There you have it. If you possess absolutely no gold, other than maybe a tooth filling, you are civilized. Congratulations!

If, however, you’ve stashed a few Krugerrands under your mattress, we’ve got some bad news for you. You are hopelessly uncivilized — a financial Neanderthal, deserving of pity from your civilized counterparts.

“I think gold is a great thing to sew into your garments if you’re a Jewish family in Vienna in 1939,” Munger remarked recently, “but I think civilized people don’t buy gold. They invest in productive businesses.”

Yes, that’s right, Charlie. Civilized people invest in productive businesses…until an uncivilized government decides to steal it, or merely tax and regulate it into oblivion. Some Jews in Vienna in 1939 operated extremely productive businesses. Unfortunately, they could not stitch any of those into their garments.

In other words, Charlie, civilized investment strategies function in civilized societies. In uncivilized societies, gold is usually a better bet. Or to put it another way, as civilizations lose their civility, share prices fall and gold soars…which is exactly what has been happening here in our beloved US of A.

During the last decade and a half, the investment return of Berkshire Hathaway, perhaps the most civilized of American stocks, has trailed far behind that of gold. Civilized folks like Charlie Munger and Warren Buffett consider that 15-year trend a fluke. Maybe so. Or maybe this trend is a warning that America is becoming a bit less civilized — a bit less friendly to productive businesses.

Notwithstanding this trend, civilized folks know better. They shun gold in order to invest in the shares of overhyped social media companies, highly leveraged banks, bonds of bankrupt governments and complex derivatives that are impossible to value precisely… until they go to zero… at which point their precise value is known.

That, Dear Reader, is civilized!

But there is one additional echelon: the über-civilized investor. Über-civilized investors shun gold to invest in über-complex derivatives. These are the folks like Warren Buffett who do not merely shun gold, but also belittle it very publicly while loading up on highly leveraged finance companies that are loaded up on complex financial derivatives.

Often, these banks are run by über-über-civilized investors — the kinds of guys who do not merely load up on complex derivatives, they load up on complex derivatives linked to the bonds of bankrupt governments. Then they utilize a “risk control” methodology that has a perfect record of failing to control risk.

You just can’t get any more civilized than that.

Eric Fry
for The Daily Reckoning

Investing in Gold as World Economies Falter originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Grexit — that’s what is being talked about this morning. Grexit is a “Greek Exit,” See how I put the two together? Simply genius, eh? HA! Seriously, this talk of a Grexit has really put the euro against the ropes

This talk of a Grexit is really beginning to get loud, folks. But let me be perfectly clear here: Leaving the euro is NOT the answer to the Greek problems, and I truly believe that a few years from now, the Greeks will regret this Grexit.

Bloomberg had a great article this morning that listed what the Greeks would have to do in a 46-hour period should they decide to leave the euro:

“Over the two days, leaders would have to calm civil unrest while managing a potential sovereign default, planning a new currency, recapitalizing the banks, stemming the outflow of capital and seeking a way to pay bills once the bailout lifeline is cut. The risk is that the task would overwhelm any new government in a country that has had to be rescued twice since 2010 because it couldn’t manage its public finances.”

I was on a call with a couple of other analysts a couple of months ago, and this topic of a Grexit came up, and I was alone in my thought that leaving would be very difficult and messy. I think this will be the case should the Greeks decide to leave the euro.

This Grexit talk has really gotten louder since the caretaker government of Greece made overtures about “renegotiating the terms of its bailout.” Hardliners in the eurozone will NOT go for that, and knowing that, the markets are preparing for a Grexit. That, my friends, is the main reason the euro is taking a ride on the slippery slope.

When I say the “rest of the currencies” are following the euro down the slippery slope, that doesn’t include Japanese yen (JPY), which is a currency on its own course. I’ve said all there is to say about the yen, so I won’t bore you with repeats.

I say don’t go against the trend that’s in place, and that trend is to flock to the so-called safe havens — dollars and yen. Swiss francs (CHF) used to be in that category, but with the “games” the Swiss National Bank (SNB) played with the franc last year, traders don’t want to touch francs with someone else’s 10-foot pole!

And who knows? The SNB could be selling francs into this dollar strength, to further weaken the franc. I wouldn’t put it past them.

One of the anti-dollar investments — oil — has really seen its price plunge, and that’s not surprising to me, given the dollar’s strength right now. You see, it’s all about the petrol-dollar.

But what’s going to happen to the petrol-dollar next month, when Iran opens its Oil Bourse, in which oil can be purchased with any currency, not just dollars? Maybe not right away, but should the Oil Bourse gain traction, it should be a real pain in the side of the dollar and the U.S.

I can tell you right now, folks, that all the saber rattling with Iran is not truly about their nuclear capabilities. The reports I read say Iran is 10 years away from a weapon of mass destruction, but you won’t hear the U.S. leaders say that, because they have to keep the focus on Iran’s nuclear capabilities. The real reason that all this saber rattling is going on is that Iran is going to open this Oil Bourse.

Now, that’s probably something you hadn’t heard or read about. But that’s me — always digging for the stories that fly under the radar. Like the story I saw go across the screens briefly yesterday — The U.S. Commerce Department has imposed tariffs of 31-250% on Chinese solar panels. Back in 2001, when I wrote the white paper called The Decline of the Dollar, I began to write that white paper because President Bush had just affixed tariffs on Japanese steel.

And while being protective of American Industries sounds good, the unintended consequences is that protectionism is one of those things that cause chinks in a country’s currency. So like in 2001, the hit to the dollar didn’t come immediately. I think this hit to the dollar will follow suit, and it will be some time before we see it cause harm to the dollar.

The European Union (EU) summit is going on as my fat fingers type away here this morning. This summit is going to be a real dogfight, and that won’t help the euro any. In the blue corner, we have French President Hollande, who wants to pull off the austerity measures and promote growth with spending (same old dookie, right?), and in the Red corner, we have Germany’s Chancellor Merkel, who will dig her heels in on the austerity measures.

But things can’t be that bad. A German auction of bonds/debt this morning saw great demand, and the issue was oversubscribed, and the yield for 10-year bunds fell to the lowest level in some time. And France also saw good demand at their bond auction this morning. And yes, just here in the U.S., where the Fed buys 61% of Treasury auctions, the European Central Bank (ECB) could very well be doing the same. I don’t think so. But I could be wrong!

One of my trading partners (thanks, Shauna) sent me some research her firm had done on India the other day — and folks, it doesn’t look good. This morning there is an article in The Times of India talking about an Indian default! “Market players are starting to worry that India’s deepening economic crisis and political paralysis could drive Asia’s third-biggest economy into default, according to the International Financing Review.”

Gold is down another $15 this morning. There just doesn’t seem to be anything to stop this slide as another anti-dollar gets whacked by the dollar strength. And we’re coming into the “traditional slow months” for gold and silver… the summer months. Last year was an exception, as gold hit its high during the summer, but you have to go back to last summer. And remember that the debt ceiling debacle was taking place, along with a downgrade for the U.S. Gold should have been going higher with stuff like that going on! And lookie, lookie… what do we have here?

Another round with the debt ceiling, which should come about by late summer. Are you with me that this could get really ugly with this being an election year? That’s why I think — and is my opinion, which could be wrong — that this current dollar strength will last until late summer.

Then from Forbes:

“Add it to the growing list of people going after JPMorgan Chase. Employees are suing the bank over the $2 billion trading loss that they say hurt their retirement plans.

“A lawsuit filed on behalf of JPMorgan employees says their retirement accounts fell in value after news broke about the trading loss, Reuters reports. That’s because the plan holds JPMorgan shares, which have dropped 18% since the loss was announced on May 10.

“The complaint, filed in U.S. District Court, Southern District of New York, names the bank, its CEO and chairman Jamie Dimon as well as former CIO Ina Drew, who resigned soon after the loss was revealed, as defendants. According to the suit, the defendants violated the federal Employee Retirement Income Security Act which gives plan participants the right to sue for breaches of fiduciary duty.”

OMG, what’s next?

To recap: The two-day calm in the currencies ended overnight as fears of a Greek exit from the euro are really strong after an EU official said that there would be no renegotiating of the bailout terms for Greece. The EU summit begins today and should become a real dogfight between the southern countries that want to spend and promote growth and the northern countries that want to continue the austerity measures. Gold and oil — the “anti-dollars” — are getting sold because of the dollar strength.

Chuck Butler
for The Daily Reckoning

Talk of a Greek Exit Gets Louder originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

I was talking to Mike last night, preparing for this morning’s Pfennig, and we agreed that all of this dollar buying is starting to look a bit overdone. At some point, the markets will figure they have “priced in” the Greek exit and will again start to trade on fundamentals.

Speaking of economic fundamentals, we got a ton of data released in the U.S. yesterday, and most of the numbers surprised on the upside. Housing starts and industrial production exceeded forecasts in April. Starts rose 717,000 versus an adjusted 699,000 in March. With the adjustment to last month’s numbers, the percentage gain in housing starts was 2.6% versus an expected 4.7% increase, but the numbers were still positive, which is all the markets focused on.

Building permits, a number that is a bit more forward-looking, were a bit mixed. Last month’s permit number was increased to 769,000, making April’s number of 715,000 look worse. April’s permit number was 7% lower than the March number versus expectations of a 4.5% drop. All in all, the housing numbers show a bit of an improvement in this very important sector of the U.S. economy.

My mortgage guy (I have my mortgage with EverBank, of course!) contacted me yesterday to let me know rates had dropped enough to make refinancing a good option for me. As I mentioned in the opening paragraph, much of the “safe haven” flows back into the U.S. dollar have been funneled into the U.S. Treasury markets.

This fresh round of bond buying has pushed interest rates down, which is obviously helping to support the housing market. The average rate on a 30-year fixed mortgage fell to an all-time low of 3.83% last week, and the average 15-year rate dropped to an all-time low also, according to Freddie Mac.

Another report released yesterday showed industrial production climbed 1.1%, the most since December 2010. The industrial production number was propelled by gains in auto sales, which were the strongest in four years. Half of the gain in factory output in April was due to a 3.9% surge in vehicle sales, according to today’s data. Utility use also increased during April, climbing the most in two years.

In addition, we got the capacity utilization numbers for April, which increased to 79.2%, the highest since April 2008. Chuck always watches this number closely, as it is a very good indication of whether businesses are using all of their production facilities. A rise of this number above 80 is typically an indication that the economy is “running on all cylinders.” We are not quite there, but certainly getting closer!

The combination of an uptick in housing and auto sales was great news for the U.S. economy, and would typically have led to a surge in the equity markets, as these are two of the most important pillars of the U.S. economy. But the stock markets were down here in the U.S., as investors continued to worry about the eurozone crisis.

Data released in Europe yesterday showed inflation slowed last month, and exports dropped in March as the region’s fiscal crisis undermined the economy. The eurozone crisis was also on the minds of the Fed policymakers during their last meeting.

Minutes from the FOMC meeting at the end of April showed members were worried about a loss of momentum in global growth caused by the European crisis. The members of the FOMC “indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough.” The minutes also pointed out the “fiscal cliff” that the U.S. economy is approaching at year-end, as U.S. lawmakers have to agree on a budget before automatic spending cuts kick in.

We will get a few more pieces of data released this morning, including the weekly jobs numbers and leading indicators. The jobs data are expected to show another 365,000 increase in weekly claims, a bit lower than last week’s 367,000 increase. The numbers of jobless claims have been steadily drifting lower since peaking in March 2009.

I spent a lot of ink this morning on the data releases here in the U.S., so I better move back to the currency markets, which have been dominated by events in Europe. The big news yesterday was an announcement by the ECB that they would temporarily stop lending to some Greek banks in order to limit its risk. ECB President Mario Draghi signaled the ECB would not compromise on key principles in order to keep Greece in the euro (EUR). The ECB said it will push the responsibility for keeping the Greek banks liquid back onto the Greek central bank until they have sufficiently boosted their capital. The announcement was meant as a warning shot for the other peripheral eurozone banks, but lending will probably resume shortly. “Once the recapitalization process is finalized, and we expect this to be finalized soon, the banks will regain access to standard Eurosystem refinancing operations,” the ECB said in an emailed statement.

Draghi fired another shot at Greek leaders with his first acknowledgment that Greece could leave the monetary union. He said while the bank’s “strong preference” is that Greece stays in the 17-nation euro area, the ECB will continue to preserve “the integrity of our balance sheet.” As I mentioned yesterday, the Greeks will go back to the polls on June 17 in what many are now seeing as a vote to exit or remain in the euro.

Chancellor Angela Merkel hosted the new French President Francois Hollande on the day of his inauguration. That just amazes me that the new French president would travel to Berlin on his first day in office. It definitely shows you exactly where the seat of power in Europe is located. I also think it is a sign that Hollande will be much more inclined to cooperate with his German neighbors than some of his election rhetoric indicated. And it wasn’t an easy trip for Hollande to make, as his plane was struck by lightning, forcing a return to Paris to board a second flight to the German capitol.

During the press conference at the end of their meeting, Merkel and Hollande sounded as if they would get along and work together to solve the Greek crisis. Hollande definitely looks like a better partner for Merkel than the last French president, and the two look like they have already started down the path of compromise concerning Greece. The European leaders said they would consider measures to spur economic growth in Greece as long as voters there committed to the austerity demanded to stay in the euro. Hollande affirmed at the closing of his visit that “we have a common task” to accomplish. “Greece can stay in the euro area,” and “Greek citizens will be voting on exactly that.”

Chuck sent me a note yesterday morning suggesting the Australian dollar (AUD) may be oversold: “A charts friend of mine sent me a note indicating the Aussie dollar is showing oversold on the RSI readings. RSI stands for relative strength index, and my research shows that the A$ has reached current RSI levels four times since 2010 and each time, A$ has bounced off these levels. So… maybe the sun will begin to shine in the A$ again soon.”

I watched the Aussie dollar continue to slide after reading Chuck’s email and thought his chartist friend had probably misread something. But as I turned on the screens this morning, I saw both the AUD and NZD have turned around and begun to move higher. These two currencies were helped by Asian stock markets, which headed for their first advance in seven days. A feeling that the U.S. Fed could introduce another round of stimulus also helped buoy these commodity-based currencies.

To recap: The U.S. data released yesterday indicated the economy is still in a “recovery” mode. An increase in housing starts and industrial production showed two of the most important pillars of the U.S. economy, housing and the automobile industry, had stabilized. Another release showed capacity utilization increased to get close to 80. The crisis in Europe continues, as some Greek banks were “cut off” by the ECB. The new French president traveled to Germany, and from the look of things, the leaders are going to show a united front in their battle to save the euro. And finally, the AUD and NZD look like they are oversold, according to the charts.

Chris Gaffney
for The Daily Reckoning

Data Show US Economy is Improving originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

We continue to remind callers that diversification is the key to long-term investing success, and the best strategy is to make an investment plan and stick with it. But before I get in trouble with the lawyers, I better get back to the purpose of this letter, which is to give readers a recap of what is going on in the currency markets.

The Greek crisis jumped back onto all of the trading screens last night after the Greeks finally admitted they couldn’t form a coalition government, and planned another election in June. The problem with these new elections is that there is a high risk that leftists opposed to the terms of an EU bailout will sweep to victory in this next election and send the eurozone into a deeper crisis.

Both of the parties who won the largest percentage of the last vote want to remain in the euro (EUR), but promised to “renegotiate” the terms of the bailout agreement. The second round of elections could shift the results further left, making the withdrawal of Greece from the euro a higher probability.

In addition to the Greek crisis, yields on both Spanish and Italian bonds rose yesterday as investors sold and sought safer havens. Moody’s Investors Service downgraded 26 Italian bank ratings, citing Italy’s recession and increasing bad debt. It also warned that Spanish banks face additional challenges.

And there is probably more bad news to come from the rating agency, as a Moody’s official said the rating agency is postponing possible downgrades on more than 100 banks worldwide as it assesses the fallout from JPMorgan Chase’s trading losses.

None of this was good for the euro, and the single currency unit approached the 12-month low of 1.2624, which it reached on Jan. 13. Bad news for the euro corresponded to an up day for the U.S. dollar, which is seen as the only “safe haven” in the most-recent crisis. The U.K. economy fell into a second recession, while Europe has avoided the double dip, according to official numbers released yesterday.

The pound sterling (GBP) was seen as a safe haven from the euro crisis, but the pound weakened the most in a month versus the U.S. dollar after the BOE said the U.K. economic growth was likely to remain “subdued” in the near term.

Central bank Governor Mervyn King admitted the U.K. faced threats from the euro crisis as he released the quarterly report on inflation. “Concerns about the possibility of a disorderly resolution” in the euro area have “adversely influenced asset prices, bank-funding costs and confidence,” the BOE said in the report. “The MPC [Monetary Policy Committee] judges it likely that the possibility of such extreme outcomes crystallizing will continue to weigh on U.K. activity for some time, even if these outcomes do not actually occur.”

