Please, click here to read this article in pdf format: november-5-2009
I really don’t have much to add today, given my comments from yesterday. Yesterday, the trading was all about getting out of the USD and into risky assets. As I mentioned, I see this trade, called by some analysts a carry trade, being played out with a certain caution.

Where is the caution? The caution is seen in the equity market mainly, which is starting to trade range bound. We have seen range bound trading in credit, but now I believe we may see the same played out in equities. If I am right, it could be a good thing: The rally would not grow exponential and at the same time, the sell off would be avoided….

The natural question therefore is how long this situation can last. This is what everyone is asking these days. All I can say is that the end is now closer than before. How do I know? I have full certainty after yesterday’s statement by the Federal Open Market Committee. In summary, the Fed sees inflation as the only way out of this mess. As long as there is no inflation, debts will be a burden. Therefore, the Fed will keep “printing” until that inflation shows its ugly head.

In conclusion, the coordinated front in monetary policy that we saw until this spring is totally broken now. The world is now clearly divided between those countries/currency areas that will seek to avoid further monetary expansion (i.e. Australia, European Union, Norway, Israel, etc.) and those who will subordinate the value of their currency to the employment rate (i.e. USA, Canada, UK, Brazil, China).

Coordination showed its first crack when the UK decided to unilaterally follow the path of quantitative easing, given its poor GDP performance. Then we had Australia raising rates, followed by Norway. We had Brazil betting on a weak currency via the very unwise policy of taxing capital flows. Canada showed that it is willing to tweak the rules in favor of a weak currency either behind the scenes, with its repurchase agreement transactions, or publicly. Two days ago, India openly dumped $6+BN of reserves in exchange of gold and yesterday, the Fed showed us its true face.

Why should we care about this? Back on April 16th and 21st (refer: www.sibileau.com/martin/2009/04/21 , “Two main market thesis”) I suggested one of the main thesis for this crisis.  I reproduce it below:

“When there is global coordination of inflationary monetary policies, gold cannot be a safe and lucrative asset. When inflationary monetary policies are not globally coordinated, gold is a safe and lucrative asset”

The thesis I postulated in April was correct, and gold made it to 1,097 intraday yesterday. I also said the opportunity to buy gold was on September 29th, triggered by the confusion in the foreign exchange market, when Robert Mundell suggested the convertibility of the Euro to the USD (i.e. the 100% coordination of monetary policy).

On September 29th (refer: www.sibileau.com/martin/2009/09/29 ) I wrote: “...Thus, what is the conclusion one can make here? Would the Fed and the ECB give up their powers in the name of stability? It seems too far-fetched to me (…) What is one to make out of this? If the idea is good but doesn’t seem feasible, the late sell off in gold should be seen as an opportunity…”

Since September 29th, gold in terms of the USD is up 9.9%, from $991 to $1,089 (…If I only followed more decisively what I write…). Nevertheless, as long as the coordination in monetary policy remains broken, gold will continue to rally.

What next? There is really nothing new. Therefore, I refer you to my letter of May 26th, “A short description of the process”: www.sibileau.com/martin/2009/05/26 . I think the May 26th letter should refresh some key concepts on this crisis.