Getting Ahead of Itself

By Tshepo Magagane

Gold – is it getting ahead of itself? Inflation adjusted all time high is USD3,800/oz – as QE started, you had Swiss based wealth managers going USD4,000-5,000/oz (the purported relationship with interest rates) 15yrs back post GFC when Central Banks raced to hold interests rates at zero, this is what we were discussing in the HF – proper smart guys!

With that exodus to gold that was expected, no gold did not shoot up to USD4,000/oz – is CB buying and increased geopolitics different this time? Possibly but go back to my thesis for Commodities Positioning in PS…and no you cant compete with Physical Traders – just think “look-back option” when thinking about that!

[The aim of QE2 is supposedly to boost the economy by lowering the cost of capital and propping up asset prices )note the cynicism which the likes of Gross (a Ponzi scheme), Tudor, Scwarzman and Grantham have poured over the so called magic portion.  Maybe it is just that ingredient which is missing cannot be got at (RMB/USD!).  In any event, the thinking goes, lower long term rates will increase borrowing and spend.  Also will debase the QE2 currency against non QE2 currencies (do not be long the USD!). Debasing a QE2 currency will cause an exodus to the likes of gold, commodities and non QE2 currencies.

Short-term:

Assuming QE2 occurs and in size (the mere mention of it by the FED has seen US equities go up 10+ per cent and Ten Year Treasury yields drop 30+ basis points), one would assume global equity markets continue their rally as amongst other things as lex put it the other day “lowering discount rates from say, 8 to 7 per cent in a simple dividend growth model for the S&P 500 almost doubles its “fair value”.  The joker in the pack for all the above continues to be Western Europe (especially Greece, Ireland, Portugal et al), but realistically, one does not see a short term problem in this space.

Medium-term:

The emperor has no clothes (i.e. the US$). Sterling is in drift. The Euro is a gamble (odds not in your favour).The Swiss Franc is restricted size wise. RMB restricted regulation wise.  Hence “corporate/asset” purchases and/or gold, silver, commodity “bets” (note Agnelli talks of a implicit hedge in his Vale model) in a weak dollar situation (in so far as not a global financial structural crisis must be a good bet). Maybe overlaid with some select European government hedges (2-5 years forwards via CDS or the like).]

PS:

Positioning in Commodities Framework – every sub-sector has its own drivers, you cant have a one size fits all approach.

a. Base case – being able to operate without any external macro circumstances and just building up the production profile

b. Upside case – understanding how the structural story is unfolding and the impact on demand / supply

c. Downside case – when the sky falls off, you should still be able to sustainably produce CF while cutting back on expansion

d. Stupid case – whereby there are market dislocations and you print such ridiculous levels of money (recent eg 1. Coal during European energy crisis 2. Gold with the current geopolitical developments