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,

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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

The Fed Has Set America Up For Disaster

On the heels of continued volatility in key global markets, the Godfather of newsletter writers, Richard Russell, discussed gold at length and also warned that the Federal Reserve has set America up for “disaster.” This is a fantastic piece where Russell notes the gold market may be ready to roar as physical gold is continuing to be drained from the COMEX.

Richard Russell: “Everybody knows that the US has an almost unsolvable problem with debt. Let’s call it a predicament, since there is no way of solving the debt problem in an acceptable way (I mean in a politically acceptable way). Of course we could declare sovereign bankruptcy — or we could turn to hyperinflation and literally inflate our way out of the debt-trap. But neither would be acceptable or politically possible.

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But before the predicted disaster, you can be certain that the coming trouble will be sensed and registered in the price of something. It will show in the price of stocks or gold or bonds or the dollar. In other words, it will show somewhere in price.

What about the bond market — isn’t the bond market now saying, “trouble ahead?” In my opinion, not yet. True, bonds have taken a beating in recent months, but I don’t call the decline in bonds, so far, a red-flag prediction of disaster … And the stock market continues to rise, probably based on the current ocean of liquidity.

How about gold? Ah, gold may be about to raise the red alarm-flag. But not quite yet. As a personal opinion, I believe gold has now put in a major bottom. Wait — what about price? Ah, there you’ve got me. Even if a bottom has been put in, we have not yet seen the “meat.” The price of gold has not yet started to boom. It’s one thing to say that you believe “the bottom is in,” but it’s another thing to see the item surge off its low.

Source: http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/7/15_Richard_Russell_-_The_Fed_Has_Set_America_Up_For_Disaster.html

Get ready for turbulent gold earnings season

The second quarter of 2013 is one that gold miners and their investors would love to forget. Unfortunately, they will have to relive the horrors when the companies start reporting earnings later this month.

The results will be ugly. Analysts at Stifel Nicolaus estimated that the gold miners under their coverage (which includes the senior producers and a smattering of others) will report an average 20% drop in EBITDA from the first quarter. Lower metal prices are obviously a key factor, but so is an anticipated decline in production (down 1%) and an increase in cash costs (up 8%).

With squeezing margins and potential mine closures on investors’ minds, the Stifel analysts ran their models at a gold price of US$1,000 an ounce to see how many operations would have to shut down if the price stayed at that level for an extended period. They found that Kinross Gold Corp., Barrick Gold Corp. and Newmont Mining Corp. would lose well over 30% of their production from closures. But Goldcorp Inc. would only lose 7% because of its low-cost asset base.

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“With a management response on costs, probably half of the production loss could be saved for a year or two. However, the simple study shows that there would be strong supply side support at US$1,000 [an ounce],” they said in a note.

The only gold miner under Stifel Nicolaus coverage to be downgraded is Barrick Gold Corp., which was cut to hold from buy by analyst George Topping. He noted the company needs higher gold prices to pay off its debt, and the stock is likely to drift lower if prices remain flat. He also anticipates a dividend cut in the second quarter, along with US$7-billion to US$8-billion of writedowns. Neither of those moves would come as a surprise to investors.

Source: http://business.financialpost.com/2013/07/09/get-ready-for-turbulent-gold-earnings-season/