Hu Throws A Cat!

Good day. Happy Friday to one and all! Well, Chinese President Hu came and went, and as William Pesek wrote for the Bloomberg, “No Nixon moment on China’s Currency for Bush.” I saw that and laughed out loud! That’s creative writing right there! No Nixon moment. That just cracks me up!

Hu came and went. Not only did we not see a Nixon moment, we didn’t get anything constructive! Instead, Hu threw a cat among the pigeons with this comment: “China is ready to peacefully resolve the nuclear issue on the Korean Peninsula and the Iranian nuclear issue through diplomatic negotiations.” Those words alone caused a sell off in gold and silver, as you’ve never seen before!

As I told you all week long, the tough rhetoric between the United States and Iran was really fueling the run up of oil, which gave gold and silver two reasons to rally: 1. Rising inflation concerns from more expensive oil – 2. We all were having the bejeebers scared out of us as thoughts of a war with Iran crossed our minds. That all went away in a heartbeat, yesterday. The dollar rallied (not that much), and gold and silver got the living snot kicked out of them!

Now, I have to say that while I warned of a possible commodity correction the other day (Pfennig 4/19/06: “And I have to say, that Commodities have really blown out of the water here in the past two weeks. So, a correction is not out of the realm of possibilities.”) I sure didn’t see this happening! Yesterday, I was asked to talk about the sell off in gold and silver on Bloomberg radio. “Don’t be nervous, don’t be rocky, you’re our guest FX disk jockey, now”!

I tried to make the points that I’ve made here: A correction was due, and then the words by Chinese President Hu, dropped a bomb on gold and silver. You dropped a bomb on me, baby, you dropped a bomb on me. No wait! This is serious stuff here! No time left for me to play around! I sure hope I got my message across. I sometimes wish that when they ask me to do those radio gigs, that they would just give me five minutes to read them the Pfennig!

OK, enough on gold and silver – except to say: The backup in price sure played well with our pricing of the MarketSafe Gold CD, this morning! Does anyone expect gold and silver to stop here? I don’t. So, this really gives new buyers a cheaper price to buy, doesn’t it? Yes, it most certainly does!

On to currencies. As I said above, the dollar did rally a bit yesterday, but the euro held on to the 1.23 handle, and that’s a good sign!

On Wednesday, The International Monetary Fund stepped up the pressure for far-reaching shifts in exchange rates, declaring that the dollar will have to depreciate “significantly” over the medium term if global economic imbalances are to be resolved in an orderly fashion.

In its clearest statement to date on this highly charged subject, the IMF said it was essential that currencies in Asia and of oil exporters were allowed to appreciate as part of the required “realignment of exchange rates.”

Wow! It sounds like the IMF has been reading the Pfennig! I have to share this story with you. You know how I’ve called the dollar’s rally in 2005 a result of SIRT (Stupid Interest Rate Talk)? I had a reader send me a note the other day that said he had an acronym for me: SYAT (Stupid yen Appreciation Talk). And then, went on to attack me. The reason I talk about this is simply that more and more people – and I mean, the Big Boys! – are beginning to jump on my bandwagon. You know, the ones that call for Asian currency appreciation based on the need to correct the global imbalances.

I don’t see it as “stupid.” The fundamentals are there! Asian currencies are the next to cause a depreciation of the dollar! Now we have this phenomenal growth in the region! GDPs are posting eight, nine, and 10% growth everywhere you look! What happens if these Asian countries learn to trust each other, and they form an alliance to export to each other? Oh my! The next thing you know, they’ll be talking about forming their own united currency! Oh, you mean like the story that Frank Trotter and I wrote one and a half years ago calling for this to happen? We even penned a name for the currency: The Pan!

Anyway, I guess what I’m trying to say is that there are times that fundamentals shout out to me, and I write about them. Then, they take some time to come to fruition. My mother always taught me that it was better to arrive early than late.

Sweden announced today that their central bank, the Riksbank, had reduced their dollar reserves and bought – Drum roll please – the euro! I like the Riksbank; they’ve always done a decent job of being a central bank. I also like the fact that they did this change, and didn’t pre-announce it. They just went about their business. It’s not like those buys in Qatar and other Middle East countries that keep spouting off about changing their reserves from dollars to euros, but not doing anything about it!

Speaking of Sweden, about a week ago I talked about how Lehman Brothers were telling their clients to buy currencies of countries that held a trade surplus. I mentioned at the time, that this is what I’ve been telling people for years. Well, Sweden is one of those countries that hold a trade surplus – along with Norway, Switzerland, and the Eurozone!

Oh! This is a great one! You won’t believe the latest line to come from Fed Chairman Big Ben. In a letter to lawmakers dated April 18, 2006, Big Ben said, “If dollar declined sharply, it would not necessarily disrupt markets.” What? I can’t believe he told them that! But what I want to point out more than his doltness, is the fact that it sounds like he is preparing them for a sharp decline in the dollar!

We have a G-7 meeting on the horizon. Once again, I doubt these guys do anything besides play some games like Battleship! Hey! You’ve sunk my Battleship! Anyway, there’s always a chance these guys come up with a hula-hoop, and currencies are affected. On that note, I’m heading to the big finish!

Currencies today: A$ .7410, kiwi .6310, C$ .8790, euro 1.2330, sterling 1.78, Swiss .7825, ISK 77.80, rand 6.0275, krone 6.37, forint 215.91, zloty 3.1560, koruna 23.10, yen 117.20, baht 37.78, sing 1.5970, INR 45.15, China 8.0170, pesos 11.04, dollar index 88.20, silver $12.21, and gold $618.35

That’s it for today. Well, the Butler boys will be batching it this weekend, which means lots of baseball, bocce ball, basketball, and whatever other game we think of to play! A happy birthday goes out to our accountant, Mary Owens. The Cardinals and Cubs are at Busch this weekend. Now that’s a rivalry! They made us look silly last weekend in Chicago, so we need to return the favor! Have a great Friday…and weekend!

Chuck Butler
April 21, 2006

The Daily Reckoning