Volatile moves in several markets

Discussion in 'Trading' started by Tasuki, Jul 24, 2002.

  1. Tasuki


    Other threads have mentioned the large decline in gold yesterday, and the sudden support of the US dollar relative to the euro. Several people suggested that there are some major behind-the-scenes financial transactions taking place on the order of scale seen during the 1997 LTCM scandal. I'd like to pursue this notion that someone, or perhaps some government, is manipulating the markets, and try to figure out what's going on and why. For starters, gold has been moving inversely to the US stock markets for a while now, as individual investors seek what they consider a safe haven, driving up the price of gold and gold stocks as the markets craters. It seems very curious to me that gold would suddenly drop even as the fear on Wall Street is reaching a crescendo. Who would have the power to drive gold down that far that fast, and more importantly, why? Could this move just be the by-product of some government supporting the dollar relative to the euro, as we saw in the same time-frame? Again, who is supporting the dollar (or, not supporting the euro) and why? Anybody have any good ideas?
  2. Rigel


    Somebody needs cash so they are selling their gold which is driving the price down?
    Who needs cash?
    Why do they need it?
    Who's taking the other side of the trades, who's buying?
  3. Tasuki


    Here's a prediction for you: everyone's looking for the "next Enron". Well, there's some evidence (I quote below) to suggest that the next major shock to the markets will come from a financial institution, possible JPM. I'm not not clear on the details, but apparently there is significant risk of financial collapse due to very risky gold-linked derivatives. My information comes from Thom Calandra of CBS Marketwatch. Here are a few excerpts from today's article by TC:

    "Bill Murphy, a gold advocate, has long warned his subscribers about the dangers of a massive bank default tied to tricky interest-rate and bullion derivatives. J.P. Morgan Chase is the largest issuer of gold-linked derivatives in this country. The contracts are designed to help gold companies, central banks and others manage -- and some say mismanage -- the market for gold."

    "Not only do the banks have potentially huge gold derivative problems, but that could set off an interest-rate derivative problem," Murphy said Friday. "Morgan has something like $23 trillion in derivative positions on their books, according to the Office of the Comptroller of the Currency. "It is the norm to account for 2 percent of those derivatives to be at risk. That is a mighty big number."

    "Derivatives are financial instruments such as options, futures, interest rate swaps and variable-price contracts. Murphy says the suffering stocks of J.P. Morgan, Goldman Sachs, Lehman and others are already reflecting a coming nightmare in the banking world. "A credit downgrade will increase their costs and make it harder and harder for certain bullion banks to carry their enormous gold short-sale positions," he says. "It will invoke credit committee crackdowns."

    "Murphy, who sees the $315 level for spot gold prices as a line in the sand for the investment banks, says counter-party derivative problems "could set off a daisy chain of severe financial problems, or defaults. That is what happened in the energy industry when Enron went bust."

    What's this mean for a trader? Well, if Calandra's sources are correct, then the consequences of a credit downgrade at any of the major banks could have a far-reaching ripple effect (nothing spooks Wall Street more than the fear of instability in our money supply), and send stock prices into a meltdown that would exceed the aftermath of the 9/11 attacks. One advance warning of such an event, according to this scenario, would be a sharp rise in the price of gold above $315. Keep your eyes peeled, amigos.
  4. DMD