Gold Gets Back to $1,000

Today is Patriot Day in the US and a day that brings back memories of those cowardly attacks on our country eight years ago. I remember the shock and horror on everyone’s faces, and that image will remain with me to the grave. I also remember trying to write the Pfennig the “day after”… It just didn’t seem that important of a thing to do, but a reader told me that to keep things as “normal” as possible was the best thing I could do… So… I wrote…

OK… The currencies – and this time I mean the majority of them, not just euro (EUR) and yen (JPY) – added to their gains this week versus the dollar yesterday. The Big Dog, euro, is once again knocking at the door to 1.46… Who’s that knocking at the door? Who’s that ringing the bell? Do me a favor, open the door, and let ’em in…

The dollar index has really tumbled this week… Recall when I told you how the dollar index was put together, and that euros were really overweighed in the index… Which means that even yesterday morning, when the dollar had rebounded a bit against the commodity currencies, the dollar index still lost ground, due to the euro strength. So, once again, I tell people that the dollar index isn’t a currency… To get real currency exposure, you must own the currency… And yes, you can buy all the ETFs you want at Gary’s Stocks and Bonds, but you can’t get the currency out of an ETF… So, if push comes to shove, you may just want to have the ability to own the currency, eh?

OK, I really went off on a tangent there… What I was working toward with the comment about the dollar index tumbling is that today marks the sixth consecutive day of the index falling in value – the longest such streak for the dollar index since March, when the dollar began going into the tank once again. And a lot of traders and such use the dollar index as an indicator… Well, fellas… That indicator is telling you something!

But I didn’t need the dollar index to tell me the negativity toward the dollar had begun growing again, and that risk assets are the king of the hill right now… And what is being used as the “funding currency” to purchase these risk assets? That’s right… The dollar!

The Japanese yen has joined its currency brothers and taken up the fight against the dollar… For the longest time, dollars and yen traded in tandem… But this week, things have changed, and yen is gaining versus the dollar… In fact, yen just went below 91! A stock company in Tokyo issued a report last night that said, “If the yen falls below 90 it may spark a downward spiral”… Hmmm…

The thing I pointed out to the boys and girls on the trading desk was that it was almost like “the old days”… The US printed some bad data, and the dollar got sold! Now, that’s the way it used to be! The data I’m talking about is the trade deficit for July, which registered its biggest increase in more than 10 years in July, as surging purchases of oil caused an unprecedented jump in imports. The deficit widened by 16.3%, its largest percentage increase since February 1999, to $31.96 billion. That’s up from the $27.49 billion deficit figure in June.

The trading pattern for a long time now was to buy dollars when bad data printed, (safe haven, they thought!) and the currencies would suffer… But yesterday that changed, at least for that piece of data it did. Like I always say… One swallow doesn’t make a summer… In this case, one “fundamentals trading day” doesn’t make for a new trend… But it could be a start, and one that I would welcome with open arms!

We’ll see how that holds up today… On this Friday, the 11th of September, Patriot Day, we’ll see the Monthly Budget Statement, which should be quite a doozy, and the U. of Michigan Consumer Confidence… Probably split down the middle as far as negativity toward the dollar, unless that is, the consumer confidence surprises on the downside… But with the stock market kicking rear and taking names, I would be shocked if consumer confidence was weak!

The Monthly Budget Statement (read deficit!) is forecast to print a whopping addition to our already eye-popping budget deficit, of $140 billion! Recall that we all thought last month’s deficit of $111 billion was bad… Well, we’ll see your $111 billion, and raise you $29 billion!

That’s just shameful, folks… We, as a country, continue to spend what we don’t have, and print money, and do all the stupid things that got us to this place to begin with! Pursuing the same stupid policy of excessive spending, debt expansion and monetary inflation can only compound the problems that prevent the required corrections. Doubling the money supply didn’t work, and neither will any amount of money supply!

I read this somewhere, forgive me but I don’t recall where, and it stuck in my head… “Buying up the bad debt of privileged institutions and dumping worthless assets on the American people is morally wrong and economically futile.”

