Aggregated Awareness

Some seven days ago as of this writing, back on the Saturday 16th July 2011 (or Friday 15th July to our European & American readers), I was doing my routine market commentary reading when I noticed something peculiar about one of the charts in GoldCore’s post for that day.

 

Australian Dollar Gold Chart

You see, being a native of the Antipodes, I take very careful note of the Australian & New Zealand Dollar precious metals prices.

And with having done so for the past 7 years, one develops a familiarity with the imprint of its chart pattern, in one’s mind. Particularly when it comes to the longer term weekly charts for gold & silver, going back 5 years or more, and particularly in the Australian Dollar.

Here is my longer term weekly chart, of the Australian Dollar gold price:

One feature of its distinctive shape that I wish to point out to readers now, is the extreme & absolute spike high at A$1565/troy oz. back in late February/early March 2009.

Without showing you all the charts, in this article, to back up my observation, since it is something that anyone with internet access can easily look up for themselves, and without wishing to encourage laziness on the part of readers to do their own research, this feature of an extreme & absolute spike high in the Australian Dollar gold price, in late February/early March 2009, is not evident in the gold price for the US Dollar, the Great British Pound, the Euro, the Yen, the Canadian Dollar or the Swiss Franc at that time.

The reader is invited to check this claim for themselves.

To rephrase the above: none of the gold price charts in those other currencies: USD GBP, EUR, JPY, CAD or CHF, has an EXTREME & ABSOLUTE spike high in the late February/early March 2009 time frame. Some of them do have relative highs during this time frame. But only the Australian Dollar gold price can lay claim to a chart pattern feature, containing an extreme & absolute spike high, at that time.

However, having established this particular observation, regarding the Australian Dollar gold price versus the gold price in the other above listed paper currencies, I have digressed.

 

US Credit Default Swap (CDS) Chart

Focusing our attention back to GoldCore’s post from the 15th /16th July. It was not the Australian Dollar gold chart, from his post, that had caught my attention. Oh no, not at all...

But I had to do a “double take” when I saw the US Credit Default Swap (CDS) price chart that was put up in his post. Please see the chart entitled: U.S. CDS – ZCTO CDS EUR SR 5Y Corp, from the link or reproduced below:

As you may have guessed by now, looking at the chart pattern of the US CDS price, one can grasp that there are many similarities to the chart pattern of the Australian Dollar gold price.

The overall shapes of the two curves are very similar. Although not perfectly correlated, the distinctive spike highs shown at the March 2009, February 2010, September 2010 and January/February 2011 time frames, are relatively close together enough between the two charts, to reveal a reasonably close correlation.

Also, the spike lows between the two charts correlate very well together. With both charts exhibiting that slow and measured rising trend from mid-2010 onwards, which does not penetrate the extreme spike high from March 2009, to the upside.

This slow and measured rising trend from mid-2010 onwards, which does not penetrate the extreme spike high from March 2009, is yet another uniquely distinguishing feature of both the A$ gold price chart and the US CDS price chart. You do not see this in the gold price charts of the other currencies: USD, GBP, EUR, JPY, CAD, & CHF, since the gold price in those currencies have made new, all time, nominal highs since March 2009.

Whereas neither the A$ gold price, nor the US CDS price, have made new, all time nominal highs since March 2009.

 

A$ Gold and US CDS Chart Correlation

Admittedly, the two charts that I have shown above are not lined up in time series, in order to help guide readers, with a visual side by side comparison of the price movement, relative to time, between the two charts.

However, here is a crude attempt at lining up the two charts in time series, to help with the visual comparison:

And it may well be, that the correct observation one can make, is that the similarities in the chart patterns between the Australian Dollar Gold price and the US CDS price, are purely coincidental. I leave the door open to that possibility.

However, in appeasing a very deep seated, human need, to draw information from pattern recognition, and synthesising it, with other facts & information, that are present in the public domain, there is something to be said about the correlation between the chart pattern of the Australian Dollar gold price and the US CDS price.

Whether that something is meaningful or not, I will let the reader judge for themselves.

However, it is not merely the correlation between the 2 charts that I wish to point the reader’s attention to, although perhaps that observation may need to be conjectured upon, in a future article.

No, it is not only the correlation, Dear Reader... But rather, it is that “spike high” from March 2009, that exists in both the A$ gold chart and US CDS chart, that I now wish to focus the reader’s attention towards.

