A 28-Year High for Gold!

Good day… And a Happy Friday to one and all! A Fabulous Friday to boot! I did three more interviews yesterday… I’m going to a recording studio later this morning to tape a video for someone’s web site… And I’m filling in for the Big Boss, Frank Trotter, who got called away. This isn’t good, because I always say that Frank has the face for video, while I’ve got the face for radio and newspapers!

I mentioned yesterday that I find it strange that when the euro (EUR) was 1.20 something and I kept telling people to buy it, no one in the media wanted to talk to me… But now that it is setting records daily… Oh well… Better late than never!

Speaking of the euro… What a day for the single unit! As I signed off yesterday it was around 1.4030, having left the 1.40 level in its rear view mirror. But that wasn’t all it had for the day. The euro kept climbing as the day went on, and at one time before I went home, it was pushing the envelope on the 1.41 handle! We’ve seen some profit taking… But nothing to knock the bloom off the euro’s rose!

The euro wasn’t the only currency to have a tremendous Thursday… The Canadian dollar/loonie (CAD) came to within a whisker of parity to the U.S. dollar/greenback. Parity! That’s wild stuff! One interviewer wanted to know if U.S. citizens would get upset that the loonie was on par with the greenback. I said… Unless you travel to Canada, or diversify your portfolio with EverBank and own loonies, U.S. citizens probably don’t know, or care! But, I’ll betcha a dollar to a Krispy Kreme that Canadians know!

With oil running up to $83… Gold climbing to $725, the loonie is soaring among the stars… Makes me start singing that old Frank Sinatra song… Fly me to the moon, and let me play among the stars, let me see what spring is like on Jupiter and Mars… Old Blue Eyes could be singing that song about the loonie.

OK… There was a BIG STORY yesterday that really lit a fire under the currencies. The U.K. Telegraph printed a story that really lathered up traders. The story centered on a thought that Saudi Arabia could be signaling that they are going to drop their dollar peg. The signal was in the form of a non-move in interest rates. Let me explain…

Normally, when you have a peg to a currency you follow every step the base currency makes and that includes Central Bank moves. The Fed cut rates this week… But the Saudis didn’t follow leaving their rates 50 BPS higher than those in the United States. Hmmm… I understand the thinking here… Saudi Arabia has inflation problems, and money supply is running at a 22% clip… However, after thinking about this most of the day I’ve come to the decision that I just don’t see the Saudis breaking a 25-year peg over this… I think what the Saudis are doing is just letting the Fed know they are not happy with their decision.

But like anything else that lathers up markets like this… The damage has been done. I would be surprised to see anything come of this at this time.

Down under… New Zealand actually saw some good news regarding their current account deficit. Well… It wasn’t a great move, but the current account deficit was lower in the second quarter than the previous quarter. Unfortunately for kiwi (NZD), the current account deficit is still 8.2% of GDP. Yes, that’s better than the previous 8.3% of GDP, and you do have to start somewhere!

Kiwi however, isn’t letting a strong fundamental like the current account deficit making up 8.2% of its GDP get in the way of moving higher, and higher, and higher! This illustrates that the carry trade is alive and well, eh?

In a different interview yesterday I told the interviewer that I doubted the Asian Central Banks were happy with the Fed’s 50 BPS rate cut. Their reserves are predominately held in dollars. So, 1. Now their deposit rates are lower… And 2. The dollars they own continue to get weaker, thus creating losses.

But what are the Asian Central Banks going to do about it? As Edwin Starr used to sing… Nothing… Absolutely nothing!

Big Ben spoke to Congress yesterday, and it was much like the tree falling in the forest when no one is around. The Saudi story had the markets by the ear and nothing else mattered. Even the data that printed was a non-event given the story.

One ex-Central Banker spoke and the markets paid attention to him. Yes, you guessed it, good old Big Al Greenspan. The former Fed Chairman – speaking in Vienna to promote his new book – said in an interview, “low interest rates in the past 15 years were to blame for the house price bubble, but that central banks were powerless when they tried to bring it under control”. He went on to add, “It’s a difficult situation – there is an enormous overhang on the real estate market. Many buildings, which just have been finished, can’t be sold. So far, prices have dropped only slightly. But it was enough to cause alarm around the world. Prices are going to fall much lower yet.”

Oh, Geez Louise, thanks for those uplifting words, Big Al! I have a question for you though… You were the head of the Central Bank of the most powerful country in the world, and yet, there was nothing you could have done to stop the housing bubble? Ahem… How about raising interest rates instead of leaving them at 1% for a couple of years, and then only raising them 25 BPS at a time, thus taking baby steps away from low, accommodating rates?

In my third interview yesterday I was asked about gold – and oh, did the interviewer step into Chuck’s room of explaining CPI! I told the interviewer that gold had soared since the rate announcement on Tuesday, because of two things: The weaker dollar and inflation fears. The young man said, “but CPI doesn’t show inflation”. Gotcha! He then had to listen to a 20-minute dissertation on Chuck’s views of CPI and why it is a stupid measure of inflation!

Speaking of gold, it has reached a 28-year high overnight! And silver has come along for the ride. HAHAHAHA… I just got that… The Lone Ranger’s horse was named Silver! Back to gold… I don’t know if you all recall this, but about a month ago, I wrote that gold and silver were champing at the bit to rally, and I thought it would begin very soon. About two days later the rally was on, and gold has added $90 to its price in the past month! WOW!

A rising oil price, which leads to those inflation fears, has really stoked gold’s fire lately. Oil reached $84 yesterday, only to fall back to $82 after some profit taking. Oil will continue to rise in price, in my opinion, and that will lead to more inflation, which will be another nail for the dollar… And, continue to push gold to $800.

The question is… Will gold reach its all-time high of $850, which was set in January of 1980? Well… If it adds another $90 in the next 30 days (like it did the previous 30 days) it has one heck of a chance, eh?

The British pound sterling (GBP) has not seen much good news lately, and has struggled to keep up with the euro. In fact, it hasn’t, and has fallen behind because of bad financial news and data… But Friday is different for pound sterling! Today, the United Kingdom printed a strong retail sales report for August… Maybe now, pound sterling can catch up with the euro.

OK… On to the Big Finish for this glorious Friday! I’ve got to get ready to go to the studio and get taped! Hmmm, I wonder what I will talk about… HAHAHAHA!

Currencies today: A$ .8640, kiwi .7405, C$ .9990, euro 1.4060, sterling 2.0150, Swiss .8510, ISK 62.60, rand 7.0550, krone 5.5325, SEK 6.5475, forint 177.90, zloty 2.6820, koruna 19.5750, yen 115.50, baht 31.77, sing 1.5070, HKD 7.7830, INR 39.87, China 7.5030, pesos 11, dollar index 78.66, Silver $13.72, and Gold… $743.60

That’s it for today… Crazy times on the desk yesterday… And we’re short handed once again! It’s with a sad note that I pass on the news that our Corporate FX guru, Ashish, is leaving us. I wish Ashish the best! With today being his last day, there will be so much food in the office… I can’t wait to see what everyone brings in! I can’t taste anything anymore, so taste is not my concern… The volume and presentation is what I’m looking for! OK… My beloved Missouri Tigers play tomorrow and then have a week off before facing their rivals for the division crown… Nebraska. I plan on going to that game… But if I’m still suffering from all the swelling in my leg, then I’ll have to give my tickets to my kids… So… Go Tigers! I hope you have a Fabulous Friday, and Wonderful Weekend!

Chuck Butler
September 21, 2007

The Daily Reckoning