December 21st, 2008

The markets, they are fickle.

This from Jon Nadler, at Kitco:
They Bought...What ???

Gold prices took their worst fall in three weeks on Friday, as a robust surge in the US dollar diverted most would-be buyers, while emboldening hesitant profit-takers. Poor physical demand in key jewelry markets is obviously still playing a pivotal role in gold's short-term fortunes. We reported on Dubai's 80% sales slump in gold yesterday. Today we tale note of the fact that gold buyers in India are patiently sitting on the sidelines, awaiting an opportunity to buy the metal at near $790 or lower once again. So much for high premia as being a reliable indicator of coming price increases. India does love gold. At a price. Just not this particular one.

Today was also the day when it was the euro's turn to take an uppercut from the dollar and stagger in the ring. Forecasts of a coming 10% decline against the dollar over the next 90 days were issued by UBS.

Apparently, foreign investors are diversifying into precisely the very vehicle that is being derided in every single hard money publication. And then some. The instrument? Treasury bills. Uncle Sam's ultimate promissory note. Whether or not there buyers suffer from severe cognitive impairment or questionable judgment remains to be seen. However, at the moment, the numbers do not lie. October's purchases of Treasuries amounted to four-and-a-half times the amount of bullion the famed GLD has amassed over four years.
Nadler then quotes this piece by Floyd Norris of the New York Times:
More foreign money came into Treasuries in October — almost $91 billion — than in any previous month.

Most of the money — $56 billion in October — has gone into Treasury bills rather than into longer-dated bonds and notes. That flow helped to push down interest rates on bills to historically low levels, sometimes even a bit below zero, as investors sought complete safety.

The other chart shows that over the 12 months through October, foreigners put just $65 billion into Fannie Mae and Freddie Mac, the lowest for any such period since 1998. Unless there was a revival of overseas interest in those securities in November and December, 2008 could become the first year to see net sales, at least since the data became available in the early 1990s.

Until the late 1990s there was relatively little overseas investment in agency securities. But as the Clinton-era budget surpluses reduced the supply of available Treasuries, foreign investors discovered these investments, which seemed to be close substitutes. Even after large budget deficits resumed early this decade, the overseas demand for agencies continued to grow until questions about their solvency began to be heard.

Now, virtually all the foreign money is going into Treasuries — at a rate of more than half a trillion dollars a year.
Nadler concludes:
An abbreviated trading week awaits, and along with it a thinly traded market with fewer participants at the controls. Maybe not the best time to go on a gambling spree.
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