Sunday, April 14, 2013

Extreme Gold Sell-Off Caused by Extreme Volatility of Japanese Government Bonds?

Gold and silver crashed on no apparent reason whatsoever on Friday, and it continues in Asia on Monday.

After reading the article at Zero Hedge (4/12/2013), at least now it all makes sense to me. Instead of unwinding the JGB positions in the new-normal extreme volatility because of the Bank of Japan meddling, financial institutions are selling other assets to raise cash for margin calls for their JGB holdings. And those assets of choice seem to be gold and silver.

Gold investors can thank Haruhiko Kuroda, the ex-Finance-Ministry-bureaucrat Governor of Bank of Japan, for doing everything he can to create inflation which he calls "price stability" (1984, anyone?) for the opportunity to add to their positions at an extremely low price considering the money printing that has been going on for the past 4 years by the central banks in the US and Europe.

Japanese financial media like Nikkei Shinbun is all excited with Kuroda's regime, calling it "different dimension (異次元)", as in Twilight Zone. Indeed.

From Zero Hedge, emphasis is original:

Japanese Bonds vs Gold: Is This Why Commodities Are Selling Off?

Japanese bond volatility appears to have crossed the Rubicon. As we noted here, the Japanese Ministry of Finance warned that a rise in JGB volatility could cause a significant sell-off in JGBs (since banks will be hampered by their VaR models-driven risk limits, which have literally gone off the charts in recent days, and be forced to reduce holdings to meet those risk limits). It seems however, that since the BoJ is set to buy more JGBs than will be issued in the next several years as noted yesterday, that financial institutions are chosing to live with the record vol noted previously, opting to raise cash buffers and liquidity reserves instead of selling bonds in order to meet surging margin demands on their JGB holdings.
 The synchronicity between the price of gold (and other commodities) and the volatility of Japanese bonds makes this risk-driven perspective very clear. This leaves the question, what happens when the Japanese (or in fact global - since front-running the BoJ has been a big winner until a week ago) banks run out of 'other' assets to sell and their VaR models continue to demand more capital in reserve?

Since QE2, gold (and other commodities) have moved in inverted-lockstep with Japanese interest rate implied (and realized) volatility as the JGB margin demands oscillate.

For some reason unknown to mere mortals, Kuroda and his boss Shinzo Abe seem to think they can control everything, achieve just the results they order.

That confidence is definitely not coming from their experience at Fukushima, that's for sure. For that pesky problem that's leaking all-beta water, they are setting up a committee to study the problem so that people, particularly those in Fukushima, are assured, in the fine comical tradition of Sir Humphrey Appleby.

(I actually burst into laughter when I read the news about this committee. Every single word of the news I have heard and watched in episodes of Yes (Prime) Minster...)


Anonymous said...

BOJ estimates that if JGB interest rates climbed to 2% Japan GDP would contract up to 1.7% (NHK).

arevamirpal::laprimavera said...

Thanks for the info, Beppe. I'm afraid Abe and Kuroda have doomed Japan (if that's still possible). Financial Times article saying it's has been a disappointment and failure.

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