Discussion in 'General Precious Metals Discussion' started by ozcopper, Feb 17, 2021.
I guess the theory of liquidating PM's to find yield in the crypto defi space has merit
ROSS NORMAN : Gold trapped in a self-reinforcing delusion.
Published on April 1, 2021
CEO at Metals Daily
We are coming up to 50 years since Arthur C Clarke introduced the science fiction film "2001 a Space Odyssey” and the computer HAL - (said to stand for Heuristically programmed ALgorithmic computer - but I prefer the idea that it was a poke at IBM with each of the letters being the preceding one in the alphabet).
And here’s the thing …
Robots were designed to ’think’ in a linear fashion - they are systematically and consistently apply a given set of rules - the ultimate automation, they have been applied to devastating effect to financial markets. Hell, they can even get away with front running which their protoplasm rivals would go to jail for.
Well welcome to the new gold market. Gold as we know tends to slavishly follow important threads and themes and the idea of using programmes to trade markets have nearly been around as long as HAL. It now no longer matters that the underlying narrative may have changed, nor that the basic premise is past its sell-by-date, momentum and trend-following algos will, because they are such a large component within the bullion ecosystem, ensure a direction of travel prevails.
The FX markets have struggled with this for a generation but for bullion it is more recent and becoming all pervasive.
The rationale for the recent selling in gold has been clear … if it can be demonstrated that gold has a high inverse correlation co-efficiency with say bond yields - and there is clear logic underlying the claim - then the bright sparks that operate algos put in place a trading strategy that exploits that ‘knowledge’. It worked in gold’s favour for a couple of years and now it's working against us. No matter that the story has changed and the relationship should be ended. The key thing is the self-reinforcing element as successful trades breed successful trades, amplifying the problem.
Gold finds itself trapped in such a delusion.
Partly to blame is the nature of the market itself which is less these days about individuals making smart judgments and more about trading programmes. Sadly robots are neither nuanced, nor lateral thinkers. And why change the model if it's making money ? It could be argued the same logic is driving broader financial markets.
In truth, gold's inverse relationship with both the US dollar and treasury yields looks solid at times … the argument being that a strong dollar makes gold expensive to the 96% of the world’s population outside the US, prompting producers to sell and inhibiting buyers (gold is quite price elastic) and hence gold to fall … meanwhile treasury yields play to the idea that gold is a non interest bearing asset that appears favourable as fixed income asset yields decline. Solid that is … until it's not. Gold’s inverse relationship with the 10 year treasury yield has risen from 32% in 2017, 59% in 2018, 91% in 2019, 95% in 2020 and 88% YTD.
And yet in the bull run of the 1970’s yields rose in near perfect correlation - not inversely - to long dated bond yields (up from 6% to 16% while gold rose from $200 to $850) … and again between 2003 and 2007 with yields rising from 3.2% to 5.0%, while gold doubled from $360 to $720. The key issue that marked out the 1970's was inflation …. something which is omnipresent today, wherever you might look, other than in government data.
The thing is the underlying narrative has changed but the song remains the same. But as Keynes said in the 1930’s … “markets can stay irrational longer than you can stay solvent”.
That same narrow linear thinking in my view - and this is where I disenfranchise many of you - applies to those that maintain that the gold market is manipulated. My frustration is firstly that there is not only no evidence to support that view and less regard or critical thinking around the second order effect of pushing the mantra. I have many personal friends who would not consider investing in gold because they believe the bullshit … those morons pushing the line are working against their own interests. No matter the damage to the 'brand''. Well welcome to the new gold market … you might get along with the robots as they think in the same linear fashion as yourselves in not considering alternative scenarios. Sorry, went off piste.
So to those long suffering gold bulls who remain incredulous that the market is not reflecting economic reality … yes, there does seem to be an injustice. Sadly the linear, polarised thinking seems to be the way of the world - man and machine alike.
Arthur C Clarke’s "2001 A Space Odyssey" showed the enormous strength, while warning us of the potentially malevolent effects of computerisation. Some things never change …
Basically what I have thought. This applies not just to pm but also stocks, until the supply crunch comes. Just like oil, which was shorted for years right till the end.
cash to cryptos wallets then collect goldsilver should b the way. wrong directions can be costly
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