Continue to Buy Gold on Dips

 

Well… There I was, in a room full of CFAs — people with minds that don’t work like mine, or should I say mine doesn’t work like theirs! And at the podium was James Bullard, President of the St. Louis Fed… And it hurts me to talk, and I would not have been able to talk loud enough for him to hear my question… Oh, the things that happen to me!

There I was, loaded for bear, and… Couldn’t talk… UGH! And if you’re reading this, Mr. James Bullard — like that has a snowball’s chance in Hell that he would be reading my little letter — here’s my question for you… You stated that the US avoided another recession and that growth will pick up from here because you watch consumer behavior… OK… Actually I have two questions… 1. If growth is going to pick up from here, why then has the FOMC stated that interest rates, which have been at near zero for 3 years already, will remain at near zero until mid 2013? And then I would like to follow that up with this one… Were you following consumer behavior in 2005, 2006 and 2007? And what were your conclusions?

OK… It was an interesting talk, though, as Mr. Bullard did say a few things that sounded as if he was a Pfennig reader at that! He said that he was “worried about the CDS market”. (You know the credit default swaps that have been written by US institutions on Eurozone country default insurance.) He went on to say that the Eurozone is learning now that it is not a good thing to be at the mercy of the markets when financing their debt, and the US had better learn that lesson…

And then finally… He very quickly mentioned, without anyone questioning him about this, that if things get 2008-like, the Fed could reopen the credit facilities they used during 2008-09, and have since been closed. In other words… The Fed is going to be the lender of last resort for the Eurozone, folks… And we all know that the Fed doesn’t have money that they don’t get from lawmakers via taxpayers, or from their printing press…

OK… I’m sure you didn’t tune into your favorite Bat Channel this morning to get a rewind of the James Bullard talk yesterday, so I’ll get to what you came here for now!

Well… The euro (EUR) has lost the 1.35 handle this morning… Actually the euro lost it first last night, in the Asian session, but when Europe opened this morning, there was a very strong spread tightening in bonds, which put a bid back on the euro, but has since dissipated. And so the euro trades below 1.35 for the first time in a month… Yes, the month of October turned out to be a good month for most of the currencies, including the beaten and battered euro. But November isn’t working out so nicely… Especially when the European Commission President, Jose Barroso tells people that “the region is facing a truly systemic crisis”…

This morning, the data cupboard is chock-full-o-data here in the US. With the most important (to me) pieces of data being Industrial Production and Capacity Utilization. But for the markets, and others who don’t realize that the US government cooks the inflation books, the Consumer Price Index (CPI) will print today for October. The experts have forecast a drop in CPI on a year-to-year basis… From 3.9% to 3.7%… Are you kidding me? But there it is in black and white for us all to see!

In addition, we’ll also see the color of the TIC’s data for September, which measures the net foreign security purchases, which is needed to finance the debt… This data used to be important to the markets, but they just shrug it off now… I still believe it to be important, but I’m just a lone wolf out here in the hinterlands!

Speaking of a Lone Wolf… I heard a great old rock & roll classic on the way in this morning, by Red Rider called Lunatic Fringe… And I started thinking about me… and how the established newsletter writers, media, and “real economists”, must think of me as the Lunatic Fringe… But that’s OK with me, folks… At least I tell people how things really are…

Speaking of that! Yesterday I talked on end about China, and their plans to gain a wider distribution of their currency, the renminbi (CNY)… And not wearing a marketing hat, I simply forgot to list the ways investors can own renminbi! UGH!

1. You can go to Hong Kong, and open an account to deposit renminbi into..
2. You can go to New York City, and open an account at the Bank of China, where you can buy and hold renminbi deposits, but, there are limits, like $10,000 worth per year… Or something like that… (When I sent them an email for a prospectus, I got back an answer that was in Chinese. A lot of help that was to me!)
3. Or… You can open a World Currency account at a US chartered bank, and with a minimum of $10,000 you can buy and hold renminbi, in a liquid account that does not earn interest… That bank? EverBank!

