Gold Reaches $700!

Good day. Well, so much for “slowing down” in currencies and metals, eh? In case you were out of touch with the news yesterday, gold reached the $700 level in the spot market, and did not back off overnight! The euro? Well, it kicked some more sand in the dollar’s face, yesterday. Both of these rallies were kick-started by a story from China. Here’s the skinny (according to Reuters):

Some Chinese economists are urging Beijing to quadruple its gold reserves to 2,500 tonnes from the current 600 tonnes because the country’s foreign exchange reserves had become the world’s largest, an official industry newspaper reported on Tuesday.

“China should raise its gold reserves so those reserves can account for 3 percent to 5 percent of the foreign exchange reserves, instead of current 1.3 percent,” said Liu Shanen, an expert at Beijing Gold Economy Development Research Centre.

Uh-oh! All this time, people worried that China would sell off Treasuries, but China shows it know a trick or two, by not selling Treasuries but simply taking dollar reserves and buying gold! OK, OK, I know this hasn’t really happened yet, and since we are dealing with China, we could see Chinese officials come out and do a Sergeant Schultz: “I know nothing!”

However, they haven’t yet, and you know me, where there’s smoke – and the smoke I smell has a slight scent of dollar.

OK, before the China/gold story hit the news wires yesterday, we had seen a disappointing German industrial production report, and that had the euro a bit weaker. Then, the “story” hit the news wires, and the industrial production report was swept under the rug! Overnight, the German retail sales for April printed and showed a different story than the industrial production report did. Retail sales for April grew the most in two years!

That’s what the euro needs. It needs the Eurozone economy to carry it through and that will require domestic demand to take up the slack that’s caused when exports slow down, which they did in Germany during March, due to the stronger euro. In my opinion, the euro is just going to continue to get stronger. So, domestic demand, here’s your cue. Are you ready to perform?

The euro touched 1.28 overnight, before the reported slower exports in Germany caused some slippage – but not much. As I look at the screens, the euro is back to 1.28! Isn’t that a great looking figure? We’re getting to the point in the proceedings that remind you of the last three months of 2004 – the negative momentum for the dollar.

Of course, more slippage could occur today, as the FOMC meets to raise rates 25 BPS. Of course, the markets have already priced this rate increase into the assets. So, the most important part of today, will be any news conference Big Ben has after the announcement. I doubt he’ll say anything of note, but he could pull a rabbit out of his hat, and talk about rising inflation – blah, blah, blah – which would put another rate hike on the burner. This would also give the dollar some room around the collar!

How about that Aussie dollar, eh? A very nice surge overnight as the Australia budget was printed. The bottom line is: The Australian Treasury expects larger surpluses for this year, and next! The budget has again benefited from windfall gains, which is a direct result of the commodities bull market. Commodities helped boost the cash available to the government over the four-year forward estimates period by $51 billion. Wow!

How nice is that? A budget surplus that adds about 1% to GDP!

OK. To contrast that superb performance: Today, we’ll see the April monthly budget statement for the United States. It is expected to top $100 billion in deficit! That probably will take away from the GDP around 3.5%! Ouch! Double Ouch! Oooooh, that’s going to leave a mark!

The Bank of England has sprayed some cold water on the hot pound sterling by lowering their 2007 economic growth forecast. Bank of England Governor Mervyn King explained that gas prices are squeezing real disposable incomes. That makes sense, but what about the profits that the United Kingdom will receive from their own oil production? Here is where I believe Governor King probably dropped the ball, but then again, it is his ball to drop! I don’t think this cold water will cause a big sell off in the pound sterling, but a bit of weakening can be expected.

Well, although the timing is surrounded by shadows, I believe the U.S. Treasury’s report on currency manipulation is due this afternoon. As I said the other day, I just don’t see the United States calling out China. I’m of the opinion that some smoky backroom deal has been struck with China. And as long as they allow the currency to continue to gain versus the dollar (almost on a daily basis), the Untied States will not call them out on currency manipulation. We’ll have to wait and see, eh?

And, while I’m thinking about Asia, the Japanese yen finally moved into the 110 handle, overnight. There are rumors going around, someone’s underground – no, wait! There are rumors going around that the Bank of Japan is moving ahead with plans to raise interest rates. Let me say this: The day that the Bank of Japan does announce a rate increase, a decade of zero or near-zero interest rates will come tumbling down, and the yen will rise versus the dollar. Look at what it’s doing on the dad-gum rumors!

Currencies today: A$ .7740, kiwi .6250, C$ .9090, euro 1.2790, sterling 1.8625, Swiss .82, ISK 70.40, rand 6.04, krone 6.0720, forint 203.70, zloty 2.999, koruna 22.11, yen 110.40, baht 37.55, sing 1.5650, INR 44.93, China 8.0037, pesos 10.87, dollar index 84.65, and our precious metals: silver $14.45 and gold $703

That’s it for today. As I said yesterday, today is National Teachers Day. Makes me think of my favorite teacher along the way, how about you? Just a last minute reminder that if you haven’t already registered for the Las Vegas Money Show, you still have time! Frank, Chris and I will be there. Hope to see you! Have a great Wednesday!

Chuck Butler
May 10, 2006

The Daily Reckoning