Shifting to the U.S., markets will be eagerly awaiting the release of the minutes from the last FOMC meeting, scheduled to be released early this afternoon. Chairman Bernanke said after the most-recent meeting that he is prepared to “do more” to boost economic recovery, which the markets took to mean another round of quantitative easing.

Investors will be analyzing the minutes of the last meeting to try and get a sense of whether or not QE3 is in our future. If there is any indication that another round of easing is in the offering, the equity markets will run higher and the dollar will get sold.

But before we get the minutes this afternoon, we will also get a boatload of other data releases here in the U.S. Housing starts are expected at 685,000, a slight increase from last month’s 654,000, and the month-over-month increase is expected to be a much-better 4.7% increase, compared with last month’s dismal 5.8% fall.

We will also get a report on building permits, which is a more “forward looking” report. Permits are expected to have fallen in April, down 4.5% from March levels. We will also see industrial production and capacity utilization, both of which are expected to show a slight increase during April.

Yesterday was chock-full of data with the release of the CPI and retail sales data. The inflation data showed consumer prices here in the U.S. rose at an annual rate of 2.3% in April, just as a majority of economists had predicted. Readers know neither Chuck nor I put much faith in this “official measure” of prices, and would rather look at John William’s ShadowStats, which pegs the price increases to a more-realistic 10%.

The retail sales numbers weren’t as encouraging, as sales slowed to a 0.1% increase during April, down from a 0.8% gain in March. Other data showed the New York state manufacturing activity improved, mostly due to falling energy prices, and business inventories were up a bit, at a 0.3% increase.

One of the most-important pieces of data released yesterday didn’t get any press in the mainstream media (no surprise there). Data showed the total net TIC flows dropped $49.9 billion in March, but the newsies chose to focus on China’s increase in its holdings of U.S. Treasuries in March. Our friends over at The 5 Min. Forecast had some interesting things to say about the increase:

“Yes, China beefed up its holdings of U.S. Treasuries in March, according to figures out this morning from the Treasury Department. But if you widen the scope and go back six years, a couple of interesting things happen. First, the increase in March was so small as to barely show up on the chart…

“And second… China’s holdings peaked last July. Coincidentally, that was the last month before Uncle Sam lost its AAA rating. The numbers declined markedly through the end of 2011, and stabilized in the first three months of 2012. This is especially interesting when you consider how Chinese imports of gold grew at the same time Chinese purchases of Treasuries were shrinking.”

They point out that China is slowly accumulating gold, but you wouldn’t know that by the recent price movements. The shiny metal dropped again yesterday, to a new low for 2012, at $1,526.97. It has bounced back up from its lows, but is still trading in the $1,540 range.

I pointed out my thoughts that gold is an excellent place for investors seeking a safe haven, but the recent trading patterns show that most investors feel it is more of a “risk” asset. The correlation between gold and the dollar has been moving closer to –1, which would indicate a perfectly negative correlation (a negative correlation indicates gold moves down as the dollar moves higher). The 30-week correlation coefficient between the greenback and bullion is now at -0.66, compared with -0.24 in September.

But some of the biggest investors feel gold will rebound from its current levels. Bloomberg reports that the median estimate of 11 analysts who track gold indicates the price will average $1,740 in 2012. Goldman Sachs’ commodity research team believes the Fed will start a third round of QE in June, which will push the value of gold higher.

Billionaire George Soros raised his stake in gold, according to a filing yesterday reflecting first-quarter holdings. Central banks are buying bullion at the fastest pace in five decades, adding 439.7 tons in 2011, and they will probably purchase a similar amount this year, according to the World Gold Council. Sounds like a good opportunity to increase metals holdings at good prices!

Chuck is working out in Las Vegas this week, giving a couple of talks to packed rooms as usual. I miss attending these shows with Chuck, who is treated a lot like a rock star at them. Fans constantly drop by the booth to shake his hand and pick his brain on the markets. He sent me the following reflections from the floor of the Las Vegas MoneyShow:

“Most people here at the Las Vegas MoneyShow believe, as I do, that the back side of the storm is about to hit the U.S. But then again, 250 of them were Pfennig readers in this humongous room I was in yesterday!

“I said something to the people there when talking about the Pfennig, and it hit me like a brick! I’ve been writing the Pfennig in one shape or form for 20 years now! WOW! Who would have thought that those handwritten notes to salesmen each morning would turn into this 20 years later!

“Even when I was ‘retired,’ after Mercantile performed ethnic cleansing on Mark Twain employees, I wrote the Pfennig from home. Back then, Alex was only 3, and used to sit on my lap and pound away on the keyboard so that portions of the Pfennig looked like this: : )*%PLKE#&^)*!

“Alex is almost 17 now — amazing how time flies, eh? But the point here is that longtime readers that go back to Mark Twain Bank days have been with me through a lot. I’m thankful for your loyalty.”

Chris again. Yes, I remember back 20 years ago, when I would find a handwritten note from Chuck on my desk when I arrived each morning. Back then, we didn’t have the Internet, so he would jot down his thoughts and leave copies on everyone’s desk. We started passing these notes along to the investors we were talking to via fax, and eventually Chuck switched to passing it out electronically.

Then there was this. I haven’t commented on JPMorgan Chase’s $2 billion trading loss, which really put egg on the face of Jamie Dimon, the outspoken CEO of the company. Dimon was one of the loudest voices protesting the additional banking regulations working their way through Washington.

Yesterday, I read a story that I immediately thought would be a great story for this morning’s “Then there was this.” The story, which appeared on Bloomberg and was also picked up by our local paper, was titled “Fed Conflict Raised for JPMorgan.” The article points out that Dimon is one of three bankers sitting on the board of the New York Fed, as required by law.

That’s right, the Federal Reserve Act of 1913 actually mandated that three of the nine seats on the regional reserve bank board be occupied by bankers. The article quotes Sen. Bernard Sanders, who sees an obvious conflict in Dimon’s two roles. “It is an obvious conflict of interest for Jamie Dimon, the CEO of the largest bank in America, to serve on the New York Fed’s board of directors,” Sanders said in an emailed statement. “This is a clear example of the fox guarding the henhouse.”

To recap. Greeks will be returning to the polls in June, and the currency markets are worried about the outcome. The euro dropped again, both on the new Greek elections and a cut to Italian bank ratings by Moody’s. The pound sterling dropped, and may not be the “safe haven” that some investors thought. We got a boatload of data released yesterday, and will get even more out this morning. Most of the data showed the U.S. economy continues to “muddle through.” China is continuing to increase its gold holdings, along with some very influential investors. And I ended today’s Pfennig with a note from Chuck, who is speaking to the masses out in Las Vegas.

Chris Gaffney
for The Daily Reckoning

British Pound Sterling Losses “Safe-Haven” Status originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

The euro (EUR) continued to drop on Monday, falling to its lowest level in almost four months as more and more people begin to imagine a euro without Greece. The dollar has been the biggest benefactor of the latest eurozone crisis, as investors moved money back into the US Treasury markets. The rush back to safety pushed the yield on the US long bond back below 3%, and the shorter maturities are also lower.

The Greeks are still without a unified government after the biggest anti-bailout party decided against joining the government. It is looking more and more as if the Greeks will be forced back to the polls for another round of voting.

And the Greeks aren’t the only ones heading to the polls. The Irish will vote on a referendum May 31, which asks the public to approve the “EU Stability Treaty.” While a sharp turn to the left in Greece and the return of the Socialist party to the French presidency has sent the euro lower, an Irish rejection of the EU treaty could be the last straw for German-led austerity measures.

On the flip side, the stability pact requires only 12 nations to ratify it, and German Chancellor Angela Merkel seems to be warming to adjustments to the treaty’s stringent fiscal rules. While a Greek exit is still a possibility, Germany could still allow them to stay after loosening the rules on maximum deficits. Many of the countries that use the euro are in better shape than Greece, but still need the ability to stimulate their economies.

All of this will be debated and discussed at the next EU summit meeting on May 23. Francois Hollande will be representing France, but it will be interesting to see if the Greek government gets organized enough to send a representative to the bargaining table.

The euro has settled into a tighter trading pattern overnight, and is actually starting to move higher as I write this morning. A better-than-expected GDP reading showed the German economy avoided “double dipping” into a second recession.

Gross domestic product in the 17-nation euro region came in flat for the first quarter, compared with an expected 0.2% decline. Germany’s economy grew 0.5% during the first quarter, a surprisingly strong number, which offset some of the weaker GDP numbers in the peripheral economies.

The dollar index snapped 11 days of gains overnight, as it weakened slightly ahead of a full morning of data here in the US. We start the morning off with the inflation numbers for April, with CPI predicted to have risen 2.3% versus a year ago, down from a 2.7% rise in March. We will also see the Empire Manufacturing number, advance retail sales, total net TIC flows and business inventories. There will be plenty of data for currency traders to move the markets.

If the data show the US economy is continuing to slide, we could see renewed calls for another round of quantitative easing here in the US. The impact of QE3 (or is it 4?) on the currency markets is tough to predict. More stimulus would probably cause the equity markets here in the US to rally, and would give the dollar a short-term boost.

But ultimately, QE is negative for the dollar, as it pumps more money into the markets, driving interest rates lower and causing inflation risks to rise. With this being an election year, the administration is geared now more than ever on the short term, so if the data show any weakness in the economy, we could see another push for stimulus.

An article appearing in yesterday’s Wall Street Journal online was appropriately titled “Rare Speed Bump in Commodities’ Long Run.” The title caught my eye, as it reflects exactly what I think we are seeing, a short-term pause in what I believe will be a continuation of the long commodity bull market. But in the short term, both oil and gold are being sold off.

Worries about the slowdown in China, combined with questions surrounding the eurozone credit crisis have decreased future demand for commodities. Oil dropped below $94 for a short period yesterday before rallying back later in the day. Gold has also dropped, erasing its gains for the year. I just don’t understand why gold is selling off in the face of such uncertainty. After all, gold is the only “real” currency, so why wouldn’t people be moving into gold as they sell positions in “risk” assets? I guess one answer would be that investors are no longer worried about inflation, and some of these investors had accumulated gold positions as an inflation hedge. Others will point toward central bank selling into the markets, getting value from one of the only assets that has maintained value. Still others will undoubtedly point toward “market manipulation,” but I will stay away from that in today’s Pfennig.

Most of the commodity-based currencies have sold off in tandem with the drop in oil and precious metals. The Australian dollar (AUD) continues to slide lower along with the kiwi (NZD) and South African rand (ZAR). Brazil’s real tumbled and traded above two per dollar for the first time in almost three years after finance minister Guido Mantega said the exchange rate doesn’t worry the government. This only led to further selling of the currency, as traders took Mantega’s words as encouragement to sell the real versus the US dollar. Brazil’s government is using a weaker real and lower interest rates to help stimulate their economy. Investors are expecting another cut to the benchmark interest rate by the end of 2012.

Then, Chuck usually uses this section to share something he has read recently that struck a chord with him. Yesterday, I mentioned Chuck’s predictions regarding the euro volatility during 2012, and a couple of readers asked me where they could read his projections. That got me looking through some of the past editions of Chuck’s Review and Focus, and I came across the following in the Jan. 1, 2012, edition:

“As we turn the calendar to 2012, most of us know all too well that this is the year the Mayans predicted apocalypse. But maybe they just failed to finish the calendar! OK, that was my attempt at humor, which I’m sure will get shot down in a heartbeat by many. 2012 will also be an election year, so maybe the Mayans were onto something. Nevertheless, this is the event, or the run-up to the event, that will put the dollar back to its underlying weak trend. I’ll explain in a minute, but first…

“I do believe that in the first half of 2012, nondollar investors using foreign currencies and precious metals will have to have some thick skin and batten down the hatches. This shouldn’t come as a surprise to you, dear reader, for in October 2011, I wrote that we were approaching a perfect storm for dollar strength, and that we should expect to see a period of dollar strength that could last several months. While that perfect storm hovered over the euro and other currencies, not really taking its wrath out on the nondollar investments, the storm became stronger until it finally unleashed itself on the markets late in 2011.

“So here we are starting 2012, just like we’ve started the past few years, dealing with dollar strength. This happens almost every year, due to renewed forecasts for economic vigor in the US, only to see those forecasts fade away by the time summer comes around. And I do believe this is where we are this year, too.”

Chuck wrote those last few paragraphs over five months ago, but he was pretty right on with his call for dollar strength during the first half of the year. Now we will see what happens from here. Will we see that event which puts the dollar back to its underlying weak trend?

To recap: The euro continued to slide yesterday as a Greek exit from the euro was on the minds of most currency traders. Euro leaders will discuss a possible “growth pact” at their summit on May 23, and Ireland will vote on the “stability pact” at the end of May. Looks like volatility in the euro will continue! We will get a ton of data in the US today. Could it point to QEIII? Commodities sold off, forcing commodity-based currencies lower. And we ended with a look back at Chuck’s thoughts for the first half of 2012.

Chris Gaffney
for The Daily Reckoning

Euro Continues to Drop originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

The euro (EUR) hasn’t gotten any help from the Greeks lately, and the currency markets continued to move out of “risk” positions and back into safe havens on Friday.

I spent a good bit of time this weekend reading up on the Greek political situation, and stole the “Achilles’ heel” phrase from this week’s Economist magazine. I thought that description was perfect for the Greek vote, as the euro has stumbled because of the recent uncertainty in Greece.

Greek leaders have been unable to form a unified government, and there is a real possibility that the Greeks will be heading back to the polls for another vote. As Chuck reported last week, European leaders have approved the next round of bailout funds for Greece, but with the continued leadership vacuum, I have to think this could be the final payment.

If they have another election, the markets will certainly see it as a referendum on whether the Greeks want to stay in the euro. A vote for the same anti-austerity parties would certainly put pressure on European leaders to rethink Greece’s membership in the single currency.

We have heard warnings over the “end of the euro” almost since it began trading, and I never put much credence in those who felt the euro wouldn’t last. But I do think the euro will evolve with the markets, and a Greek departure is a real possibility.

I think the euro will actually be stronger without Greece, like the buffalo herd that is being chased by a pack of wolves. The exit of one, or even two, of the weakest members will actually make the remaining group stronger. But the exit could get ugly in the short term, which is exactly what Chuck warned all of us about in his “currency projections” for 2012.

The euro also weakened after a report released this morning showed industrial production in the euro region contracted in March. German manufacturing was the one bright spot, but gains in Germany couldn’t overcome slower production in Spain and France. Industrial production slipped 0.3% from February, versus forecasts of a 0.4% gain. From a year earlier, production declined 2.2%.

The Greek political uncertainty weighed on the euro Friday, and today’s poor production report continued to push the euro lower, sending it near the lows for the year. The uncertainty in Europe has investors moving out of anything that can be associated with “risk,” which means the higher-yielding currencies got sold.

Looking at the currency screens this morning, the only currencies that are appreciating versus the U.S. dollar over the past month are the British pound (GBP) and the Japanese yen (JPY). I expected to see the yen at the top of the list, as the Japanese currency is seen as a “traditional safe haven.” But the pound sterling was a bit of a surprise.

The pound is being sought out by investors who are looking for shelter from the turmoil on the European mainland. The sterling has appreciated 3.6% this year, a surprise move considering the poor economic fundamentals in the U.K. The Bank of England has been flooding the financial markets with sterling in an attempt to boost the economy, so the appreciation in the face of all of this liquidity is even more impressive. But is the recent appreciation in the pound sterling justified? I hardly think so. The U.K. economy fell into its second recession in the first quarter, the first double dip since 1975. U.K. output is almost 4% lower than the peak in 2008, and unemployment is close to a 16-year high, at 8.3%.

Perhaps currency investors are just looking for political stability, which the U.K. can provide in contrast with the European turmoil and the U.S. elections. Prime Minister David Cameron is sticking to the austerity programs he instituted after his election two years ago, stating that deficit reduction is needed to keep interest rates low. The S&P rating service has affirmed Britain’s AAA rating and stable outlook, a confirmation of Cameron’s calls for further fiscal tightening.

The more traditional safe haven of the Swiss franc (CHF) hasn’t seen a big rise, as the Swiss National Bank has kept its promise to keep its value tied to the falling euro. So currency traders have turned to the pound sterling for shelter from the European economic storm. As Chuck pointed out last week, the U.K. is winning in the “ugly contest” in Europe, but I would certainly think there are some prettier places to park cash (the Nordic currencies are a prime example).

The Australian dollar (AUD) dropped below parity for the first time this year, a pretty dramatic move from a high of $1.0856 at the end of February. The “breaking of the buck” is a pretty big psychological move, and will probably send the Aussie dollar even lower. The commodity currencies all got sold as investors exited “risk trades.” The carry trade continues to be a popular investment strategy, but volatility in the markets can cause losses for these trades, so the renewed European crisis caused investors to sell the high-yielding currencies and move back into the relative shelter of the U.S. dollar and Japanese yen.

The Australian dollar continued to slide in spite of a report that showed the nation’s housing market is improving. Home approvals unexpectedly rose in March, the first positive move in three months. The number of loans granted to build or buy houses increased 0.3% in March versus the Bloomberg median estimate of a 2% decline.

The Aussie dollar, New Zealand dollar (NZD), and South African rand (ZAR) are all dependent on demand for commodities, and most of that demand now comes from China. Demand for the commodity currencies was boosted a bit after China lowered reserve requirements for banks in an effort to stimulate their economy. The PBOC also turned their currency around again, letting it slip vs. the U.S. dollar. China has held off lowering interest rates, choosing instead to reduce reserve requirements and lower the value of their currency. The 50-basis point move, effective May 18, will inject about 400 billion renminbi of liquidity into the banking system, according to estimates by ANZ.

The two moves by China indicate the Chinese policymakers are concerned about the recent slowdown in the global economy. Chinese leaders are looking to boost their economy after a batch of disappointing economic data was released last week. Two separate reports showed China’s industrial production and retail sales grew less than forecast. The industrial output in China increased 9.3% in April, the least since May of 2009. Estimates of Chinese growth have been steadily lowered, down from lofty double digits to the current estimate for 7.5% growth in the second quarter. China’s growth rate slowed to 8.1% in the first quarter from close to 12% just two years ago.

The Chinese economy continues to be the engine of global growth, so any further adjustments to growth projections can have dramatic effects on the currency markets. Many in the markets are wanting to see the Chinese become even more aggressive in their attempts to stimulate growth, and if growth slips below 7.5%, I think we will definitely see more aggressive moves. The 7.5% level has been widely discussed as being the level of growth necessary to maintain harmony in the Chinese economy. A lower level of growth risks social upheaval by Chinese workers who have come to depend on these higher rates of growth.

And a report out of India showed inflation in the world’s second-most-populous nation accelerated in April. The benchmark wholesale price index rose 7.23% from a year earlier, after climbing 6.89% in March. Higher inflation will definitely limit the room for further rate cuts by the Reserve bank. The RBI slashed the benchmark interest rate 50 basis points last month, and further rate cuts were expected in June. But the recent rise in inflation has cut these expectations and should actually help put a floor under the Indian rupee.

To recap: Greek political uncertainty continues to push the euro lower, with a Greek exit from the euro a definite possibility. The pound sterling is being sought out as a “safe haven” currency, taking the place of the Swiss franc, which is tied to the euro. The Australian dollar fell below parity for the first time this year as risk trades got reversed. The Chinese renminbi turned around and headed lower again after the PBOC lowered the reference rate. And a report out of India showed inflation unexpectedly accelerated in April.

Chris Gaffney
for The Daily Reckoning

Pound Sterling as a Safe Haven? originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

That little mini-rally, which a handful of currencies saw yesterday, faded overnight, and those currencies are all back to the levels of Wednesday. UGH! The handful, in case you were wondering, included the Australian dollar (AUD), euro (EUR), Brazilian real (BRL), Norwegian krone (NOK), Swedish krona (SEK), Singapore dollar (SGD) and a couple of others.

Yesterday, we saw the U.S. trade deficit widen from $45.4 billion in March to $51.88 billion in April. It’s not all with China, folks — the majority is with OPEC. Remember, the price of oil in April was well over $100 all month!

We also saw the initial weekly jobless claims, which was flat versus the previous week, at 367,000. The continuing claims remain a problem, folks. I know I talked yesterday about jobs, etc,. and I received a few emails from very disgruntled folks that have been looking for jobs, and don’t believe there are any out there to be found.

That brings me to the thing that I’ve said since 2008 — that a lot of the jobs that were lost were not going to come back, and the jobs that did open up were going to be completely different than what the unemployed person was trained to do. I’m not insensitive to this, folks. I just tried to get it out there a few years ago so that people could begin to make changes.

OK, did you see that the monthly budget statement, which had been a deficit each and every month for so long that I had begun to call it the monthly budget deficit, actually stopped the bleeding in April? The government posted a $59.1 billion surplus in April. WOW!

OK, hold on a minute there. Isn’t April the month that all taxes owed are collected (for the most part, anyway)? The key here is to see where this balance goes the next couple of months. My bet is that it will go right back to the monster deficits that were seen every month prior to April.

Today, we’ll see wholesale inflation (PPI) for April, and the University of Michigan confidence index.

Overnight, we heard that the Greeks were having second thoughts about electing an anti-euro government, and now it appears that the government that will be elected will keep the euro, no questions asked. That’s nice of them! Obviously, calmer, smarter heads prevailed here, because I don’t believe that the Greeks want to see what life is like for them outside of the euro!

Euro traders are kind of lost between two lovers here. They just can’t figure out whether they want Greece to leave or stay.

The Aussie dollar (A$) had climbed back above $1.01 yesterday, but is right back to Wednesday’s level of $1.0050 this morning — losing half a cent overnight. The other day, I talked about the forecast Aussie budget surplus for next year. While that would be great for them, should they achieve that surplus, it won’t really be known if that’s going to be a reality until September.

I also told you, a couple of weeks ago, that I thought bond buyers of Aussie government bonds were behind the resiliency of the A$ in the face of a rate cut. Of course, back then, I thought that the Reserve Bank of Australia (RBA) was going to cut only 25 basis points, and they surprised the markets with a 50 basis point rate cut. That severely inhibited the resiliency of the A$.

And I talked about how it is believed that if Australia does achieve a budget surplus, the supply of Aussie bonds would drop by a large margin. So if that were true, that underpinning that the A$ enjoyed from bond buyers would be damaged. But as I told a small group the other day, “Even if the A$ falls to 95 cents, it’s still a strong currency; just 10 years ago, it was trading around 50 cents.”

As far as today’s prospects for a risk-on day go, I think the chances are slim to none. All the overnight bourses are down, and U.S. stock futures are down.

Everyone is running for the hills after a story in The Wall Street Journal hit the streets last night. According to the WSJ report, “JPMorgan Chase has taken $2 billion in trading losses in the past six weeks and could face an additional $1 billion in second-quarter losses due to market volatility.”

Most of you all know how I would have reacted to this report in “the old days.” So this is your chance to “be like Chuck” and give me your version of what Chuck would have said in the old days. (You don’t really have to send it to me unless you think you have really nailed it!)

I think I’ll talk about silver now (wink, wink). Did you see that China had introduced silver futures contracts that will trade in renminbi/yuan (CNY) on the Shanghai Futures Exchange? The contracts will not be allowed to fluctuate more than 7% per day. I have to wonder how the Chinese are going to take seeing the price of silver brought down in after-hours trading.

And did you know that China is now the world’s leading producer of silver? No, it’s not Mexico, and no it’s not Peru. It’s China. And that’s good because China is the world’s second leading consumer of silver, behind the U.S.

Have you been following the news on Scotland contemplating leaving the U.K.? That would be a HUGE blow to the U.K., not only prestigewise, but monetarily. Scotland’s economy is second in contribution to the U.K. economy, coming behind the southeast part of England.

The pound sterling, which has defied gravity recently, is beginning to feel the weight of doing a double dip in the recession pool, and everything else that’s going on badly there. Like this morning, they reported that March construction output was very disappointing, which points to a downward revision to first-quarter GDP, which already showed that the U.K. economy was going for a double dip.

Gold enjoyed a day in the sun yesterday, but it’s raining on the shiny metal again this morning. It seems that we’ve returned to the days around 2008 and early 2009, where the dollar is rewarded with bad data. Dollar bugs will tell you that this is how it should be, as the only true safe haven is the U.S. dollar and Treasuries. I want to hit these dollar bugs over the head with a gold bar! Maybe then they would find the true safe haven!

Speaking of gold, I did some math about a year ago and ran it here, and with all the talk about the U.S. paying off its debts by selling its gold holdings, I thought it best to pull this back out:

There are 5,046 tons of gold at Fort Knox
There are 7,716 tons of gold at the N.Y. Fed
Total = 12,762 tons.

There are 32,000 ounces in a ton
12,762 tons x 32,000 = 408,384,000

Price of gold is $1,590
408,384,000 x $1,590 = $649,330,560,000

Sorry, but $650 billion doesn’t pay for even the stimulus that was thrown at us a couple of years ago! But if the price of gold were to be pushed up to let’s say $5,000, then we would be talking about making some inroads to the debt! And if the price were pushed to $10,000, then we’re getting somewhere. But we would still be left with a very large national debt.

You see that’s the problem with deficit spending. At some point, the numbers become so HUGE that you can’t make a difference in total unless you come in with both guns blazing! And then keep those guns blazing! Doing one-off corrections are only chinks in the armor.

For longtime readers, do you remember a few years ago when I tried to show the knuckleheads at CNBC that the markets were being manipulated in the after-hours trading and they laughed and told me to take the story to Hollywood? Well, CNBC has come a long way, I guess, for they allowed Eric Sprott to talk freely about manipulation the other day. Of course, maybe not that long a way, as I wanted to include the link to the video here, but it’s not working. And the folks at CNBC did attempt to ridicule him. But he would have none of it!

Maybe CNBC will have it fixed later. Just Google Eric Sprott at CNBC and look for the most-recent video.

Anyway, Eric Sprott, Ted Butler and others, including me, have done our best to inform the public of what’s going on. Maybe one day, We the People will get the message and exercise our right to contact our representatives and discuss this with them.

Then I saw this on Reuters:

“Financial advisers increasingly warn that U.S. Treasury bonds are close to a bubble and suggest that clients look elsewhere for stable and safe returns. Alternatives recommended include investment-grade corporate and emerging-market bonds, master limited partnerships and preferred stocks.”

I liked that they had finally come around to noticing the Treasury bubble, but nowhere on their list of alternatives do I see gold.

To recap: The mini-rally in a handful of currencies yesterday was wiped out in the overnight markets. And the currencies and gold are back to Wednesday’s levels. The Greeks agree to elect a government that keeps Greece in the euro. The U.S. posted a monthly surplus for the first time a very long time in April, but tax collections are made in April, so one would think that if they can’t book a surplus in April, when can they? And JP Morgan has really thrown a spanner in the works for a risk-on day with their after-market announcement yesterday.

Chuck Butler
for The Daily Reckoning

US Posts Monthly Budget Surplus! originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Americans, by and large, run all their affairs within the confines of the US. The US economy is so large and so varied that it’s easy to assume that everything you want to do with your wealth can be done without crossing any borders. And people in the US, like people anywhere, live with the habits and attitudes developed over generations. They’re only human. In the case of Americans, those habits grew out of long experience with a government that was small and that generally practiced the rare virtue of following its own laws. In a happy exception to mankind’s experience with rulers, there was little to fear from it.

Stay at home is still the norm for Americans, but it’s a norm that is slowly fading. Every billion-dollar tick of the government debt clock, every expansion of the government’s regulatory apparatus, every overreaching judicial decision made in the name of a compelling public need, every inversion of protection for citizens into license for the state and every intellectually tortured discovery of a new meaning in the Constitution’s 4,400 old words leaves a few thousand more people wondering how prudent it is to consign all their eggs to a single national basket. Encounters with high-handed IRS agents and eager TSA gropers do nothing to ease that concern. And for those who listen thoughtfully, the messages from our designated leaders and their would-be replacements only hurry the dawning sense of unease.

Specific worries include exposure to predatory lawsuits; fear of where income tax rates might climb; the prospect of losing a family business in a regulatory battle or simply through estate tax; the fragility of financial institutions that have operated for forty years with the assurance that the Federal Reserve would rescue them from any folly; the possibility that a government desperate to protect the dollar from collapse might impose foreign exchange controls or capital controls; the memory and precedent of the forced gold sales of 1933; and the thought that a government floundering in deficits might start pilfering from IRAs and other pension plans.

But beyond those particular worries, and perhaps more important than any of them, is the sense that from here on, anything goes. The politicians will do whatever they find expedient, because there is no longer anything to stop them — not an electorate that is jealous of its freedoms and certainly not the Constitution, which is now just a playhouse for judicial imagineering. No one can know what’s coming next from the government and the financial system it has fostered, but for many of us there is an awful suspicion that we are not going to like it.

Most Americans still have yet to stick a single financial toe across the border, but more and more are considering it. Many, perhaps millions of toes are now twitching at the thought. Their owners want to end their absolute dependence on what happens in the US. They want to prepare for whatever is coming down the road, even though they don’t know what it will be. They want to be as ready as possible, even though their worries can only guess at what’s ahead.

Because internationalizing your financial life means dealing with the unfamiliar, the project can seem more complex than it really is, so it’s best to start with the simplest measures, even if by themselves they don’t give you all the safety you’re looking for. Even from a simple beginning, what you learn with each step will make the next step easier to plan. Start with the first rung on the ladder of internationalization. Then climb, at your own speed, to reach the right level of protection.

Rung 1: Coins in Your Pocket

Gold coins that you’ve stored personally give you something whose value doesn’t depend on the health of the US economy, doesn’t depend on any financial institution in the US and doesn’t depend on any US government policy. Gold coins are portable and hold their value no matter where in the world you might take them. They’re internationalization in a wafer. Safety cookies.

It’s best to buy the coins for cash, for maximum privacy. And there is a good reason to favor one-tenth-ounce gold Eagles. Gold coins mean readiness for troubled times; if you ever need to dispose of the gold in an informal market, it will be easier to do so with small-denomination coins that are widely recognizable and whose value matches the scale on which large numbers of people normally trade.

The premium on one-tenth-ounce coins (the price compared with the value of the gold content) is higher than on the larger coins — usually about 15% for the small coins vs. 5% for one-ounce Eagles. But the premium isn’t a dead cost, like a commission or bid-ask spread. The premium is a second investment; it’s what you pay for the packaging, and you can expect to recover it when you sell or trade. And in the circumstances when you would have the strongest reasons for thanking yourself for having bought some gold, the premium you paid will look like a bargain.

Rung 2: A Foreign Bank Account

On its own initiative, the IRS can freeze any bank account in the US without warning. The action might arise from mistaken identity, from an erroneous filing by some other taxpayer, from your failure to respond to an IRS notice in time or even from a postal error. And that’s what can happen without malice. Other government agencies have similar powers to act on their own, without giving you an opportunity to object in court. And any one of them might act against you for any of their specialized reasons — perhaps because someone resents your inattention to the needs of the migratory birds that visit your property or perhaps because someone thinks it would be fun to point to you as a terrorist, drug smuggler, arms dealer or child-porn merchant.

In principle, there are legal avenues for undoing a freeze or a seizure. But you’d need a lawyer, and being suddenly penniless could get in the way of hiring one.

A foreign bank account protects you from being trapped in such a nightmare. The US government can get to your foreign bank account eventually, because it can get to you. But a lightning seizure is very unlikely, because it would require a foreign government to override its own legal processes, which it generally wouldn’t be willing to do except in a grave emergency. So if your liquid assets at home were frozen, you would have cash outside the US to fund the legal cost of untangling the problem.

A foreign bank account is also a way to step back from the uncertainties of the US dollar, since the account could be denominated in another currency.

The US government has seen to it that Americans are no longer welcome customers at foreign banks. So forget about opening a Swiss bank account in your own name. However, if you apply in person (not by mail), you still can open a bank account in Canada. Be prepared to show your passport and to give the bank an original utility bill that confirms your place of residence.

Rung 3: Gold Abroad

The forced gold sales of 1933 were the work of an executive order signed by President Roosevelt. The purported legal basis for the order was the Trading With The Enemy Act, a legislative artifact of World War I. I have yet to find an explanation of how the authority for an order requiring Americans to sell their gold to the government at the government’s official price of $20 per ounce could be found in the Trading With The Enemy Act, but the fact that the enemy in question had gone out of business 15 years earlier didn’t seem to interfere with the legal logic.

The forced sale was a prelude to an increase in the official gold price to $35. The government’s reason for wanting that price rise was to gain leeway for a substantial, though limited, inflation of the dollar while keeping the dollar on the international gold standard. The forced sale was a way for the government, which operated in a political environment that still disfavored deficit spending, to capture the profit from the price rise. That profit would be a kitty for more spending without more borrowing.

Today there is no gold standard for the government to stay on. And deficit spending isn’t something politicians especially want to avoid; they’ve promoted it as a civic duty, to stimulate the economy. So the depression-era motives for a gold grab don’t seem to apply. Yet you can’t listen to a conversation between two gold investors without hearing the seizure topic coming up.

Are they just scaring each other? I don’t believe so. There are two potential motives for the government to again treat gold differently from everything else.

