I’m in beautiful Vancouver, Canada, with Black Swan Capital’s marketing guru David Newman; we are attending Michael Campbell’s World Outlook Conference. I think this is the fourth time I have been invited by Mike and his excellent team to speak. Each year I am thrilled to be invited.
I deeply respect Mike on so many levels—business and personal – and am honored to be associated with him through the World Outlook Conference; it’s a quality affair throughout, from the venue, to the people who organize and run the show, to the attendees, and the many excellent and accomplished speakers.
As you may know, we are not exactly gold bugs here at Black Swan, but of course much of the attendees and speakers are. So we stick out a bit. Of course, given the run in gold, we wish we had been more bug-like in our behavior. Interestingly, a very nice gentleman at the conference said to me yesterday: “You don’t like gold do you?” I told him, it’s not that I don’t like gold; it’s just that I am a gold agnostic. I understand the appeal and reasoning, which at times are quite valid, but it is far from a religion for me, as it seems for many gold bugs. The gentleman then asked: “Can I get directions to your father-in-laws house?” Too funny!
If you are new to Currency Currents, here is a quick history on my honorable father-in-law’s (FIL): the gold bug. When I was engaged to my beautiful wife, 31 years ago, I lived with my future mother-in-law (MIL) and FIL, while attending graduate school and mooching heavily off of them. This is when my FIL started to “get into” gold and silver. It was during those heady times when gold was soaring and the Hunt Brothers were cornering the silver market. And we lived in Dallas at the time—ground zero for the Hunts. Anyway, my father in law decided the best place to hide his stash of metals was in the walls of his house. Of course that time also marked a top in gold that was only recently surpassed.
No matter, in true gold bug form, my FIL hung on to all his gold and silver and continued to add more. Needless to say, it was no time for a punk kid who wanted to marry his daughter to suggest that maybe gold wasn’t a good investment. And needless to say, as the punk kid, me, grew more cocky about his ability to foresee the investment future (which old kid now knows is silly in retrospect), he shared said views with the bug—my FIL. And true to form, over the years my FIL was never deterred by agnosticism toward his much beloved metal.
So you can just imagine his glee and gloating as his buckets of coins, hidden somewhere in the walls of his home, soared in value. Once again, validating his initial view, which all good fathers have, “This clown is way too dumb for my daughter!”
Thus is why the keen interest in my FIL’s address by the gentleman here at the conference. So I’d like to announce we will soon be auctioning off my FIL’s address here in Currency Currents as a way of making up for all missed opportunity flowing from my agnosticism.
I chatted on line with my FIL this morning and told him he was a star! In his usual modest way, he didn’t boast. He just said it is good The World Outlook Conference allows people with divergent views on gold to speak. And that my view might actually come true some day. And he added, “but unfortunately I won’t be alive to see it.”
He isn’t ailing. He is quite healthy and expects to live a long time. And so it goes. LOL But no matter, I got the big prize, so I am way ahead of the game.
Part of the reason I wanted to tell that story is so I can show you this chart:
Gold versus US Dollar Index versus US-Euro 6-month Benchmark Yield Spread:
… A few key points here: 1) the dollar and gold have been quite positively correlated of late, which suggests to me that what is happening in the world as it relates to gold is much more than a fear of the US dollar. There is truly a “race to the bottom competition” going on among most currencies in the world. 2) Much of the run in gold may likely have been a function of rising fear about the euro coming apart, thus why gold and the dollar surged higher at the same time during Q4 2010; and 3) there is an extremely tight correlation between US-Euro yield spread and the US dollar. Therefore, if the yield spread continues to move in favor of the dollar relative to the eurozone, the dollar will likely rally against the euro.
And rising relative yield spread in favor of the dollar is part of our story for 2011 … But if our view pans out, gold may have a rough year. Here’s why:
1) Rising interest rates in the US and globally, if driven by growth expectations, not just inflation expectations, mean there is rising competition for money, as gold pays no interest.
2) If the US grows it reduces global systemic risk in the world, i.e. the risk premium in gold fades
3) Because my FIL is getting just a bit too cocky.
Given our cautiously optimistic US growth view, we were quite happy when we learned we were on the same page with Dunnery Best here at the conference. He is Managing Director, and Portfolio and Investment Advisor, with CIBC Wood Gundy. Besides that he is one of the smartest (and nicest) guys I have ever met in the financial services industry (which has been a long time).
Dunnery believes the US economy could surprise in its growth in 2011. He also thinks the US dollar could surprise people. This closely matches our 2011 scenario as laid out in our Dollar Smile framework (upper right quadrant in the chart below). Long-time readers will recognize the Dollar Smile; below is the updated version I presented last night at the conference:
The upper right quadrant says the dollar rallies on growth. Remember, we are talking
relative growth. And here I am thinking relative to the eurozone, the UK, and Japan in
particular. Thus, they are the key currencies we would be looking to play against going
But the reality is despite the building optimism for economic growth in the US, and our
cautious optimism, things can change rapidly given the fact global imbalances are
arguably worse than they were before the credit crunch. Plus, the eurozone continues
to be threatened by a debt-cum-banking crisis; the UK is facing a nasty stagflation
scenario, and the world’s primary demand driver—Mr. US consumer—is still in fragile
Yesterday, the US recorded a slightly higher current account deficit than expected.
Some see this as bad news. But of course it is good news for China as it shows the US
continues to take on their exports. The rising US current account deficit, again, is part
and parcel to the rising imbalances and reflects China’s growing reliance on external demand in order to keep the music playing.
In 2010, the US trade deficit widened by the largest amount ever in the last ten
years, growing by 32.8% compared to last year to US $497.8 billion, according
to the Commerce Department.
Professor Michael Pettis, at Beijing University, summed up the growing dangers of this ongoing trend quite well in a recent missive, he said:
… So that leaves the US. Either it can accept rising trade deficits as it absorbs the employment problems of the rest of the world, or it can move to intervene in trade. I don’t know what it will do, but I am confident the domestic debate will intensify. One way or the other the crisis in international trade is far from over.
Danger looms, but the dollar is looking like it’s trying to carve out a bottom in here.
Our view may prove wrong. But the rationales we think make sense. Plus, the reward of being right far outweigh the risk of being wrong. It’s the kind of bet we like, especially given the shrill pitch of promoters who tell us point blank: A dollar crisis is guaranteed soon.
Stay tuned. Have a great weekend. And thanks again Mike! And by the way, you get first bid on FIL’s home address.