Metals Traders and Investors Flock to Gold

Yesterday’s “good feeling” in the currencies and metals lasted all day! WOW! That’s pretty amazing, considering the Elvis Presley hips that have dominated the markets recently. Gold turned around yesterday and put in a very strong showing considering it was down $10 at one point in the morning… And I can hear you asking… Hey Chuck, what turned gold around? I’m glad you asked!

Well… I’ve told you for several months now that there will eventually be a QE3… There are plenty of writers, analysts, economists, that don’t agree with that thought… But, if you believe in the old thought that “where there’s smoke, there’s fire”, then you have the reason for the turnaround in gold, yesterday… You see, Fed Head Lockhart was speaking yesterday, and when the question to him addressed whether or not the Fed was “out of bullets”, Lockhart replied, “We’re not out of bullets, we could purchase assets”…

Was that the Fed’s first baby-step in getting us prepared for another round of debt monetization? I truly believe so… And guess what’s just around the corner? The Fed’s Jackson Hole boondoggle, where last year’s QE2 was announced… Could the Fed use Jackson Hole to launch QE3? Maybe that’s too soon, folks… But, it’s not out of the question!

And, so… Metals traders and investors flocked back into gold… I not only told you what I thought about investors running out of options and turning to gold, but my friend David Galland followed that up with his version… Then I got a call from Alix Steele from the… She wanted to know my thoughts on gold… Here are a couple of snippets from the interview… “Butler argues that the euro was once thought of as a challenger to the dollar’s reserve currency status but with that hope falling by the wayside and no other real contender people are going to gold.

“Butler thinks gold will get back to recent highs of $1,817 an ounce and eclipse it once momentum buyers jump back into the market. ‘I still don’t believe that gold is a bubble…you always want to look at the longer term trends.’”

Thanks to Alix Steele for thinking to call me!

So, the markets aren’t all about gold, right? So… Here’s the rest of the story!

The euro (EUR) is a bit weaker this morning, falling back into the 1.43 handle, off by about 1/2-cent. A report this morning on Eurozone growth, is the culprit behind the 1/2-cent loss so far this morning. Eurozone growth slowed more than forecast in the second quarter. Even Germany’s economy, which is the largest economy of the Eurozone, wasn’t strong enough to pull the weak sisters up. Eurozone GDP for the second quarter rose 0.2% versus the first quarter… But begin to become Chicken Littles, and go about screaming that the sky is falling… Eurozone GDP rose 1.7% from a year earlier… Hmmm… seems that the sky isn’t falling, just yet, eh?

And just to remind you… Merkel and Sarkozy are meeting again today… I told a reporter yesterday, that this going back to the “meeting room” for Merkel and Sarkozy was beginning to remind me of buying a new car. You know, where the salesman keeps going into the sales manager’s “magic room” to come out with another price for the car that you’ll reject! I told a guy last year, that “this is my price” don’t go back into the room, unless you can come out with “my price”… He didn’t, and I walked…

And soon the markets will walk on the Eurozone and the Merkel and Sarkozy meetings if they don’t come up with a permanent solution… All they’ve done previously is put Band-Aids on the problems… I’ve said it before and I’ll say it again… They need to issue a Eurobond…

A reader sent me a note yesterday, asking me what good a Eurobond would do? Well, it would reduce the interest that has to be paid, and debt servicing is going to be key in the future (just ask the US!) and it would strengthen the debt rating, and not allow markets to go after a weak sister like they’ve done with Greece, Ireland and Portugal, and, tie all the governments together… I know that each country wants to maintain its sovereignty but, hey! Didn’t they give that all up, when they merged their currencies?

I’m laughing in my seat at this news story title I just read… OK… “Back in the day” the guy they called “Mr. Yen”, Sakakibara, used to be able to direct the markets on where he wanted yen to trade… Well, Mr. Yen, believes that yen (JPY) will “overshoot” to 60! WOW! That’s a pretty aggressive call, Mr. Yen… Is there a reason you believe this to be the direction of yen? Hmmm… Seems that Mr. Yen has been reading the Pfennig! He too believes that, “The US will enter a ‘lost decade’ as Japan experienced in the 1990s, while Europe’s debt crisis may deepen. What we’re seeing is a downfall of the West. Dollar weakness will be unavoidable, and the US will likely tolerate that.”

