Gold Falls Below $1,200

Front and center this morning, gold is retreating again today and has fallen well below $1,200… Here’s the skinny… Yesterday, it was announced that China’s Agricultural Bank of China reported a very successful public offering, raising more than $22 billion. Now, what does this have to do with a gold sell-off, I hear you saying? Ahhh grasshopper… Come, sit, let’s discuss…

Basically, it’s like this… If a Chinese Bank can pull off a very successful IPO without breaking a sweat, then the daggers can be put away on global risks, and that could be seen in the performance of equities all across the board yesterday.

So… Where does gold go from here? Well… I would have to think that the selling has been overdone, probably some real big profit taking was mixed in, and we should see buying emerge from this sell-off. In the recent past, $1,200 has been a launching pad, and the time gold has spent below $1,200 has been brief… So, this would qualify for a dip, eh?

Overnight there was a statement from China about how they are looking at either buying more gold or selling, due to the cost and the lack of interest payments. Hmmm… Sounds like they are trying to make a big purchase and want to see the price of gold fall so they can buy it cheaper… But then again, that’s just how I see it!

OK… Like I said at the top… Tuesday was a good day for the currencies, led by the Big Dog, euro (EUR), which climbed to 1.2640 on the day… This in the face of more and more analysts that believe the euro will return to parity versus the dollar this year. I’m not in the camp… For those of you keeping score at home!

The currencies have backed off from their lofty levels of yesterday, as the risk dominance has backed off. For instance, US stock futures are down considerably before the market opens this morning. It’s difficult to say just what turned this all around overnight, but it has turned… And once again, the currencies and risk assets are not able to put back-to-back strong performances together…

I would say that the poor-excuse-for-a-Nobel-Prize-winning-economist (in my opinion) Paul Krugman, put the scare in the markets, but that would be giving him too much credit!

Long-time readers know that I’ve been on the opposite side of the fence from Krugman over the years, and this time is no different… Yesterday, in an interview with Bloomberg, Krugman said that the “US should have a kitchen-sink strategy that uses all fiscal and monetary policies possible to prevent the economy from sliding back into a recession.” He went further to say that the “US should increase its quantitative easing”…

Now… I agree with him when he said, “we are in a deep hole here”… But, as opposed to Krugman… Isn’t it time we stop “kicking the can” down the street? Sooner or later we’ll have nowhere to kick the can, and then what do we do? Like in the old days, we need to take our medicine, even if it tastes horrible… But in the long run, we get healthier… Think about that… As opposed to following the likes of Krugman and his band of can kickers…

I received a note from a reader yesterday, asking me if unemployed workers would accept lower wages… Would it be conceivable for US businesses bring the work back to the US and could that put us on the way to a recovery in the economy and jobs?

Well… I guess you could get there with that… But it’s more than the wages, folks… And trust me, those wages are a HUGE hurdle to jump over… But it’s more than wages… It’s the over burden of taxes, and the fees, rules, regulations, paperwork and demands that the government keeps imposing on small businesses, which are the growth engine for jobs. The whole shootin’ match is geared toward Big Business…

Do you think that some people have their priorities mixed up, in the government?

OK… Enough of that!

I just glanced over at the trading screens, and noticed that the Canadian dollar/loonie (CAD), and the Swiss franc (CHF) are trading at the same level versus the dollar! In dollar terms, or “American style,” if you will, they are both trading at $0.9440… You just don’t see that very often. But I guess when you think about it, these two should be trading side by side, as they are the both the main drivers of currency strength versus the dollar, these days!

Speaking of the loonie… It had recently been sitting out a few songs, but got back in the conga line yesterday as the price of oil firmed, and the price of copper rose, leading commodity prices higher…

In Australia… The Aussie dollar (AUD) saw a strong performance yesterday. The hawkish tone of the Reserve Bank of Australia’s (RBA’s) policy statement after leaving rates unchanged, was the push for the Aussie dollar. Today, we’ll see the latest labor report from Australia. In recent months, the jobs data has consistently surprised to the upside each month, so it’s not like going out on a limb to say that I expect the job creation to be better than the +15,000 that’s forecast.

Long-time readers know that I’ve always considered the Aussie dollar as the proxy for risk… So following the fortunes of the Aussie dollar is a good indicator as to whether it’s a risk on, or risk off day… Today… The Aussie dollar is down a 1/2-cent… So, there you go!

A currency that I haven’t mentioned in a while, the Brazilian real (BRL), continues to perform nicely versus the dollar. Yes, it has some wild swings, but over the years, we saw the same thing from the South African rand (ZAR)… Wild swings, very volatile moves… But at the end of eight years, the rand is one of the most profitable currencies.

In Brazil, the central bank continues its attempt to keep the real weaker than the markets would take the currency. Most of its attempts have only weakened the real for a short period of time, only to see the real gain back its lost ground. The real could also be a proxy for risk, if it weren’t tied to the “emerging markets” tree… I’ve explained this before, that an “emerging markets currency” gets thrown in with all the others considered to be “emerging markets currencies” no matter what is actually going on in their own country. In other words, they all get thrown into a barrel and thrown over the waterfall!

So… Be careful with reals… It should really only be a part of the “speculative” portion of your portfolio…

The Norwegian krone (NOK) got whacked really bad overnight, after spending most of yesterday with at 6.37 handle, it’s back above 6.43… (Krone is priced as a European-style currency, which means the larger the number, the weaker it is versus the dollar)… Manufacturing in Norway fell -0.09% in May, and that won’t bode well for those looking for another rate hike here… And that has weighed heavily on the krone overnight.

Well… The long awaited “bank stress tests” in the Eurozone are going to be on the agenda of the European Commission today. The Commission will reveal the methodology of the tests, with the results being produced on July 23… I don’t think these will amount to anything, folks… I mean, did the US bank stress tests amount to anything? I don’t think so… This is nothing more than a tempest in a teapot as far as I’m concerned…

Then there was this… I read this in the LA Times… “US car buyers turned out to take advantage of discounts and special financing offers early this year, but when the deals ended, auto dealers’ showrooms emptied out. Product recalls and concerns about a possible double-dip recession have cut consumer confidence, and auto industry analysts are lowering their sales forecasts for 2010. On top of declining showroom traffic, fleet sales are dropping off.”

I can tell you one of the big reasons these car sales are slipping… I went to price a new car for my beautiful bride, and could not believe that the prices are still so darn high! I thought, that car dealers would be discounting prices by now… But NOOOOOOO OOOO… And so, they have to lower their sales forecast for this year! You have to be able to adjust, improvise, change, to remain a growing business, and apparently, the car guys don’t get it… Unless the government gives them our money!

To recap… The currencies had a great day on Tuesday, but have given back some of the gains overnight, as risk has been taken off the table once again. Gold is below $1,200, which has meant a buying opportunity in the past.

Chuck Butler
for The Daily Reckoning