GOLD THOUGHTS: Gold investors thank HSBC, the global bank. $Gold had been making time, unwinding an over bought condition. Last week, HSBC announced its loan loss provision for 2006 will top $10 billion, 20% more than previously expected, because of mounting losses on U.S. mortgages. Markets recognized this as only first of blood letting to be done at financial institutions involved in U.S. Mortgage Mania. More financial blood will follow. Economic bottoms are not announced on CNBC or in research notes from Wall Street, but rather are marked by financial blood and failures. Is the Chairman of Wachovia updating his resume? Stocks of all mortgage related financial institutions should be sold. Proceeds should be moved to Gold on any price weakness.
Gold market recognized implications of this announcement, rising about $15. Previous resistance at $650 passed into history. Further support came yesterday from $61.2 billion trade deficit for United States. In the past month, about half of this deficit was recycled by central banks into U.S. government & agency debt. Other half is destined to be converted to other national monies. These dollars are overhead supply for foreign exchange market. Gold should be ultimate beneficiary of this financial overhang as Gold's value is reciprocal of dollar's value. Dollar is in a long-term bear market as a result of trade deficits, and Gold should gain value from it. While currently over bought, on next price weakness add to physical Gold holdings, Gold ETFs, or GDX to benefit from this situation.
Currency crises are often created by what is referred to as currency mismatch. Last good ones were Mexico and Russia. These events develop because the national money in which financial assets are denominated is different than the national money in which liabilities are denominated. In the case of Mexico, assets were peso denominated and liabilities were dollar denominated. Almost universally such a currency mismatch leads to a problem. In the case of Mexico, the peso plunged in value as it was the denomination of the assets.
Godfather of all currency mismatches, the yen carry trade, has been created, and is many times all that went before. Loan proceeds from Japan are invested in U.S. assets. Japanese yen is weak as the yen are sold to shift to dollars. Strength in yen would put carry trade loans at risk. With hundreds of billions of such loans a massive currency mismatch is threatening the dollar. When catalyst arrives, these loans will have to be reversed. Hundreds of billions will flow out of U.S. financial markets and the dollar, and back into yen. Dollar's value will plunge. Gold will rise, perhaps as high as $1,400. U.S. interest rates will rise, creating more losses for mortgage lenders. U.S. stock market? Down with gusto. Gold should protect your portfolio from financial mayhem that will follow this currency mismatch.
GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report, monthly, and Trading Thoughts, weekly. To receive a trial subscription send a note to Ned at firstname.lastname@example.org.