Chuck Butler

Gold received some roughshod treatment on Friday from traders and investors who once horded the shiny metal… And all because of rumors going that China MAY raise their interest rates to cool their economy… That’s called applying the brakes… But will it apply the brakes on global growth, or even growth in China to the degree that called for a $43 dollar slide in gold on Friday? I don’t think so! But, that’s what happened, so you go to the ropes, do the rope-a-dope, and try to get through the round, right?

So… I guess the thought that China is trying to slow down (HEY! This would not be their first rate hike, or other method to slow down their economy!), is just too much for the commodity guys. Just look at the Reuters/Jefferies CRB Index of 19 raw materials… It lost more ground on Friday that it had in any trading day in 18 months! So, is this the end of the commodity bull market? I hardly think so, folks… Haven’t we seen sell-offs in gold in the past 10 years, during its bull market run? Yes, siree Bob, we have! And didn’t they eventually become tiny items in our rear view mirror? Yes, siree Bob!

In addition, news that China’s four biggest banks have stopped extending new credit to developers for the rest of the year and the total credit available to the property sector will be cut by 20% next year also weighed on the risk assets… So, Friday was definitely a risk off day, and this morning is looking like Friday will carry over… UGH!

So… With all the commodities taking a shot to the mid-section, causing the commodities to lose their air, the commodity currencies got tarred with the same brush… So, the likes of Australia, New Zealand, South Africa, Canada, Brazil, and Norway, all were sold.

This morning, gold is off another $3.50, so the selling hasn’t stopped…

The euro (EUR) this morning is feeling the effects of a stronger dollar, and…more problems for Ireland… It now seems that Ireland is mulling around the thought of using the Euro-Fund, which was created last winter/spring to keep the Eurozone members from having to go to the IMF, and keep it all “in the family” OK.

The dollar buying ran so deep on Friday that even the Chinese renminbi (CNY) got sold. And, you should have seen the bets being taken off the currency… I’ve explained this before, but for those of you new to class… The Chinese renminbi is not a fully convertible currency, with limited liquidity, and is traded on what’s called a “Non-Deliverable Forward”, which means all trades in renminbi must be settled in dollars, and it can’t by title be delivered anywhere. The Chinese government sets the daily trading range on the renminbi based on its relationship with a basket of currencies. (No one really knows what currencies are in the basket.) So… the markets can’t dictate the “spot price “ of the renminbi like it can other currencies. The only thing the markets can play with is the “future level” of the renminbi… And this is where it becomes so costly to do business in this currency, because the markets get completely out of hand, driving the price of the renminbi higher, based on their prognostications for the renminbi.

Well… Those bets for outrageous currency appreciation were reduced last night… I really did think the markets were getting ahead of themselves here, but… They are the markets; they are never wrong!

While I’m on China… And I realize the China talk is getting long in the tooth this morning, but this is important to talk about, even The Economist thought it was important to talk about! Here’s a snippet from The Economist…. Chinese rebalancing alone wouldn’t fix US economy…

US President Barack Obama didn’t say anything untrue when he criticized China at the Group of 20 summit, but his comments open the US to a charge that it is behaving irresponsibly, according to The Economist. The US has played a major role in bringing about the economic imbalance that Obama blames on China. “The ultimate American goal should be a sturdy economy,” the magazine notes. “Chinese rebalancing, absent reforms in America to increase savings and facilitate growth in export industries, will leave the American economy short of this goal.”

OK… The data cupboard has October retail sales for us this morning. The retail sales numbers/reports lately have been good, which makes me so curious as to how…right? But, I guess, we’ll just go with it… My beautiful bride was out shopping yesterday for almost 10 hours! Christmas shopping… YIKES! The Butler Household Index will be flying off the scale next month! But for this month, I have to say that once again, I think retail sales will be good… The spending is picking up by consumers… I told you it would, 22% unemployment or not, US consumers cannot sit on money. They would rather spend it than to watch it earn 0.10% and then have to pay taxes on that measly amount! I bet when we get the Personal Income and Spending it’s going to be like old times with the spending far outpacing the income.

In New Zealand overnight, their retail spending for September was stronger than expected, moving up 1.6%… That’s a strong move, folks… and I hope the Reserve Bank of New Zealand (RBNZ) noticed! I doubt it, though. The RBNZ gave their latest assessment on the economy last night, and delivered a sober medium-term assessment for the economy, in their The RBNZ Financial Stability Report.

New Zealand has had a tough row to hoe lately, having to deal with an Earthquake, diseased kiwi-fruit vines, and they always have a central bank Governor (Bollard) who is Mr. Downbeat on the currency… But, I do expect the sun to shine on New Zealand again, as winter is now over, and spring will bring about a rate hike or two in 2011 from the RBNZ.

I’m sitting here, typing and reading stuff, and I get the feeling that somehow G-20 is going to make this sell off in commodities – and that includes food prices – into something that they take credit for… After having not done diddly-squat at their meeting! Oh well… Who cares, I guess I should say, eh?

Treasury yields continued to rise on Friday, with the 10-year at 2.83% this morning… Hmmm… Once again, this could be the beginning of the popping of the Treasury bubble, but… I doubt it, as the Fed will be buying $600 billion of Treasuries in the coming months… And these higher yields are needed to attract foreign investors… And for now, the higher yields are supporting the dollar rally.

Then there was this… I’ve been doing a lot of reading about the latest round of Quantitative Easing (QE2) by our esteemed (NOT!) central bank… I came across this and thought it played so well with my dislike for QE… Nearly a century ago, the great economist Ludwig von Mises observed that massive central bank easing is invariably a form of cowardice that attempts to avoid the need to restructure debt or correct fiscal deficits, avoiding wiser but more difficult choices by instead destroying the value of the currency.

To recap… The dollar is in favor this past week, and that continued on Friday, especially against gold, as the shiny metal sold off $43. China is rumored to be ready to hike interest rates to cool their economy, and the thought of China cooling their economy was too much for commodity traders, and the commodity currencies. Treasury yields continue to climb higher… Is this the bubble popping before our eyes? Now with the Fed ready to buy $600 billion in Treasuries in the next few months…

Chuck Butler
for The Daily Reckoning

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