Last Chance to Buy Gold Below $1,700?

Yesterday morning, I received an email from a currency dealer telling me that China had announced a large stimulus package for their slowing economy. But then there was no other reporting of such stimulus. I scoured the newswires and couldn’t find even a mention of stimulus. So either this dealer knows something that no one else knows or received some bad intel. But I believed it, hook, line and sinker, for this is what I’ve been waiting for. Yesterday, I looked out at the one-year forward points and couldn’t believe my eye! One-year forwards, which on a nondeliverable forward like Chinese renminbi/yuan (CNY), is as much speculation as it is interest rate differential. And the speculators are seeing the renminbi/yuan much weaker in a year from now. Really? I thought. Really? I’m not buying into that thought. But that’s what the speculators have pushed the forward rates to.

So the currencies kind of drifted yesterday, with no real conviction to move higher, and just a slight bias for them to move lower. As I said yesterday, there wasn’t much in the way of data, anywhere in the world, so the currencies and metals were left to trade on their own merits. And these days, that’s not good enough to move higher, apparently!

This morning, the euro has moved higher, to 1.2550. But the Australian (AUD) and New Zealand dollars (NZD) are both seeing weakness. Which is further proof to me that no stimulus in China was announced, stealthwise or not. Otherwise, these two currencies would be stronger this morning. The euro got a boost when Spain announced that their auction of bonds this morning went well and borrowing costs fell to a four-month low.

Last week, I told you about how September would be chock-full o’ event risks and didn’t even mention the Big Kahuna of a Fed meeting will take place the second week of September. And it should, in my opinion, hold the announcement of additional stimulus. You see, not a lot of people catch onto these things, but just as you can’t sneak the sun past the rooster, you can’t sneak these things past me! The thing I’m talking about is the statement in the FOMC meeting minutes from August that unless the economy showed strong progress, additional stimulus would come “fairly soon.” Folks, they basically told us that it would come at the next meeting!

By doing this in September, they hope to not look political. So there! And for anyone caught by surprise next month at the Fed action, they obviously weren’t listening to the Fed heads, or reading the Pfennig! And all the talk by hawks like Plosser and Fisher, which should be the voices of reason, are not the consensus of the FOMC. So when you read a statement from a Fed head that’s a hawk, you might be moved to think that no additional stimulus is in the cards. And if you agree with Goldman Sachs, you’ll come to that same conclusion.

Goldman recently issued a statement that goes, “Our best estimate is that it will take until late 2012/early 2013 before Fed Officials return to balance sheet expansion.” So, folks, this is really a conundrum for the markets. Will they or won’t they? I lean toward what I always fall back on. My thought that the Fed heads “feel” like they need to stimulate the economy and that the “fairly soon” comment is like smoke. You know what I always say: Where there’s smoke, there’s fire.

I saw this in The Washington Post and thought it played well with my thought that while austerity plans and implementation slows down an economy short term, they do not put a lid on economic growth further down the road, due to the fact that the government has less debt to deal with. But here’s The Washington Post from this past weekend:

“In Ireland’s case that has meant a jump in employment late last year, a smidgen of new growth and success in persuading global investors to buy several billion dollars of long-term government bonds in July. Portugal has not done as well, but its exports are growing, budget targets are being met and growth is expected to resume next year.”

So you CAN implement austerity measures and come out on the other side in better shape. That’s what I’ve been telling audiences for over a year now. The eurozone, if held together — and I have no reason to believe it won’t be held together — in three-five years will be much better off having gone through the pain of austerity. Sure, the eurozone economy as a whole will suffer, and there will be pain, but as the old football coach used to tell me: “There’s no gain without pain.” And in three-five years, the euro will once again be the currency to own, for the eurozone debt picture will look completely different. And the U.S.’ debt picture? Or Japan’s debt picture? Or even the U.K.’s debt picture? None of these will have gone down the austerity road. Shoot, Rudy, the U.S.’ GPS system can’t even find that road!

According to The Wall Street Journal, the ratings agency Fitch has warned the U.S. that their AAA rating is at risk of a downgrade by the end of the first half of 2013. Nothing like dragging this out. Fitch has a had a negative outlook on the U.S. since December 2011, and they keep warning the U.S. administration that they will cut the rating next year if the administration does not create a “credible” fiscal consolidation plan.

In the latest poll on the U.S. economy, two of three people polled believe the U.S. is on the wrong track for economic growth. Are those two of three people prepared to do deal with the pain that will correct that track? I doubt it.

Sooner or later, France will come back into the austerity fold. The markets in France are already losing faith in French President Hollande. France has rising unemployment, a widening current account deficit and a budget deficit. The economy hasn’t grown in three quarters, and now after returning from a 15-day summer vacation, Hollande has to figure out how to fill a 30 billion euro budget hole. Remember that Hollande ran on promise that he would cut the budget deficit to 4.5% of GDP this year and to 3% of GDP next year, from the current level of 5.2% of GDP.

So Hollande knew he couldn’t win the election if he talked about joining in with Germany and the austerity program. Then President Sarkozy ran with that. But now Hollande has to figure out how to do that. Reminds me of that old TV show joke where they would ask the guy to do some outlandish thing and he would say, “I can do that,” and then mutter, “How am I going to do that?”