If the dollar’s slide in foreign exchange markets threatens to turn into a panic, the government might want to use gold sales to foreigners to mop up foreign-held dollars — in which case it might see a need to mop up the gold owned by its own citizens. That’s bad enough, but a second motive is a good bit nastier. At a visceral level, people who have centered their lives on government just don’t like gold. It’s an affront to the government’s authority to command and control and an insult to government’s supposed aptitude for solving economic problems. So disrespectful. From their point of view, every ounce purchased by an American is another tomato hurled at the political class. And the purchasers still constitute a tiny minority of the voting population. What could be more satisfying and convenient for the politicians than to kick sand in the face of gold investors for being such lousy citizens?

A new attack on gold ownership probably wouldn’t be a point-for-point reenactment of 1933. There are many weapons for mugging gold investors. It could be a prohibition on gold ownership coupled with a prohibition on sales of gold to foreigners. The only one left to buy would be the government, and being the only bidder, it would be a very low bidder. It could be a commandeering of privately owned gold, with token compensation like the $15 per day paid for jury duty. It could be a super tax, say 90%, on gold profits, which would get the job done slowly… or quickly if it were accompanied by a mark-to-market rule. Or it could be something none of us has thought of yet.

Not only can’t we know the shape of a future gold grab, we can’t know whether or how the rules would touch foreign-held gold. Owners of gold stored outside the US would be a minority of a minority. Their gold wouldn’t be the low-hanging fruit — it would be higher up in the tree and more trouble to get to. That’s why, in a casino sense, gold overseas is a different bet and a better bet than gold at home.

Maybe it will turn out that storing gold overseas won’t matter at all, in which case a little effort will have been wasted. And maybe it will turn out to matter a great deal.

To be continued tomorrow…

Regards,

Terry Coxon
for The Daily Reckoning

Protecting Your Assets from an Out-of-Control Government, Part I originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

I don’t know what the markets mean when they flock to dollars and yen (JPY), the two big dogs when it comes to debt creation. But it is what it is, so we carry on, and look for other things that make sense!

Like the Chinese buying eurozone government debt. I explained this all previously, but for those of you new to class, the eurozone is China’s largest export destination. Did that surprise you? I bet you thought it was the U.S. But no, it’s the eurozone.

China is making progress with its attempt to switch from being a country that depends wholly on exports to drive its economic growth, to one that shares the load of driving the economy with domestic demand, but they aren’t there just yet, and therefore, exports remain very, very important to the Chinese. Therefore, they cannot afford to lose their biggest customer.

And this is part of the plan, folks (China’s plan to replace the dollar standard). The Chinese have become the world’s financier, taking that away from the U.S., and they have also made big inroads to removing the dollar as the settlement mechanism — in terms of trade — by signing currency swap agreements with a boatload of countries.

These currency swap agreements allow China and the country with whom they are trading to exchange each other’s currencies and not use dollars, as the way it was done since the end of World War II.

Last year, I told you that the New York branch of the Bank of China had begun allowing deposit accounts in CNH, the new, deliverable Chinese currency. The account size is limited, but the idea of deposits was what stirred the drink, folks.

Now there’s word that the U.S. Fed had approved an application by ICBC (Industrial and Commercial Bank of China) to acquire retail bank branches in the U.S.  ICBC will pay $140 million to buy an 80% piece in Bank of East Asia USA.

People that should know better are not making a big deal of this, and saying things like, “This is too small to be concerned with,” and so on. But it’s a foot in the door, folks.

And just another baby step for China to remove the dollar as the reserve currency of the world.

OK, after going through all that, I see a news story go across the screen that says “China’s Sovereign Wealth Fund (SWF) Stops Purchasing European Sovereign Debt.” Let me try to break this down (and let this be a warning to the U.S.).

Obviously, China has bought enough European sovereign debt (ESD) to fill their desires. If The Chinese SWF can back away from its biggest customer, then it should have no problem backing away from its second-biggest customer (the U.S.).   I think that China will attempt to invest in Europe to help keep the ship afloat — they just won’t make a big deal of it.

OK, I didn’t mean for this Thursday Pfennig to carry on about China for the whole letter. So I’ll stop there, and return to our regularly scheduled programs.

The dollar’s mighty hammer stopped swinging so wildly yesterday, and in the overnight markets, we’re actually seeing a handful of currencies that are attempting to gain back some lost ground to the dollar in the trading days since last Friday’s jobs jamboree disaster.

The Norges Bank, Norway’s central bank, is meeting as my fat fingers fly across the keyboard. I don’t think the Norges Bank is going to cut rates today, so it will be interesting to hear what the Norges Bank has to say.

You see, right now, I’m not a fan of the Norges Bank, when normally I am a fan. What has soured my taste right now is the fact that the Norwegian economy and fundamentals are calling for higher interest rates.

But the Norges Bank has been struggling with a strong krone (NOK) (to the euro (EUR)) for some time now, and a rate hike would only make their struggle more difficult. But in Chuck’s world of “when I’m the head of a central bank,” I wouldn’t let those kinds of things bother me — especially if I were head of Norway’s central bank. They have oil revenue coming out of their ears, they have to offset the inflationary problems that oil revenues bring and they can do that with a combination of a strong currency and appropriate interest rate levels.

I see where global investors have given Fed Chairman Big Ben Bernanke a 75% approval rating. Of course they did! Big Ben has been responsible for keeping the stock market ship out to sea with his quantitative easing, and ZIRP (zero interest rate policy). Of course, with this highest rating for the Fed chairman comes the EXPECTATION that he take further action this year to accelerate a revival in U.S. financial markets.

I wonder what these people will say in a few years when we see the unintended consequences of Big Ben’s policies. I doubt they give him a 75% approval rating then, but on the other hand, maybe they will, for we could be talking about QE4 or QE5 or QE10!

The price of oil seems to have found a bid at $96, as it has held that figure for three consecutive days now. The petrol currencies of Norway, Canada, Russia, Brazil, the U.K. and even Mexico will breathe a sigh of relief if $96 is the bottom for this sell-off.

While I like seeing the price of oil lower, I know in my heart of hearts that this sell-off was overdone. You see, it all started with the Jobs Jamboree disaster last week, and has continued until reaching $96. That’s a fall of $8 in a week. Talk about overdone!

Gold had a very interesting day, as the price dropped, recovered, dropped, recovered and finally gained a bit. When I see this happening, I think that the “price manipulators” are being matched by the Chinese and Indians taking advantage of the cheaper price. And talk about a sell-off being overdone! But when the “price manipulators” smell blood, they attack, and attack they did this past week. I would love to give these “price manipulators” my version of Jackie Gleason on The Honeymooners. One of these days, price manipulators, to the moon!

The eurozone has approved the next scheduled payment to Greece. There was some thought going around yesterday that eurozone leaders would hold up the payment, as penalty to the Greeks for attempting to elect an “anti-euro” government. Of course, that government didn’t have enough seats and couldn’t put together a coalition that worked, so it dissolved, and the Greeks will have to vote again.

There are renewed calls for Greece to leave the euro. I still don’t think that will happen, as the problems for Greece would multiply, not be reduced, by leaving the euro and going back to the drachma. But hey, that’s never stopped leaders of a country from doing stupid things before!

I would think the euro would be better off without the baggage in the long run.

The Swiss franc (CHF) continues to be strong. Not as strong as a year ago, but strong, nevertheless. And that’s killing the Swiss National Bank (SNB). The cross to the euro remains stuck at around 1.2015 — spittin’ distance to the floor set by the SNB last September. I’m surprised that the markets haven’t tested the SNB’s resolve here. But they haven’t, so life goes on in Switzerland.

The Bank of England (BOE) just ended their meeting today and left rates unchanged. No surprise there — what can they do? They’ve cut rate to the bone, they’ve increased their version of QE/ bond buying… yet the economy does a double dip in the recession pool..

I told a small group of people yesterday that just like the euro and dollar are an ugly contest, so too is the British pound sterling (GBP) and the euro. And here, the euro loses. But really? Investors think that things in the U.K. look better than in the eurozone? Really? Maybe they are, but I sure would be looking elsewhere in Europe. (Remember, Norway, Sweden, Switzerland, Poland, Hungary and the Czech Republic don’t use the euro!)

Then one of my fave reads on Bloomberg is the author and columnist Caroline Baum. She always makes sense to me, and you don’t find many writers on economics that do that! Her latest column on Bloomberg is about the labor picture here in the U.S., titled “Government’s Snake Oil Won’t Cure Jobs Ailment.”

In the column, Ms. Baum talks about how the jobs problem could be structural. “What if the Fed, through all its efforts, can’t buy more employment? What if unemployment is structural, with an inadequately trained workforce or labor immobility preventing employers and job seekers from hooking up? Signs are pointing in that direction.”

