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Gold Armageddon and the European banks

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Gold has no intrinsic value goes the confusing tautological definitional cliché. Gold is atomically dichotomous to the securities spectrum, inclusive of any asset class of tradeable title. Gold does not exist on the duration/yield spectrum; you can't discount it forward except as an inverse of the general securities spectrum. The risk of gold is the inverse of general economic expectations. Since gold is never actually consumed in a manufacturing process then it doesn't fit on the commodities ('soft' or 'hard') spectra. Protons have the opposite charge to electrons in the nucleus they are negative thus a preference for Gold is protonic; the attraction is in a denial of expectations of anything else. Gold is defined in what it is not. It is a perverse psychology this buying of Gold thing (& that of the few other similar behaving precious carbonates); Currently access to the metal is liquid, particularly indirectly although one should heed warnings of transaction costs.

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The context is political Laurel & Hardy in Europe & government sterility in the UK is the macro background. Equity markets were in flatline but in August the needle shifted to stochastic freefall! The only room beyond the door market EXIT is full of bullion it seems!




The problem is in 'the means of exchange'; money, cash. The route cause of the Liquidity Trap remaining around so long in Europe has to be somewhere in the Euro m3/m4 corridor; (to state the bleedin obvious); its in the transmission mechanism; Europe is having a bank-capitalization mini-crisis. Its happening in every individual European country right now. But you have to read every newspaper in Europe to understand that since we have no media which consolidates such an Olympian view; If European political anarchists wanted "heads chopped off" in European banking then they finally got it this month! Both in layoffs and share prices. The European banks are involved in massive layoffs in case you hadn't noticed there is a generational change going on there right now. Currently European banks have no capital, no people & Greece! If you want Armageddon, look at European Banking! But, I wonder will the generational clearout in Europe be significant? Could it be the case that senior banking management use this opportunity to be innovative in whom they hire and not just play swap the idiot in a massive round of musical eames chairs. If the banks can't manage their balance sheets then no matter how much "LIQUIDITY" the politicians create the banks can't get it to us! Right? These screwed up bank balance sheets are just like blockages in the monetary pipeline; exacerbated by their freefalling equity prices. It's going to take innovative and imaginative management, some thinking to fix all that and it cannot be done without an external context of political assuredness and governance which is blatantly lacking right now. Europe sticks out like Van Rompuy's pate!




In the banking-Armageddon scenario-diagnosis the perverse preference for gold does not seem so antipathetic or irrational; now does it? Though, where Gold does behave like any other member of the tradeable securities complex is once it is internalized in your portfolio. Once you own this "different" thing as a standard unit in your portfolio then from the internal perspective of the portfolio it's just like any other asset class; subject to standard timing decisions. Gold is defined by what it is not but once internalized in a portfolio, then it becomes, just another swap decision; your Beta decision in your time frame towards your Alpha target. Momentum in Gold has been asynchronous to the securities markets complex so far the question is when is trend reversal or mean reversion? In the end what will trigger your decision to swap your gold holding for an ordinary equity on any European bourse is when you see Beta you like returning to securities. What would trigger "proper-Beta" in European indices (e.g. the AEX)?

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Beta which can drive long run Alpha (Long-only Beta if you like). It's a SPOF situation in Europe I think. Single Point of Failure. To use the cliché its all about confidence and confidence is built in layers; the foundation is political confidence & there is none of that in Europe today but it could be achieved, that will feed into markets; the second is getting 'on the street' banking fixed, its nowhere in any country in Europe today. The political failure is about banking and the banking failure is about people; so its all about confidence. Should the politicians stop bickering internally and make some of the sane obvious and astute self-less decisions which seem obvious then in consequence or parallel should some proper innovative sensible and quantitative decision making start to happen in banking then the transmission mechanism could unblock and suddenly all that QE liquidity would balloon through European industry and commerce. That's the switchpoint is it not?




In summary should political adulthood in Europe infuse self confidence in the myopically adolescent banking and securities industries again and should this testable level of confidence be demonstrably in place in Europe then equity markets at least and risk capital in general (the securities markets complex) can rocket off with Beta chasing Alpha all the way up; it can be all over at lightspeed today before the little guy day trader has had a chance to blink; & not really caused by algorithmic HFT that's just the way it has always happened. Then your swap-costs rise in the melee, everyone rushing from the EXIT room onto the field of play again. The question is when? Since although Gold is definable by what it is not it is valued relatively thus timing the switch is all! Gold has internecine correlation to political confidence; it probably has for thousands of years; the question is when is the point when you switch which makes you 'ahead of the pack' & not just the loony visionary on the haystack (burning like the wickerman).




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