I would love to be a fly on the wall or active participant, when you discuss with AM, because that might set off other angles, that has not come up yet. For now, I am working on an illustration - simple as mud - to explain the expected mechanism and the observed mechanism. It will take a while still. But you just sent me back to the working table with renewed energy, that is for sure ;-)

@ Redwood: Thanks also to you. I hope you will chip in with your thoughts as well.

@ Kcap: Re the probability for another smack down to get rid of the last cartel shorts. It sounds reasonable. I also speculated on Thursday evening after they had revisited the 0,0720 ratio twice in one week, that they would have another go at the 0,0734 again, because that was the highest level reached in a while in my examples. Unfortunately that would require a price of approx. $1362 to reach on Sunday night. Lets hope not - but it would not surprise me one bit by now - after all the earlier smacks.

Lamenting Laver (25. May 2013)

http://www.tfmetalsreport.com/comment/316074#comment-316074

Redwood:

Further to your interesting stuff.

Let's face it.  The entire world is watching US debt as the globe's financial stability is entirely hamstrung by this monster.  China is aiming to rid itself  of this by acqiring as much gold as possible.  But the  gold price has a very tight relationship to US debt.  Look at this.

http://www.munknee.com/2013/01/startling-relationship-between-gold-price...

So we have the following variables:

1. other currencies vs. gold price (ratios)

2. gold directly correlated with US debt.

3. gold varies proportionately with other currencies; inversely to USD

Conclusion:  If gold drops (according to above article) as an averaging trend line against US debt, we will see other currencies kept low and the US dollar remains supreme, maintains world reserve status and secondarily global financial stability is maintained.   Isn't this what this is all about in the end?

Lamenting Laver, these are just ideas I am considering as I agree with others than your work thus far is brilliant.

Redwood (25. May 2013)

http://www.tfmetalsreport.com/comment/316077#comment-316077

Silver66:

Take a look at table S-4

http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/t...

Very bullish for gold, if you think there is a correlation to US debt and POG

Silver66

57goldtop... hope you hit them straight

@ Redwood - Munknee ( 26. May 2013)

http://www.tfmetalsreport.com/comment/316232#comment-316232

Redwood: [..."Conclusion:  If gold drops (according to above article) as an averaging trend line against US debt, we will see other currencies kept low and the US dollar remains supreme, maintains world reserve status and secondarily global financial stability is maintained.   Isn't this what this is all about in the end?"...]

Laverne: [...I have just had the chance to look at the article now.  I would agree that the answer to your question is yes, but I have a few comments to put a big question mark next to the conclusion from the article:...]

Lamenting Laver - excellent (26. May 2013)

http://www.tfmetalsreport.com/comment/316122#comment-316122

Strawboss:

Lamenting Laver - excellent work.  Still trying to wrap my mind around what you are presenting which is proving difficult as if your brain is pea sized, I am working with something akin to a grain of sand.

Is there a way to graph the data?  The ultimate purpose in trying to understand what you are presenting is to see if there is a way to project/understand the points at which the price of gold will rise/fall - which would enable your work to be used to forecast price and/or to position ones account accordingly - which could be tremendously valuable.

@ Strawboss et al - Graph (26. May 2013)

http://www.tfmetalsreport.com/comment/316168#comment-316168

Laverne:

"Is there a way to graph the data?  The ultimate purpose in trying to understand what you are presenting is to see if there is a way to project/understand the points at which the price of gold will rise/fall - which would enable your work to be used to forecast price and/or to position ones account accordingly - which could be tremendously valuable."

Thanks for your kind feedback. I am sure there is a way to graph this, but I haven't found it yet. However, all the great feedback has given me confidence that I should just keep saying what I think, because it may interesting to others after all, even if I lose the logic once in a while myself, and make a mistake.

The foundation for me right now is, that it makes no sense to have a completely free flowing in space currency complex, and that something is tying it all together. That is the Currency Ratio, I wrote about.

I am also looking at this from the perspective that, most of us are saying that everything is manipulated, and I believe it is impossible to hold steady every moving part in itself - it would simply become too complex. So they have to have a grip on the central "crank". In my mind that is the currency market, and it sends signals to all the other markets, most notably the bond markets, which helps managing the rest. I feel sure we can find evidence of this in the USD/YEN cross, although I haven't matched the pattern examples with the ratio line-of-thought yet. I still need to pin down the basics of "what is expected" and "what is actually observed" in my own head first to avoid confusion.  

