Dan Norcini's Daily Commentary
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Comex gold put in a strong upside day today building on the back of the higher euro and a strong rebound in crude oil prices, closing up $15.70 at $814.70.
The dollar was down against most of the majors with the exception of the British Pound and the Japanese Yen as the yen carry trade revived overnight after yesterday’s monstrous short squeeze in the US equity markets. That served as a tonic to calm the “risk aversion” psyche that had taken hold of investors and the bi-polar hedgies came stomping back into the commodity sector driving up the price of precious metals and industrial metals. It still amuses me to no end to see analysts refer to gold as a “risky trade”. If that does not qualify for the term, “oxymoron”, call me hopelessly confused.
Let me see if I have this new definition down correctly – “risk aversion” means you run to the “safety” of US Treasuries with falling yields backed by a collapsing currency and away from gold which has for 6,000 years been the ultimate store of value and the place for safety during times of economic uncertainty and fear! Hmmm… Maybe this is a symptom of our current education system which is more interested in teaching political correctness than history and sound economics and has produced this generation of mental midgets.
Euro gold was fixed today at €553.326.
The big news of the day for equity bulls was the announcement from Bear Sterns that the worst of their credit related woes are behind them and that its leveraged finance business was improving. That brought buying back into the beaten-down financial sector and dispelled fears of an economic meltdown. I don’t know about you, but I am sure going to be sleeping a lot better at night after learning this.
Isn’t it always reassuring that no matter what the problem that seems to surface in the US financial arena, it is always completely fixed in the matter of a couple of days? After all, what’s a few billion here and a few billion there and a few billion everywhere especially when the Fed stands ready with its partner at Treasury to just create more billions. I saw somewhere among the various emails that cross my inbox daily that our clever community has figured out that M3 is increasing at a rate of nearly 18% per year! That is mind boggling. All I can tell you is that I know plenty of folks, myself included, who wish we had the capacity to create all the money we need out of thin air. It sure would make financial matters disappear as the source of many a marital problem wouldn’t it?
“Honey, you’ve been down at that bar again and drank away all of our money for the week – what are we going to do now to pay the rent? No problem my beloved carbon-based female unit – I shall forthwith go down to the basement and come back up with a stack of newly printed dollars for us to use.” Right, you and I would be locked up for counterfeiting but the monetary authorities get to basically do the same thing and are congratulated for their “heeding the call of the markets”! What a scam this perverse definition of money is!
Along that same line, there was an interesting report from Lehman Brothers which stated that their entire subprime position was hedged. No worries mate, we’re all fine here. As usual, GET TV was touting the beaten down financial sector as the place for smart money to be!
The HUI and XAU put in pretty nice days today as the mining shares made some nice recoveries from the beating they took on Monday. Still, the HUI will need to get back above the 440 level to get the bulls excited and to put some fear into the short sellers. The XAU will need to best 185-186 for the same to occur among the hedged issues.
Royal Gold announced today that they were increasing the dividend on each share of common stock from $0.26 to $0.28 on an annual basis. They sure have come a long way seeing that the first dividend they issued was $0.05 per share back in 2000.
In some economic news released today, the Commerce Department reported October retail sales rose a piddly 0.2%. To give you a comparison, September retail sales rose 0.7%. That sure does seem to contradict the Street’s upbeat assessment of the health of the US consumer especially after Wal-Mart reported yesterday and Macy’s today. Pundits are now banking on Christmas shopping to save the day. Methinks I hear the incantations already rising – “Double, double, toil and trouble, fire burn and cauldron bubble – CHARGE IT! We’ll pay it off later… and later… and later… and later…
The PPI showed price rises at the wholesale level magically were non-existent. Nothing surprising about that –nothing the US releases when it comes to the costs of goods has the faintest connection to reality any more. Personally, I trust my own eyes and ears a helluva lot more than what the feds are telling me.
Bonds, which were weaker before the data was released, ticked higher as the thinking is if the Fed wishes to cut rates some more, there was nothing in this morning’s data that will prevent them from so doing. The yield on the ten year note is 4.28% as I write this.
There is a lot of noise coming both out of Canada and out of Euroland about the rapid rise in their respective currencies. That has fueled a great deal of speculation that we are going to see some kind of actual intervention coming out of the ECB to beat back the Euro besides their current round of verbal intervention and perhaps even some out of Canada (that I doubt). The problem however is with both China and Japan. As long as those two nations maintain their pegs (the Japanese have a quasi peg for all practical purposes due to the yen carry and their yapping finance ministers), there is going to be a great deal of friction if not outright anger directed towards them both by those countries who feel that they are unfairly having to carry the brunt of the US Dollar’s devaluation. That is why I personally do not see a whole lot coming out of any upcoming summits where currencies are sure to be discussed. There simply is no consensus among the major players at this time.
The Euro/Yen cross is currently trading near the 163 level. The all time high is near 167. Unless the Japanese get on board, any intervention by the ECB alone is not going to work to produce the desired results. They will need coordinated intervention by the US and Japanese monetary authorities. Just the other day we heard from Japan that they did not like the rising yen (gee – what a surprise) and all communications from the US about a “strong dollar” notwithstanding, the authorities here are more than happy to see the weaker dollar since it is helping to cushion the fallout from the subprime and credit related meltdown. We very well might see speculators calling the hand of the Trichet and the ECB and willing to take them on.
Personally, all of this is rather disgusting to watch since it certainly appears that the US and Japan are more than willing to debauch their own currencies rather than to take the drastic steps needed to curtail the problems that resulted in their weakness in the first place. Make no mistake about it – all great powers have strong currencies and the slide in both the Yen and the US Dollar are symptomatic of the decline in their economic influence in the global scheme of things. As a US citizen, I deeply resent what the current monetary officials have done to the Dollar as we are talking about the future of my children and their grandchildren. These people are entrusted with the status of the Dollar and it is very obvious that they have squandered their stewardship for the sake of short term gain. “Avoid economic pain at all costs - damn the long term ramifications”, is their motto. To use an analogy – they have sold our birthright for a bowl of stew.
Gold is going to continue keying off of the dollar, particularly the euro and the euro-yen cross for the time being. Eventually it will break its connection from Euro-Yen but at what point, I am not sure. Sooner or later it will enter the minds of many who in are denial, that things are not near as rosy as operation White Noise is asserting. Traders should stay vigilant since you have to protect yourselves from the clowns who run the hedge funds. Investors who have a longer term horizon can watch the day to day gyrations with amusement knowing that gold is going considerably higher and that no amount of happy talk is going to fix what ails the US economic system.
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