Gold Takes Two Steps Back

Good day. I’m at a loss this morning. Usually, I have done some reading the previous night, and come to work loaded for bear. But that didn’t happen last night, as Alex and his band mates had “band practice” in my man cave/basement. While I love listening to Alex play his guitar, the beating of the drums gets to me after about, oh, five minutes! So I went upstairs to watch the baseball game, and since my computer is downstairs, no reading!

Which means this could be short and sweet today. Then again, you never know with me, once I begin to bang on the keyboard with my fat fingers!

And never knowing what’s going to happen next is the trading pattern we’ve been thrust into these past months, but even more so now, as the central bankers around the world begin to figure out what they could have learned years ago, by reading the Pfennig, and that is they can’t control the economy as they think they can! And with every central bank meeting between the U.S. and eurozone, the leadup to the meeting is full of anticipation, and then we are left with disappointment.

The markets want more from the central banks, but they’ve done just about all they can do, and none of it works. You know, if they had just looked at Japan, they would have learned long ago that central bank meddling into the economy doesn’t work over time. Sure, there are short-term blips of positive response, but those last about as long it takes to get lathered up about the economy, and then the disappointment sets in.

I did an interview with yesterday, and we talked about gold, and a few other things. I made the point that while it doesn’t make sense to me, investors are selling gold ahead of the Eurozone summit this week, as most people believe the eurozone leaders will disappoint the markets. And since the markets have had their share of disappointment lately (see Ben Bernanke x 2), they are selling gold and buying dollars.

OK, to prepare for disappointment is sound, in my opinion. But to sell gold when there is uncertainty in the world, on both sides of the Atlantic? I don’t find that as sound. But as I told the reporter, I learned long ago that the markets are never wrong. I might not agree with them, but you don’t try to fight them. Instead, you do the old Ali, rope-a-dope.

All this talk about disappointment isn’t carrying over to what you’re feeling while you read the Pfennig this morning! Yes, I’ve been very serious so far — not the usual Chuck stuff. Don’t worry, it’s coming!

Yesterday, we saw the currencies bounce around in a very tight range, with no direction and no conviction to move either way. Gold lost $13. So it’s one step forward, two steps back with gold these days. But I don’t worry. Can you see me as Alfred E. Newman, with a balding head and a big beer belly, saying, “What, me worry?” As I told the reporter yesterday, gold’s backing off this year certainly gives all those who missed the boat the first time cheaper levels to buy.

This morning, I turned on the currency screens and noticed that half of the currencies were in the red, and the other half were in the green. Red is bad; green is good. And gold is down another $5 this morning — one step forward, two steps back. I really don’t believe we’ll see much movement in either direction today for the currencies, as the markets await the eurozone summit, which begins tomorrow.

Last week, I wrote about what I believe the eurozone leaders need to do to calm the markets at this summit, so I won’t get into that again, but I’m afraid we’re not going to get what I believe is needed.

There’s been some “leaking” of news before the summit, and it appears that the eurozone leaders are going to opt to come up with a “plan to have a plan.” Uh-oh! I don’t think that’s going to calm the markets, but as I said above, we don’t know how the markets will react. Maybe they’ll be buffaloed into thinking that this is good, just as they were last summer, when the U.S. debt commission couldn’t come up with spending cuts, and the so-called “automatic cuts” were supposed to take over.

From what I read this morning, the “plan to have a plan” will go about half of the way toward what I said was needed, by providing an accurate diagnosis of the challenges facing the eurozone, and the steps that will need to be taken. They’ll talk about the four pillars (growth, banking union, fiscal union, political union), but they won’t get past that discussion.

And then the “plan to have a plan” will put off the next phase until late fall, and maybe even into winter! So you see, if the markets get a sniff of this, as I did, then the disappointment will really set in — unless, as I said above, they get buffaloed.

And the eurozone leaders need time to put pressure on Germany to agree to all the things in the “plan.” It all begins tonight when German Chancellor Angela Merkel sits down to dinner with French President Francois Hollande. Mr. Hollande will attempt to use his “French charm” and get the German Chancellor to weaken her stance. Whoa, that almost sounds like the beginning of one of those romance novels, or whatever they call them! But what will most likely happen is that Angela Merkel will use Jedi mind tricks on Hollande, and he won’t know what hit him!

I know what that feels like, as I’ve had Jedi mind tricks played on me for years. HA! Chris Gaffney and yours truly say that the Big Boss, Frank Trotter, plays Jedi mind tricks on us.

The global growth prospects got a boost overnight, when the China Securities Journal talked about the country introducing more-proactive policies to ensure stable growth in the world’s second-largest economy. Then the Xinhua News Agency said, “China plans to boost Hong Kong’s integration with mainland financial markets.”

As I’ve told you all a couple of hundred times before, China still has the treasure chest stuffed full of reserves that can be used to stimulate their economy without going into debt doing so. But even more, China has more tools to use, as they have not painted themselves into a corner like Japan, the U.S. and the eurozone have done by cutting interest rates to the bone and then going to quantitative easing.

T years ago, when economists and analysts said that the Chinese economy would collapse, I said that it would moderate, but not collapse, and that’s exactly what’s happening! I love it when a plan comes together!

Italy auctioned some bonds this morning, and actually saw decent demand for their debt, and yields actually fell for the first time in a month of Sundays. But even this news isn’t enough to take the markets focus off the eurozone summit that, as I said previously, begins tomorrow.

Here in the U.S., we’ll see the color of durable goods orders for May, and pending home sales data from May. Not much in the way of market moving data. The “experts” are forecasting an increase in durable goods orders of 0.5%, and top lawmakers in the Senate say they have reached a deal on freezing student loan rates for another year.

But get this: They are still deciding the mechanics for how the proposal should make its way through the legislature before Congress leaves for the July Fourth holiday week. Hey, just pass it, no wait! Chuck, don’t go there!

Other than that, U.S. consumer confidence fell for the fourth consecutive month in June. The index number dropped from 64.4 in May to 62 in June. You know me — not that I want to see this, but it’s finally going in the direction I believe it should have been going all along, given the wars, the debt, the unemployment and the list goes on. So maybe this is playing catch-up now.

And in the category of “What the heck is going on here?” Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission (CFTC) — you know, the guys I complain about all the time for not doing their jobs — said regulation inevitably will lead the agency to go beyond domestic borders to police the derivatives market. He’s not the only one who sees it that way. “We are looking at the CFTC effectively becoming the global swaps regulator,” said Hannah Gurga, head of European affairs at Icap. “Maybe that will be a good thing for financial stability, but it’s something overseas regulators need to be grappling with quite seriously.”

Isn’t that the way things go in life? Screw up something beyond recognition, and get more powerful.

Then There Was This… Yesterday, I talked about how the U.S. government was recruiting people to sign up for food stamps. I find this to be totally wrong. A couple of readers sent me a note that just made me laugh and laugh. So here goes:

“The food stamp program, administered by the U.S. Department of Agriculture, is proud to be distributing the greatest amount of free meals and food stamps ever.

“Meanwhile, the National Park Service, administered by the U.S. Department of the Interior, asks us to ‘Please Do Not Feed the Animals.’

“Their stated reason for the policy is because the animals will grow dependent on handouts and will not learn to take care of themselves.”

Chuck again — talk about ironic! And that’s all I’ll say about that!

To recap… A very tight range for the currencies yesterday lead us into what will probably be another tight range trading day for the currencies ahead of the eurozone summit, which begins tomorrow. Chuck believes the eurozone leaders will leave the markets with disappointment, unless they are buffaloed, as they were last summer here in the U.S.

Chuck Butler
for The Daily Reckoning