Oil Price Jumps Closer to $50

And now… today’s Pfennig for your thoughts…

Good day, and a wonderful Wednesday to you! 

The dollar has backed off of some of its mighty swings against the currencies overnight, but the green/peachback is still in the batter’s box looking to go yard against the precious metals this morning. The metals performance is very ugly in the last week. I don’t know how else to say that, and I sure don’t want to sugar coat it!  So, let’s go through the roundup of things that happened since yesterday morning, and see what shakes out of them.

Let’s start with the price of oil. It jumped through the $48 handle and is trading this morning with a $49 handle! This move came after it was reported that there was a larger than expected decline in U.S. crude inventories last week. The American Petroleum Institute said yesterday that its data for last week showed a 5.1 million-barrel decrease in crude supplies. So, like I told your earlier this week, that the price of oil looks hell-bent and whiskey bound to get to $50 this summer. Our friends over at OPEC (NOT!) say that they see the price of oil recovering to $65! The head of the OPEC believes that the price of oil has “not been trading at a fair price” and believes $65 is more like it.

The currency that moves with the price of oil step for step is the Russian ruble, and the ruble traders have taken the currency for a ride on the rally tracks overnight. This currency is the proxy for oil in my opinion. And if the price of oil is going to $65, as the OPEC head has suggested, then the ruble is going to be in high demand. But if the OPEC leader is just blowing smoke in the markets ears, then we’ll probably see the ruble bounce back and forth with the price of oil just like it has for the last couple of years.

Yesterday we saw good stuff from the German ZEW reports, and today we get more of the same good stuff from the Business Sentiment Indicator (optimism) as measured by the think tank IFO, which saw its May index number rise one full point to 107.7 from 106.7 the previous month. A rise to only 106.8 was the consensus, so this data beat expectations by a wide margin, and one would expect the euro to respond favorably. And it has, although the rise has been muted by the news that the IMF, Eurozone and Greece have kicked the can down the road even further.

I went through this “give Greece a loan to pay their current loan payment” thinking in the Eurozone, on Monday, and I really don’t feel like going through it again, because, well, I can’t believe that anyone believes this is a good thing, other than it keeps the markets from going bonkers again. I did see this though, and thought: Boy, I’m sure glad I read this, I don’t know that I would have made it through the day without this information. Here it is: “The Eurozone finance ministers said that Greece had done what was necessary to unlock the next slice of financial aid.” Of course I could have tons of fun thinking of what it was that Greece “had done”.

The Bank of Canada (BOC) meets today. I told you Monday that I believe that rates will remain unchanged here, but that Poloz would probably take his best shot at knocking the loonie from its currency perch. But the rise in the price of oil has taken loonie traders down a different path so far this morning, and that is to mark up the loonie, and not worry about Poloz does or doesn’t say later today.

The Norwegian krone which gets tarred with the same brush as the euro all too often, is seeing a double dose of underpinning from the price of oil and the euro mini-rally this morning. Things for both the Norwegian krone and Swedish krona haven’t been fun for the last four years, especially in the last two years with the huge slide in oil prices, and the global economic slowdown (the lines to buy a Volvo have shrunk, but those IKEA stores sure have the U.S.’s attention!). I always view these two currencies as euro-alternatives, and think that one day, traders will wake up, do a V-8 head slap and realize what big dolts they have been, tarring these two with the same brush as they use on the euro.

Both the Aussie dollar (A$) and New Zealand dollar/kiwi, are rallying this morning. And one wonders why. The New Zealand April Trade deficit widened, and the Aussie Construction data for the first quarter showed a drop of -2.6%, which doesn’t bode well for tomorrow’s print of CAPEX (capital expenditures) and that won’t help the A$ avoid more talk of additional rate cuts. But the two are rallying this morning, so don’t call attention to it, Chuck! Leave it alone! Just move along, there’s nothing to see here…

In Singapore, first QTR GDP was revised upward to 0.2% from 0.0%, but the year on year increase  of 1.8% remains the same. the upward revision is not exactly something you would see under the heading of “strong” and so I think the Monetary Authority of Singapore (MAS) was correct last month in lowering their trading band for the Sing dollar.

The world is in need of a new hoola-hoop, badly, folks. Other than war, that is.

