Gold as an Inflation Fighter

Good day… And a Tub Thumpin’ Thursday to you! Day One at the Orlando World Money Show (WMS) went well. My room for the presentation was packed! It was standing room only, and the good part was the fact that there were only about 30 Pfennig readers in the crowd. I say that not because I have something against Pfennig readers, oh Lord, they are dear readers! The reason I say that is that I like to know how many of the non-readers I can convert to Pfennig readers!

Well… As you know, when I’m on the road like this, I’m not sitting in the saddle back home, watching the markets all day long, and reading stories about what’s happening, etc. So, the “road Pfennigs” tend to be a bit shorter. But as my friend, and once editor of our monthly newsletter, David Galland, used to tell me… “You’ve got to get it out every day, no matter what!”

So… From what I can tell this morning, the currencies traded in a very tight range after the sell-off from the previous night that I told you about yesterday. Japanese yen (JPY) is a bit weaker, from yesterday morning’s currency round-up, but other than that small move in yen, the levels look like they are wearing the same clothes as yesterday!

Today we have the central banks of England and the Eurozone meeting to discuss rates. As I said earlier in the week, I truly believe the Bank of England (BOE) will cut rates aggressively once more to bring their internal rate to 0.5% or 50 BPS, just like here in the United States. The forecast is for the BOE to cut to 1%… But I’ll go out on that limb and say they’ll be even more aggressive. Here’s the thing that just gets my goat, though… The more aggressive the BOE is in cutting rates, the better pound sterling (GBP) will trade. Now this should be the opposite, as a rate cut is a true debasing of one’s currency. But the mental giants in today’s trading world don’t see it that way. They see it as a plus for the economy and so for the currency.

I could really go off on a tangent now about how trading desks are run by Ivy leaguers that got that jobs right out of grad school and don’t carry the same “valuation tools” as old timers… And quite frankly, that could very well be one of the reasons we’re in this mess today… But I won’t go there, as that’s too touchy of a subject!

The European Central Bank (ECB) will also meet today, but ECB President, Trichet has pounded it into everyone’s heads that the ECB will NOT cut rates today, and to look to the March 5th ECB meeting as the next “chance” for a rate cut.

Here’s another example of not carrying the same “valuation tools”. The ECB is being prudent and waiting to see the results of previous rate cuts, so as to not “over cut” and get in trouble with spiraling inflation, etc. Why debase the currency when you don’t have to? But…. NOOOOOOO! The mental giants these days are punishing the euro (EUR) because they believe the ECB is now “behind the curve” with regard to rate cuts. See how crazy this has all become?

Yesterday, I told you about the surprise Pending Home Sales report, and how maybe it’s a sign of better times, but I needed to be shown more before I would commit to saying that it’s a true sign. Well, my friend, Bill Bonner here at The Daily Reckoning had this to say yesterday about this very subject…

“Our guess is that the little light investors thought they saw will turn out to be another torpedo blowing up. Millions of homeowners and stock market investors have gone down already…but there are many still afloat.

“And many torpedoes that still haven’t found their marks.

“In Japan, for example, property prices began falling in 1991. They fell for the next 13 years…reaching a low in 2004 equal to where they had been in 1973!

“If that pattern plays out in the United States, the housing market won’t hit bottom until 2020…when you’ll be able to sell your house for what you paid for it in 1989.”

Our old Fed Chairman – who is highly regarded for his inflation fighting in the early ’80s – Paul Volcker, spoke last night; and he’s none too happy with the delay in starting the economic advisory group that the new President, Obama, set up. Obama picked Volcker, but Volcker isn’t seeing any moving forward with this advisory panel. Volcker wants to help, and I believe we need his voice, but no one wants to “include” him. Hmmmm… I wonder what’s going on there… Does the new administration believe they don’t need Volcker’s voice? I sure hope that’s not true!

In another sign that the German economy has fallen into a recession, German Factory Orders for December fell 6.9% bringing the annual number to a staggering decline of 25%, according to the report I saw this morning. This is just another reason why the euro no longer trades at 1.60.

I saw a report this morning regarding India and the rupee (INR)… I don’t talk about India very often, because not much in the way of market moving news comes out of India… But, this report is talking about black clouds hovering over India, so I thought I had better fill you in… An advisor to the Prime Minister said last night that the 2009 Budget “may” reach 7.5% of GDP! The forecast is for 2.5% of GDP. If this is true, the writer believes that the rupee could sell off from today’s level of 48 and change to 52. If that all holds true, then holders of rupees will be thankful for the above market interest rates to cushion that blow… But again, this is all based on a “may” and could turn out to be a boy crying wolf!

I’ll end today’s letter with a “feel good story”… Gold rallied to $915 yesterday… Gold traders say that they believe government spending will spur inflation, the dollar will weaken, and gold will take off on the strength of its inflation-fighting make up.

Goldman Sachs Group, Inc. (which probably has so many research people you can’t count them with stick) said that they believe gold will reach $1,000 within three months. And a commodity analyst at Dresdner Bank said this… “Expectations of future inflation and dollar depreciation are driving the market right now.”

I told the crowd at my presentation yesterday that gold IS an excellent inflation fighter… And not to listen to those that preach otherwise, as they use the high of the ’80s at $800 and say gold hasn’t done a very good job of fighting inflation since then! But! Not so fast, Tim! I say you have to go back to when President Nixon closed the gold window, and took the dollar off the gold standard. Gold was trading then at $35 an ounce. Now follow gold’s price through the years to the present at $915… Now… That’s what I call an inflation hedge!

And finally on gold… Kristin sent me this note that she came across… “Short term, said Tom Pawlicki, of MF Global in Chicago, ‘Investment has been a key supporting factor for gold,’ and thus ‘Passage of the stimulus package in its current form would likely be inflationary and bullish for gold while a Senate filibuster would be bearish.’”

On to the Big Finish! Wait! There’s been a nice move up in the currencies since I got up this morning! WOW! Alrighty then, let’s go to the currency round-up!

Currencies today 2/5/09: A$ .6485, kiwi .5130, C$ .8125, euro 1.2875, sterling 1.4515, Swiss .8615, rand 9.9765, krone 6.83, SEK 8.2625, forint 230.32, zloty 3.62, koruna 21.98, yen 89.70, sing 1.5050, HKD 7.7540, INR 48.77, China 6.8367, pesos 14.44, BRL 2.3075, dollar index 85.60, Oil $40.44, Silver $12.71, and Gold… $915.80

That’s it for today… I had a very nice dinner last night with current colleagues and one old colleague… It was nice to see Walter Meyer again! I’m going to have dinner with one of my faves, Mary Anne Aden tonight! Mary Anne is in the “house”! She’ll be giving a main stage talk today… Me? They send me off to the side rooms! Hey! At least I fill the side rooms to the brim! My publisher and editor of the “other” monthly newsletter that I write, the Currency Capitalist, are in town for meetings with me, today. Sure hope they didn’t come here to give me a pink slip! Nah…. They “love” me, they really “love” me… (I’m doing my Sally Field, here)… OK… Time to hit the send button and get ready to meet Chris for breakfast… He’s probably already gone out and run 10 miles this morning! He’s amazing! Oh, well, that’s not for me, I’d rather spend my time with you, dear reader! On that note, I hope you have a Tub Thumpin’ Thursday!

The Daily Reckoning