Euros, Oil and Gold Move Higher vs. US Dollars

The euro (EUR), gold and oil have all been on a winning streak this week that the Cardinals would envy. And brother, did these three get a boost yesterday when the FOMC meeting minutes were made public. In simple terms, not speaking central bank parlance, the Federal Reserve sent another strong signal that it is preparing new steps to boost the recovery, saying that stimulus will be needed “fairly soon” unless the economy shows substantially stronger growth. The minutes of the July 31-Aug. 1 meeting showed many members felt further support will be needed “fairly soon” unless the economy improves significantly.

So what will kind of “accommodation” will it be? They certainly can’t be thinking that more Twist and Shout or Operation Twist will work, could they? Well, of course they could. They are the Fed heads. Remember the story I told you about the “guy” that says he sat in on a dinner with lawmakers and Big Ben Bernanke and Big Ben was told to never even say the words “quantitative easing” again? Hey! If you’re going to do this stimulation of the economy, why not call it what it is? With every central bank accommodation action, we go further down the road that Japan has already traveled. And it’s a real shame, folks. Yes, I know they mean well — they truly believe that this is what the economy needs.

Fed head Charles Evans, president of the Chicago Fed, said to reporters in China, “I don’t need to see any more data to know that I think we should have more accommodation. I certainly would applaud anybody who takes action in order to strengthen their economies.” Now, that was interesting, dragging China into the conversation on Fed accommodation, don’t you think? Personally, I think Mr. Evans is attempting to coax China into some sort of stimulus so the Fed heads can point to China and say, “If it’s good for China, it’s good for us.”.

So I’ll get back to China in a minute. But first, let’s dive into the upward moves of euros, gold and oil. I really get uncomfortable about the upward moves when all that’s backing the moves are some statements that were made three weeks ago. But that’s the markets, always “looking forward” and trading today for those forward thoughts, which means the downside risk is even greater should the Fed drag this accommodation out, not wanting to look political.

Why in the world would the euro be on the rally tracks when the eurozone’s manufacturing index remained below 50 for the seventh straight month? The index did rise in July from June’s low of 46.5 to 46.6, but the gain was a micro gain, at best. At least it didn’t fall further! The euro is the offset currency to the dollar, and I’ve explained this many times in the past, so if you don’t want to go through it again, skip to the next paragraph. OK, for those that want to stay, by nature of being the offset currency to the dollar, it matters not what the eurozone economy is doing. If the dollar is getting sold, the euro will go up in value.

Gold has really gathered some wind for its sails this week, and a huge breeze filled the main sail for gold yesterday with the FOMC meeting minutes. Gold moved to a 16-week high yesterday, and is continuing to move higher this morning. The really important move for gold has been to climb above its 200-day moving average. If you get the physical demand for gold in concert with the technical traders, we could very easily see gold push toward $1,700. But that’s just my opinion, and I could be wrong. And as I said above, this could all have cold water thrown on it if the Fed heads drag out this accommodation talk.

Gold has been trading below its 200-day moving average since March, but is now $21 ahead of the 200-day moving average, so a very strong move, eh? This strong move could very well see some short positions having to be closed out. And I like seeing those short positions having to be covered with losses! Shorting gold… what were they thinking?

And oil. The price of oil has reached $98 this morning. Well, the dollar is down from last week, and basically down on a dollar index basis since reaching a high of 84.10 on July 24. This morning, the dollar index is 81.38. I’ve said this before, but it’s worth repeating: Gold and oil are “anti-dollar” assets. So using that thought, you’ll understand why oil is closing in on $100.

And I can’t forget silver! And I’m not talking about the Lone Ranger’s horse! I’m talking about the precious metal that has climbed back to $30 an ounce! You know, silver has actually outperformed gold in, like, seven of the last 11 years. I once wrote an article that was printed in a magazine (can’t remember which) that talked about silver being the new gold. I fell on my face with that one, eh? But you never know!

We saw the HSBC version of the Chinese manufacturing index overnight. Remember HSBC does one, and then the government does one. The HSBC reading is usually worse than the government one. I tell you that because the HSBC manufacturing index for China shows that this month, the pace of the Chinese economy has really slowed. The index number was 47.8, versus 49.3 last month. So not only has the U.S. Fed signaled the need for more accommodation, but this report, if confirmed by the government report, will signal that there is more accommodation needed in China.. Let me say this again, for those of you who missed class the 100 times before that I’ve said it. The difference here is that China has a treasure chest of reserves to use. The U.S. doesn’t.

Did you see the report from the Congressional Budget Office (CBO) yesterday? This nonpartisan, independent accounting office issued a report that said a deep recession is probable in the first half of 2013 if Congress steps over a “fiscal cliff.” Here’s the back end of the financial storm that I’ve been talking about, folks. So it pays us to look into what qualifies a “fiscal cliff.”

