Gold Leaves $1,250 in the Rear View Mirror

And now… today’s Pfennig for your thoughts…

Good day, and a marvelous Monday to you!

Well, today is starting out slow, as most of Asia, and Pan Asia is closed for holidays, as is a lot of Europe, as they still celebrate May Day, which fell on a Sunday, so naturally, they take Monday off. And I don’t believe that things in the U.S . will get hopping wild today either, unless the ISM Manufacturing Index which is scheduled to print, has a rabbit in its hat…

There are a ton of Central Bankers globally, out on the speaking circuit, headlined by the European Central Bank (ECB) President, Mario Draghi, who is probably going to throw the euro under the bus, as the currency trades nearer the 1.15 handle than it does the 1.14 handle this morning. There are a couple Fed members that will speak, and it will be interesting to see if they sing from the same song sheet. Historically, they don’t, but maybe this time they can share the same song sheet.

The Reserve Bank of Australia (RBA) meets late this afternoon, (tomorrow morning for them) and the latest poll of economists have 45% of them thinking that the RBA will go ahead and get this last rate cut out of the way at this meeting.  With the call very close to 50/50 for a rate cut or not, I’m still of the thought that the RBA would be prudent here, and wait to see if the latest inflation report was just a rogue report before cutting rates again. The A$ traders don’t seem to be on the same page as the economists, for they have pushed the A$ higher this morning ahead of the RBA meeting. You don’t see that every day!

Once again the Japan yen is stronger this morning that it was on Friday morning, and overnight a Bank of Japan (BOJ)  official (Aso) noted that he was concerned with the strong move of the yen. In the “old days” of currency trading, this kind of talk would be a precursor to intervention by the BOJ, but not any longer, the BOJ was handed their playbook at the Shanghai G20 meeting, and all the now have at their disposal to slowdown this move by yen traders is their mouths. And I don’t think the markets are concerned with what comes out of the mouths of the BOJ members. The Mighty Puff ceased his roar.

Gold has really pushed past $1,250, and the figure now appears to be in gold’s rear view mirror. It sure took a few frustrating times before finally moving past $1,250 for good. Not that I’m complaining. Much. And what really surprises me with this move is that it comes when the physical gold demand has backed off its previous strength. Not that it has dried up or anything like that, but demand backs off and the price of gold soars.

Hmmm… now, that’s a new one on me! But I’m not going to question the move, or sit here and tell you that it shouldn’t be happening, because all the time that physical demand was soaring, gold lingered and even lost ground, so that too was confusing to me! So, this makes up for the last four years of watching physical demand soar, but gold falter.

The Big data print this week will be the Jobs Jamboree on Friday. Right now, the experts are thinking that the job creation for April will remain around 200,000 to 215,000. I don’t get involved in the guessing what the number will be any longer, because I could never get my arms around the adjustments that the BLS would make to their surveys.

I’ll mention this once again, but why do the markets get all lathered up over “surveys” that the people that run the “surveys” then have to apply adjustments to? Seems all convoluted to me. Why wouldn’t we as a country use tax returns as a means of computing our total employment? Ok, that’s a discussion for some other day. But for this week, we’re stuck with the Jobs Jamboree as presented by the BLS on Friday.

As usual, China printed data on the weekend. They love to do this, so that the data can be absorbed by the markets without market movement. I don’t agree with this method, but I don’t think they care.

The Chinese printed their April PMI (manufacturing index) and for the second consecutive month, the index printed above 50 at 50.3, after a 50.2 print in March. I would say this is a stabilization of some degree for the Chinese and could mean that the country would hold off on further stimulus. And for this “stabilization” the renminbi saw depreciation in the overnight fixing. Yes, that’s opposite of what I would think would be the reaction by the Peoples Bank of China (PBOC), but remember, China boosted the renminbi by a large amount last week, and I’m sure they decided to make sure once again, that the markets didn’t think it was going to be a One-Way Street of appreciation.

The Russian ruble is seeing another strong positive move this morning, as the price of oil hasn’t really moved much, but that seems to be a good thing for the Petrol Currencies like the ruble, which doesn’t need any oil price weakness for sure!  The Central Bank of Russia (CBR) has pointed toward the high rate of inflation as a reason they can’t continue to cut rates further from their emergency rate hike levels. I think if the ruble continues to appreciate, that it will help with the inflation problem, and interest rates could get back to near normal, in Russia, which would still be above the majority of rates in the world.

Well, I’ve been reading so much about negative rates lately. There are articles on it everywhere, and of course not all of them are in agreement. But I’ll pin my colors to the mast of analysts like Grant Williams, who believe that while things may not be rotten in Denmark just yet, they will eventually.   

