December Effect

It has been more than 3 months since my post on the dollar/gold movement post in 2009. It is a good time to recap and see if my bets had proven correct or went into a tailspin. Lets start with looking at gold prices (Source: www.goldprices.org), gold prices surged during the period from October 2009 till December 2009 and then the slide set in. December has seen a quite sharp fall in gold prices as compared in any other month in the previous 6 - 7 months. Lets now move onto the performance of the dollar (Source: http://www.marketwatch.com/). The dollar index also shows a reversal in fortunes with strong movement in December 2009. The dollar has shown its strongest performance in 2009 in December. What could be the reason behind this strong movements, did risk aversion started falling or did people think that a bubble had been formed?. Remember that in the last 6 months, dollar carry trade had increased a lot and with fed taking a posture of low interest rates for a long time it was only expected to increase. None of the conditions which resulted in the dollar carry trade and liquidity led rise in asset prices has changed. Interest rates in US are still low, governments have not started retracting stimulus packages, inflation concerns are still be sounded out. No major policy decisions were taken in December by any major economy.

One hypothesis which i have heard but did not have great belief is the "December Effect". With December being the last calender month and most of the traders having achieved there year end targets or not having the time to realise these targets for this year, would have shut shop and limit there risky positions. Also the holiday season of last 10 days of December when limited activity takes place, many people would be happy to reverse there risky trades and limit their exposure. Whether this a reason for the movements seen in December is very difficult to prove. Lets have a look at the equity market performance if there has been any December effect in these markets. The MSCI emerging markets ETF has not seen any major movement in December 2009 (Source: www.marketwatch.com).

Going forward, if December effect was the primary reason for the movements in December, then the reversal should be taking place. The projections I had made in October 2009 still hold good. One major concern on which i would touch upon next week in my next blog would be the performance of the China Property market.