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The Fiat Money Carry Trade to Buy Gold and Agriculture

Commodities / Gold and Silver 2010 Feb 05, 2010 - 10:34 AM GMT

By: Eduardo_Moreno

Commodities

Best Financial Markets Analysis ArticleLast year it did not matter what you bought, you made money. Today, many are shocked by the drop in stocks, silver and gold. One simple explanation for the drop in silver and gold could be the strength of the dollar. This alone will affect the value of commodities that are priced in dollars. But then, why are agricultural commodities like wheat or soybeans going up? Shouldn´t they also be going down? They are also commodities priced in dollars.


The end of the dollar carry trade

I think we are starting to see the end of the dollar carry trade. We are in the final phase of the surge in asset prices fueled by easy dollar credit and negative outlook for the future value of those dollars due to excessive money printing. During 2009 the dollar has been very weak against the euro and most currencies. This has encouraged especulators to borrow in dollars in order to buy assets and other currencies. This has recently reversed due to the weakness in the Euro Zone, due to the problems in Greece and the contagion of the crisis to Portugal, Spain, Italy, UK, Ireland... Now we watch the unwinding of the speculative chasers of the dollar carry trade to buy stocks, silver and gold.

However, I believe that western countries are so indebted that the only way out they have left is either default on their debts or printing money. It seems clear that the US and the UK already made their choice: printing money. Once the US starts printing money and debasing the dollar, the rest of the world has very limited options, basically, they can only start a devaluation of their own currencies in a race to the bottom. Otherwise they will be unable to be competitive in their exports.
In my opinion the drops in stocks and precious metals of yesterday and today are just signalling where the hot money was invested: stocks, gold and silver.

Last year many people bought gold with the "dollar carry trade": the outlook of the dollar looked so bad that they borrowed dollars to buy almost everything, including gold and stocks. But with the Euro so weak the "dollar carry trade" is wounded. Does this mean that prices of gold and silver are doomed because they surged due to the dollar carry trade and will die with the end of it, as some, like Derek Blain predict? I do not think so.

Black swan hunting for the year 2010.

After my first article I have been asked in several emails how did I manage to get high returns during several years and was challenged to give an example of the strategy I called "black swan hunting".

So I am up to the challenge and I will discuss now one of the "black swans" we intend to hunt during 2010:

Bye, dollar carry trade, wellcome fiat money carry trade!

Our black swan prediction is that the dollar carry trade will just transform into the euro carry trade, the swiss franc carry trade, the sterling carry trade, the new dollar carry trade... you get the point. An all fiat currencies carry trade. But this time, the amount of assets chased by the hot money will narrow dramatically. And what type of assets will this global fiat carry trade buy? We think it will mainly buy two type of things:

1) The only currency that can not be debased: gold. I actually believe that is the meaning of George Soros´ words that "gold is the ultimate bubble". I believe it is actually the ultimate bubble, the last one yet to occur due to the global fiat money carry trade. Because it is one of the few assets one could buy when all fiat currencies debase to the bottom. We are however only carefully buying gold, because we believe the unwinding of the dollar carry trade could still have room to go, but we will be aggressive buyers as soon as there are signs that this fall is over. To put a price, we may start buying strongly around and below 1040, the price at which the central bank of India bought 200 tons from the IMF.

2) But there is still the ultra-ultimate bubble, in Soros´ parlance. Commodities that are fundamental for basic human life, essentially food. This demand will suffer the least from the global crisis. Therefore we are buying wheat, soybeans and corn. Interestingly, the fact that agricultural prices seem stronger is an indication that no carry trade inflated the price of agricultural commodities. This makes me believe that agricultural commodities will start to profit the first ones from the coming black swan: "the global fiat money carry trade".

To contact us, please e-mail: emoreno@cnio.es

By Eduardo Moreno-Lampaya

http://blackswanhunters.blogspot.com/

Eduardo Moreno-Lampaya is a private investor, has a PhD in biology and an MBA in administration of technology-based companies.

© 2010 Copyright Eduardo Moreno-Lampaya - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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