The fiscal cliff would be reached IF the Bush tax cuts expire AND the $1.2 trillion in spending cuts go into effect as they are scheduled to do. (Remember $1.2 trillion is over 20 years, but still, the cuts to spending would hurt the economy.)

Folks, I love tax cuts just as much as anyone. And on the outside looking in, one would think immediately that we, as a country, can’t afford the tax cuts. But the debt has grown so much that abolishing the tax cuts is not going to be the elixir for what ails us. No, I’ve gone over this many times in the past, but at this point, we as a country have only three choices in dealing with our debt:

1. We can increase our revenue (raise taxes — it’s coming!)
2. We can reduce our expenditures (cut deficit spending — fat chance!)
3. We can allow the dollar to depreciate further and further to pay back debts with cheaper dollars (looks like the easiest thing to do — right?)

My call on this is that we’ll take what’s behind doors Nos. 1 and 3 and hope for the best!

Sorry to be the bearer of the bad news, but don’t shoot the messenger! It’s not as though longtime readers are hearing this stuff for the first time. I’ve become a broken record talking about debts, deficit spending, what’s going to happen, etc. OH! And just because I said that allowing the dollar to depreciate further sounded like the easiest thing to do doesn’t mean that it’s not going to hurt! Our purchasing power will be reduced, which is just another tax, in my way of thinking!

I am sorry for being so wrong about something I said yesterday. Recall — I’m sure you will — that I said that I thought Canadian retail sales would beat the forecasts of +0.2%.. I was wrong! Canadian retail sales were very disappointing! This was June data, so take it with however many grains of salt that you wish. But June retail sales fell 0.4%. The sales of motor vehicles were really down. Which is what I was telling you yesterday about the Bank of Canada’s Gov. Carney speaking to the autoworkers. That spelled weakness for the Canadian dollar/loonie (CAD) to me. And the loonie did weaken a bit yesterday, but the drag of the other currencies higher has the loonie moving higher again this morning.

This morning, I saw a report on unemployment here in the U.S. that said that unemployment is up in 44 of the 50 states. That’s not a good thing for the economy, and it’s stuff like this that really makes the collar around the Fed heads’ necks become very tight. But at least Pfennig readers won’t be surprised if the backside of the financial storm that hit us in 2008 reaches our shores, for I’ve been warning you all about this for months now.

I can tell you that after 20 years of sitting on a trading desk that working alone in one’s office leave’s one feeling very lonely. So I came back out to the desk yesterday. I did mention the other day that I was going to have more surgery on my mouth. Actually, I have to have most of the jawbone on the right side of my face (the right mandible, for those with medical experience) cut out to get the cancer that’s in the bone.

I dread the recovery and rehab. But look at this as a way for me to lose some weight, which is much needed, as I won’t be eating for some time afterward! I won’t be talking much either, and that means that family and friends won’t be shy about coming around, for they don’t have to fear hearing me talk about debts, deficit spending and the economy.

Please, I ask of you, this is a decision I made. Please don’t send me notes telling me not to do it, or that there is a better alternative. I’ve seen them all. Please support my decision, that’s all I ask.

But I’ll be away for at least two weeks, probably more. The surgery is Sept. 5. Make sure you light a candle that day.

Then There Was This, from Der Spiegel:

“The severe drought in the U.S. has been blamed the rising prices of agricultural commodities. But that is only part of the story: Biofuels, financial speculation and changing dietary habits are also playing a role. The global food supply faces pressure from all sides…

“The American Midwest… is experiencing its worst drought since the 1930s. One-sixth of the corn crop has been lost, and the soybean plants and wheat stalks don’t look much better. Shortages and rising prices for essential commodities are the result.

“Some prices have soared by almost 50% within just 10 weeks, and grain warehouses are beginning to empty out. Other important supplier countries also anticipate poor harvests. Because of a prolonged dry period in Russia, wheat exports are expected to be only half of what they were last year. Brazil, on the other hand, has had too much rain, which is bad news for sugar cane farmers. ‘The latest crop predictions suggest that we should fear the worst,’ the United Nations World Food Program warned last week. It is the third such warning in recent years, following similar crises in 2008 and 2011. Catastrophe, it would seem, is becoming the norm.

“Sudden spikes in the prices of wheat, soybeans and corn threaten the well-being of every individual. Economists warn of ‘agflation,’ or inflation triggered by a rise in the price of agricultural products. Poor nations, however, are disproportionately affected because people there spend a larger share of their income on food. But consumers in the industrialized world will also feel the effects.”

When they are writing about the drought in the Midwest over in Germany, you can bet the world sees this as a major problem.

To recap: The FOMC meeting minutes sent the dollar for a ride on the slippery slope yesterday afternoon. Gold, euros and oil all saw huge jumps in their respective levels as the Fed heads signaled that if the economy doesn’t show some very good strength, they are prepared to implement additional accommodation “fairly soon.” Of course, the downside risk of these moves higher against the dollar is that the Fed heads drag their feet on this accommodation, not wanting to be seen as political.

Chuck Butler
for The Daily Reckoning