Ad Hoc Commentary – Paulson, the Hunt brothers of our time?

“In response to the Hunts’ failure to pay variation margin, their brokers began closing out their outstanding futures position and selling some of the bullion they held as collateral. Most of the selling took place on ‘Silver Thursday,’ March 27. The brokerage houses, not the Hunts, directed the selling, and other market participants were aware of the pressure to sell at any price.”
Page 49, Manipulation on Trial: Economic Analysis of the Hunt Silver Case.

The Hunt brothers who famously cornered the silver market in the 1980s became too big to trade. After a brief period of fame, they lost their shirts.

Gold is trading sub 1600 again. Long term, gold is a hedge against the sovereign debt crisis. Gold is not a hedge against inflation or deflation. It is a hedge against sovereign debt crisis that usually leads to taxes and possibly war. In times of peace, you buy equities to hedge inflation, bonds to hedge deflation. Gold is a hedge against the taxing hands of governments as it can be hoarded away; and is a hedge against war when fiat currency is worthless.

In all likelihood, the too big to trade in the gold market will need to be flushed out first. Soros and Moore sold significant proportions of gold in Q4 2012, but Paulson maintained his holdings? Did someone forgot to call John? Or could it be, like in of Hunt’s case: brokerage houses were aware of the pressure to sell at any price.

Going back to our macro picture, Japan is contracting the sovereign debt flu as expected. Abenomics thinks that inflation will chase money out of hoarding into investments. What he forgot is that the Senkaku-Diaoyu affair gives capital very little confidence to invest within Japan. In all likelihood, money will flee the country. The G20 turned a blind eye likely because buying Euro government bonds sounds like music to politicians desperate to keep the debt going. When the slow money moves, they will be moving into FDI windows of places like Indonesia.

The Franco-German core is contracting the sovereign debt flu after taking the virus out of the PIGS. The French looks more vulnerable than ever. America is standing tall amidst all these. However, if Obama can’t cut spending by 85 billion, forget 1.2 trillion. If they decide to tax for the 85 billion instead, then don’t be surprised when Uncle Sam comes for 1.2 trillion too.

Today, US treasuries is still the place where capital hoards. That is because it is not America’s turn yet. However, yours truly thinks that the 2012 low in UST 10y yields is the multi-decade lows. We will not see them again. Especially if Obama does not sequester as promised, but taxes for it instead. Remember, capital fears tax – that’s why we have offshore financial centers.

Good luck all.