One topic, where it is necessary to define "what is expected" first, is the Fiat Peer Gold Crosses versus the XAU/USD. The Peer crosses started trading much later than the XAU/USD. I believe the reason for this is that after the Bretton Woods accord, all fiats were "counter-anchored" by the USD and the USD was "counter-anchored" by Gold (XAU/USD).

To me, this means that the currency exposure that other countries had towards their USD reserves, could be hedged by using the XAU/USD. At some point, this was not enough. Maybe the peer countries were printing too much by themselves, and an additional hedging instrument was needed to counter-balance this, or maybe the countries felt their currencies were too easily manipulated with only one Gold-anchor. I do not know, but we will get closer to this later, I think.

The point is, my understanding of the Peer Gold Crosses "what is expected" is that they should trade inverse to their respective currency - to pick up/measure the perceived strength/weakness of the Peer Currency irrespective of what the USD might do, because the latter is captured by the XAU/USD. This would result in the following behavior using CURR as a label for any of the peers.

USD Down - CURR Up - XAU/CURR Down - XAU/USD Up.  

So in a perfectly balanced hypothetical world - the XAU/USD and XAU/CURR should trade inverse to each other.

However, the "what is actually observed" says something else. At a glance, the XAU/USD and XAU/CURR trades more or less together. Sometimes at skewed levels, but they appear to be strongly correlated. This can be explained by the fact that Gold is Gold is Gold - no matter the language and currency. I will also look into why the skews occur (semi inverse behavior after all? and in which crosses?). But in general this raises the question, what are the XAU/CURR used for then? - because if they are not trading perfectly inverse to the their respective currencies, how would they be any good as hedging instruments?

Now, if you could use these country crosses somehow for fine-tuning individual strengths between the Peers (in inverse trade mode) and the Peers versus USD (in correlated trade mode), while XAU/USD is used to lift the entire fiat boat, then it could be useful from a management perspective. This is what I am looking for examples of, but please remember that this part is still only speculation as opposed to the Currency Ratio - that has been shown to exist clearly in the spreadsheet examples. 

So back to your question. I am making an illustration series to simplify the "What is expected" concept for myself, so I don't confuse myself midstream. (You have to have a simple blueprint of the machine, to be able to identify and document which nuts and bolts are being removed/turned/changed/re-attached by the market mechanics to arrive at the observed result) When that is done, I will go back to the Yen patterns to see, if they match my initial "feeling" idea.

When that is done, there will be either proof examples or not, on how this levitation is done, if indeed that is what is going on. If there is proof, we need to go back and trace many more examples - not only in Yen, but try to find the same patterns in other crosses as well - and where the originator/trigger seems to be. For this we probably have to help each other out, because it is a massive job manually finding and documenting all those data points, without access to the juicy trading data databases for more focused large volume queries.

When we have the data - hopefully a picture will emerge as to precisely, who (which CB's) must be involved (and correlate with more macro/political information known), for how long, if it has changed over time, and possibly/hopefully a pattern in the ratio levels sought, and the absolute number of pips moved on average in every currency on every drop/bounce - and then you will begin to have your forecasting tool ;-)). We have a loooong way to go yet, it seems.....   

However, I think the existence of the ratios prove that there is indeed a plan and an active coordinated management of sorts going on. And when there is a plan, the results of that plan can be dissected and used for forecasting, until of course the plan is changed ;-)

In summary - For now, I am making the simple illustration, and will post it, when I am done.

Can anyone tell me how to delete files in my Turdville account - the keyboard Delete button does not seem to work.

Also, I would like to make one of those small animations with two picture movement, but I haven't got a movie-maker etc. Any ideas on how I do that with as standard tools as possible?

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The floor is now open

The repeats/copies are just for background info. If they are not of interest, please skip and hopefully the discussion starts right here. I have a post with the "What is expected" illustration almost ready, but need a little shut-eye first. If you have thoughts, please go ahead and post them.

The forum is now open ;-)

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You Are Awesome Laverne!

Thank you for all of the effort to make this into a stand alone Forum!

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Appreciate the work LL!

This is a bookmark. ;-)

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Wow.

I'm expected a doctorate in economics if I get through this thread!  Granted by U of L (Laver)

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Serious Question

For those of us riddled with ADHD, may I ask a couple of simple questions?

What is the key data point we should be looking at, or in other words, is there a single metric that is critical?

What is the "actionable" or "investable" information here?

Honestly not trying to be a toad, just asking.

