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Today’s letter is very brief and is the continuation of Friday’s, which at the same time, constitutes another good test of our Thesis No. 2 on gold, postulated on April 21st, 2009. Why is today’s letter so short? Because it has an attached chart that I think is worth more than a thousand words.  As we wrote on Friday, Dubai’s crisis is starting to look contained, delimited and unique by its political background. Of course, given the impact on financial institutions locally and in Europe mostly, one cannot ignore it. But, as we wrote too, according to our thesis, if central banks step in to coordinate action against potential contagion in the foreign exchange markets, gold loses its chances to become a reserve asset.
Thus, on Thursday night, the news that the Bank of Japan was considering intervention (according to some analysts it did not carry it fully out, to avoid adding confusion to the situation in Dubai), as the chart below shows, brought gold to its knees overnight, after it had held admirably well on Thursday. Also shown (at the bottom of chart), is the 3-month Libor – Overnight Index Swap spread, which a benchmark of the liquidity conditions in the USD market. On Friday, this spread opened almost unchanged. Thus, in Europe equity markets ended up correcting Thursday’s sell off and even as the S&P500 Index was down to 1,083 intraday, the VIX Index managed to contract intraday, closing at 24.74 or 5+% higher than Monday’s open. What is the conclusion? Well, I hope it will be obvious by now how much control central banks retain yet…

Martin Sibileau