India's Gold Monetization Plan To Begin November 5

And now… today’s Pfenning for your thoughts…

Good day. And a Wonderful Wednesday to you!

Well, yesterday I was sitting here doing some reading/research, and a thought came across me, as I glanced at the currencies, which in the early morning were for the most part all rallying vs. the dollar, but had turned sour throughout the day, and said to myself. “Chuck, it does appear that we’ve come tight ranges in most markets, the “dog days of summer trading” have finally set in”..    I guess we’ll have to call it.. “The Dog Days of Indian Summer Trading”.

You see, historically, the summer trading especially in August, is dull, and void of major moves, but this year, we had the pending (well what the rate hike campers thought was pending) rate hike on the docket, and the Chinese devaluation, and a host of other things that kept the trading lively in August, but as Rocktober has come upon us, the markets, and I mean bonds, currencies, metals, and maybe even stocks, although I don’t follow them much, seem to be stuck in tight ranges.

The euro between 1.13 and 1.14, Treasury yields between 2% and 2.10%, and Gold between $1,150 and $1,200. Stocks are actually up month to date here in the U.S. but down year to date.  So, since I don’t really look at them, I’ll just say they are an outlier..

And so we start today in the currencies looking like they are wearing the same clothes as yesterday. They might be stronger overnight, but that’s after they were beaten down yesterday afternoon. I looked and looked and couldn’t find anyone writing anything that would lead me to believe that there was something behind the dollar’s rally yesterday afternoon.  The only thing I could see was the Housing Starts data in the U.S. that printed stronger than the average bear for August. But Housing hasn’t really been a market mover in the past, so I couldn’t really put my finger on it, unless Housing suddenly became the end-all for data prints in the U.S. !

This morning, like I said above, the currencies are fighting back, and the Biggest Mover overnight, and something rare to say about this currency is that it was the best performer overnight, and that is the Chinese renminbi!  Just what the heck is going on in China and the currency moves? One day, the downward move is large, and the next day the upward move is larger. These aren’t your father’s Chinese renminbi movements, folks! HA!

There is something that is interesting going on in China, and that is local lenders increased their holding in onshore forwards to $67.9 billion in August. These are positions that would boost the renminbi’s value vs. the dollar, and the amount is 5 times more than the average in the first seven months, according to the Peoples Bank of China (PBOC).

Ok, was the clear as mud? Well, that’s what I’m here for! And all this time, you thought I was here as your musical director, and sports information guy! HA! Well, I’m more versatile than that! And here’s the skinny…

Remember when I told you that China’s reserves were dropping due to their defending the renminbi after the PBOC devalued the currency? And then last month the reserves weren’t so depleted? Well, this is how the PBOC is able to defend the renminbi without spending their reserves. When an institution buys a forward contract on a currency, they don’t pay for it until it comes due, and when it comes due, the institution can simply roll it forward and pay a net settlement or receive a net settlement.

So, there! See. I’m not just some handsome, GQ dressed, dude. OK, now some of you have met me in person, and if you’re not laughing hysterically right now, then you missed what I just wrote!

Well, tomorrow, Rocktober 21st, we’ll have two major Central Bank meetings. First on the docket will be the European Central Bank (ECB) Meeting.  Last week, the groundswell of thoughts on this meeting had ECB President, Draghi, probably discussing the need for more stimulus. Of course I didn’t think that would be the case, and told you so.

Well, in the past week, the data from the Eurozone has pretty much tempered those groundswell thoughts about more stimulus. Data like how the lending environment in the Eurozone had eased for the 7th consecutive month.  And think this is a key piece of data for the Eurozone, for if lending is improving, then there is no need for more stimulus..

So, in the end tomorrow, and I might change my mind by tomorrow morning, but I doubt it, I could say something really mean here, about how I change my mind as often as…  but I won’t, I’ll let you fill in the blank, but in the end tomorrow, if we get anything from Draghi it will be him simply reminding the markets that he has tools to implement should things turn bad.

The Bank of Canada (BOC) meeting will also take place. And here, I think that the BOC has no other choice but to keep things unchanged, given that the summer months have seen a pick-up in GDP, and the country just went through a national election. It’s time to let the dust settle here. so move along, these aren’t the droids we’re looking for.

I’m thinking that the next Currency of the Month for our Sunday Pfennig editions will be the Canadian dollar/loonie, as there are bound to be changes in store for Canada, given that they are the first country to go from the austerity leadership, to a Liberal one which plans deficit-financed stimulus. YIKES.

I know, I know I said the other day that given Canada’s strong financial position, I didn’t think that changing parties would hurt the loonie, but at that time I didn’t know that the Liberal party would win the majority of seats and have control of policy decisions. Uh-Oh.

