Gold Gets Ambushed in Asia

Today’s Pfennigfor your thoughts…

Good day, and a marvelous Monday to you!

I have BIG news regarding gold this morning, and it’s not good news either…

Front and center this morning, things have gotten very ugly with gold in the Asian session folks. Here’s the skinny as far as I know. In Shanghai and the Shanghai Gold Exchange (SGE) close to 5 tonnes of gold was sold on the SGE in a two minute window in a market where the normal amount of gold traded on a daily basis is 25 Tonnes.

The August 15 Comex gold contract also saw 7,600 contracts traded in the same two-minute window, the paper trades led off and I would think caused the HUGE sell off in the SGE.

Gold had already fallen 1% in Friday’s trading, as the markets got spooked when China supposedly revealed their gold holdings and they weren’t what most gold observers thought they would be.

I think this has all gotten out of control very quickly and for no good reason other than investors, hedge funds, whatever, that don’t pay attention to the details.

Yes, China reported a figure on gold that was less than what was expected. But, according to gold researcher, Koos Jansen at bullionstar.com, saying that, “I think it’s possible the PBOC (Peoples Bank of China) hasn’t been completely honest by stating that their gold reserves have grown by only 604 Tonnes since 2009.”

Now if anyone knows and understands what the Chinese are doing with gold, it’s Koos Jansen. And Koos Jansen believes that…

China’s import data acknowledges imports of both monetary and non-monetary gold but customs reports quantify only the non-monetary gold, never the monetary gold, thereby signifying that the People’s Bank of China does not want is gold purchases made public.

That is, official gold purchases in China, like official gold swaps and leases in the West, are highly sensitive and top-secret.

And therein lies the big difference, as we all know the huge amounts of gold China imports and produces every year. Who are they trying to kid with this 604 tonnes of gold increase since 2009?

Well, they fooled the hedge funds, and large players that trade gold because they panicked.

So, this morning, gold has fallen to a level it hasn’t seen in 5 years, and has come back a bit, as the “gone too far, too fast” trading came into play. But the shiny metal is sitting with a $20 loss right now. And Silver, Platinum and Palladium are faring much better percentage wise. So, it’s an ambush.

There were reports that maybe the gold sale on the SGE was “margin influenced,” which would mean that large investors use gold as collateral on stock trades, and as the Chinese stock market has dropped the margin calls have come in, and maybe the gold piece has to be sold on a margin call.

But that’s difficult to get my arms around, because it was such a large piece of gold at one time. But, hey! We are talking about large investors!

Well, there’s other things going on today besides the gold price drop and China’s announcement. So, let’s talk about them.

The best performing currency overnight is the New Zealand dollar/kiwi. But folks, I don’t expect this to be a lasting thing.

First of all, kiwi moved strongly higher on the words of PM Key, who said that, “kiwi has fallen faster than expected and that the economy is still growing at a good pace.”  That caused a short squeeze in kiwi overnight, and got kiwi the best performer award.

But I just don’t see this lasting too long, folks, because on Wednesday, the first day of my summer vacation, the Reserve Bank of New Zealand (RBNZ) will meet, and 18 of 19 economists surveyed said they expect the RBNZ to cut their Official Cash Rate (OCR) 25 Basis Points, with the one exception expecting the RBNZ to cut 50 Basis Points! OUCH!

So, if you’re like me, you are scratching your head right now and saying, “What, what?, The Prime Minister, just said that the economy was still growing, why would that lead the RBNZ to cut rates?” I hear you brother, and sister. And I shake my head in disbelief, and disgust.

Kiwi is an outlier for the currencies this morning, as the dollar has the conn on must currencies right now. The Aussie dollar (A$) hasn’t seen enough “pull” from kiwi to help it much, but at least the A$ is flat on the day, and the euro is flat to up a small bit, Swedish krona is flat, and the Czech koruna is up a small bit.

Other than those fighting to keep their heads above water, the rest of the currencies are down vs. the dollar today.

I mentioned that the euro was flat to up a small bit, but that doesn’t really tell the tale, as the single unit really took one to the mid-section on Friday, and fell through the 1.09 figure and now trades with a 1.08 handle. UGH! Really. Is this necessary?

I was looking through files at home looking for something this past weekend, and came across the print of an article that was written in Sarasota Herald Tribune on 3/21/2004, and it was a long interview with yours truly. It was a very good article I must say so myself!

Here’s an excerpt from that article from 11 years ago:

Q: Right now there is a little dollar rally going on.

CB: Just like this last summer there was one too. We saw the euro move from 1.18 to 1.08. And everyone thought, oh, the weak trend in the dollar is over. It wasn’t over. It was just merely a correction that needed to be made and then we moved higher from there. That is the same thing that is going to happen right now in my opinion.

I read that part and thought to myself, “You sound like a broken record all the time Chuck. Have you ever considered that maybe, just maybe the weak dollar trend is over?”

That’s something that you can’t let happen, having self-doubts. But, when facts change, you need to change your stance, right? Well, that’s true. But I’m not ready to change my mind yet.

Now, if we get to October, and the IMF/renminbi decision, and things don’t go the way I believe they will go, then I’ll have to go back to the chalk board, and make a call. But not until then.

I really got a kick out of reading that article from 2004. They even had a picture of me to go along with the article titled: International Bond Trader Talks About Playing In Foreign Currencies.  Of course that was the writer’s choice of words “playing.” I would have said diversifying with foreign currencies.

OK. Back to the Future. 2015.

Well, the U.S. data cupboard on Friday sure had a full docket, but the main points were the housing starts and building permits which kicked some tail and took names later!

Again, as long as the Fed keeps talking about rate cuts coming, the housing sector data is going to look good, as the “get in before the rates go higher” campers take advantage of the rate environment.

The Stupid CPI was bang on expectations of a 0.3% increase vs. May, and a year on year increase of 1.8%… Still not 2%…  I want to send all those out there in writer land a picture that shows how 1.8% is not quite 2% yet.

The U. of Michigan consumer confidence index actually saw a drop from 96.1 to 93.3.

Hmmm, now that’s interesting, eh?

There are no data prints on the docket to print today, so, we have to look at the rest of the week, and quite frankly there’s not a lot that’s going to tell a story one way or the other this week.

I’m still reeling from the ambush of gold in Asia last night. I’m almost afraid to send the letter out today, given the panic that the news caused in Asia and Europe overnight. Oh well, here goes nothing!

That’s it for today. I’m going to venture away from the unusual stuff, and highlight my good friend, Dennis Miller and his new blog site.  Here’s the link. www.milleronthemoney.com.

Dennis is what MarketWatch calls a retirement guru. And he’s authored a book called Retirement Reboot.  If you’re retired, getting ready to retire, or just thinking about retiring, you should read what Dennis has to say.

His latest piece on the site is titled “I’m Going to Sting Like a Butterfly and Float Like a Bee.” Yes, that’s intended to be backwards from the great Muhammad Ali’s famous like.  Here’s a snippet:

The Fed wants us to believe the market has already priced in a rate increase – no worries! Yeah right! Retirees are risking trillions in high yield bonds and dividend paying stocks – they need income and have no place else to go.

“Massive overvaluation” is a bubble. When the massive overvaluation in fixed income and equity markets eventually rights itself – and it will – bubbles burst, people get stung financially, particularly retail investors.

Chuck again. Well, he’s landed on his feet! Dennis was part of the Casey Research Group that got cut after a recent buyout, so I’m glad to see that he’s continuing his work to help people with retirement on their minds!

That’s it for today. I hope you have a marvelous Monday!

Chuck Butler
for The Daily Reckoning

P.S. The Daily Pfennig is first published everyday, right here.

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