Of Sushi and Jewelry

The views expressed in this column are those of the author and not SVB Financial Group.  

We go together like
Rama lama lama
Ke ding a de dinga dong
-Danny and Sandy (Grease) 

Relativity can be a difficult concept.

There are many who believe the dollar is going down, the euro is going down, and the pound is destined to drop.  The yen is the only developed currency that stands to gain, it seems.

This makes no sense. Unless, of course, people move from all those currencies into gold.

This week, the Bank of Japan dropped its target interest rate from 0.10 percent to a range of between 0 percent and 0.10 percent.  Its goal was to stem the rising yen which threatens to cut off Japan’s enormous export economy. Or so goes the theory.

But, in fact, a cut of this magnitude (or lack thereof) would have no effect on the currency exchange rate, and would only give the market more confidence that the Bank of Japan is out of bullets.  And so, the currency continued to rally ending the week at 81.93 — its highest level in history.

Gold, for its part, settled just below its all-time high at $1345.30 on Friday.

Now, I am a believer in efficient markets to a point, but I believe there must be an arbitrage available in the currency markets today.  Specifically, all currencies cannot drop forever.  There is simply too much wealth tied directly to these currencies — whether fiat or not.

I understand most of the arguments against the developed currencies, headed up by fears of inflation.  But I just can’t buy the kind of currency Armageddon that seems to be predicted.

Fear is running rampant in these markets, but economic activity remains relatively high.  Transaction volume in these currencies is also considerable, whereas holders of gold seem to be waiting for the apocalypse. They are sadly mistaken in this prediction and retribution in the price of gold will be swift, though the timing remains uncertain. (It’s quite possible gold prices are rising simply due to ETF challenges in keeping up with purchase demand in the short run.)

Throughout history, humans have valued this odd commodity which is not very useful at all.  You can’t eat it.  You can’t use it to build anything.  But it looks good.

If there is a downfall of society as goldmongers surely hope, their precious commodity will not be worth very much. Think about it.  If the dollar becomes worthless, who cares how many dollars it takes to buy an ounce of gold?  We will only care where/how we can get food and shelter. And in this scenario, will you exchange your ears of corn or fresh water for a piece of metal that looks pretty?

No doubt about it, any gold play today should be treated as a short-term bet and not a long-term position, for in the long term gold must represent only the value it actually provides: something that looks pretty.

Key Developments

Credit declined by $3.34 billion in August after falling a revised $4.09 billion the previous month. Consumer borrowings continue to decline as more Americans are trimming their credit card balances. The high unemployment rate has kept spending in check, as credit card debt has decreased for the 24th consecutive month.

Nonfarm payrolls showed a loss of 95K jobs for September, due to a 77K decline of temporary census workers. The private sector produced 64K, and the unemployment rate held steady at 9.6 percent. The underemployment rate, which includes discouraged workers and part-timers, increased to 17.1 percent. The labor market continues to struggle as companies are still hiring at a rate not sufficient to bring down unemployment.