Hinde Capital On China, Gold, AndThe Continuing Unravelling Of Our Monetary Order

The global crisis is a financial crisis driven primarily by global trade and capital imbalances; and Hinde Capital believes the crisis is in full swing again and asset prices are in danger of falling globally. Money is less effective at catching the falling knife. Investors and policymakers do not believe this is the beginning of a major EM contagion crisis. They are lulling themselves into a false sense of security. They see the EM market tremors, and do not fear a re-run of the EM crises of old. They are right. This is not (just) going to be an EM crisis. The disproportionate reaction of central bankers and policymakers alike has merely succeeded in compounding and exacerbating the error of this highly imbalanced monetary system. Recent events in emerging countries are a manifestation of the continuing unravelling of our monetary order.

Via Hinde Capital,

Over the past four decades the global economy has largely experienced prolonged imbalances, with countries running large current account deficits in symbiotic relationships with those running large surpluses. In our recent HindeSight Investor Letter – Top of the BoPs (below) – we revisit our long held belief that the current monetary order as defined by a constellation of exchange rate arrangements between the major global currencies, and which maintained these imbalances artificially, has led to excessive global liquidity and credit creation. This in turn drove a litany of asset price bubbles.

The bursting of these asset bubbles has continued in a series these past two decades, each one’s demise leading to more disruptive policy responses which have only succeeded in igniting yet more bubbles, only for those too to fail.

Finally in 2008 we witnessed the finale of decades of credit creation, rising in what appeared to be a crescendo of credit excess and widespread asset booms. We saw this event as the death throes of an unstable monetary regime, only then to see an unprecedented global reaction by policymakers in a coordinated fashion to keep the global system alive. For a moment here today, there are those who dare to believe they have succeeded, with rising equity markets a testimony to a reviving global economy. Nothing could be further from reality.

We stand by our assessment that the disproportionate reaction of central bankers and policymakers alike has merely succeeded in compounding and exacerbating the error of this highly imbalanced monetary system. Recent events in emerging countries are a manifestation of the continuing unravelling of our monetary order.

In the 1980s it was a hike by the US Fed that triggered the LatAm crisis. Today, the mere whisper of tighter monetary conditions in the US, vis-a-vis a tapering of QE has led to higher bond rates globally. Note tapering is not the same as hiking interest rates.

The consequences of multiple rounds of QE have heightened global risks as it has both exacerbated ‘currency competition’ and hot capital flows into countries seeking desperately for a return both from income and capital growth. This has created major distortions in term rates, equity and bond values, driving them artificially high in price.

These distortions have created risks far greater than the fragilities of EM countries of yesterday years. The system of credit creation has produced unstable growth underpinned with collateral which is both mobile and suspect in its integrity.

Investors have nowhere to turn, emerging market countries growth is faltering in response to export disadvantages brought about by rampant G10 currency devaluations. China is finally succumbing to its side of the global imbalance excesses. First it was the deficit nations now it’s the turn of the creditor nations to falter, primarily China.

Trade flow reversals are leading to massive capital outflows out of EMs and the question remains: will the central banks of these countries sell their FX reserves, UST- bonds and euro government bonds (bunds) to finance this surge in outflows?

It is not clear that renewed global central bank liquidity provision will even stabilise a situation we see as growing dire by the day. China is the driver. All eyes on china.

We believe the bursting of the ‘Great Bond Bubble’ will lead to a formative and substantial rise in gold as official money, institutional and investor money seeks an asset that can protect us all from a global default and resetting of the monetary order. The time to buy gold is fast approaching, if that time is not already upon us.

HindeSight Investor Letter June 2013 – Top of the BoPs

Source: http://www.zerohedge.com/news/2013-07-15/hinde-capital-china-gold-andthe-continuing-unravelling-our-monetary-order

Gold short positions hit new record

Short sellers in the futures market extended their position for the sixth consecutive week last week pushing the overall short position to a record 14.6m oz.

But, while the move is indicative of a continued bearish attitude by traders toward the yellow metal, analysts say it could be a good thing for gold.

According to UBS, while there remain no anticipated shifts at a macro level that would improve sentiment, ” The fact that gold shorts are sitting at all-time highs would make aggressive attempts to the downside relatively more difficult. At the same time, this means that an upside catalyst would likely obtain a more significant reaction as recent shorts get squeezed.”

But it says, ” The difficulty gold has faced thus far to break above the psychological $1400 mark suggests that many are still looking to sell rallies and it would have to take a much more convincing move to get the shorts significantly worried.”

That said, there are some encouraging signs for the metal, primarily the support offered by physical buyers.

As UBS says, “Headlines this week reveal continued appetite from central banks in April… Buying from these central banks highlights the trend for increasing gold reserves, especially among EM central banks, which we expect to remain in place this year. While news of central bank buying does not have an impact on price, it does help overall sentiment on the margins.”

Meanwhile, the bank says, physical demand lingers, “albeit at a less frantic degree than what was observed in the few weeks that immediately followed the sharp correction in April.”

Standard Bank also remains positive over the long term saying “Even taking a slowing of Fed quantitative easing into account, we still feel that fundamentals remain supportive—global liquidity should continue to grow, although maybe at a slower pace, and real long-term interest rates look set to remain low. Nevertheless, we cannot ignore investor apathy towards the metal and acknowledge that it will take some doing to restore confidence. Consequently, while we do still foresee upside, such gains will most likely be hard won. The first challenge will be to push past the $1,400/oz hurdle.”

Source: http://www.mineweb.com/mineweb/content/en/mineweb-gold-news?oid=191937&sn=Detail