Fun With Numbers

Today’s Pfennigfor your thoughts…

Good day.  And a Tom Terrific Tuesday to you!

Well, no fireworks this morning in gold like yesterday’s major whacking.  No five tonne sales on the Shanghai Gold Exchange )SGE) this morning and no 7,600 short contracts on the COMEX.  I had a dear reader send me a note yesterday asking me who bought the five tonnes of gold that were sold since there always has to be a buyer and a seller. Good question!

That my friends is the problem as I see it with gold. It’s not transparent in its trading, which is something that I pointed out in yesterday’s missive on the Chinese Gold announcement.  The Chinese didn’t include their purchases of gold, which they didn’t want to be public. So, looky there! Without the market moving trades, gold is up $10 this morning. Hmmm. Would that be a bone the price manipulators are throwing us to make us forget yesterday happened? Sure appears that way to me!

The dollar overall is a bit softer this morning and not swinging its mighty hammer. The currencies for the most part have a small gain. There are no Fed members scheduled to speak today and raise everyone’s hopes that interest rates are rising to support the dollar. Nor is there any data to support the dollar today. We could see this drifting go on the rest of the day.

For the second consecutive day, the New Zealand dollar (kiwi) is the best performing currency overnight. I’m told by a trader friend in New Zealand that this is the continuation of a short squeeze that began the night before after Prime Minister Key made comments about how kiwi had dropped more than expected and that the economy was still strong.  I do have to remind you that the Reserve Bank of New Zealand (RBNZ) meets tomorrow night (Thursday morning for them) and most economists believe that the RBNZ will cut their OCR (Official Cash Rate) by 25 Basis Points (1/4%). All this euphoria in kiwi the past two nights could very well be wiped out in one fell swoop by the RBNZ tomorrow night.

Across the Tasman, the Aussie dollar (A$) isn’t faring as well as its kissin’ cousin, kiwi. The A$ is flat to up a small bit this morning, just like yesterday, as the pull from kiwi is strong and overcoming what was said in the Reserve Bank of Australia’s (RBA) last meeting minutes. Things like: The A$ is still too strong, and growth has probably slowed in the last quarter.  And to follow that up, RBA Gov. Stevens will be speaking this evening in Sydney. We will see 2nd QTR GDP print in Australia today. Right now, it is expected to rise 0.8% versus 0.2% the previous quarter… and year on year to rise to 1.7% versus 1.3%.  I don’t see those numbers “slowing down” as the RBA suggested in their meeting minutes, but they’re closer to the action than me. HA!

A currency that I don’t talk about much, because there’s not a lot to talk about, the Mexican peso, is touching a 16 handle this morning. In 1998, I was in Cancun, Mexico, and the peso was 10. I have to say that the President that took over a couple of years ago, with much promise and renewed hope for the Mexican economy, has failed miserably. But then how did he know that the price of oil would drop like it did, thus reducing the revenue for the gov’t owned oil sector?

But you can’t place all the blame on the drop in the price of oil, here. And besides one of President Nieto’s reforms was to go public with the oil sector, so the revenue would have been reduced to tax receipts any way.

The euro is a bit stronger this morning than yesterday morning. But it’s like removing a bucket of sand from the beach. Nobody notices.

Apparently the Greek debacle still hasn’t gone away for now. The Greek Parliament will vote tomorrow on civil procedures and bank resolution directive. In other things going on in Greece, the Greece gov’t is working on a moratorium for foreclosures of private residences, pension reforms and a whole host of other things that have to be worked out per their agreement.  I found it interesting last week that friend, Bill Bonner, from the diary of a rogue economist letter, said that he “wasn’t buying the Greek Austerity Myth“.

You can always depend on Bill to look at things differently. As everyone is looking at Greece’s inability to pay their loans, Bill says, well, they aren’t going to carry through the Austerity measures any way!

On a sidebar. I saw this in this past weekend’s email edition of The Daily Reckoning and laughed out loud, so I thought I would share it with you:

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Moving along… I did want to mention that we are observing a 10 year anniversary for the renminbi.

Yes, it’s been 10 years since the Peoples Bank of China (PBOC) announced that they were dropping the peg to the U.S. dollar, revaluing the renminbi upward by 2%, and that the renminbi would now be pegged to a basket of currencies.

No one ever really knew the true identity of the currencies in the basket, but most observers believed that the basket consisted of the SDR (special drawing rights) currencies of the dollar, yen, euro, and pound.

I find it now to be quite interesting that the Chinese thought to peg their currency against the SDR currencies 10 years ago. For 10 years later, they are optimistic that the renminbi will be added to the SDR currencies by the IMF in October.

The Chinese weren’t that good at seeing 10 years into the future were they? Well, you can either think that they are that good, or that it was just dumb luck. I think I’ll choose what’s behind door #1.

Let’s go back 10 years and see what’s happened in China in the past 10 years:

1. The economy is 5 times larger than it was in 2005…

2.  …and has surpassed Japan and Germany to become the 2nd most used currency for trade finance.

