Commodities Take It On The Chin

Good day. Well, we saw some real dollar strength yesterday versus all currencies, even the belle of the ball, Canadian loonies. There was really no data to push this move. There was really no talk going on, but the thing that really moved the dollar was the plight of gold, the CRB, and Oil.

Early yesterday, there were stories going around that there would be plenty of heating oil supply in the United States, thus reducing the inflation pressures that would arise from a rising oil price. At that point, many holders of gold took their profits, and pushed the price of the shiny metal down over $20 at one point in the day. With oil falling, gold falling, the CRB (commodities) took one on the chin, too.

Yes, the base metals got taken down, too. This looks all too much like hedge funds and speculators taking profits, and then turning it into a rout. I think that in the long run, this will prove to be a blessing, in that a lot of “short-timers” got out of their positions, which leaves the people that want to own gold, silver, and other base metals for the long run. It’s short-term “noise.” 

Yesterday, I talked about traders taking positions in Japanese yen ahead of the Bank of Japan’s (BOJ) meeting later this week. It’s thought that the BOJ might signal a change in their long-running zero-interest-rate policy. The traders don’t necessarily need an actual rate move. They just need some tough words from the BOJ.

The reason they just need tough words is they already have seen everything else. Consumer spending is up. The Nikkei 225 had a 40% increase in yen terms in 2005 (the best performance since 1986). Investment flows continue to come Japan’s way. The most important of all: deflation in Japan seems to be on its last leg. Now, we have to get traders all lathered up, and get the Japanese government to keep their hands out of the manipulation cookie jar!

Did you see the announcement yesterday that Toll Brothers, Inc. (U.S. homebuilder) is cutting its sales forecast (a second time) and rekindling concerns that the housing market would fall to its knees, leaving the U.S. consumer without a full ATM to draw spending money from.

I’m not going to get into the problems facing U.S. stocks, which I believe are heading straight for a bear market, but what I do want to say is that a country’s relative investment attractiveness is very important when placing a value on that country’s currency. So, as I tell people all the time in my presentations, the S&P 500 has been basically flat for the past four years. Yields on bonds are still low, and negative when looking at their yields versus inflation. So, if we are heading to a bear market in stocks, the dollar is going to have to scratch and claw to get attention from foreign investors. That’s my story, and I’m sticking to it!

I see, this morning, that Germany’s current account surplus for 2005 grew to euro 90.4 billion versus euro 84.5 billion in 2004. The December surplus actually was down, but overall for the year, a very nice showing for a country that had every arrow in the quiver shot at it during the year.

To represent the other side of the coin though, I did have a reader from Germany send along a note telling me that he doesn’t feel that the economy is building the head of steam that I keep talking about. That is fair. He’s there, and all I know is what I read, and read, and read…and read. So, it’s not all seashells and balloons yet for Germany, but I still feel it will be.

The Chinese renminbi has once again hit a post 7/21-drop-of-the-peg high versus the dollar at 8.0545. The Bank of Japan begins their two-day meeting tonight. I would certainly love to see or hear them hint that they are considering a rate hike. I think that would help all the Asian currencies move higher versus the dollar.

While reading Bill Bonner’s Daily Reckoning yesterday, I came across something he said about Ben Bernanke and inflation in the United States. So, here goes: “Under these circumstances, inflation is a dead certainty. The only unknown is how and when it appears. Until now, it has happily gone into asset prices. Stocks – then real estate – rode high on the tidal wave of money, while consumer prices, mostly, stayed put. But the dollar is vulnerable, warned the experts. Bill Gross, who manages the largest bond fund in the worlds, claims it is “doomed.” When doom will show up and in what guise we do not know. But we bet that when it does show, it will yank up the cost of living for consumers. Prices of imports – at say, Wal-Mart – will shoot up. Anticipating this unwelcome variety of inflation, the central bank may turn the screws longer than expected.”

Since I’ve just touched on Bill Bonner, my friend and Bill Bonner’s co-author of The Financial Reckoning, Addison Wiggin, tells me that their new book, “Empire of Debt,” is now on the shelves, and ready for you to read! Here’s a link to the promo and how to go about ordering the book. I have my copy, and anyone who feels that the U.S. has let this debt situation get completely out of hand, should have a copy, too. So, click here: Empire of Debt

Last week at the Money Show, I kept telling people to look to Canadian dollars/loonies, but they may want to wait for a “dip” in the price. Well, look what we have here…a dip in the loonie! Yes, the drop in oil and gold yesterday, weighed heavily on the loonie, and pushed it down about half a cent. I don’t look for this to continue.

The other commodity currencies, the Aussie dollar and the kiwi, were not left unscathed. The lived by the sword (commodity prices), and they got cut by the sword.

One of my favorite Asian currencies, Thai baht, has seen some weakness this week due to political tensions. As I’ve said before, the markets do not like uncertainty. Add to that the thought that the government could get all caught up in these tensions and distract it from the task at hand. Keeping the growth in the economy going strong, two ministers resigned last week, and now the prime minister is under attack. I’m hoping this is nothing more than a tempest in a teacup, and we can soon see baht gaining ground versus the dollar again!

OK. The Icelandic krona, has certainly been one hot currency on the newsletter circuit lately. Everybody is talking about it. I told a crowd that gathered around me in the hallway at the Money Show, that a lot of the allure is due to the fact that it is finally available. It’s no longer the “forbidden currency.” Of course, paying over 8% interest goes a long way toward gaining allure!

The krona has been up and down since we first began trading it late in November, but for the most part, it has been steady-Eddie, which works out fine, as long as it has that 8% interest rate hanging on it! Again, this is a very small country. With population less than 300,000, the currency could get caught up in a speculators run. But for now, the currency is flying below the speculators radar screens, and let’s not forget that the krona has outperformed the euro the last four years!

Currencies today: A$ .7380, kiwi .6770, C$ .8670, euro 1.1970, sterling 1.7430, Swiss .77, ISK 62.75, rand 6.22, krone 6.70, forint 210.11, zloty 3.1975, koruna 23.81, yen 118.33, baht 39.70, sing 1.6330, China 8.0545, pesos 10.55, dollar index 90.22, silver $9.275, and gold $546.50.

That’s it for today. It was a tough day yesterday with everything going down. It’s finally snowing in St. Louis! OK locals, don’t dust off your snow blowers just yet; we’re only slated to get an inch of snow! My marketing people tell me that the Web cast of the presentation last week will be on our Web site in about 10 days (I think they’re trying to figure out how to make me look thinner! HA!). It’s Wired Wednesday, which is fine with me, as the coffee is already flowing this morning! Have a great Wednesday.

Chuck Butler
February 8, 2006

The Daily Reckoning