Gold's Drop Below $1,800 Didn’t Last Long

Good day… And a Wonderful Wednesday to you! Thanks to each and every one of you dear readers, for your kind words and thoughts yesterday. I truly appreciate them! I’m very lucky to have so many readers that I feel are “friends”… I think about sitting down with a nice hot cup of coffee, and the Pfennig, and me talking to you, as if I was sitting right there with you… If I ever stray from that type of conversation, please remind me of my roots…

OK… Well, the currencies look very much like they did yesterday morning, so the trading for Tuesday and the overnight markets has been in a very tight range. There’s been no new news from the Eurozone or Greece, so the default watch continues.

Gold rebounded yesterday back to $1,800 and above. With each passing day’s trading in the books, I’m convinced that $1,800 looks more and more like the trading that went on when gold reached $1,100… And we all know what happened when the short sellers finally crawled back into their holes, then… OK, there’s no guarantee that gold will climb another $700 like it did after forming a base at $1,100… But think about this… I’ve told you that gold’s high on an inflation basis is $2,400… And that JP Morgan/Chase put out a communiqué saying they thought gold would reach $2,500… Well… Add $700 to $1,800, and you get there, both on an inflation basis and on a JP Morgan forecast.

Of course I have to make certain you understand that I’m not saying that it’s a given that gold will rise to that level… I’m just pointing out some co-inky-dinks…

OK… The other thing we’re waiting for today, is the conclusion of the FOMC meeting, where the Fed Heads prove to us that their 2-day meeting wasn’t all about board games, but a real discussion about how to stimulate the economy. So… Around 2 PM CST the markets will come to a standstill and all eyes and ears will be on the Fed’s announcement…

That’s why the currencies have traded in such a tight range for the past 24 hours… Nobody wants to take a position either way, for they have no idea what Bullwinkle… I mean, the Fed Heads, have up their sleeves…

You may recall me telling you quite a few times in the past that since 2007, what happens in the UK usually happens here in the US about 6 months later… Well… This time I think the time period is going to be much shorter, as the Bank of England (BOE) officials announced last night that they may need to buy more bonds to bolster a faltering economy. The policy makers said that it was “increasingly probable that further asset purchases to loosen monetary conditions would become warranted at some point.”

In Fed Speak… That’s quantitative easing (QE)…

OK… In Canada yesterday… Bank of Canada (BOC) Gov. Carney gave a speech which broadly repeated the BOC’s message from the September Policy Statement… You may recall that the BOC is very concerned with “external headwinds” that would affect Canada. But here, Mr. Carney strayed and said that “the Bank continues to expect Canadian GDP growth will resume in the 2nd half of this year.” Mr. Carney made a point that the direct impact of weaker European growth on Canada is “relatively modest”… But then pointed out that a more direct impact would come from a renewed US economy…

I know that Carney is sounding much like Fed Reserve Chairman Big Ben Bernanke with this talk that growth would resume in the second half… But unlike The Fed Reserve, the Bank of Canada can point to some recent data that backs up Carney’s talk… For instance… We recently saw a 3.2% gain in the volume of July merchandise exports as well as better-than-expected 2.8% and 1.5% increases in the volume of July manufacturing and wholesale sales… Proof in the pudding I would say…

The Canadian dollar/loonie (CAD) has been trading in a tight range, and every time it ticks up to $1.02, it gets kicked back down… But I think that if you track the loonie alongside the price of oil, you’ll see where this range trading comes from… The price of oil keeps ticking up to $90, and then it gets kicked back down…

Another currency getting dragged down by the price of oil is the Russian ruble (RUB) …not that I follow the ruble that much; I just see it following the price of oil up, down, and all around…

Another oil-dominated economy, Norway, will see their central bank, The Norges Bank, leave rates unchanged this morning, but maintain a significant tightening bias going forward… The meeting is going on while I type, but that’s my thought on what we’ll see, with the Norges Bank citing the goings on in the Eurozone as the reason they can’t hike rates further at this time.

Remember yesterday, when I told you about the story from Ambrose Evans-Pritchard regarding China considering liquidating Treasuries? I told you that, well, let’s go to the tape and see exactly what I said… From the 9/20 Pfennig, quoting a Chinese official who said, “We would like to buy stakes in Boeing, Intel, and Apple, and maybe we should invest in these types of companies in a proactive way.” And then yesterday I see that Apple is at a new high… Hmmm…

Well… Here’s another reason why I believe the Fed Heads will feel as though they need to do something to stimulate the economy, and thus push us further down the road to turning Japanese… Sales of existing homes dropped in July to the lowest since last November, and the median price fell another 4.4% from a year earlier…

But will looser monetary stimulants help Housing? I doubt it… You have rising foreclosures, tighter lending requirements by banks, unemployment at 23%… I don’t think making loans more “affordable” is the bottleneck here… I saw that Housing Starts for August fell 5% from the previous month… And that’s OK in my mind… Too much inventory is one of the problems plaguing housing right now, so we don’t need to add to inventory! Just like deficit spending… We don’t need to add to deficit spending to help it… But we continue to do it any way!

On Monday, I talked to you about how I disagreed with the move the Brazilian Central Bank made, cutting interest rates to stem the real’s (BRL) rise, but disguising that intention by saying they cut rates to promote growth… Well, either way, they cut rates at a bad time… Yesterday the central bank released a survey of inflation expectations and the central bank itself showed deterioration for every time period, and accumulated inflation over the past 12 months at 7.23% continues to exceed the central bank’s target ceiling of 6.5%. Like in the movie Airplane, Lloyd Bridges’ character, Steve McCroskey… The central bank picked the wrong week to cut rates…

Then there was this… from The Boston Herald

“The top executives at bankrupt solar manufacturer Solyndra Inc. plan to invoke their Fifth Amendment rights and refuse to answer questions when they appear at a congressional hearing Friday. Both Mr. Stover and Mr. Harrison will be sworn in under oath this Friday,” said a statement issued by the committee Tuesday. “We have many questions for Solyndra’s executives on their dealings with the administration, their efforts to secure federal support for a project that appeared doomed from the outset, and why they made certain representations to Congress regarding their dire financial situation just two months ago.

“We would encourage Mr. Harrison and Mr. Stover to reconsider this effort to dodge questions under oath and hide the truth from those American taxpayers who are now on the hook for their $500 million bust.”

This whole thing just turns my stomach sour… Tax payers’ money being used as venture capital… Someone explain this to me again, as to how this was a good thing? If this is a “hot” sector, someone with deep pockets will pick it up and run with it… Apparently that wasn’t the case… Sick, just sick!

To recap… It’s all about the FOMC meeting and the end of the 2-day meeting this afternoon… What will the Fed Heads pull out of their hat for the economy now? The currencies have traded in a tight range for the past 24 hours, as no one wants to take a direction until they see the color of the Fed’s program. Bank of Canada Governor Carney sees growth being resumed in the second quarter, and has some proof in the pudding to go along with that thought. The Norges Bank will keep rates steady, keep their tightening bias, but point to the problems of the Eurozone as the reason they can’t hike rates now.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning