Gold Trades Past $1,600!

Well… The dollar is on the hot seat versus gold and silver this morning, but on the opposite side of the burner, the dollar is applying heat to the currencies… Strange, because normally dollar weakness will show up in all non-dollar assets… But not today… And speaking of gold… It’s within spittin’ distance of $1,600 this morning, making those prices at the beginning of the month tiny objects in the rear view mirror!

One currency that’s not letting the dollar drag it down, is the Swiss franc (CHF)… The franc just keeps going higher and higher… I saw an article over the weekend that called for the franc to reach parity with the euro (EUR), thus making it the most expensive currency in the world! Of course, some of that reaching parity with the euro will come from the euro weakening…

And as yields rise in the Eurozone peripheral countries like Italy and Spain, the Swiss franc picks up new buyers, and that drives the price even higher! And since everyone believes the problems of Portugal, Greece and Ireland will spread, it’s looking like the franc will be underpinned for some time…

Friday, the Eurozone bank stress test results were revealed, and there were five banks that failed the stress tests, but like I told you Friday, the markets were already punishing the euro, because they believed the stress tests were limited in their bite… So, while the results showed that five banks had failed, the damage to the euro was already being priced in…

That feeling of selling euros on Friday carried through to the overnight market last night, even after being given a couple of days to simmer down… There will be a “summit” of Eurozone leaders this week, on the 21st, so any strength that the euro might show ahead of that meeting would be short-lived, for all eyes will be on the Eurozone leaders’ resolve… European Central Bank (ECB) President, Trichet, still believes that the Eurozone can win this situation, by showing will and determination… He said, “It is not a question of technique. It is a question of will and determination.”

He went on to clarify the ECB’s position on collateral they hold, and here, this is important… Because the ECB’s credibility is at stake… Trichet said, “If a country defaults, we can no longer accept as normal eligible collateral defaulted bonds issued by the government of that country. Because, in the eyes of the Governing Council, this would impair our ability to be an anchor of confidence and stability.”

OK… I think it was important for Trichet to make a stand like that… Now, he just needs to make certain that the ECB doesn’t have to eat those words… I also hinted a message that Trichet was sending to his fellow central bankers around the world, namely the Federal Reserve… It was like he was saying… “We’ll never do what the Fed did”!

Or maybe that was just me thinking that… Because I always read into what people are saying…

Well… The US lawmakers didn’t invent a debt hoola-hoop this past weekend… But it looks like the NFL is about to end their lockout in time to start the season… The lawmakers are still pointing the blame finger at each other for not getting this thing worked out… I saw a letter that Judge Andrew Napolitano wrote to the Speak of the House, John Boehner… Telling the Speaker that he needs to make a stand and not raise the debt ceiling… Very interesting letter…

On Friday, US CPI (a stupid index!) printed and showed that inflation in this country fell -0.2% in the month of June! Don’t ask me how they arrived at that figure, because I doubt the government accountants know exactly what goes into the calculation! But, hey! There it is, right there! The government is telling you, to not worry about inflation… Because… In their eyes, it’s only “transitory”… Which if you believe what this report is telling you, then the government was right about the inflation being transitory…

Well… Here I go into the conspiracy theory room again… Stay with me on this one, because it all makes abundant sense… Big Ben Bernanke pushed quantitative easing rounds 1&2, on the grounds that the economy wouldn’t grow with deflation all around (still fighting deflation he was)… The other day, he mentioned that if the economy stalled, or deflation rose, he would be willing to do more QE… Well, just two days after saying that about deflation… US CPI for June fell -0.2%! So… Big Ben could very easily point to deflation again… We all know that CPI since the mid-’90s has been so hedonically adjusted that no-one that uses today’s methodology really knows for sure what CPI is… John Williams over at Shadow Stats, still computes inflation using pre 1990 methodology… So, he knows!

So, what I’m trying to say here is that, could this all be part of the plan to allow the Fed to implement another round of QE, and do so on the grounds of “deflation”? I think so… But that’s just how I roll…

Industrial production in June was better than May’s -0.1%, but still not what the forecasters were thinking it would be, and Capacity Utilization remained unchanged versus May… So… There’s no sign of a recovering economy there, folks… No sign at all!