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I can't answer your question

I can't answer your question directly but all I now is that having the ability to not go through money changers/bank charges etc when I visit different counties (thereby avoiding the rip off rates etc) by selling au in that country when/if I need to is a small blessing and one I am grateful for. For me in the current environment of weird economics, that is a hedge on a grass roots level.

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Bravo LL - Bravo

Unfortunately I lack the mathematical nouse to do more than follow your train of thought. I do however possess a very strong intuition that tells me when I am looking at something significant. Akin to AMs setup thread which similarly bemuses me often.

You are doing the exactly right thing asking for contributions from the turdites. There are many powerful thinkers here who are extremely interested in all related subjects and very generous with their insights.

Personally I think you have started to crack an extremely big nut.

If I could only figure out why! I will have to let it percolate some.

So bravo again & Hat tip to you madam.

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Great posts Lamenting

Great posts Lamenting Laverne. It will be very interesting to see where this forum eventually goes.

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I agree

I agree that the relationship is no longer stable.  As I have said a couple times this month the chaos cascade has begun.  Unfortunately this means a lot of your current work will become less and less predictive (since this is the nature of mathematical chaos).  However it will still be very useful in that it exposes the nature of the players and the moves they like to do so it is still very worth persuing.  

I have arrived at my belief that the currency nature of gold vastly outwieghs the commodity nature through intuition and I have little in the way of quantitative/deductive logic to contribute for you.  I would only add the following:

1) Gold is the odd man out.  Technically this makes it the only currency not used as an official currency by states.  However we all know it is used as a currency in many important ways by states and their CBs.  But as the odd man out it is ideal for using as a swap buffer.  This is what it has become and in many ways the way it has been used for decades even before 1971 if you look at the way currency swaps evolved from the early 20th century into the later 20th.  In a sense it is the super-currency or the meta-currency above the others.  That non-states are not involved any more has been the Great Manipulation of the last 40 years.  In some ways we are not on a true fiat standard, they were using gold as this meta-currency to "stabilize" (i.e. makes things work like they wanted rather than as they normally would) things with the games you sketched out, where various "currency pressures" are shunted into the buffer of gold and then swapped around to other currencies or bonds as desired.  But in the end they cannot contain the chaos the fake enforced relationships cause.  Thus we are now starting the decent into the disorderly and of course seeing the inevitable fracturing of alliances.  This can take a while to fully play out, like 2 years or so.

2) Other nations outside of the major axis of cartels, including small nations, are certainly playing this as well so there will be times when any particular currency or cross may not correlate well.  States have always messed with gold and they always will, they absolutely cannot help themselves.  There has never been a gold free market and never will be.  Some kind of market yes, free market not even close.

Also I have a suspicion this whole system, in one incarnation or another, goes back to the 1870s when silver was essentially removed from most major money systems and replaced with actual or de-facto gold standards.  Within thirty years even the die-hard pure silver standards (as opposed to be-metallics) had switched over to gold standards , then world war 1.  When you look at WW1 and then the 1920s the nature of money was changing radically and while some nations attempted to reassert metallic standards they did so poorly and either went off them entirely by the 30s or revalued and confiscated all of the common people's access to gold.  Silver was left alone as it had already been soundly defeated previously as the world by and large went to gold standards.  

We have a  40 year period where silver was systematically relegated to second bannana/taken out entirely on a world-wide basis.  We then have another 40 years where the only metal left as the official standard, gold, was systematically taken out of normal people's hands and finally consolidated into the hands of one nation via Bretton Woods.  The is why silver could be taken out of the coinage years before gold was.  Normally doing so would have been a disaster, but decades of the undermining of silver allowed it.  We then have that nation go off the supposed gold standard and then use this gold as a CB currency, a currency for sovereigns alone.   When viewed in this 40 year step-wise cycle the strange recent history of silver makes more sense to me.  In other parts of history treating silver as it was in the 1960s would have been a national disaster of huge proportions.  Silver was killed first because it was always the normal people's metal and was the majority of circulated money.  Designed or not is immaterial.  This has been the trend.  A trend of more and more central planning and consolidation of things.  But as always the central planners bring chaos by imposing their idea of order on a complex system that they can never hope to assert their plans upon in the long term as the accumulation of variables make the consequences of their impositions less and less predictable.  

What the next 40 year step will be I have no idea but I think it simply can't be more consolidation.  This use of gold as a buffer/meta-currency to allow them to basically redefine money and the price of money however they wish and essentially make it like any other completely arbitrary political construct (i.e. BS that means whatever you want depending on the situation) has reached its breaking point.  Will this mean silver and gold go back to the people?   Who knows.  One thing is for sure, in one way or another the sovereigns will desperately and at any cost attempt to continue a similar game.  As being able to define the terms of things is the ultimate in political power.  

This is what gold has become for a cartel of sovereigns and why it is essentially an incredbily important thing.  Not exactly a currency so much as the way they mange their currencies and the price of money (interest rates).  Bretton Woods was a simple exchange but it set the standard for all currency's to use the US Gold Reserves as a reference.  Once they disconnected the ability of anyone to actually drain that reserve it became a de-facto buffer due to various mechanics already in place for gold as a currency balancing/swapping tool.  Just look at the Monetary Base versus M2, they are using gold in a similar way and have been doing so for a while.  I wouldn't be surprised if the idea for QE came from this.  In both cases they simply cut off/completely control the flow from one reservoir to the other.  In the case of gold it has become universally not legal tender (which is changing) thus making that monetary pool not be part of circulation just as the Monetary Base is no longer truly transferring into the circulated money.  QE is the "buffer" that is used to manipulate our currency and our price of money.  Gold is simply the internationl forex version of QE for the world.  The mechanics are somewhat different and more restrictive for gold.  But it also explains why the gold market is so dangerously,  stupidly hypothicated.  At least that is my current hypothesis.  Might be a little off.

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Back at the desk

Thanks to all for the encouragement ;-) I will return to the questions asked a little later. Ctob - that was a great post with a few concepts that I hadn't thought of before - like the Base Money and QE being equivalent to the Gold buffer. I will have to think about that for a bit before responding...  OK - here follows what I have been playing with these last few days: 

What is expected

As per earlier posts, I initially thought that the XAU/CURR crosses were introduced as an equivalent to the XAU/USD in order for them to reflect monetary expansion in the Peer Currencies, so that they could function as a hedging instrument.

I know already that this assumption is not going to stick in court all the time, but in the interest of avoiding confusion, I have made an illustration of "What is expected", so we have something concrete to refer to, when you guys tell me where I get it wrong ;-)

Ergo - Monetary Cartoon Time... Yaaay!.

This is the Bretton Woods Monetary System in abbreviated form. On the top scale we have the USD counterbalanced by Gold. Attached to the chain, we have the Peer Currency scales, where the Foreign Dollar Reserves resides in the little Green Boxes, and we have the Peer Currencies Value on the other end.  

The essence of Bretton Woods was that the individual countries no longer needed to have Gold as an official important element to counterbalance their currencies, because that role was taken care of through the Dollar reserves that were tied directly to Gold.

The balancing act for the Peer Countries was/is to not have too strong currencies and not too weak - because the goal is price stability with moderate inflation every year. This is how it works:

Dollar down - Peer Currency value up - Reserves value down, but bouyed by the fact that, if the Dollar would depreciate too much, the countries could request to have some of the reserves swapped with some of the now higher value Gold to keep their own system in better balance. 

Over time, the Gold bar in the Federal Reserve shrunk so dramatically that in 1971 Operation "Mighty Big Scissors" were executed, and the Central Bank Gold redemption mechanism was "snipped".    

After the hoohaah in the early 1970'ies, the Gold redemption mechanism was replaced by an Oil redemption mechanism, when it was agreed with the "Land of the Moon that lies down all night" (KSA), that Oil would only be delivered in return for Green Box Reserves. This gave the boxes some much needed utility value back for the Peers.

Behind the scenes - it is speculated, and I believe to be true - the agreement was that some of the now hidden-in-another-Knox Gold would flow to KSA via other channels, so that KSA would not find themselves sitting on an increasingly worthless Green Box over time. 

This arrangement meant that - although Gold had lost its official direct role in the "snipped" version of the Bretton Woods system, as long as a continued flow of Gold to KSA was ensured, Gold would have a magnet effect to temper the Oil price even if the Dollar value would fluctuate some.    

So basically that leaves us with the following result:

Then at some point something happened, that is not entirely clear to me. Maybe this mechanism of Oil redemption was no longer enough to keep the utility value of the Green Boxes, and the Peers wanted to have their own Gold instrument to rebalance reserves.

Up until the end of 2003, it would appear from Netdania data, that a Gold price had been set in the Peer currencies once every day. Then on 22. December 2003 XAU/CURR started trading for all the major Peer Currencies. 

Above chart shows the USD-Index, and the developments just prior to December 2003 is marked. 

Compare that with the action in the XAU/USD (approx. 300->425$) - that is supposed to hedge the Green Box Reserves through the relationship with the USD - and one has to ask oneself, whether the introduction of traded XAU/CURR crosses has something to do with this USDX slide - but that remains to be discovered.