So… If Mr. Yen is really bang on… Yen will continue to defy the atmosphere’s pull and fundamentals!

Yesterday, I spent quite a bit of time on Brazil, and said something that I didn’t really think about too long, when I said that “The Brazilian government was going to kill the Golden Goose with the newly implemented tax”… Well, a reader and customer in Brazil, pointed out that I had forgotten about something very important… And that is the amount of investment that’s needed in Brazil for the next 5 years, to build the infrastructure that will be need to host the World Cup in 2016… And he’s bang on! So, while the Brazilian government might want to stem the real’s appreciation, they certainly don’t want to cut it off at the knees!

And on cue, the real (BRL) rallied very strongly yesterday…

Seems like every day we could be saying this, so why not today? The Chinese renminbi (CNY) reached a 17-year high versus the dollar overnight. There was a story in China about how the time was ripe for the Chinese government to allow a wider band for the renminbi to trade in. This was the fifth day that the renminbi was allowed to move higher and book 17-year high gains. Do you think that the Chinese government is telling the markets that they will allow a wider band, and currency gains are going to be tolerated? Could be, folks… Could be.

The Reserve Bank of Australia’s (RBA) meeting minutes last night, hopefully put to bed the strange calls in Australia for rate cuts. The RBA expressed concern over the medium term outlook for inflation despite the downside risks to global growth.

The RBA didn’t, however, talk about a rate hike that I truly believe will still happen this year… An Australian dealer that I talk to believes the rate hike has been pushed to next year… So, we have a bet with a shiny quarter as our winnings!

Chris mentioned a week or so ago that the pound sterling (GBP) was rallying, and questioned those marking the currency higher… The pound has defied gravity and fundamentals… I don’t see any good fundamentals in England to warrant a currency rally, but then again we have the comparison to the dollar… And just like the euro, who keeps winning the ugly sister contest with the dollar… The pound sterling is allowed to enter too, and this currency performance tells you what the markets think… The dollar is uglier than euros, sterling, and the list of ugly sisters goes on… Instead of asking who is the fairest in the land, the dollar could look into the magic mirror and say, mirror, mirror on the wall, am I the ugliest of them all?

Ok Ward, you’re being a little hard on the Beaver now…

For the past month, the Canadian dollar/loonie (CAD) has been underperforming against the major currencies… I told the folks in Vancouver 3 weeks ago that they needed to watch the price of oil to know where the loonie is headed… And that has played out Big Time since then. Look for the Bank of Canada (BOC) to surprise the markets with a rate hike at their September meeting, and for oil to rebound, and then the loonie will be able to play catch-up…

The US data cupboard will yield a couple of important data prints this morning. Two of my faves, Industrial Production and Capacity Utilization for July will print, along with July Housing Starts… No real market movers, though… So, the markets will focus on Merkel and Sarkozy coming out of the “magic room”

Then there was this… From my long time/good friend, Frank Trotter…

I am a little surprised that an important 40-year anniversary has generally gone unnoticed. On Sunday August 15th, 1971, President Nixon went on national television to announce that the US was withdrawing the US dollar from convertibility to gold, floating the value of the US dollar, and imposing wage and price controls. In the succeeding years of good and bad and ugly we have been presented with a case study of what happens when government is no longer constrained by anything but its own judgment. It is almost poetic that almost to the week forty years along we find ourselves in a Keynesian Conundrum with out of control fiscal and monetary policy and a much deserved credit rating downgrade. And as reported by The Wall Street Journal over the weekend based solely on the CPI (which we think understates the impact of inflation) the purchasing power of a US dollar has dropped by 82%. What a great change in policy.

Thanks Frank! I’ve always told Frank that he could be a writer, but Frank can’t sit in one place long enough to write! He’s got 100 other things going on all at once! I tell audiences all the time that Frank and I have worked together so long… That the Dead Sea wasn’t even sick, when we began working together! I know, I’ve told you all that before, but… There’s always new readers!

To recap… The currencies enjoyed a full day of recovery yesterday with no intra-day gyrations, and gold turned around Big Time on comments by Fed Head Lockhart regarding what bullets the Fed had left… Hint, quantitative easing… Eurozone GDP came in weaker than expected, and has pushed the euro down 1/2-cent this morning. And Mr. Yen, Sakakibara believes that yen is going to 60!

Chuck Butler
for The Daily Reckoning