 

Anomaly in Price Action, Unique to Two Different Major Markets

In getting back to the late February/early March 2009 time frame, in both the Australian Dollar gold price & US CDS price charts, one can see that both charts exhibit, an extreme & absolute spike high at this time.

The US CDS market is very large, purely because of the de facto connection that it has to the very large size of US Treasury Bond complex. (Ed. In fact, “very large” is probably a “very modest” description of the US Treasury Bond complex, however, I’m sure the reader gets the point). Thus, it would not be unreasonable to call the US CDS market, a major one.

In looking at the Australian Dollar gold market, one can make the observation that: since Australia is currently the 2nd Largest Gold Producer on the planet, behind China, then a significant percentage of Australia’s annual gold production, is available for sale from the mines, and is sold for Australian Dollars. This obviously causes demand for both the Australian Dollar (i.e. from the miners), as well as gold (i.e. from the buyers of mine production), and this demand would be global, since Australia sells domestically and exports much of its production.

In further looking into this demand for Australian Dollars, it has been well established by now, that the BRIC’s (i.e. Brazil, Russia, India & China, excluding South Africa), Middle East Oil Producers, certain ASEAN nations, some other countries besides Brazil in South America, as well as certain surplus nations in Europe, have publically stated that they have been, and currently are, diversifying their currency reserves away from the US Dollar and towards a basket of other currencies, of which the Australian Dollar is a component.

This indicates another source of demand for the Australian Dollar, at least whilst the global debt markets are backstopped by the world’s central banks (i.e. when “Risk is On”).

This trend of foreign official & private sector diversification out of the USD, and into the AUD, NZD, BRL, CAD plus others, as well as Gold & Silver, is a secular one that has gone on for 5 years or more, and there does not seem to be an end to this trend at the current time.

However, this trend of reserves diversification will not be all smooth sailing, and it will be violently interrupted by “black swan” events, as it was in late 2008/early 2009, when the AUD crashed on foreign exchange markets. But one can still reasonably extrapolate, that the Australian Dollar would be bought by the foreign official sector and foreign private sector, for diversification purposes. Even when this process of “diversification”, is not merely about owning the AUD per se, with the relative yield of the AUD being high compared to the yields being offered by the 4 major currencies. Please let me explain...

It is prudent, to be cognizant of the fact that this buying of the AUD, is not solely to own the Australian Dollar itself, but rather it being about a “currency conduit” for the world’s creditors, to allow them to purchase gold & silver plus other tangible wealth in and from Australia. Since it makes perfect sense, for the world’s creditors to be buying gold from the world’s 2nd largest producer, for diversification purposes.

Besides, global creditors have earned US Dollars from their exports for years. And with the US Dollar’s value, currently acting in an extremely volatile fashion, due to its major debt problems, it makes perfect sense for global creditors to offload some of that risk.

One can determine from this that the global demand for the AUD, is in some part, a derivative, of global demand for gold produced in Australia. Particularly so, when the gold price, in that 2nd largest gold producer’s currency, the AUD, has been relatively low in the past 18-22 months, when compared to gold that is priced in USD, GBP, EUR or JPY during the same 18 -22 month time period.

This is yet another source of demand for both the Australian Dollar & Gold produced in Australia.

Nevertheless, these two points: of Australia being the 2nd largest gold producer, and the demand for AUD that flows from it; and that global creditors are partially diversifying their reserves into the AUD, show that the Australian Dollar gold market is also a major market globally.

Although it is orders of magnitude lessor in dollar size than the US CDS market, it is, nonetheless, of a significant size, when viewed from the perspective, of the number of troy ounces of gold produced per annum that is available for sale on the global gold market. And it is for this reason, that would make the A$ gold market, a relatively significant one globally.

Having pointed out that these two markets are major ones, but for differing reasons, we now come back, to what I like to call, an “Anomaly in Price Action”. Statistically, speaking, an “Anomaly in Price Action”, would approximately equate to events, such as price movements, that are two standard deviations, or more from the norm.

These events are significant because they are outliers, and as such, they require severe financial & economic dislocations in order to affect price in such a dramatic way. As evidenced by the very sharp upward spikes in the A$ gold price & US CDS around early March 2009.

Thus, an “Anomaly in Price Action”, may allow us the opportunity, to peer behind some of the mechanics at play, in terms of “net” global capital flows, during these periods when an “Anomaly in Price Action” is occurring.