(I will get back to the meaning of the blue lines in a later post.)

I have the following ideas for the reason:

- Peers wanted to have a hedging tool against own devaluation

- Peers wanted to have Gold Crosses, that are somehow not as easily controlled/influenced by the USD faction, because USD is not involved in the transaction?? And as such a preparation for a new Gold mark-to-market system, where all currencies have a XAU/CURR cross, with no negative bias towards a rising Gold price?

- The central banks needed yet another trading vehicle to influence the perceived value of all fiats, because a Gold Bull Market was gaining steam, and they needed pressure relief valves to keep the Fiat system alive a little longer.  

We will see, but the Euro was introduced in 1999 and started circulation in 2001, if I remember correctly. The first Washington Agreement on Gold was signed on 26. September 1999, where a group of Central Banks declared that they would not increase selling or leasing above already existing plans. I wonder, if this is directly connected to the emergence of the XAU/CURR crosses.

Anyways going back to the original thought of XAU/CURRs as hedging instruments, the current configuration of the "snipped" Bretton Woods system now would behave like this in the "What is expected" scenario:

After writing the posts on the Currency Ration 2 Gold and the post that speculates about Interest Rate Management, I wanted to be able to precisely define, which "levers" and "cranks" that were available to manipulate.

In this way, I imagined that it would be easier to look more structured at the charts for evidence, and it would be easier to explain the findings to you guys, having defined a terminology to refer to. This probably needs to be expanded at some point, but this is my suggested starting point.

As of right now, I am guessing that it is the joints marked by the red arrows, that are being detached - in some well tought out sequence - for a few seconds or minutes during management operations and then re-attached again, when done. I imaging that one or more joints are disconnected at the same time depending on what the desired outcome is.

This sounds really crazy now, as I am writing this, but that is the picture I have in my head, and that I hope we can find examples of.

One thing seems clear though. *Something* seems to happen during the Gold raids, that in some cases have the effect that the currencies are weighted differently against each other and against the USD, when the raid is over.

If we cannot find evidence of fundamental reasons for these shifts are happening magically at the same time - and cough cough shifts to fit a remarkably similar ratio to each other - then some mechanism *must* be at work, that facilitates that effect. That is the mechanism, I hope to find in this Forum.

Did that make sense?

Apart from following the comment here, my next step will be to work on is the "What is actually observed" along with compiling a list of all the still unanswered questions from the background material, along with a few new ones.

I will add the To-Do's as we go along as well, as e.g. Argentus' input about creating an Index over the currencies mentioned in the Ratio post and defining the other hard assets that are interesting to track in this regard.

Argentus - can you elaborate on, what you had in mind with your comment, please?

Finally, I have some rather unclear thoughts about how to apply timeframes to the chart investigations, because panning in and out in the wrong places, will probably result in no clear signals and hence confusion. Since the USD/YEN cross seems to be driving the action lately in un-wind mode, I am considering using that cross to define the time frames to hone in on - in conjunction with XAU/USD of course - because any un-wind has at some point been wound. More on that later.

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Hi

Hi, I like your forum topic post, that's all I have time to read for now though.

Lamenting_Laverne_and_the_Scoundrel_Suctioncups wrote:

The control had to start here - also because Interest Rate Management must be closely connected with currency values - and the continued confidence in the bond markets is what keeps the situation from coming unglued. 

This guy had interesting argument of why rates will remain at 0 forever that I hadn't read before, "Until of course, social or natural phenomena disrupt the engrained charter than has not been sapiently decided, but rather forced, upon swaths of the world."
 
"From a basic mathematical perspective, with the intuition and practice that can be attained in grade or high school, we can understand that the yield on a bond instrument can be represented as k/x, where k represents the original payments in the interest service, and x is the price of the bond. Visually, as the price of the bond increases, a plot of the yield versus the price becomes extraordinary flat. Mathematically, as the price of the bond (x) increases to very high levels, the derivative, or rate of change, of this function (-k/x^2), approaches zero. The largest rates of change of yield with respect to price is when the price of the bond is very low. This is one of the reasons why in the summer of 2011, yields in peripheral European countries were exploding. However, once the price of the bond is forced to be sufficiently high, either by endogenous market participants (funds), or exogenous factors (central bank intervention), it is exceptionally difficult to influence the yield based on the simple aforementioned relationship. Therefore, it only required that the ECB, BoJ and the FED push bond prices to a certain level whence it becomes absurdly facile to maintain low rates."
 