She goes on to say: “Structural unemployment, like the nation’s other fundamental deficits, is a tough challenge for policymakers all around. Jobs are a big issue in the presidential election. No elected official wants to see the public suffer, financially or emotionally, from being unemployed. There a strong desire to do something even if nothing is the lesser of two evils.

“On the fiscal front, attempts to correct long-term structural imbalances with short-term tax-and spending are doomed. Cyclical medicine leaves the patient with more debt and the same old ailments.

“What happens if the monetary authority misdiagnoses the cause of high unemployment and uses its usual tool, the printing press, as a cure? For the same money, the Fed will buy itself more inflation and less growth. That’s the sort of jolt the economy can do without.”

As I’ve said since the financial meltdown and the jobs problem began, that a lot of those jobs were not going to return. It appears that I hit that one bang on.

To recap: A few of the currencies are showing some life this morning, while the majority are still under the spell of the dollar and the flight to safety that began after the Jobs Jamboree disaster last week. China gets approval to buy a U.S. bank. Another baby step, folks. The Norges Bank meets today and will probably follow the lead of the Bank of England and leave rates unchanged. And we have a special treat with a snippet of a column by Caroline Baum!

Chuck Butler
for The Daily Reckoning

China Stops Buying Eurozone Debt originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Both of these elections couldn’t have gone any worse for the euro. France’s new leader, Francois Hollande, ran on an anti-austerity platform, and for now, that will carry a lot of weight with traders and investors as far as wanting to take on euro exposure. Of course, history tells us that eventually Hollande will see things along with the Germans. But maybe, and here’s that phrase I dislike, “this time’s different.”

Greece still hasn’t formed a government, so talk about a screwed-up country! Sorry, I don’t mean to insult anyone that’s Greek, but come on, the country had a government that was doing the right things, bringing their excessive deficit spending down, but the pain apparently was too much for the citizens. I’ve got news for them: That pain was nothing compared with being bounced out of the euro!

With the Big Dog (euro) getting hung out on a line, the footing for the currencies has been very slippery. And with the proxy for global growth, Australia — seeing their central bank debase the Australian dollar (AUD) — the rest of the commodity currencies are also in search of terra firma.

Gold and silver have really seen heavy selling, but by whom? We’re not seeing it here on our metals desk, but we’re not a “bullion bank” or big-swinging metals dealer, so maybe they’re seeing something different.

U.S. stocks are getting their due, too, dropping four days of the last five. This has people running to U.S. Treasuries again. Oh, by the way, the U.S. Treasury will auction $72 billion worth of new Treasuries this week. The U.S. government is doing their best to provide job security for the Treasury people. In the first six months of our fiscal year 2012, the U.S. government has spent $1.84 trillion.

For comparison of numbers purpose only, for the entire year of 2001, the U.S. government spent $1.86 trillion, which happened to be an all-time record at that time! But this current group will double that all-time record of 2001 this year.

Speaking of 2001, I gave a presentation this past weekend to a group of people who had no idea who I was! Give or take a couple of current Pfennig readers, it was a new group that would hear things they hadn’t heard before. A lot of them signed up to read the Pfennig, so welcome to you!

The thing I was going to talk about, though, was I showed them the U.S. Debt Clock of 2001, when our national debt was $5.7 trillion, and then showed them the Debt Clock, circa 2012: $15.7 trillion! The U.S. government has increased the national debt by $6.7 trillion in the last five years, but the previous five years weren’t exactly good, as the debt increased $3.3 trillion.

I also told them that in 2001, Chuck had more hair, less weight and few believers.

OK, I’ve got to go on to something else before I explode here and begin throwing things! How could we as a country allow our leaders to do this to us, our kids and grandkids?

But right now, everyone wants to take pot shots at the eurozone debt crisis, and not pay any attention to the U.S. debt crisis. Look, the eurozone, as a whole, and the U.S. each contributed about 20% to the global GDP last year, so it’s not like we’re comparing apples to oranges here. Both of these problems are nothing to ignore.

The brightest shining star of the eurozone, Germany, saw their industrial output jump 2.8% in March from February, which was three times the consensus forecast. And February’s -1.3% decline was revised upward to finish at -0.3% — much better — and suggests to me that Germany probably skirted by the recession gauntlet.

It looks like Australia is going to turn their modest budget deficit of $44 billion into a budget surplus next year. And with that news, the Aussie also announced that bond sales would decrease by 80%!

Remember when I told you that I had the feeling that Australia was becoming the new Switzerland? Well, if they can pull this off at a time when a lot of countries are finding it difficult to live within their means, then a big feather will be in their cap! And think about this: Reducing their bond sales will make the rest of the outstanding issues more valuable. Or at least that’s what I learned from the guy that taught me all about bonds, my friend, Ed Bonawitz.

Now Australia’s kissin’ cousin across the Tasman, New Zealand, is going in the opposite direction with their Budget. The New Zealand budget deficit widened in the nine months through March, to NZ$787 million. Of course, NZ$787 million isn’t exactly $1.2 trillion, but New Zealand is much smaller than the U.S. So that goes back to my thought on comparing the U.S. to the eurozone.

The New Zealand dollar/kiwi (NZD) has really shown some weakness lately, as it no longer can cling to the coattails of the Australian dollar. And now this budget deficit isn’t going to sit well with traders.

But hey! The Japanese yen (JPY) is securely back on the rally tracks! See how mixed-up the investing world is these days? Japan’s debt is beyond the atmosphere, the U.S.’ debt is up to its eyeballs but investors seek out these two when the risk takers head for the hills.

The Chinese renminbi (CNY) has been bouncing back and forth in a very tight range lately. Today, the renminbi is a bit weaker, but that’s a tiny move in the renminbi world. A week has gone by since the U.S. Treasury Secretary Geithner was in China to urge them to do things more like the U.S. Hopefully, the Chinese will continue to ignore the calls by the U.S. to do things more like them.

Years ago, when it was fashionable to kick the Chinese for our trade deficit, when all they did was sell us stuff that we ended up buying. I told you all that the currency level of the renminbi was not going to correct our trade deficit. Our financial meltdown took that task on and reduced it by a large amount, but the trade deficit remains a problem. Why? Oil. Go ask the OPEC members how many dollars they have in reserve from their oil sales.

Why doesn’t the U.S. Treasury secretary sit down with the OPEC members and see if he can get them to change the way they do things? He’s tried it with China on numerous occasions.

I don’t mean to kick sand in the Treasury secretary’s face. I’ve talked enough about his past at the New York Fed before and after the financial meltdown that I won’t bore you with repeating all that.

The Singapore dollar (SGD) continues to remain strong. The Monetary Authority of Singapore (MAS) gave the wink and nod for further S$ strength, so when the Chinese renminbi decides to stop trading in a range and get back on the rally tracks, the S$ will follow along.

I see the British pound sterling (pound) continues to surprise me with its strength. Remember, I told you that the U.K. had gone for a double-dip recession. The Bank of England (BOE) had decided to add to their bond buying (stimulus). But the pound hangs tough. I guess right now it’s good to not be the euro.

The U.S. data cupboard is pretty empty today, so there’s nothing to look for to drive the markets this morning. I guess they are on their own!

Then, in keeping with what I talked about above, regarding history with French and German leaders, German Chancellor Angela Merkel told reporters ahead of a meeting that she’ll have with France’s new leader, Francois Hollande, that the fiscal pact is not up for renegotiation (from AFP):

“Merkel said Hollande would visit the German capital shortly after his inauguration as president, expected to take place on May 15, without giving a date for the much-awaited meeting.”

“The German chancellor irked Hollande by openly campaigning for his rival, Nicolas Sarkozy, who comes from the same conservative political family as Merkel.

“During the campaign, Hollande won few friends in Berlin by criticizing Merkel’s insistence on austerity as the way out of the eurozone debt crisis, seeking to shift the focus to growth.

“But Merkel told reporters that both budgetary consolidation as well as growth was necessary in Europe and reiterated that the EU’s fiscal pact — aimed at reducing ballooning deficits — was not up for discussion.”

This is not what the euro needs right now — or the eurozone, for that matter! They need a united front to implement austerity measures to get deficit spending under control.

To recap: The risk takers have all headed for the hills. Stocks, currencies, commodities including gold, silver and oil, are all down. And U.S. Treasury yields are falling again. German industrial output was very strong in March, and February’s number was revised upward, thus suggesting that Germany will not go into recession. Australia announced that they will have a budget surplus next year and reduce bond issuance by 80%! And the Japanese yen continues to run alongside the dollar.

Chuck Butler
for The Daily Reckoning

Elections Throw Euro Under a Bus originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".