OK… Enough of that! Yesterday I also mentioned that Spanish bond yields were on the rise… I have to say right here, right now, that it has been thought by most, including me, from the beginning of the peripheral country debt crisis, that Spain would be OK… And they probably will be, but if the markets decide to hurt them with high yield demands for their debt issues, then Spain will suffer like the rest… But here’s the difference to me, folks… Spain is not Greece, Spain is not Ireland, Spain is not Portugal… And Spain is not Italy… While the Eurozone might be able to deal with those problems, Spain will be the proverbial horse of a different color for the Eurozone. Mark my words on that…

Greece and Italy long had economic problems before joining the euro, and as I say about the countries that received bailouts, they should get down on their knees and thank their lucky stars that they were allowed to join the euro in the first place…

When I arrived at the trading desk this morning, the TV with the Bloomberg channel was showing a press conference with the Bank of England’s (BOE) Mervyn King… From what I could read in the closed captioning, King believes that inflation at this point is a non-event, and instead is worried about the Eurozone problems… Because the fear here is that the UK, like Norway and Sweden will get tarred with the same brush that’s used on the Eurozone, should things continue to deteriorate.

In the South Pacific… Yesterday I told you about how badly the New Zealand dollar/kiwi (NZD) had performed the previous night, well, last night wasn’t much better for the currency. The euphoria that was all over New Zealand last month, has gone with the wind, and with the Central Bank Governor and the Finance Minister taking pot shots at the currency, the markets have said, “OK, we’ll play along too, and weaken your currency to meet your wishes”…

The Reserve Bank of New Zealand (RBNZ) had the opportunity last month to hike rates, and underpin the currency, but, knowing that they would do that, they passed…. To me, folks… New Zealand is an island nation that needs to import most things… They produce dairy, wool, lumber and few other things, and then they need to import the rest, which means they are at the mercy of other countries for price stability, which means they import other countries’ inflation, which should leave the RBNZ no choice but to keep the currency strong, to fight those inflation pressures… But ever since Don Brash left the RBNZ, his successors have taken a road that leads to a weaker kiwi… UGH!

However, having said all that… I truly believe that both Aussie (AUD) and New Zealand dollars have been subjected to weakness that comes from the overall feeling that the Eurozone is going to push investors back into safe havens…

And this just came across the screen… The Eurozone inflation annualized for October was… Drum roll please… 3%! That’s 100 basis points or one full percent above the European Central Bank’s (ECB) ceiling target for inflation (2%), which, again just tells me that the ECB has lost some credibility for cutting interest rates two weeks ago…

And gold…first saw a $17 dollar slide yesterday morning, then a rebound to up $3 on the day… This morning, gold is down again, $6, so… Another dip… You know, it was reported last week that hedge fund manager and long-time fold bug, John Paulson, had sold about $2 billion of his GLD ETF… The Chicken Littles were all screaming that the gold bull market rally was over, if John Paulson was getting out… But a closer look tells me that Paulson wasn’t “getting out”, but more that he was probably matching customer trades, or… the darker side of me sees him concerned with the ETF, and has chosen to take the funds to trade gold in physical form…

Anyway… No need to panic, in my opinion… Continue to buy on the dips, and add to your gold holdings. That’s what I intend to do! But… And this is to make the legal beagles smile… That’s just me, and my opinion, I could be wrong!

And Japanese yen (JPY) lost a full figure last night… The Bank of Japan (BOJ) must have been in the markets intervening again…

Then there was this… A lot of the discussion at yesterday’s talk with James Bullard centered around the question: Should monetary policy be used to help reduce high unemployment? I was happy that Bullard was not a part of the FOMC crowd that does believe that monetary policy should be used when unemployment remains high. He instead believes in unemployment insurance and retraining… But, more than one member of the FOMC, of which Bullard is not a voting member until 2013, believes that more policy accommodation is needed…

This is what I talk about all the time, folks… When I said the Fed would cut rates aggressively in August of 2007, when I said they would implement QE2, I wasn’t saying it because I wanted them to do it… I was saying it because that’s what I saw the FOMC doing… And that’s why I still believe that the FOMC will turn to QE3 by the time I head off to spring training next year.

To recap… The euro has lost the 1.35 handle and trades below 1.35 for the first time in a month. European Commission head, Barroso, deeps-sixes the euro with comments. Chuck brings us some of James Bullard’s comments from yesterday’s speech. Kiwi continues to fall in value, and gold continues to bounce around…

Chuck Butler
for The Daily Reckoning

Continue to Buy Gold on Dips originally appeared in the Daily Reckoning. The Daily Reckoning provides over 400,000 readers economic news, market analysis, and contrarian investment ideas.

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