 

Lamenting_Laverne_and_the_Scoundrel_Suctioncups wrote:

In addition to this, the Forex market is trading 24 hours and is highly computerized, so from a market management perspective, it is perfect!.

Actually the FX market is the least computerized, but I'm working hard as I can to fix that problem, and that is a good thing.  Don't let biased misinformed individuals shape your mind, educate yourself, which I'm sure you'll do judging from forum topic post.

Different article from same guy above.

http://srikantkrishna.wordpress.com/2013/02/04/in-defense-of-automated-trading/

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Laverne

Absolutely amazing Nancy Drew work here! I have been working on an algorithm for almost a year based an a macroeconomic model. For the sake of sanity, I am not ready to delve it out for public consumption just yet. However, I can tell you that you are definitely holding some keys. By the way, have you considered a career in a think-tank or macroeconomics? ;)

Despite the popular belief of the system being rigged by the cartel - there is actually something much larger at play that happens across currencies, petro, and to some extent gold. The mechanisms are more complicated than Greenspan could ever model. I believe it's an algorithmically complicated formula that has some degree of circuit breakers. I too believe there is a heavy correlation between raids and currency balancing. It has to do with derivatives, and currency swaps - likely a reset in valuations. Gold is a mechanism or I should say variable.

In the currency basket is a counter-party variable, being gold and petro. However, the correlation is also tied to debt and /or derivatives. 

I have often hypothesized that if one currency were to fail, the whole basket would come unwound because algorithms are tied to one another across currencies. However, I think there are enough correlations that a single currency can be cut away from the algorithm (peer currencies) and you can still have a functioning equation. It will not be perfect - there will still be volatility - but the house of cards will not fall. We will see this with Yen. After it is cut loose and stabilizes it will be reintroduced to the equation.

Great job on this Laverne! Two things though; when there is discovery, often times people go to great links to hide that (I mean if traders and specs had information on a clear working algo - it would have to be reworked and hidden). Keep this is mind if you get close to a solid correlation. I guess what I am saying, is not all things are best said in a public forum. ;)   Second; When watching trends or algos that you are on to - pay special attention to movements that make no sense whatsoever  - without solid proof, I have traced such algos. Again, something I  have been modeling for over a year that often ends me back at square one.

So when I see CoT reports, TA charts of spec positions, trends, net short / net long, and all the other pretty charts you would expect someone with a securities background to think of... I can pose the analogy of a doctor that treats the symptom and not the real mechanism of what is really happening.. I hope that makes sense. Again, great work - great mind!

 

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Qanda Time - @ rtabit

Thank you for your reply. 

About highly computerized currency market or not so much. This is exactly what I hope to accomplish with this forum. That all assumptions are stated as clearly as possible upfront by everybody, so others with more concrete knowledge on the subject can object, if one has got the wrong idea. This was an example of the more dangerous kind of assumption, because I had already imbedded that as fact in my mind, and did not even question it myself. Thank you! This is how we can approach a greater level of clarity - by sorting the wheat from the chaff as we go along. 

About the mathematical formula for interest versus bond value behavior. That is interesting. I have only read the first link still, but based on reading that, I am reminded about the calculation of normal down-to-earth price elasticity. (He may be expressing exactly this with his formula, but I don't understand the language, so I wouldn't know)

Price elasticity calculation has the aim of defining what one increment in the unit price (of a non-Giffen Good item) will do to expected number of units sold. Assuming infinite production capacity initially, there will come a point with the last increment in price, where revenue from volume sold will turn negative on this step. If the producer has real world production capacity to fulfill the volume requirement at this step, where he gets the highest relative "bang for the buck" - otherwise he will have to trace back through the steps, until he finds the price level at which he can produce the goods sustainably.

Here is an example, for those who are not familiar with price elasticity:

I am producing quality leather shoes with a certain configuration of leather thickness, sole material, snazy looks etc. My unit price / unit sales are estimated to develop as follows: 

What we see is that although volume is dropping in the first 4 steps, because discount chasers are leaving, we are seeing value for money buyers coming in, who would rather spend a little more to have comfortable shoes for several seasons, which is why the volumes are not dropping as rapidly in the first 2-3 steps. In step 5 the optimum is reached according to the buyers, because in step 6 the buyers clearly demands a better configuration for the shoe, in order to buy. So they stop buying on the margin, when the price hits 200.

Now - can this behavior be applied to what Srikant Krishna writes about with regards to the bond market?