Today, we get the “once important but nobody pays attention anymore” TIC flows… You know the data formerly known as the “Net security purchases by foreigners” report… The buying of our debt has not been close to covering the trade deficit each month, but what happens is that the report showing the lack of funding, prints a month after the trade figures does, so, being the “what’s happening today” kind of traders, they don’t have the time or capacity to go back and see that the trade deficit for May was $50.2 billion… Anything less than that in the total net TIC flows should be a hammer on the dollar… But we haven’t been covering the deficit for so long now that nobody cares… Well, nobody but me…

OK.. Enough of that “data talk” in the US… Let’s go elsewhere for our giggles…

And that place is New Zealand… Last week New Zealand posted a very strong second quarter GDP report, especially in the face of the earthquakes that have disrupted the economy there. Now it has printed a much stronger than expected CPI report… New Zealand inflation picked up 1% last month and 5.3% year on year! So… A strong GDP report followed by a strong inflation report has the New Zealand dollar/kiwi (NZD) holding on to the 84-cent handle with ease, while currencies around the world have difficulty handling the dollar strength.

Well… While I was just typing away here, gold has moved past $1,600! And silver has climbed back to $40! The uncertainty of the US not reaching a debt ceiling resolution, and the debt picture of the peripheral countries of the Eurozone, are really responsible for this latest push in gold and silver… I think we’ll see gold hover around $1,600, going back and forth above and below $1,600 for a while, like we saw it do at $1,000, $1,100, $1,200, $1,300, $1,400, and $1,500… I know I’m not the sharpest tool in the shed, but I think a see a pattern here! HA!

And then this story came across my computer this past weekend, saying that 1 in 7 Americans are now on food stamps… Here’s a snippet from The Economist… “Participation in the US food stamp program has surged, with 1 in 7 Americans relying on it to have enough to eat, according to The Economist. Moody’s Analytics found that spending $1 on food stamps generates $1.73 in economic activity, which makes the program the most effective stimulus.”

Of course, The Economist, being what it is, would believe that you should send food stamps to each and every individual whether they can afford to have them or not! So, don’t take that part from the snippet… Take the other part of it: 1 in 7 Americans being on food stamps… That’s just unreal to me…

When I was a young boy, my dad – who was a truck driver, and didn’t get paid if he didn’t work – seemed to be on strike all the time, and our family got “assistance”… I’ll never forget that… I was embarrassed at the time, and still carry that with me… One of the reasons I went to work when I was in the 7th grade, working evenings, going door-to-door selling newspaper subscriptions, so that I would have “my own money” and never need “assistance” again… The point I’m making here is that it’s not something that these 1 in 7 people want… I know…

Then there was this… My friend, whom I’ll see again next week in Vancouver, Addison Wiggin, orchestrates a great daily letter called The 5 Minute Forecast, or The 5… On Friday, Addison was talking about how he thought that, in the end, US lawmakers would make some backroom deal and raise the debt ceiling, without any spending cuts to speak of…. He went on to say…

As an example of how these things take place in the real world, think back to last April, when a partial government shutdown loomed.

That was averted when the White House and Congress agreed to $38 billion in spending cuts. That was all supposed to take place during the current fiscal year.

Never mind that during the three weeks the politicians tangled over this, the national debt ran up by $41 billion. But it gets better: The Congressional Budget Office put the accountants to work, figuring out how much of the savings were real, and how much were just an accounting fiction.

Actual savings – only $352 million. Out of a $1.65 trillion deficit, that works out to 0.02%.

Let’s hope in our heart of hearts that “real spending cuts” are made this time…for our kids’ and grandkids’ futures…

To recap… Gold has rallied to $1,600 this morning, and silver is back to $40! Other than Swiss francs and yen (JPY), the dollar is swinging a mighty hammer, this morning… The New Zealand dollar/kiwi is holding on to 84-cents and only slipping slightly. US CPI printed at -0.2% on Friday… Can you believe that? And the Swiss franc should be underpinned for a long time, due to the problems of the US, the Eurozone, and the Middle East…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning