Deutsche Bank: It's Time to Buy Gold

And now… today’s Pfennig for your thoughts…

Good day, and a marvelous Monday to you! This is going to be a very busy week data-wise, geopolitical-wise, and other stuff-wise, so get ready for it, because we could be all over the place with the currencies and metals this week.

Well, first off, Friday’s price action in the currencies and metals was not good, as the U.S. dollar kicked some tail and took names later! The U.S. Data Cupboard had some strong numbers for the second consecutive day, this time in the Personal Income and Spending reports, and that set the markets off on a journey that took them through “rate hike forest”.

Yes, before the data on Thursday and Friday of last week, the so-called baked in the cake, rate hike for March had been completely off the books, out the minds, and forgotten about by the markets. Shoot Rudy, even the Fed members were beginning to sound very dovish about a March rate hike.

But that all changed after Thursday and Friday. So, let’s a do a quick re-run, and then get going on this week, because I’ve got a lot to talk about today.

Thursday’s Data Cupboard had strong Durable Goods and Capex Goods Orders for the first time in a month of Sundays, even when you take the airplanes (transportation component) out of the data. Now, mind you all the data prior to Thursday was not good, but the Thursday data trumped the earlier data in the week.

Then on Friday, the U.S. showed stronger than expected Personal Income and Spending data, and at this point, the markets are back on board with a rate hike in March. That idea, has really propelled the dollar to higher levels, and pushed the currencies and metals down. down on the ground.

And that’s where we are this morning, with the dollar swinging its mighty hammer once again. Every time in recent memory, that the dollar appears to be ready to succumb to weak data and the currencies and metals, it receives a miraculous reversal. Is this the PPT? Is it the Invisible hand, like the one that helped Maradona score a goal in the World Cup years ago?

Yes, I get it, the most recent two-day trip through the data fields, have given the dollar some reason to believe that the U.S. economy has turned the corner, and rate hikes will come as advertised by the Fed in December.  But, do we really believe the data? And how did, just when the dollar appeared to be tipped, the data suddenly become strong? Oh well, I could spend all day on that, but I have much to talk about today, so moving along…

Tonight, the Reserve Bank of Australia (RBA) will meet. I’ve been telling you for a few months now that I didn’t think the RBA would be cutting rates at this meeting, so hopefully this is what happens, and the following statement by the RBA Gov. will be important, for signs of future moves. The Aussie dollar (A$) is up about 1/4-cent this morning, and is one of the few currencies gaining vs. the green/peachback today.

The best performing currencies vs. the dollar overnight is the Japanese yen, once again! Yen is stronger by one full figure vs. the dollar and I can’t believe what I’ve been reading about what currency traders are thinking regarding yen. The consensus is that because of yen’s so-called safe haven status, that it will continue to gain and one currency trader, known for being quite accurate, says that yen will rebound to “fair value’ vs. the dollar once again.

ARE YOU KIDDING ME? Can a currency from a country that’s such a basket case with regards to its economy, debt, and demographics really rally like this? I guess the answer is yes, because it’s all about sentiment these days, not fundamentals.

The one thing I would say is that if yen is rallying because of its so-called safe haven status, then that must mean that there’s a lot of fear in the air, and that should be manna from heaven for gold. I’m just saying.

The G20 boondoggle ended with no major “coordinated effort to stimulate global growth”, that the IMF had called for prior to the meeting. In fact, G20 didn’t really come up with anything at all, except a statement about how countries should not resort to the Currency Wars.

That cracks me up, folks. It’s that like giving the fox the keys to the hen house and telling him he shouldn’t resort to eating chickens? HA! These G20 countries have already been involved with the Currency Wars! Oh, slap our wrists, ok, now can we go back to purposely selling our currencies to promote growth?

Crisis, what crisis? Right? In that vein, a dear reader sent me a link to an article that was written that reported what the scariest things Americans are most afraid of.  And guess what was #1? They are afraid of the government corruption, followed by Cyber-terrorism, followed by government tracking of personal information, followed by terrorist attacks, and so on a so forth. And nowhere on the list is government bankruptcy. Imagine that! No one surveyed was afraid of the ever-growing government debt, the unfunded liabilities, negative rates, or a banishment of cash.