Assuming the observed behavior is correct, first we have to explain, why the relationship is as described. I understand what he says as the following:

Namely - when the bond price is changing in the super high area, the relative difference in obtained interest rates is much smaller, than changes carved out lower on the bond price curve.

My first question is, whether this behavior is a natural phenomenon or if it is a result of an already distorted/manipulated reality. To answer this question, it must be clarified what the primary reason for investors to buy bonds is in the first place:

1) Is it the income revenue stream from yields over time with the aim of holding to maturity?

2) Is the prospects of capital gains on the principal much more so than running yields with the aim of selling at a profit before maturity?

3) Is it to ensure safely kept principal, that will be returned unharmed in nominal terms after having given up on attaining profits in real terms (as in compensation for lost purchasing power and premium for deferred gratification).

I believe that option 1 is the animal spirit of the bond market. Option 2 began ruling, when interest rates were artificially restrained over a long time frame possibly around January 2002, and that after the 2008 crisis, option 3 became primary motivation. At present day, we are now somewhere between option 2 and 3 for natural buyers.

This means, that there is no really good incentive these days for bond buyers to push hard back on the curve, because that would be self defeating for the aim of option 2 - hence the relative smaller moves in interest rates at larger changes in bond prices, while we are at elevated levels. Could that be an explanation?

This leads me to believe that this interest behavior at high price levels is not a natural phenomenon, and that it is most likely made possible by some kind of interest derivatives insurance contract, that protects against capital losses on principal. But that does not mean that some of the price elasticity approach cannot apply anyway.

(Aside: Another option could be that bonds are actually trading as Giffen Good, but I think that the Japanese Bond market has just proven that not to be the case... at least anymore.)

Srikant Krishna: [...Therefore, it only required that the ECB, BoJ and the FED push bond prices to a certain level whence it becomes absurdly facile to maintain low rates...]

If we compare this with the price elasticity view point that there is a given price level to aim for within a certain product configuration, and recall the following:

Srikant Krishna: [...But in the context of examination of factual evidence, given the previous two reasons, all that is required for central bankers (or primary dealers and equivalents) to retain or suppress interest rates is to simply to act as marginal buyers...]

If we look back at the table with price steps for a certain configuration of shoes, and imagine that this particular configuration of shoe - a certain quality - corresponds to a certain bond issuance product like a 10yr Bond issuance, with a certain coupon - of e.g 1,7%.

Then if the FED has calculated/estimated the price elasticity of that particular product, they will know that by "buying on the margin" around 73800 units, they will keep the revenue as high as possible in that series, while sending the signal to the market, that there is absolutely no need to demand a much different configuration of shoes/bond aka coupons.

Just a silly thought - but as I said - the explained bond price behavior versus interest rates in the context of value for money in the current market climate - reminded me of price elasticity.

I will look at the rest - from your snippet, it looks like some quants people are freedom of information people. I like that ;-) - and I will try not to eat raw any bias that may be floating around with regards to highly computerized markets "as bad". I understood that this was in particular what you cautioned against. Correct?

In any case - I have NO problems with putting computers and trading together - it is the current level of transparency (or rather lack thereof) and the robustness of the infrastructure that I have very unhappy with. 

Lamenting Laverne
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Qanda Time - @ Margaritatime

LOL - I actually had to look up, who Nancy Drew is. Thank you for the positivity.

Magaritatime: [...However, I can tell you that you are definitely holding some keys. By the way, have you considered a career in a think-tank or macroeconomics? ;)...]

I hope you will share, when the time is right for you. It sound very interesting. About think-tank or macroeconomics. Even bigger smile (albeit a very good one). No, never - It has never occurred to me, that I might have something of value to contribute in such kinds of forums. And macroeconomics? I did actually take a class once, and my professor was an ex-wise man for the government hot-shot, but to call him a "teacher" would be an insult to teachers.

This man was so absorbed in his ultra complex mathematical deductions, that anyone who asked about concepts and required the answer in human speak, was regarded as lower than fleas on amoebas on rats.

Suffice to say, any and all of the few things I may have picked up on the subject, I have learned by myself. He added absolutely nada to the equation (pun intended) ;-) But hey, maybe one day, if I have success in finding some of the hidden gems through structured approach... I sure could use the income ;-)

Margaritatime: [...I believe it's an algorithmically complicated formula that has some degree of circuit breakers. I too believe there is a heavy correlation between raids and currency balancing. It has to do with derivatives, and currency swaps - likely a reset in valuations. Gold is a mechanism or I should say variable...]