The Chinese see what we’re doing, folks… And they don’t like it one iota! Why does that matter, you may ask? Ahhh grasshopper… Come; sit… Did you ever borrow money from your parents, grandparents? (I didn’t, but I know how it works…) Well, in the presence of the people you borrowed money from, you are thrifty, and show that you are doing what it takes to pay them back… Hmmm… Think of China as the parents that have lent money to the child (the US)… They see us as doing harm to their money…

I know that I’ve talked about this so many times before that you’re tired of hearing about it… But, China is the gatekeeper, folks… We were stupid enough to get to this place, with all our deficit spending, and now… As my mother used to say… You made your bed; now lay in it!

Well! Someone opened the door and let the euro in! The single unit just traded above 1.46! You are my shining star! Well, wait a minute here, Chuck… There are a lot of shining stars in the sky for us to see, especially when you get out into the country away from the city lights! In the case of currencies being shining stars… Aussie (AUD), kiwi (NZD), real (BRL), loonies (CAD), Swissie (CHF), and krone (NOK) are all up there in the sky to shine for us all!

I know that a lot of people do not believe in the Chinese economic growth story… That’s OK… But without it, we wouldn’t be having this rally in risk assets… So… I tend to go along with it, until somebody can prove to me that the Chinese data is bad… For instance, last night, China reported that their industrial production rose 12.3% in August versus a year ago. I told you long ago that China would be the first country to come out of the global recession… And they have proved that to be bang on!

I received a note yesterday that put a smile on my face… The note was from the “Audit The Fed Coalition”… I’ve made such a stink about the need to audit the Fed, and to support Ron Paul’s HR 1207 Bill that calls for such an audit, that these people have made me an honorary member of their coalition! Anyway… The note said that House Financial Services Committee Chairman Barney Frank has officially agreed to hold hearings on HR 1207! The hearings are tentatively scheduled for Friday, September 25 at 9:00 AM.

This doesn’t mean we’re home free, here… It just means the Bill will take the next step toward giving the American people the ability to see the man behind the curtain, and where the money is going, etc. in other words, the Fed would have to defend itself to the American people.

And this has nothing to do with currencies and economies, but I have to get this off my chest… I read where US Treasury Secretary Geithner has proposed that bankers get paid in equity, something that can be “clawed back” if the bank doesn’t perform. This reminds me of a Governor we had here in Missouri years ago… He said he wouldn’t raise taxes without a vote by the people… But after being elected he raised the taxes without a vote by the people… But he also then put in place a law that prevented any other Governor from ever doing that in the future… This is the same thing with Geithner… He would have stomped and whined for days years ago if they told him his pay would be in equity rather than cash.

OK… I’m back now… Hey! Gold is back above $1,000! Yesterday, it was $984, when I went through the currency round-up… And I had told you all that my new thing was to look to buy on the dips below $1,000…

OH! I almost forgot! The Bank of England (BOE) and the Bank of Canada (BOC) both kept rates unchanged as expected… The BOC, which I took to the woodshed yesterday morning, maintained their “conditional” commitment to keep rates at 0.25% until near the end of 2010… Again, I just don’t see how they can make that statement… The data in Canada lately has shown signs of a nascent recovery… I would think the BOC would have to move earlier should this recovery get legs.

And… Finally, I’ve complained for years about this guy and his jawboning and dissing his own currency, and he’s at it again… Reserve Bank of New Zealand’s (RBNZ) Governor Bollard said, “The currency’s gains are undesirable and unhelpful for an export-led recovery”… Now, that’s true in one sense… But, not completely true! Look at the euro! It’s strong, and Germany’s exports are rivaling China’s! I feel bad for kiwi… It’s just not right for a central banker to talk about wanting his country’s currency to be weaker! Where have you gone, Don Brash?

Don Brash was the Governor of the RBNZ years ago and understood the “perception” that a strong currency gives to a country! I met Don Brash years ago, and in fact I have a picture with him! Oh well… A little history never hurts!

So… Let’s recap… We have a strong currency rally going on, after the US printed an awful one-month increase in the trade deficit. The euro has scratched and clawed its way back to 1.46 this morning, and we’re holding our breath for the Monthly Budget Statement today…And gold is back to $1,000!

The Daily Reckoning