3. The stock market has opened up to foreign investors

4. The bond market has opened up around the world

5. More currency swaps have been signed

6. The renminbi has appreciated 34% in the 10 years since the drop of the peg

And then a final observance, the Chinese are making big strides toward a floating currency system for the renminbi, and making good progress in my opinion.

You know, come to think of it, could it be this year?

Think about that for a minute. It was 1995 when China first pegged the renminbi to the dollar. 10 years later in 2005, the Chinese dropped the peg to the dollar and pegged the renminbi to a basket of currencies. And 10 years later? Interesting don’t you agree?

Well, we’re getting into the dog days of summer not only for baseball, but for the currencies. I can tell you that historically, this time of year going into and through August, is a very slow time for the currencies and metals given that most traders in Europe go on vacation.

And looky here, that’s what I’m doing! But I’m no longer a trader. But I still act like one, and I’m going on vacation! But the most important thing here is to recognize that this will be a slow period for the currencies and maybe even the metals.

Well, the U.S. data cupboard is bare again today, but they do have something for us to kick around later this morning.

First let me set this up. Those of you who have been keeping score know all too well how badly the U.S. Industrial Production and Capacity Utilization reports have been this year. Well, today, the U.S. accountants get to make revisions to those weak numbers.

That’s right, this is officially, “Revisions to U.S. Industrial Production and Capacity Utilization, Day.”

So, we all know how weak those reports have been so far this year, so guess what the revision will tell us? Go ahead, you don’t have to wait for the actual print of revisions to tell you. They’ll find a way to revise them upward, that’s a given, right?

If at first you don’t succeed, try again, right? Isn’t that what the U.S. government did for GDP last year? They didn’t like the results of the weak GDP, so they found a way to goose it higher? I call it Fun With Numbers!

And I said above that gold was up $10 this morning. A bone, I call it.

And regarding the whacking that gold took yesterday that started with the relatively low total of gold reserves that China said they had, compared to what observers that count the SGE withdrawals and production numbers thought China had, I saw this quote…

David Marsh, from the monetary forum OMFIF, said, “China would risk unsettling the world gold market if it revealed bullion reserves of 2,000 or 3,000 tonnes. This might be interpreted as an unfriendly move against the dollar at a ‘delicate time.'”

I received this from the GATA Folks.  And I thank Ed Steer for making that happen for me. I want to make certain everyone knows that Ed is well, and still posting a daily letter on metals. You can find Ed here.

Here’s Tocqueville Asset Management’s senior portfolio manager, John Hathaway, as he writes:

We and others have commented at length about the contradictions between the markets for paper (synthetic) and physical gold. The declining price of paper gold quotes in NY and London doesn’t square with worldwide physical flows that reflect demand far in excess of mine production.

It appears to us that gold positions traded in London and New York among bullion banks, high-frequency traders, hedge funds, and commodity traders constitute highly levered derivatives with only distant and notional relationships to the physical substance.

The power of synthetic gold markets (COMEX in New York and over-the-counter in London, in conjunction with the London Bullion Market Association fix) to determine gold prices could start to ebb as physical gold migrates to Asian financial centers.

A bit of history is instructive here: The collapse of the 1960s Gold Pool, the aforementioned secret and collusive effort by seven central banks to keep a lid on the gold price, preceded a most difficult decade for financial assets.

A lesson to be learned from the 1960s is the unpredictability of government actions, their inherently anti-free-market nature, and the unintended consequences that can arise from them.

The Gold Pool was, in retrospect, a clumsy attempt by Western democracies to disguise the deteriorating fundamentals of the U.S. dollar stemming from the Vietnam War, rising inflation, and the weakening balance of payments.

The dollar had been pegged to gold at $35/ounce since the end of World War II, a number that proved too low in light of the changing fiscal realities for U.S. sovereign credit caused by the escalation of the Vietnam War and the introduction of large scale welfare policies under the umbrella of the Johnson administration’s ‘Great Society’ initiative.

In retrospect, the scheme was clumsy because the manipulation of the gold price was accomplished by the exchange of physical gold for dollars held by foreign creditors who saw the writing on the wall. The objective of the Gold Pool was to disguise reality.

In the long run, that price-suppression scheme did not work. The failure of the Gold Pool of course was resolved by the suspension of dollar/gold convertibility in 1971. When free-market gold trading resumed in 1974, the gold price rose by nearly 20 fold over the next eight years.

Chuck again. Love those history lessons when it comes to this stuff, because you know what they say about how if you don’t learn from history you’re doomed to repeat it.

I love these guys that have just about everything to lose that come out and talk about the distortions in the pricing of gold. You’ve just gotta love ’em!

That’s it for today. I hope you have a Tom Terrific Tuesday.

Regards,

Chuck Butler
for The Daily Reckoning

P.S. The Daily Pfennig is first published everyday, right here.

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