When you say "Circuit Breakers" do you mean that the programs/algos have predefined levels built in, corresponding to particular derivatives contracts or entry levels for swap agreements, so that when the market approaches those "levels of danger of getting underwater" the programs automatically flip into reset mode - that overrides in all markets - then initiates a raid, cleans up the levels that are skewed or dangerous, and then reinstates "business as usual" mode again afterwards?

I ask because I have noticed examples where the raids set in at EXACTLY the same time/candle, with same "nature" of candle across several currencies and Gold, which indicates that this 100% computer initiated very centrally. So that they basically maintain a database over critical levels to manage, and depending on how many contracts will get into trouble on any given level, with how big an amount, the algos will know with what fortitude to "circuit break" the problem.

Do you know what a Currency Swap is precisely? How is it constructed? Or is that simply the activity performed, when you sell or buy a Currency Cross. Sorry for being clueless, but I really do not know. The same question applies to an Interest Rate Swap? Will you explain a little further, please?

The Gold (and oil) as a central variable - as a counterparty to the currencies - makes sense to me. The things I have looked at so far, makes me ask myself the following question:

By letting the USD rise in the USD/YEN (hereby weakening YEN), while YenGold is kept artificially flat, does this slow down a signal to the Japanese Bonds to demand higher interest rates, because of a weaker Yen, if Yen has not really weakened against Gold. The effect of which would be over time a slow coiling of the Japanese interest rates - keeping confidence in the market re what rtabit mentioned Srikant Krishna had said about higher valuation levels yielding overall lower pressure on interest rates, despite fundamentals.

With the aim of - on other days with genuine downward pressure in the Dollar, where Treasuries should lose value with higher yields due to natural forces - this move can be hedged by the rise in Japanese Bond values due to natural forces of a strengthening Yen on a higher level. Or possibly to use the opposite mechanism with an artificial flatish USDGold to signal no real weakness in USD even if selling pressure is a reality.

The only way this would make sense to me is, if Gold is used as a part of calculations that determines the purchasing decisions of professional currency traders. And/or if Gold is somehow  imbedded in valuation calculations of credit indexes or values of derivatives contracts. A variable - as you say ;-)

Margaritatime: [...However, I think there are enough correlations that a single currency can be cut away from the algorithm (peer currencies) and you can still have a functioning equation...]

If I understand you correctly, this ability to survive will be because enough of the other currencies are same-way correlated in other contexts, so that the one(s) that are the most exposed to the currently failing currency, will be rocked and rolled, but the strings attached "on the other side" towards the lesser exposed currencies will dampen the ripples during the first turmoil. Is that correct?

If so, and I really haven't checked this well enough in the other crosses yet, but it "feels" like the most exposed currency to Yen trouble is the USD, because it "feels" like Yen has been the currency directly tied to the hip of the Dollar by being different than the other peers in some cases. For example in the "Back at the desk" post, the USDX chart showing a significant drop in 17. August 1998 in connection with the collapse in Russia.

Apart from me wondering why on earth the USDX was falling at this particular time, with all the "flight to safety" mechanism, we are being told,  I also noticed that while the USDX recovered completely and then some in those two blue line time frames from 17. August 1998 to 12. July 1999 to 27. November 2000 - the USD/Yen did not recover to "before collapse levels", which means to me that Yen strengthened against the USD on a permanent basis more so than the other currencies in the USDX basket.

If this has indeed happened (and I don't know that for sure yet) a number of times in the decades before mid 2012 - that Yen has been "artificially" strengthened against USD, then I guess that the unwind will "all else equal" produce "artificially" accelerated weakness in the Yen and strength in the USD - something that may be fine for the US Bond Market - but less fine for hedging instruments that rely on the Yen and less fine for instruments that becomes unstable with higher volatility in general. Plus of course, it will do US exports little good as well. Does that make sense?

Margaritatime: [...Keep this is mind if you get close to a solid correlation. I guess what I am saying, is not all things are best said in a public forum. ;)...]

The thought have ever so briefly crossed my mind, but I seriously doubt that I will find anything to make even a slight dent in already well established stuff. But ya kno... just entirely hypothetically speaking.... juuuust in case this forum should one day stumble across some kind of bulls eye.... what are we talking about ;-) Rewritten algo and wasted time in establishing a pattern that has gone poof? .... Sudden computer problems? .... Black Vans? ...... ;-) Inquiring minds would like to know (as in most likely my dad ;-D)

The rest you said makes perfect sense. Please come back again when you have time and if you feel like it. You can bring good stuff to the table, I am sure. And thanks also for the Margin Account answer the other day ;-)

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