Diary of a Trader

The Diary of a Trader includes semi-daily updates of the trading diary of a Swedish trader. It is included as an experiment to provide an insight into the forces that control the capital markets. Send us your comments.

The Diary of a Trader has been discontinued. Below are the latest comments.

January 25, 2003

Since last time, the dollar continues to get dumped, while gold has continued to rise. American stocks have been sold, and lately, this has spilled over to the Swedish market. I sold some January OMX futures last Friday at 509.70 average, and yesterday they expired at around 498. I didn't roll them over, and I never planned to. I expected that sometime next week we might have a date for the war with Iraq, and I expect that once we have a date, we might have a rally going into that date. Everyone is expecting stocks to rally once the bombs start to drop (no, everyone know stocks will rally), so there may be quite a bit of buying just before the war. Anyway, we might not have a date after all, it seems. The disagreement between the UN security council nations may cause the US to perhaps wait a bit.

Gold continues to rise as the dollar gets dumped. This is a development that I have been expecting for a long time. Jewelry demand for the metal is probably down to next to nothing right now, while safe haven investing has taken over. What I didn't expect was the extraordinary strength of the South African Rand. The currency is actually strengthening more than the price of gold everytime gold moves. I have a hard time understanding this. Every time the price of gold strengthens, the South African gold producers are hurting because the Rand is strengthening more. I am sure this is temporary, but I can't understand who is buying all the Rands. Why don't they just buy the metal instead if they want to speculate in rising gold? There is a huge disconnect in the way the gold-related assets trade in general, by the way. Gold shares move independently of the gold price, currencies have oversized gold related moves. This repeats again and again. Someone ought to lose a lot of money making bad trades like this. Maybe there is something going on behind the scenes that I am not aware of. However, I get the feeling that the market is just not getting it yet.

One explanation for the Rand moves might be sale of private, physical gold out of South Africa. May long term scenario for the country is not a good one. The current administration seems determined to follow in the foot steps of neighbour Zimbabwe. I don't know enough of the current situation in the country, but I don't expect distress selling of gold yet.

I remeber commenting on Mr. Roach, and expecting him to gain respect and importance. Well, it seems that has happened. I still don't thing he understands what is happening, but he is heard, and no doubt the policies he suggests will be considered. He is a proponent of the deflation scenario, and of course if you expect deflation, printing money is the solution. This is also the scenario most easily accepted by the politicians. So now we have Roach, the US Fed, Krugman, and certainly the US administration all in favour of more stimulous. The result will almost certainly be inflation. There is really no-one of importance in favor the inflation scenario. However, the falling dollar puts pressure on the inflationists. If we have dollar deflation, then why is the dollar falling? Why is gold rising? The answer of course, is that we had a period of capital destruction during the stock market mania. We also have a very dangerous credit bubble still going on. This means demand for a lot of the bubble products will fall back to their normal level (and in most cases, demand will fall even more). At the same time, there is much more money in circulation. More money, less real capital. This will cause prices to rise. But often, price rises lag the infusion of money or destruction of capital. As long as people are saving, prices will not keep rising. However, the saving is illusory. The savings don't go to productive investments, but instead help keep weak companies afloat. This means that the productive assets will keep shrinking. Somewhere people will realize that this is not a good way to save, and will abandon their currency in favor of tangibles. Then we will have roaring inflation, and then it will be too late to do anything about it.

I periodically look into oil in order to try to determine when is a good time to enter that market. I expect oil-related investments will be my next big plunge, but it also seems it is still too early. Oil production is in the process of topping out - maybe within ten years we will reach peak production. However, this near the top, production capacity does not change much. Right now, almost everyone but Saudi Arabia, Iraq and Quwait are producing at full capacity, and are near or beyond their peak. However, a recession will dampen demand growth for the next couple of years. Once the economy starts to recover we may, however, start to hit the roof whenever there is production disruptions. This something that hasn't happened since the 70's. I am sure that this is something the Saudis are expecting will happen. This is the reason they work through OPEC to stabilize oil prices. They are the ones in a position to profit the most once oil shortage occurs. Anyway, over the next few years, Middle Eastern oil will increasingly become a more important source of supply. This should benefit shipping, and possibly oil drilling eqipment (as other countries try to maintain their market share) even before the price of oil starts to rise.