Gold & Silver Continue To Soar

Good day. Whew! What a crazy day for the currencies yesterday! As I was signing off, I told you that the euro had already gained half a cent since my arrival that morning. Well, it didn’t stop there. That story and some great news for Iceland are our lead stories this morning, so let’s get to the tape!

First and foremost, I felt like a real dolt yesterday afternoon. I realized that I had come to work loaded for bear with a story on Iceland, only to forget it completely once I began to type the Pfennig. Duh. Throw me the ball coach!

Anyway, here it is: It’s a real feel good story on Iceland, which as you all know has taken a beating around the head and shoulders since Fitch issued a report downgrading their “outlook” for Iceland. That was followed by a report by the Big Brokerage House that owned a bull. Those two reports scared hedge funds and institutions to unwind carry trades, and the currency was bounced out onto the street and into the gutter.

Since that time, Standard and Poors wrote that they did not agree with Fitch’s and Merrill’s reports, but that didn’t stem the tide versus Iceland. On Friday, we saw the latest report from a rating agency, Moodys, and this is worth writing about! Here it is:

“Iceland’s Solvency and Liquidity Are Not at Risk

“Moody’s – 11 Apr 2006

“According to a report from Moody’s Investors Service, Iceland (rated at Aaa) is not experiencing undue risk to solvency or liquidity as a result of recent volatility in the nation’s business and financial cycles. ‘While we have warned of the risks that may accompany increased leverage in the economy, Iceland has our top rating with a stable outlook, and we believe these concerns have recently been exaggerated,’ said Moody’s Joan Feldbaum-Vidra, author of the report. A sizable accumulation of banking system external debt and large short-term payments falling due are among the recent events that have ignited concerns about systemic risk in the banking system. ‘Iceland is well positioned to deal with any potential claims on government resources that might emanate from a systemic problem in any sector of the economy,’ said the analyst.”

I sure hope this goes a long way toward some healing in Iceland…

OK. Now for yesterday’s trading. First of all, New York traders came in and took the ball and ran with it, running the dollar down to almost 1.23 versus the euro. This was in anticipation that the Net Foreign Security Purchases (NFPS) would disappoint. But then, the report printed and lo and behold, the report surprised big time on the upside! I mentioned to the kids on the desk that the report’s numbers, which came in at $86 billion, would wipe the euro’s gains.

It did, at first, then guess what? The dollar buying stopped. I then said, “There must be something in the numbers that have caused the dollar buying to stop.” So, a review of the data was in order. But really, I didn’t find much there except for the fact that central banks had reduced their participation. Oil-producing countries had picked up the slack. I don’t see that as a “strong foundation” for investment in the country, but why nitpick?

So, the U.S. current account deficit continues to be funded by capital inflows. That news didn’t keep currency traders “buying the story.” I think traders are finally beginning to see what I’ve ranted about for some time now: the U.S. just keeps issuing debt and there has to be a limit as to what someone or a central bank is willing to accept after a while.

Today, we’ll see the minutes of the last Fed meeting. After sifting through all the reminiscing about the “good ‘ol days under Big Al,” we most likely will see that Fed is going to have discussed the need for further rate hikes, which would be dollar friendly. What we won’t see is what I think is really going on and that is a Fed that is very confused about what to do with an economy that seems to be going along da dum, da dum, but inflation that’s going through the roof!

The commodity currencies of Australia and Canada really gave us a super-ball bounce yesterday. It even drug New Zealand along for the ride! As I reported yesterday, gold & silver have gained psychological levels of $600 and $13 respectively. They haven’t stopped there. Now, there’s word that the base metals are jumping in price again, with copper leading the way after reaching a level that leaves it at double the price it was a year ago! It’s getting difficult to run with gold and silver.

This rise in base metals is tied to the thoughts that China isn’t going to slow down, and their demand will be greater than supplies. I guess when Chinese President Hu announced that the Chinese economy had grown 10% in the first quarter, the fact that China isn’t going to slow down finally sunk into the heads of traders! Yes, they can be hardheaded. Wait! Am I hardheaded? I’m afraid so.

Crude oil is well above $70 again, with all the rhetoric and finger pointing with Iran taking the blame for the move.

In addition to the Fed minutes, we’ll also see March PPI, which is expected to have gained 0.4%. We’ll also see March housing starts and building permits, both of which are expected to have fallen from February’s numbers. I think the number for housing starts is going to be weaker than the currently forecasted number (2030k). If so, that won’t be dollar friendly.

Currencies today: A$ .7395, kiwi .6275, C$ .8740, euro 1.2265, sterling 1.7730, Swiss .7840, ISK 75.70, rand 6.06, krone 6.40, forint 217.35, zloty 3.20, koruna 23.38, yen 118, baht 37.92, sing 1.6020, China 8.0240, INR 45.18, dollar index 88.60, silver $13.69, and gold… $617.25

That’s it for today. Hey! Did you see the article in the Wall Street Journal over the weekend that highlighted our MarketSafe Gold CD and our Metals Select product? Good stuff! As I look up and out the window, I can see a beautiful sunrise going on. Sunrises and sunsets on the water are two of my favorites – seashells and balloons. Have a great Tuesday!

Chuck Butler
April 18, 2006

The Daily Reckoning