Precious Metals Storm Back

Good day and welcome to March! This is one of my favorite months! Yesterday, there was a half-cent rally in the euro. With no profit taking overnight, the other currencies had a chance to move versus the dollar – especially the Icelandic Krona, which has moved back to the 64-cent handle and is almost back to where it stood before the Fitch fiasco!

Watching the Canadian dollar/loonie trade yesterday and wondering if it was going to try to hit 88 cents, our Corporate FX guru, Ashish, told me that there was a bevy of option trades to sell loonies at 88 cents. So, together we thought it would certainly be a tough row to hoe for the loonie to trade to 88 cents. However, as we have seen with currencies over the years, they will make a couple of runs at a specific figure before finally breaking through or they will give up the ghost and let the currency sell off. I’m a firm believer of the former idea here.

Canada received news yesterday that their GDP wasn’t up to what they had thought it would be, and still the currency rallied. Gross domestic product for Canada came in at +2.5% annualized. I think this number is way low, and will be revised upward in the future. The loonie shrugged that news off, however, and was able to move higher versus the greenback when the precious metals, (including gold) rebounded strongly.

Yes, gold put in a very nice day at the office, rising over $7 to a three-week high of $562. There has been renewed buying of the shiny metal by funds. The white metal, silver, continues to move higher, as it awaits news on the proposed silver ETF. I wonder what’s keeping the silver ETF on the shelf. It was being reviewed by the SEC three weeks ago! But then, we have our own experiences in that arena, and know the final decision can take longer than what was originally thought!

It’s coming; stay tuned. We’re getting ready to announce something big!

There was another piece of good data from the Eurozone, this morning. Manufacturing for the Eurozone nations grew at the fastest pace in 19 months, during February. The purchasing managers index rose to 54.5, from 53.5 in January. And adding icing to the cake, the European service industries index is expected to rise!

The euro, as I said above, did rally half a cent yesterday. It looks as though it wants to move higher, as we creep ever so close to tomorrow’s ECB meeting, where I expect interest rates to be moved higher. The most important part of the meeting will be the press conference following the meeting. Here, I believe Trichet will be so hawkish that he’ll look as though he’s sprouting wings!

Well, the Chinese continue to allow the renminbi to gain versus the dollar, reaching yet another post-peg record of 8.0369, last night. Recall on Monday, I said that U.S. Treasury Undersecretary Tim Adams had left China, with nary a word about the meeting. That changed last night, as Adams reportedly told the Chinese that allowing the currency more flexibility “would be a positive development for China’s economy.” Whoa there, partner! I fail to see where it helps China at this point!

Yes, China does need to eventually allow their currency to float, but their economy isn’t ready for that. Until inflation appears in the economy, all a stronger renminbi would do is slow China down. That’s what we would see if China floated their currency now: stronger renminbi versus the dollar!

Ahem, as I clear my throat – no wait, I’m typing not talking, UGH! Anyway, Ahem, Mr. Adams, have you thought about how consumer spending is keeping the U.S. economy afloat right now? If prices on goods from China go higher, because their currency is stronger versus the dollar, what might it do to the Goose that laid the golden egg?

OK. I was gone for a while, but I’m back now. Yesterday, here in the United States, we saw the Chicago purchasing manager’s February report. The index unexpectedly fell to 54.9 from 58.5. We also saw consumer confidence fall in Feb to 101.7 from 106.3. I have written an Epistle in the past on how I fail to see how people can be confident with everything that is going on. Maybe those that are surveyed are coming around to my way of thinking – maybe.

Yesterday, I received a call from the MarketWatch people for some quotes on what was moving the dollar lower. They then printed some of what I said. They made it sound like I thought the U.S. economy was just fine. Then, the slap in the face: They put my first and last name together and called me “Chutler.” Oh well, I carry on despite these shortcomings!

What I told them, is that yes these reports were weak, but they shouldn’t be used as the only reason the dollar was weaker.

The Japanese yen traded with a 115 handle for most of the day, yesterday. It’s back to just above 116 right now, as some traders and investors are getting cold feet holding yen. As I’ve told you this week, the yen was getting all kinds of airplay and gaining versus the dollar on thoughts that the Bank of Japan would signal a change in their zero-interest policy next week. Now, some of those thoughts are turning to questions on whether the Bank of Japan has the intestinal fortitude to make such a change. As I said the other day, all the data and signs point to the Bank of Japan making the change, but if there’s one central bank that is known to look the other way and disappoint, it’s the Bank of Japan!

Nevertheless, the yen, in my opinion, is grossly undervalued versus the dollar. On that note, I think I’ll head to the big finish!

Currencies today: A$ .7440, kiwi .6650, C$ .8785, euro 1.1945, sterling 1.7675, Swiss .7650, ISK 64.70, rand 6.1610, krone 6.7180, forint 212.08, zloty 3.16, koruna 23.6725, yen 116.05, baht 38.95, sing 1.6190, China 8.0369, pesos 10.46, dollar index 90.10, silver $9.80, and gold $563.90

That’s it for today. Good riddance to February, it wasn’t good for the currencies, nor the precious metals! March holds much more promise, plus we get St. Patrick’s Day, and Chuck’s two trips to spring training! Yahoo! Sorry, I missed talking about Shrove Tuesday, yesterday. With my Irish heritage, I forget all about it! UGH! I was supposed to be eating pancakes until they came out of my ears. Well, there’s always next year! Have a great Wednesday!

Chuck Butler
March 1, 2006

The Daily Reckoning