FINANCIAL ICEBERG

Always consider hidden risks

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MARKET INSIGHT

Gold in Yen and SP500 and Bitcoin : Back to the Future

​( From Barchart, Bloomberg, World Gold Council, Bitcoincharts.com, CNBC, Wiki, FRED )

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The Situation



​ To achieve an inflation target of 2 percent within two years, the Bank Of Japan is doubling its purchase of Japanese bonds to roughly 7 trillion (about $79 billion USD$) per month to reflate the Japanese economy . That is well beyond the roughly 4 trillion to 5 trillion yen many analysts were expecting.



Inflation expectations changed from a deflation perspective to a potential inflation shift in Japan. Already as an inflation edge, I wonder what should be done​​. The perceived traditional edge for potential inflation had always been gold. But in that case, we should look at gold with a view from a Japanese investor : let s price it in Yen as shown in the graph below...







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Gold Price in Yen

Gold Price in Yen : Back to the Future



Tha actual price of gold in Yen is ​​140 400 Yen per once of Gold. The last time it reaches that kind of level was October 1980 when it spiked at 145 000. Let s go back in time and see what was the price of a few financial assets back then and now...​

Asset September 23 1980 May 17 2013





Yen​​​ 218.2 103.25

Gold ( London Fixing ) USD$ 720.50 1360



US Trade Weighted Dollar Index 93.8 84.2



Nikkei 7020 15 350

Dow Jones 962.4​​​​​ 15 354

SP500 129.5 1667



Japanese 10 year bond yield 9.21 0.79

US Treasury 10 year yield 10.76 1.95



​​​​​​​Japanese Consumer Price Index YOY 8.7 -0.9

US Consumer Price Index YOY​ 12.8 1.1

Now, let s have an historic view on Japanese inflation ( CPI ) and the Japanese bond yield with a maturity of 10 years as shown by the graph below...

Japanese Consumer Price Index YOY ( Blue )

​Japanese 10 year bond yield % ( Red )

So the obvious observations are that the Yen was a lot cheaper in 1980 than now, US stocks outperform tremendously the Nikkei, rates have tumbled and inflation is a lot lower now...

So the other obvious conclusion is even if the Bank Of Japan is doubling its purchase of Japanese bonds to roughly 7 trillion (about $79 billion USD$) per month to reflate the Japanese economy, why should I own Japanese 10 year bonds at a yield of 79 basis points if I believe in the reflation story ?

Japanese Monetary Aggregate M3 ( Blue / Left Scale )

Gold Price in Yen​ ( Red / Right Scale)

Gold and Money



​​The other ovious one ( in theory ) is that quantity of money and not inflation is the key driver of the inflation hedge : GOLD. On the graph below, you can see the Japanese Monetary Aggregate M3 compare to the price of gold priced in Yen ; the trend is your friend they say...

And if we observe the growth in M2 and M3 Monetary Aggregates for the main economic sector of the world ( USA, Japan and China ), we will see that growth has been huge for the past ten years, explaining the gain in value of gold...

US Monetary Aggregate M2 ( Blue / Left Scale )

China Monetary Aggregate M2 ( Red / Right Scale)

Central Banks Seen Buying More Gold

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Central banks are increasing purchases of gold, yen and China’s renminbi to reduce their dollar and euro holdings as a percentage of total reserves, the World Gold Council said.



Official holdings increased to more than $12 trillion in 2012 from $2 trillion in 2000, while the share of gold and currencies apart from the greenback tripled in absolute terms since 2008, the London-based council said today in a report. The group is funded by gold producers.



Central banks added 534.6 tons of gold to reserves in 2012, the most since 1964, the council said last month. Barclays Plc forecast government purchases of 300 tons in both 2013 and 2014. Currency debasement and inflation concerns will spur metal demand, Morgan Stanley said in a Feb. 25 report.



​​Building gold reserves in tandem with new alternatives is an optimal strategy as central banks remain under-allocated to gold and many attractive alternatives are either too small or, as is the case with the renminbi, not yet open to broader international participation,” Ashish Bhatia, the manager for government affairs at the council, said in the report.



Hmm! Even Central Banks are adding to gold...​​









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Central Banks Official Reserves US$ Bn

Bitcoin

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Bitcoin is a decentralized digital currency based on an open-source,peer-to-peer internet protocol. Bitcoin is the most widely used alternative currency and accepted by various merchants and services internationally. As of the end of March 2013, the monetary base of bitcoin is valued at over $2.9 billion USD. The large fluctuation in the dollar value of a bitcoin has evoked criticism of bitcoin's economic suitability as a currency as shown by the graph below...









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The funny thing is that the creation of Bitcoin was introduced by a Japanese pseudonymous developer named Satoshi Nakamoto in 2009.

​Satoshi Nakamoto was the pseudonymous person or group of people who designed the original bitcoin protocol in 2008 and launched the bitcoin network in 2009. . Maybe back then, he was already asking himself about the value of Central Banks money !

Read also : Central Bank Diversification Strategies : Rebalancing from the Dollar and Euro