The Japanese yen has dropped back to 110 handle (in April it was 106!) and it looks like BOJ Gov. Kuroda, will get his wish and see yen continue to weaken. The Boys and Girls at Goldman Sachs AKA Lola, believe that yen should be trading closer to 133 (I would agree), and think that the BOJ will do what they can to see an orderly drop to 120 by year-end, and 125 next year at this time. Yen has been one of the best performing currencies vs. the dollar this year, but that wasn’t going to last, not with Japan’s fundamentals, folks.

And the Chinese renminbi was weakened in the overnight fixing. The Peoples Bank of China (PBOC) has to be discouraged by the strength of the dollar, given if they had their druthers the PBOC would prefer to see a steady rate exchange against the dollar. And that’s not what they are getting in any stretch of the imagination!

I was having a brief conversation with Chris Gaffney yesterday about China, and I pointed out that I think all the Chinese would have to do is to call the White House and say, “if your Fed hikes rates in June, we will devalue the renminbi again, and you know how much that gyrated the markets a couple of months ago” and soon we would be hearing the Fed members singing a different tune. But I think the Chinese like doing things differently, and would more prefer to surprise the markets with a devaluation, if the Fed does hike rates next month.

The U.S. Data Cupboard has the Monthly Trade Balance for us today. and that’s about it. Yesterday saw New Home Sales skyrocket in April. Just pumping more air in the bubble as far as I’m concerned. But then nobody is talking about it except me, so maybe it’s just me that sees this, or maybe I’m not seeing anything, and I’m barking up the wrong tree. I guess we’ll have to wait-n-see. When I wrote about the housing bubble the first time in 2003, it took a few years before it became clear to everyone what was going on.

Gold is getting whacked daily now it seems. So much for the rally in gold in 2016. or so it seems. Maybe this is just giving those that missed out, a chance to buy before it takes off again. Maybe, maybe I’m wrong, to go on thinking, to sing my song. Maybe this world’s falling down. And maybe I don’t need to be quoting any lyrics by the Blue Jays! Anyway, gold got whacked by more than $21 yesterday, and is down another $7 this morning. In December when it appeared that the Fed would hike rates gold suffered, until the actual rate hike occurred, and then gold rallied. Could this be a repeat of that scenario?

Did you see the comments by former IMF economist Ken Rogoff regarding gold? This is good. Rogoff, who is now a Harvard economics professor, is recommending that countries diversify out of government bonds and into gold. “With bond yields effectively at zero or below, there’s nothing to be gained through the purchase of such bonds, while gold is a “low-risk” asset that offers the possibility of capital appreciation”. Rogoff has written some very interesting pieces while he was at the IMF, and I didn’t always agree with him, but I sure do on this thought!

On a sidebar here… I just read on Ed Steer’s letter that the world’s biggest banks have shed about one in three bond traders since 2011.  Yikes. As most of you know I used to be a foreign bond trader. It’s a fraternity, close knit at that, bond traders. I hate to see this because it’s all being blamed on all the new regulations and rules..

Well, there are more than a few countries that are ahead of the curve when it comes to buying gold, and I’ve talked about them over and over again the past couple of years. One of those countries ahead of the curve with regards to buying gold is Russia, and this article chronicles the latest news about Russia’s gold buying, and can be found here, or here’s your snippet:

The Russian central bank is continuing to buy gold at a faster rate than China with a purchase of 500,000 ounces (15.6 tonnes) of gold in April according to figures put out on Friday.  The amount is interesting as it the same sized addition as in the previous month and while the February increase was smaller at 9.3 tonnes, January was larger at 21.8 tonnes so the increase for January and February combined was thus at the equivalent of 15.6 tonnes a month. Does this now mean that the Russian central bank has set itself a gold reserve increase target of 500,000 ounces (15.6 tonnes) a month.  If this rate of buying persists through the year then it could be that it is aiming to build its reserves by 187 tonnes in 2016.

Russia has thus been buying significantly more gold than the No. 2 buyer China so far this year with purchases totaling 62 tonnes so far against the 46 tonnes so far reported by The Peoples Bank of China.  If both continue purchases at the current rate that would suggest an increase of central bank gold holdings from these two countries alone of over 320 tonnes.

Chuck again. Pretty amazing the amounts of gold that both China and Russia have accumulated in recent years. And you know my old call that you should always follow the money.

I’ll get out of your hair for today, and hope that you have a wonderful Wednesday! Be good to yourself!

Regards,

Chuck Butler
for The Daily Pfennig

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