That’s Hollande. My bet, as it always has been, is that he’ll come back to German Chancellor Angela Merkel with his tail between his legs and ask for forgiveness. Just my opinion, but history tells me this is what happens between French and German leaders.

So look for France to begin an austerity program soon. You know, there are a lot of economists out there that think that the austerity way of doing things is wrong. But their kicking the can down the road with more debt and hoping that you can inflate the debt away just doesn’t sound good to me. I would rather pay the piper now.

Well, switching gears here, I’m pretty shocked to see that the price of oil slipped yesterday. Isaac has now idled 78% of U.S. Gulf oil production, and the fire at the Venezuelan refinery continues to burn. Oil production is getting hit hard, and we all know that means at the gas pump. The U.S. economy can’t carry a higher gas price too.

I mentioned yesterday that the Swedish krona (SEK) was the best-performing currency in the overnight markets of Sunday and Monday morning. I had a Pfennig reader send me a note from Sweden telling me that the markets are screaming for a rate cut to help weaken the krona, but the central bank governor is having none of that. In fact, the reports are that the Riksbank has been buying krona.

But then this morning, I see this story on the Bloomberg: “‘Investors should buy the Norwegian [krone] (NOK) versus its Swedish counterpart on the view that the Norges Bank [Norway’s central bank] interest rates will be more supportive of the currency,’ Nordea Bank AB (NDA)’s ‘Alpha Strategy’ team said in a note.”

So this research team has issued a buy krone statement. You know what I’ve told you over the years: that you have to take these kinds of statements with a grain of salt, as you don’t know if the statement issuers are long the asset they are touting and this way they get the price to bump up and can sell their long position, or the other way around. So be careful here. But the Norwegian krone is stronger this morning.

Last week, I told you about the longtime Pfennig reader that sent me the note about Australia. Well, to counter that note, I also received a note from an Aussie Pfennig reader who had this to say about the BHP announcement that we talked about last week:

“BHP have decided not to proceed with the expansion of Olympic Dam, although they will continue to examine smaller-scale expansions with a lesser capital exposure. The project would have made a significant contribution to South Australia, but obviously not such a contribution to the BHP coffers — from what I understand, there was a very long payback on the project (25 years?). The ore is buried under 1,000 feet of waste rock with a billion tonnes to be mined before ore is hit.

“The 15,000 jobs (in a state of 1.5 million people) were not only jobs at the mine. This figure represents the likely additional jobs created across the state as a result of the expansion of the mine.

“End of the boom? No! Just one very large project with relatively unattractive economics being shelved because of some pessimism regarding the copper price outlook and other more-attractive projects in the portfolio. Exploration continues, other projects continue to be developed. All is not pessimism.”

I see conflicting reports. Last night, my longtime friend John Mauldin sent out an article by Jonathan Tepper, the title of which is “Australia: Running out of Luck Down Under.” So the conflicting stories continue, which is why I say that it’s far too soon to think about shorting the Aussie dollar (A$). But that’s just my opinion, and I could be wrong!

The price of gold is down $2 this morning. No biggie. The move higher in gold in the past couple of weeks has been very impressive and reminds one of the moves gold made in years like 2010, when it gained 28%. If gold were to gain 28% from its low of $1,540 back in May, that would push the price of gold to $1,972. Now, I’m not saying that this is going to happen. I’m just making a point that gold has gained 28% in a year before, and it could be done again.

And with that thought, Then There Was This: Here’s my friend Jeff Clark of Big Gold with his thoughts on gold’s corrections:

“In 2006, after a total decline of 22.6%, it took a year and four months for gold to surpass its old high. After the 2008 meltdown, it was a year and six months later before the metal hit a new record. The 16.2% drop in 2003 lasted seven months, and another two months before the price stayed above it.

“You can see that our (current) correction has lasted just shy of a year. If we matched the recovery time of 2006, gold would hit a new high on Christmas Eve (Merry Christmas!).

“But here’s the thing: That’s how long it would take gold to breach $1,900 again — it will take a couple months or more for the price to work up to that level, meaning the remaining time to buy gold under $1,700 will likely be measured in days or weeks, not months. This is bolstered by the fact that the price moved up strongly last week, and also that we’re on the doorstep of the seasonally strongest month of the year.

“This is an educated guess, of course, but what the data make clear is that all corrections eventually end — even the bloodbath in 2008. The current lag will come to an end too, and we’re certainly closer to the end of this corrective period than the beginning.”

Yes, we must go back like Jeff has done to measure the time spent in a correction and the resulting rally. I think Jeff is really saying that this is the last-chance saloon to buy gold below $1,700. To see Jeff’s full article, click here:

To recap: The currencies and metals drifted yesterday, with only a slight bias to sell them. This morning, the euro is stronger on the news that Spain’s auction went well, with borrowing costs reduced to a four-month low. The price of oil slipped overnight, even with Isaac bearing down on the Gulf coast oil production and the fire still raging at the Venezuelan refinery. The price of gold also has slipped by $2 this morning, but I wouldn’t put too much into this slippage. And it won’t be long before French President Hollande comes back to the austerity plan. He’s in a huge hole that needs to get fixed.

Chuck Butler
for The Daily Reckoning