Pretty telling if you ask me.

The Chinese decided to really whack the renminbi in the fixing overnight, moving it by more than usual. The Chinese announced this past weekend that they were reducing their reserve ratio again, in an effort to stimulate growth in the Chinese economy. It’s been a week since we’ve seen an appreciation in the renminbi fixing. The Chinese sure know how to play the Currency Wars game, don’t they?

So, get this. China is at the G20 meeting, they sign off on the statement about not resorting to join the Currency Wars, and then go out a devalue their currency by a larger than usual amount. I guess they were telling their G20 counterparts “this is what we think of that statement”.

The euro has taken the brunt of most of the dollar strength since Friday. Having the Irish election not go as planned, as the incumbents were tossed out, hasn’t helped the euro, but the euro’s main problem has come from dollar strength. At any time now, this morning, the Eurozone Flash CPI report will print for February. I don’t know what to expect, here because recent CPI (consumer inflation) reports have shown an increase in inflation, but Eurozone officials have been sending smoke signals of weaker inflation that’s coming. UGH!

But, I’ll say this once again. Just look at Japan, and all the debt they’ve built up over the years, and then wonder why they have deflation so bad. The Eurozone had the austerity programs in place and following them and seeing improvements in debt levels, and then got complacent, and lax with regard to the austerity programs, and they are still left with unsustainable debt levels, and soon they will find that debt deflation is something that they can’t shake a stick at.

The New Zealand dollar/kiwi is weaker this morning by about 1/4-cent on weaker building permits data, along with a drop in consumer confidence. These two unexpected weaker data prints have the rate cut campers parading through the streets and shouting about not one but two OCR (official cash rate) cuts that are coming. This has really knocked the stuffing out of kiwi, folks. And if the Reserve Bank of New Zealand (RBNZ) does decide to cut rates this month, we could very well see kiwi get whacked, and really diverge from the A$.

Up to now, kiwi has benefitted from a distancing of it from the global growth concerns, and weak commodity prices, but once the RBNZ does the dirty deed, that distancing will go away, and kiwi will be thrown right back into the mix of currencies that are dealing with these things.

The U.K. pound sterling (pound) has taken a step into the dark abyss, it hasn’t moved its full body into the dark abyss yet, but it sure has taken a step, and that begins to get scary, folks. You see the pound hasn’t really spent that many days below the 1.40 figure through the years, and it is trading at 1.3850 this morning. It’s all about the BREXIT, (British exit from the European Union), and here are my thoughts on that subject…

Long-time readers will recall me talking about how the U.K. kept the pound out of the euro (first it was bounced out of the ERM, but could have reentered the ERM any time after that), and how that had benefitted them, due to the Eurozone’s debt problem. Well, the negative Nellies will have their day selling the pound after the June vote goes to the “leave” vote (in my opinion) , but that will be short term, and eventually the markets will see that Britain is just a different animal than the Eurozone members, and that it will eventually be a good thing for Britain. But for now, and through the summer, it’s going to be a tough row to hoe for the pound.

Earlier in the letter today, I mentioned that currency trading being all about sentiment these days. Well, the thing about sentiment is that it causes wild swings in currency values in shorter periods of time. Longtime currency traders like me, were so used to the long sweeping moves in currencies that were tied to trends and fundamentals.

I was reading an article on the Bloomberg this morning about this very thing, from a 27-year veteran in the currency trading business. He said that “liquidity is drying up because investors and banks are shying away from taking risk, and that makes for sharper, quicker currency turns. We’re now starting to play a lot at the extremes of the ranges, and what I mean by that is that the markets not only mean reverts, but goes back through to the other side of the price very quickly, so you’ve got these whipsaws between ranges.”

Pretty interest take on the whole thing, but I still like my stance better.

The U.S. Data Cupboard doesn’t have much for us today, but don’t get too comfortable and do some deep couch sitting, as that will not be case this week as we go along, ending the week with the Feb Jobs Jamboree. Today we will see three different regional manufacturing indexes, the Chicago, Milwaukee, and Dallas regions will all report on how manufacturing fared in their regions in February. I would be a monkey’s uncle should these reports surprise to the upside, and we should get back to daily weak data reports this week.

Gold got whacked nearly $11 ($10.90) on Friday as it got caught up in the traffic jam that stronger U.S. Data caused, but the shiny metal has gained back that $11 in early morning trading this morning. I have to share this stuff from Deutsche Bank who decided suddenly to become an advocate of proper diversification using precious metals, especially gold. let’s listen in to Deutsche Bank, talking about gold:

‘There are rising stresses in the global financial system; in particular the rising risk of a U.S. corporate default cycle and the risk of a sharp one-off renminbi devaluation due to the sharp increase in China’s capital outflows,’ Deutsche Bank added. ‘Buying some gold as ‘insurance’ is warranted.’

Deutsche Bank also mentioned that, ‘Gold is still expensive, but rising economic risk and market turmoil mean investors should buy it (Gold) for insurance.’

This is all me today folks. I have something to get off my chest, and well, this is the place to do it! Have you heard of the term “Helicopter Money”? No, I’m not referring to the famous speech by former Fed Chairman, Big Ben Bernanke. I’m talking about a term first used by economist Milton Friedman, and it’s all about the issuance of new money to the population. As if it were being dropped from a helicopter.

Well, believe it or don’t, this is becoming a hot topic in the markets. So much so that one of my fave reads, Jared Dillian, who writes for www.mauldineconomics.com and his free letter is called the 10th Man, and just last week Jared talked about this new topic going through the markets around the world.

So, basically, what would happen is the government just deposits money into your bank account, with the hopes you go out and spend it. Now, is that just plain ridiculous or what? Remember the rebate money from about 10 years ago?

And this past weekend, I read in Ed Steer’s letter that Ray Dalio, found of the world’s largest hedge fund, Bridgewater Associates, is advocating the use of helicopter money, as a means of correcting the economic ills that the world seems to have right now. This is sheer lunacy folks! But don’t just take my opinion as the gospel, let’s listen in to see what Jared Dillian has to say about this:

So like I said, we have lost our minds. We’ve gone cuckoo for Cocoa Puffs. Seriously. If it were 1996 and I told you we were considering just handing out free money in 2016, you would have taken a swing at me. But here we are, talking about it.
There are a couple of reasons why this absolute lunacy is being considered a serious possibility:

.       Central banks and governments can no longer tolerate a recession. It used to be, you get a downturn in the economy, you tough it out, and it will come back eventually. I graduated high school in 1992. Right at the end of the recession. People called it the “jobless recovery” and said youngsters wouldn’t be able to get jobs. They did, eventually. The free market has a way of doing that.
.       We’ve gone far, far to the left politically in the last 30 years.
.       Keynesianism and interventionist policy have become very much in vogue. Hard to believe that Hayek and Friedman once won Nobel Prizes, back when neoliberal economics was in fashion.
.       There are worries about political instability in the case of a downturn, but I’d argue that we are getting political instability in the upturn, because of monetary policy.
.       Groupthink. Get any unaccountable committee together, and they will come up with stupid ideas.

Chuck again. All it takes is for one Central Bank in one country to decide that this is a what they need to do, not what they should do mind you, what they think they need to do, and the others will follow. Build it and they will come? More like distribute newly printed money and watch all the Central Banks fall all over themselves to do the same! Oh, and wanna place a bet on who will do it first?  I say Switzerland.

I have to follow up this discussion and say that in my opinion monetary policy in almost all countries has run its limit, and therefore the focus has shifted to giving newly printed money to the people, under the auspices of calling it Fiscal Stimulus.

Unfortunately, for the largest countries in the world, the U.S., the Eurozone, Japan, the U.K. they’re hands are tied, unless they want to run their debts up even higher.  Therefore, they are limited to words, to improve each respective country’s citizens’ sentiment. And in today’s financial world, it’s all about sentiment, folks.

That’s it for today. I hope you have a marvelous Monday, and don’t forget to be good to yourself!

Regards,

Chuck Butler
for The Daily Pfennig

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