Well, Japan, aka “the basket case economy”  took another step toward seeing Prime Minister Abe whispering in the Bank of Japan (BOJ) Gov. Kuroda’s ear, that they need to jack up the stimulus, as Japan printed a Trade Deficit once again, I might add!  Oh, and looky there, the BOJ will meet on October 30th! Just in time for more fun and games with Abe’s 3 arrows.  Oh, by the way, yen is back to 120 this morning.

I guess when Japan’s three largest export destinations are having their own problems, the 3 largest destinations of the U.S. , China, and the Eurozone, don’t have much demand for Japanese goods. I really don’t like to see these things going on in Asia, because whenever something bad happens or we get a bad data print, the collateral damage to the South Pacific starts.  And by that I mean the currencies of Australia (A$) and New Zealand (kiwi) see selling, for these region is so all inter-connected trade wise.

And that’s exactly what we’re seeing in the A$ and kiwi this morning. selling. I mean didn’t we just hear the Reserve Bank of Australia (RBA) say that they didn’t see a need for further rate cuts for now?  Shouldn’t those words trump what’s going on in Japan?  If I were an A$ trader I would certainly be paying more attention to the RBA than Japan aka the basket case economy!  But I’m not, and like I’ve always told you. Traders are fickle.

Well, speaking of the U.S. I was reading my daily dispatch from Casey Research last night and came across something that really highlights what I’ve been telling you dear readers for some time now. That the U.S.  economy is NOT as strong as government officials and Fed members would have you believe it to be… Check this out: Standard & Poor’s Ratings Services downgraded U.S. Companies 297 times in the first nine months of the year, the most downgrades in any year since the Great Depression!  Uh-Oh.  And we all know why S&P downgrades a company’s rating don’t we?

Well for those that want a refresher… Credit Rating agencies lower a company’s rating when they think the Company’s financial health is getting worse. OK. So if that’ s the case, why would these Companies that have seen downgrades to their credit rating be seeing their financial health getting worse?  Well, there are a few reasons, but the main one is that they aren’t selling enough, and why aren’t they selling enough? Because the economy is too soft!  You know, the old knee bone is connected to the leg bone, and the leg bone is connected to the ankle bone, and so on.

297 downgrades in the first seven months of this year?  That’s crazy folks! Simply crazy. any way you slice the pie on this, it’s a reflection of the soft U.S. economy. I know it, I would hope by now you know it, and I’m actually pretty darn sure the Fed members know it, they just can’t say it, because if they did, they would be acknowledging that all their “tools” didn’t work. You know all the king’s men and all the king’s horses couldn’t put Humpty together again.

Today’s U.S. Data Cupboard is once again void of any data except the weekly look at Mortgage Applications, which swings wildly from week to week, so no one really pays attention to it. So move along here too, there’s nothing to see. UGH!

Yesterday’s U.S. Data Cupboard had the Housing Starts data from September. And brother was it strong! But why wouldn’t have been? Interest rates are still near zero, and mortgage rates can be had at sub 3% levels! So, book ’em Danno! This is one of the bright spots of the very uneven U.S. economy folks, and will continue to be, until all the people that wanted to build a new house build one, or rates go higher. And you know me, I just don’t see that happening for some time.

Gold is flat this morning, well in all actuality right at this moment of me writing, it’s down 65-cents. I would call that flat.  In other news on gold… Recall when I told you that India had announced plans to monetize gold? Yes, that’s right, with all the gold sitting around in India in the hands of consumers, they will now be able to deposit that gold at a bank and get paid interest for their deposit.

Well, the announcement yesterday was that this plan will begin on November 5th, and in case you’ve got questions about this, here’s the skinny:

The idea is to tap into the country’s idle bullion by allowing owners to deposit their stocks with banks to earn interest. The minimum deposit is 30 grams in the form of bullion or jewelry to earn tax-free interest, under the draft rules. The mobilized metal might be loaned to jewelers by the banks to make jewelry, in which case you won’t get back the same metal you put in.

If the government is able to put the stockpiles of idle gold to use, it could help curb imports, which currently stand at nearly 1,000 tons annually and reduce the country’s need for foreign exchange reserves.

Have you seen the Direct TV commercial where one cable company buys a competitor cable company and on the first day they bring in breakfast. No not bagels, no not pastries, but peel and eat shrimp. And the head of one of the cable companies says, “not what I would have done, but, it’s “innovative” and I like that! Well, that’s what I have to say about India’s plans here. It’s innovative!

And with that, I’ll get out of your hair for today, and hope you have a wonderful Wednesday!

Regards,

Chuck Butler
for The Daily Reckoning

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