Speaking of Denmark, where rates have been negative for four years now (yes, can you believe it’s been four years of negative rates here?) the private sector is saving more than it did before there were negative rates. Last week, I even played this out for you and said that while most economists thought that negative rates would get people to spend, it was doing the opposite and getting them to save more to make up for the “tax” of negative rates. You have to think about this deeper though, and that’s where I come in!

Stop for a minute to really think about this. If the country you’re living in has decided that negative rates are necessary, wouldn’t you as a citizen of that country think that the sky was falling, and wonder where Chicken Little was? I know I would! And if the sky is falling what do you do as a citizen? Hunker Down, batten down the hatches, and run for cover, right? Now, did you think that the mental giants (NOT!) that come up with the idea for negative rates ever thought about this scenario? NO! They only saw the people pulling their money out of the bank and spending it. Well, that’s not working, and it’s not going to work either!

And sooner or later, these countries, like Denmark, the Eurozone, Switzerland, Sweden, and Japan will realize that negative rates are counter-productive. I shake my head in disgust at these Central Planners that don’t see this a counter-productive.

And when you think about it, the same is happening here in the U.S.  But we don’t have negative rates, Chuck!  OK, technically we don’t have negative rates, but we do have “real negative rates”.  If the Fed Funds rate is 0.50% to .75%  and inflation, using either method you want to use to calculate it is greater than the interest rate then the “real rate is negative”. And again, I think this is what’s happening here in the U.S. as citizens save more to protect future purchasing power.

Well, I already spilled the beans and told you that the U.S. Data Cupboard has the ISM Manufacturing Index today, and I think it will show some slippage from the March rebound. But not much movement, so no real market reaction in my opinion. We’ll also see Construction Spending for March, which seems so long ago to me now. And Fed member Dennis Lockhart will give the first of his two speeches this week today. Tomorrow, Fed member Loretta Mester will speak and this is where I was talking about how we’ll have to see if they sing from the same song sheet.

Well, gold is kicking tail and taking names later once again. I’m surprised at how silver, which had been outperforming gold up to last week, has lagged. But that’s OK, silver is still moving in the right direction, so no need to panic here. Gold is up $11.72 this morning, and has crossed the Rubicon. Gold is above $1,300 this morning, after adding $26 to its price on Friday. A nice day indeed, but as always, it could have been even better if not for some aftermarket selling by the you know whom.

Before I go to the Big Finish, I wanted to share this with you. I have a friend, Sean Hyman, who is a technical guru. He’s asked to speak to groups all over the world, and he shared this thought with me regarding the Dollar Index:

The U.S. Dollar Index is basically at its last rung of support around the 93 level. If it breaks that long-held support….’look out below’.

For 93 has held up every time over the past year and a half, but the technicals are looking weak and the metals are looking strong. So IF we break 93ish and close below it, it’s going to light the next fire under foreign currencies and metals and take them much higher than the rally we’ve seen in these on the mild drop in the dollar thus far.

The dollar index in case you don’t want to wait for the currency roundup is 92.87 this morning. Even a dull tool in the tool box like me, knows that’s below 93. Now it just has to close there.

I was reading Ed Steer’s letter this weekend, and he mentioned an article on ZeroHedge and I just had to go there to see if for myself. You can find the article here, or here is your snippet: 

While the U.S. Treasury’s semi-annual report on the foreign-exchange policies of major U.S. trading partners has traditionally been, pardon the pun, a paper tiger, as the U.S. has not named a single country as a currency manipulator since it did so to China in 1994, and it didn’t go so far as to blame any country as an outright manipulator in the just released April edition, there was a new addition to the latest report.

In an inaugural ‘monitoring list’, the US put five economies including China, Japan and Germany (as well as South Korea and Taiwan) on a new currency watch list, saying that their foreign-exchange practices bear close monitoring to gauge if they provide an unfair trade advantage over America.

This is about as direct a threat to the 3+2 nations not to engage in major currency devaluation whether through QE, NIRP or major interest rate changes as Jack Lew could come up with, and in some ways was to be expected in the aftermath of the G-20 meeting which as we found out this week, precluded any additional QE by the BOJ.

Recall that as part of the most recent G-20 accords, which many believe is what unleashed the steep slide in the dollar, the member nations agreed to refrain from FX intervention absent ‘disorderly markets.’ It also made clear what could push a country from merely the watch list to full blown manipulator status.

Chuck again. Hmmm…  Now I wasn’t trading currencies in 1985 when the Plaza Accord took place, and the dollar was set in motion to weaken for about nine years, but I bet it looked and sounded a lot like this, don’t you?

That’s it for today. I hope you have a marvelous Monday, and be good to yourself!

Regards,

Chuck Butler
for The Daily Pfennig

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