Look at the A$ gold & US CDS price charts again. Notice the extreme & absolute spike high in both charts from the late Feb/early Mar 2009 time frame. Both spikes are an exhibit of an “Anomaly in Price Action”, that occurred simultaneously, but in vastly different markets (i.e. A$ Gold & US CDS).

This is because the movements in price, in both markets, are so severe, in that they are more than two standard deviation price moves.

The rarity of such an occurrence, of a simultaneous, extreme & absolute spike high, between two totally different markets, may reveal something about the patterns of global capital flows at that time. And potentially, also in the short to intermediate term as well, predicated upon certain macroeconomic and financial events occurring.

 

Conjecture - Causes for the “Anomaly in Price Action” in A$ Gold & US CDS Markets

So, what may have caused both A$ Gold and US CDS, to exhibit their extreme & absolute spike highs around the Feb/Mar 2009 time frame?

Remember what happened to the AUD:USD currency pair during that time?

It crashed from the 98 US cents level in July 2008, and completed its double bottom around Feb/Mar 2009, at around the 63 US cents level. A crash of approximately 35% during that time frame.

This crash was mainly due to the systemic financial uncertainties caused by the financial “flushing” of Lehman Brothers and Bear Stearns, as well as the AIG insolvency, amongst other events.

In other words, when “Risk is Off” in the markets, due to global financial uncertainties, capital retreats from where it came from: US Dollar & Japanese Yen “Carry Trade”, recycled foreign exchange surpluses, etc...

And since Australia has always been a “net” importer of capital since its inception, a crash in the Australian Dollar on global foreign exchange markets equates literally, to capital being sucked out of Australia and retreating from whence it came.

It is my view, that this global capital flow, whether so called speculative “hot money”, foreign direct investment, or official & private funds for investment, was sucked out of Australia during the height of the Global Financial Crisis during this July 2008 to March 2009 time frame, as evidenced by the crash in the AUD, with its corresponding extreme & absolute spike high in the Australian Dollar gold price.

And on a “net” basis, the majority of this capital moved very quickly, into the so called “safe haven” of the US Dollar & US Treasury Complex, as well as the US CDS market, as evidenced by the rise in the US Dollar from June 2008 til March 2009.

USDX Index:

And the rise in the US 30 Year Treasury bond Price during the same time period:

On another interesting note, a percentage of the capital that was flushed from Australia and other “Risk Trades” from around the world, made its way into gold as a “safe haven” play during this time. As evidenced by gold rising, when priced in some of the other major currencies. Although the rise was not to the same extreme & absolute way, that it was raised when priced in AUD.

The below charts of gold priced in EUR & JPY are evidence of “safe haven” capital flows into gold during the July 2008 – March 2009 time frame.

Euro Gold:

Yen Gold:

Getting back to the topic, of the “net” basis trend in global capital flows, towards the US Dollar & US Treasury Complex during July 2008 – March 2009, and away from “Risk” such as the AUD, it can be reasonably observed, that if demand for the US Dollar & US Treasuries are increased at that time, in order to fulfil the market’s need for any kind of perceived relative “safe haven”, then demand for US Credit Default Swap insurance would also be required to expand at the same time. Since most credit market participants would not be buying bonds totally unhedged.

And since US Treasury bonds had an extreme spike high increase in demand & price at this time, then so too, do we see an extreme, increased demand in US Treasury bond default insurance, as evidenced by the extreme & absolute spike high in the US Credit Default Swap (CDS) price around March 2009.

 

Conclusion

The fact that both A$ Gold and US CDS prices had their extreme & absolute price highs at the same time, indicates that much of the capital that was sucked out of Australia during the GFC, as evidenced by the crashing AUD, and thus an extreme spike high in A$ Gold, on a “net” basis, ended up creating a spike of demand in the US Dollar and US Treasury Bond Complex, and thus creating the extreme spike high in US Credit Default Swap (CDS).

It would be reasonable to expect, that if macroeconomic conditions cascade in such an extreme way again in the future, as they did during July 2008 and March 2009, then it would not be unexpected for the prices of both Australian Dollar gold, as well as US Credit Default Swaps (CDS) to once again, spike higher at that time.

Although, whether or not the US Dollar and US Treasury bond complex is the recipient of such generous capitals flows in the future, as they were during July 2008 – March 2009, is not so assured.

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