Friday, November 27, 2009

Eyes Wide Open: How Significant Is The Potential Dubai Default?

The quick answer to that question is that we don't have enough information to make a real assessment.  We know that the Dubai World fund is looking to restructure payment terms on $80 billion in debt.  Dubai World is an investment vehicle owned by the Dubai Government.

That's the devil we know.  The devil we don't know is to what extent Dubai World has off-balance-sheet liabilities.  Even more consequential, we don't know to what extent banks and hedge funds globally have engaged in Credit Default Swaps tied to the debt issued by Dubai World.  Like every other financial accident that has happened - and the bigger ones waiting to happen - the OTC derivatives abortion has the potential to magnify the damages by many multiples and to inflict damage in places where we we least expect it (i.e. U.S. investment and pension funds).

We also know that going back to Long Term Capital and Enron, when smoke started billowing from these entities, it didn't take long for those firms to disappear, incinerated by hidden, off-balance-sheet nuclear landmines.   The long list of financial firms that followed, often vaporized overnight, included Bear Stearns, AIG, Washington Mutual, Lehman, Wachovia and many hedge funds.

JP Morgan is out with a report that the U.A.E. has plenty of money available to bail out Dubai. That may be the case and this crisis may blow over as quickly as it surfaced.  But these sovereign bailouts, led by the multi-trillion dollar U.S. bailout schemes, will eventually become ineffective, drown out by the flood of money printed in order to make them happen.

One thing I do know, all the anti-gold critics and media morons have been quick to point out that gold was sold off hard and thus was not performing as a flight to quality instrument.  What I would like to point out is that gold has actually rebounded 4% off of its overnight lows and is unchanged from where it was trading for most of the day on Wednesday (albeit a bit below Wednesday's close).  No doubt gold was affected by the knee-jerk reaction of hedge funds who piled into gold's upward momentum and other weak-handed holders.  Hedge funds tend to sell anything not nailed down at the first sign of downside volatility, and this would include gold futures thereby exaggerating gold's sell-off.

Quite frankly, in the context of the dollar spike and the hard sell-off in stocks globally, I think gold is holding its own quite well. In fact, gold is outperforming the dollar quite handily since the equity markets opened today.  Keep your eyes wide open to what is happening in Dubai.  Not so much for what is obvious, but for the collateral effects that might not filter out thru CNBC, Bloomberg News, et al.  The event that triggers the next huge cliff-dive in global equity markets is likely to come out left field with little or no warning.  Did anyone expect to wake up yesterday to see European bourses down 3-4% on the news of potential debt default from Dubai?


  1. Its not so much who holds the debt.

    The big question is who are the parties to the CDS.

  2. Correct. That's why I referenced the fact that problems related to this could surface in U.S. funds.

    The other issue is whether or not UAE will smooth over this problem.

  3. Dave,
    after a late night of thanksgiving revelry I awoke expecting to see market fireworks, but of course the markets are giving the Dubai issue a big yawn. Carry on as usual.

    Huge win for the Broncos last night! They really put things back together and embarassed the G-men at home

  4. Dave, I think you are forgetting something. Yesterday (or was it the day before) you wrote about the gold futures and that market participants would have to sell their contracts on Friday if the didn't want to get the real stuff delivered to their door. Couldn't that have puhsed the price down so violently?

  5. Kristjan. For sure there is going to be some liquidation of December today. We'll know how much later this afternoon.

    HOWEVER, the big move down in gold occurred around the time London opened for trading early this morning. That would not be Comex liquidation-related. That would be related to panic selling in all sectors.

    Interestingly, gold on a percentage basis outperformed the SPX once U.S. stock trading opened.

  6. When push comes to shove, printing, printing, and more printing, broadly defined, will ensue with each and every swoon in global financial markets. What we will increasingly have here in the U.S. is a Wile E. Coyote reality, where old Wile E. will seem to magically hover above the abyss even as the U.S. economy-if not the gobe's economy- inexorably collapses.

    The second there is even a hint that easy money and bailouts are off the table, we will see price cuts occur (in record time) in the major averages that will dwarf last year's worst carnage. And this prospect is why there will be no cessation of monetization. Gold in excess of 3k an ounce, or gold at 200 an ounce before Obama's first term is up are our choices.

  7. Dave,

    Please see my reply at the WSB:


  8. Back at ya on WSB, JJ. See my post above also

  9. Kitco says the plunge was during New York Globex hours, a few hours before London open. I am confused. Any help, Dave?

  10. Kristjan: well, my realtime futures charts show the gold plunge occurring around 1:30 a.m. Denver time, maybe starting down a little after 1 a.m. time my time. The LSE begins trading activity around 12:50 a.m. my time. NY Globex hours is pretty much around the clock, with a 1 hour "dark period" in the afternoon (3p.m. my time/5 p.m. NY time).

    So technically Kitco is right, the sell off did occur during NY Globex hours. But it happened to coincide with the opening of the LSE. In fact, there is a high correlation between gold selling off and the opening of the LSE. That occurrence happened every day this week.

    Kitco/Jon Nadler is basically full of shit.

  11. Thank you, Dave.

    "Jon Nadler is basically full of shit"
    I wonder why they keep him on the front page. He's wrong on a consistent basis, yet he is still allowed to publish articles. He's like a politician..

  12. Kitco's signature product that they sell is essentially a paper product that offer as if it's an investment in real physical gold. But there have been several people who have raised issue with the validity of Kitco's product - quesitons which Kitco fails to answer. In other words, Kitco, like GLD, sells a product that it represents to be backed by gold, dollar for dollar. But it won't prove it for all to see. In all probability, it is a fraud.

    My best guess is that Nadler is supposed to represent Kitco's editorial view that the price of gold is unjustifiably high.

    Nadler is a fraud and Kitco is ultimately a fraud.

    Nadler has relentlessly and arrogantly embarrassed himself for several years now. Recently he has pulled out of two precious metals conferences in which he was scheduled to debate the various issues surrounding the gold market. He is a spineless coward hiding behind false arrogance and lies.

    He's the kind of guy that, when the day oomes that gold pulls back from $5000 to $4000, will say "see, I told you so" LOL