Monday, November 24, 2008

Jim Rogers Holding Gold

As you'll know if you've ever read his books, Jim Rogers isn't a full time Austrian. He just comes to Austrianism at a tangent, through his immense knowledge of markets and human psychology. He is also holding gold, as can be seen in the picture above, which is very Austrian behaviour.

If you want to know why he is holding gold, especially if you're currently holding dollars, then check out the Financial Times video link below:

=> The Dollar, Obama, China, and the Recession

Watch all four FT Jim Rogers videos, which will appear in sequence, if you want to know what's going to happen next in this world of chaos brought about by government stabilisation programmes.

In the first segment, this AngloAustrian hero explains his prediction from one year ago about why the dollar would rise (covering shorts) and why it will eventually collapse in the medium term (as soon as he sees that a dollar euphoria has set in, which is when he will abandon the dollar).

In the second segment he covers Obama and why his policies of protectionism and capital growth taxes will be such a disaster for America; in the third he discusses China and how commodities will come out of this recession first because of their sound fundamentals; and in the final segment he explains how the current government mania about "price deflation" is a flash in the pan caused by forced liquidation and the reason why massive government money pumping, as evidenced by lowering interest rates, will eventually create massive price inflation. (He even mentions the dreaded Zimbabwe word at one point!)

Along the way, Rogers covers exchange controls, how Long Term Capital Management should have been allowed to fail in 1998, taking most of the investment banks with it, and how possibly Bretton Woods II will choose the Euro or even the Renminbi as the new world money standard (and why this will fail).

AngloAustrian view: Fantastic!! Gotta see!! Marvellous!! Etc.

Pip pip!!


Anonymous said...

Excellent. Thank you for posting this.

Rogers deals with the recent apprecation of the dollar. He says its temporary on account of investors covering "short positions".

Could you clarify what this means please? I tried looking it up on one of the web investor definition sites but the explanation given seemed rather circular to me (i.e., opposite of a long position and when I looked that up it said opposite of a short position).

Jack Maturin said...

Yes, it's tricky, and it involves lots of smoke and lots of mirrors, but let me have a go...

What the Jim Meister means is that a lot of people in foreign exchange took a short position against the dollar. That is, they bet that the dollar would go down. They were right, because they anticipated that Ben Bernanke would print dollars like they were going out of fashion to bail out his friends in Goldman Sachs. But what that means in practice is this:

The Austrian-reading short side speculators bet that they would take in some currency (e.g. the Euro) and supply dollars against this, at some point in the future (let's say one year) - this is known as an FX forward contract. The person on the other side, the non-Austrian reading patsy in this case, thought that the dollar would remain strong, so they took the opposite position/view/bet.

Let's say the bet was $2 dollars for one Euro, in one year. Let's just imagine that the current rate, at the time of the contract being struck, was $1.50 dollars per Euro (this is extreme, but what the heck!)

Lots of people will have taken this 'long' side, wanting to be 'long in the pocket' of dollars, thinking that there was NO WAY the dollar could go to $2 dollars per Euro.

But let's imagine that the dollar goes to $3 dollars per Euro in one year (again, we are being extreme, to make a point) because of Bernanke running the Fed's printing press 24x7. This is a paper profit to the people who bet against the dollar.

However, these people on the short side (i.e. those delivering dollars against Euros), although they have made a PAPER profit of one free dollar per Euro, still actually have to deliver REAL dollars, in anticipation of the much more valuable Euros that they are expecting from their long counterparties.

However, the short person (i.e. the one who is short of dollars) knows he is going to receive one Euro. He needs to supply $2 dollars to meet his contractual obligation against this (because he is 'short' of dollars). One year has passed. He can get $3 dollars for each Euro, right now, on PAPER.

But perhaps there are lots of people in his position, on the short side. They need to buy dollars with Euros borrowed from a bank (in anticipation of getting Euros to pay off these Euro loans - let's just hope they didn't bet against Lehman Brothers!).

So they go out and buy up dollars with borrowed Euros, but in doing so, their increased demand bids up the price of dollars, above $3 dollars per Euro, and eventually approaching $2 dollars per Euro (i.e. the dollar gets more valuable against the Euro, as people with Euros bid for it - you get less dollars for your Euro, if this is case). As long as these short side speculators can get dollars cheaper than $2 dollars per Euro, they will make a REAL profit, as opposed to a PAPER profit.

Think of it this way. People in the market, to make a profit, are flooding the market with Euros, to soak up dollars. The Euro thus goes down in value, and the dollar thus goes up in value - but this is all because of the SUCCESS of those people who thought the dollar would collapse in value relative to the Euro.

Let's say these speculators can get all the dollars they want at an average REAL price of $2.50 per Euro, despite the original PAPER price being $3 dollars. They then deliver $2 to the long side (those who wish to be 'long in the pocket' with dollars), and receive one Euro in return. They immediately pay off the bank the one Euro they borrowed (plus a little interest), but keep the $0.50 dollar difference as profit.

(Or more likely, if the one year forward bet was one million Euros against two million dollars, at an average price of $2.50 dollars per Euro, they spend 800,000 Euros and receive 1,000,000 Euros in return, thus making a 200,000 Euro profit.)

In doing this, and taking this profit, they push down the value of the Euro, and push up the value of the dollar. If ENOUGH people are doing this, the swings in the two currencies can be immense, and in 'strangely' the 'wrong' direction.

If any of that made sense, welcome to the dark side of foreign exchange.

In REAL markets, PAPER profits are very rarely realised, except perhaps in VERY liquid UK and US treasury bond markets (and even then, not in the current climate). This is because of demand and supply, which Jim Rogers is the world's foremost expert in, hence his assumption of this twisted piece of knowledge.

The point of this, and the point of what the Jim Meister was saying, was that at some point EVERYONE will realise the dollar is collapsing, so there will be no counterparties to keep the value of the dollar up, all of the shorts will eventually clear their contractual obligations, and THEN the value of the dollar will collapse. What Jim is hoping to do is to anticipate this point, and sell ALL of his dollars JUST BEFORE it.

The only hope of a prayer that Bernanke has to escape this collapse of the dollar, is that he can persuade all other central banks to inflate their currencies as much as he is inflating his, to mask his ineptitude. Yes, he can get away with this for a certain period.

But eventually the central banks will run out of gold to keep people's faith going in the dollar, and mass worldwide hyperinflation will set in, with a collapse of ALL paper currencies against gold. Hence, Jim's use of gold in the video! ;-)

Hence, why all of the central bankers in the world are currently running around like headless chickens, and why the Austrians are the only ones who can make any sense of what is going on (and I suspect that there are some 'evil' Austrians WITHIN the central banks, who also know EXACTLY what is going on).

Hence, my other recent article about why there are only two solutions to this crisis. Either a commodity money standard (probably gold), or outright world fascism and a world fascist government, to prop up the world's paper currencies on the rifle sights of the world's state police forces.

This fascism, should it come to pass, will lead to massive supply and demand shortages of all goods, of course, but that is another story for another day.

And if any of the above made the slightest bit of sense, your price is to order a copy of 'Man, Economy, and State (with Power and Market)', by Murray Rothbard, and to read it cover to cover.

And if that doesn't make sense of trading market for you, my personal bible on how PAPER profits differ from REAL profits, is the following amazing (and cheap) book by Edwin LeFevre:

Reminiscences of a Stock Operator

Don't let the age of this book put you off. It is still one of the foremost books read by market traders, all around the world.