Gold Turns Around and Rallies

Gold turned the table around yesterday, and instead of being on the chopping block, it was being added to, as the shiny metal rallied. It was pretty incredible to watch, given that gold was down $50 when it turned around to post a $15 gain… It almost erased the previous day’s $77 drop… But the shiny metal is still down on the week, by a lot! I was stopped in the kitchen here, by the darling Danielle, who wanted my opinion on her gold holding… I asked her if she had bought gold as a “trading asset” or a “protection asset”… For if you want to “trade gold” you should buy the ETF… Otherwise, holding physical gold means you are looking to retain a store of wealth, and “corrections” like gold was going through, shouldn’t mean a hill of beans, unless of course, someone is looking to buy more at the new cheaper price! Satisfied, she went back to work, and so did I!

That went on longer than I thought it would! A reader sent me a note the other day, asking me why I don’t just “let loose” and do what I call an Aaron Neville, and tell it like it is… And do an “R” version of the Pfennig… Ahhh grasshopper, you’ll have to come sit on the pool deck with my buddies, when we talk about this kind of stuff with “Chuck’s color”… Can’t do that in the Pfennig… Not the place… wouldn’t be prudent…

OK… Enough of all that! Reserve Bank of Australia (RBA) Gov. Stevens spoke last night, and his thoughts shifted to the Chinese renminbi (CNY)… Stevens said that, “the yuan [same thing as renminbi] is undervalued using any objective gauge. It would be beneficial to the global economy and indeed beneficial to the Chinese people for there to be more flexibility.” He went on to speculate that he “believed the Chinese Central Bank would do this immediately if it were their call, but it isn’t. Exchange-rate regimes are a government decision.”

I agree with Stevens here, but… I also agree with China’s decision to allow this flexibility in baby steps… And… With the renminbi “undervalued” that would mean traders would push the currency higher in a heartbeat, if they could… So, to retain some control of how quickly it appreciates is key to the Chinese…

Stevens was giving his assessment of the economy to Parliament… And before he spoke, the Australia interest rate curve was pricing in a 1% drop in rates by December! Well… I think those boys and girls learned a lesson… For once Stevens was finished talking, that 1% drop in rates had disappeared… Stevens didn’t mix words, or beat around the bush… He was very firm with his thoughts that in times of turbulence, a prudent approach to monetary policy was to… Sit still…

So… After this talk, I’ve got to re-think my call that the RBA would still hike rates by the end of the year… I’m not sure this deep sixes that thought, but it sure doesn’t place it on terra firma!

Things have been pretty quiet down in Brazil, since the Brazilian government announced their tax on trades that short dollars and go long real (BRL)… I said at the time that I believed it could end up being a big deal, given that the government had the flexibility to move the tax as high at 25% (it started at 1%)… But, once again the markets have flexed their muscles and decided to continue to go long real.

For they know as well as we all do (since I talked about this last week), that Brazil needs to keep the spigot of foreign investment open as they prepare for not only the World Cup but the Olympics! We’ve seen over the years, that when a country is going to be the host for the Olympics, that country’s currency gets a boost… So, it’s too early for that “Olympic boost” for the real, but you see what I’m saying… they need the investment to fund the infrastructure projects they need done…

Interest rates are just below 7% in Brazil, which is why the internal interest rate in Brazil is 12.25%… That’s not what you can get paid in real outside of Brazil though… Even still… Receiving whatever you can get in Brazil is better than you can get in most corners of the world, so that’s worth something, eh?

I’m watching the currencies weaken a bit from where they were when I came in, but they remain in those tight ranges I talked about above…

Today we’ll see the latest revision of second quarter GDP, which is expected to be revised downward to 1.1% from the first print of 1.3%… This is so far in the past now, that I just don’t see the significance of printing these revisions… We’re so “past” second quarter data!

The U. of Michigan Consumer Confidence for August will also print today. The “experts” forecast an increase of consumer confidence for August… I would jump up and down, if I could jump up and down, and shout “are you kidding me?” The Dow is down 10% in the past month, and the S&P 500 is down nearly 13%… The Economist Magazine says that the US economy is heading for a double dip, 1 in 7 Americans receive food stamps, and 400,000+ people file for unemployment claims each week! And people are confident? Sure, people could feel optimistic that this could all turn around, but are they confident of that?

Well… Japan has seen its 5th Prime Minister in the past 5 years resign last night… Naoto Kan resigned last night, after receiving bad marks for his time as PM… But what’s with this job that no one can keep it? There are 5 candidates for the PM job all lined up, but the problem here is that all 5 could have been cloned… They all represent no change in the Japanese policy… And yen (JPY) rallied on the news!

Next Tuesday, the US will print the S&P/CaseShiller Home Price Index for June… And close out the second quarter… I think this will be a very important report, even if it’s two months old. (House prices don’t move that quickly to eliminate a June report.) I continue to believe that home prices will continue to fall, as there’s just too much supply, not enough people that qualify for a home loan, and foreclosures that continue to pile on…

Then there was this… From The Royal Bank of Canada, who a year ago, highlighted the problems with the US housing sector, and said then that it would remain the anchor around the neck of the US economy… They continue to believe that, and have given us some bullet points that give us their thoughts in a nutshell…

Housing’s importance around US economic recoveries cannot be underestimated and its prolonged absence will keep growth well below potential for longer.

  • Dynamics in both the product (massive supply glut) and the credit end of the housing market should see home prices decline at least another 8% through 2012.
  • Policy initiatives (whether monetary or fiscal) have proved ineffective and merely stalled the process of finding a true market equilibrium on prices.
  • The US housing backdrop looks shaky, but other areas of the world have barely begun the purging process.

I think that captures the problems for sure, and next Tuesday we’ll see the color of the latest Home Price Index… People get ready… There’s a train a comin’…

To recap… The currencies traded in tight ranges again last night, and gold turned a $50 loss yesterday morning into a $15 gain! WOW! But is still down big time on the week. Japan will get a new PM, and RBA’s Governor Stevens thinks that renminbi is undervalued…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning