Gold is Soaring!

Did you see the strong performance that gold put in yesterday? And it didn’t stop there… Overnight, gold is up another $7 on top of the $20 gain it had yesterday… So $1,090 and change should look pretty good to you right about now… That is as long as you are a gold holder!

So… What put the tiger in gold’s tank yesterday and overnight? Well, the weaker dollar helped… The thought that the Fed would keep rates on hold this week helped… But the real beef came from the announcement that the Reserve Bank of India was buying 200 tons of gold from the IMF… I know, I know, I told you yesterday that I thought it would be a “wash” for the dollar and the gold price… But that was before I learned that the Reserve Bank of India paid for their $6.7 billion dollars worth of gold with… SDRs!

So… Either, the Reserve Bank of India (RBI) didn’t want to get rid of their dollar reserves… (Yeah, right!) Or… The IMF didn’t want anything to do with dollars, and preferred receiving SDRs! (For those new to class, an SDR is a basket of currencies that make up one unit called a “Special Drawing Right”, which the IMF uses; and lately it’s been rumored to be the replacement for the dollar as the reserve currency of the world… The one government, one currency thing.)

I’ll pin my colors to the mast of the IMF not wanting anything to do with dollars at this point! Been there, done that, bought the T-shirt!

So… The price of gold is nearing $1,100… I reminded my beautiful bride last night that just two months ago I told a group of close friends that they should seriously be considering buying gold as it had slipped to $940 an ounce… I wonder what they think when they see gold at nearly $1,100… I’m sure the V-8 head slap is going on all over my neighborhood!

OK… So what’s going on with the currencies, as the dollar has had the hammer for three consecutive days now… Well… The dollar is back on the slippery slope this morning, as those same thoughts about the Fed will keep rates unchanged this week, really emphasizing the fact that Australia has raised rates 50 BPS so far, and Norway has raised them 25 BPS… There are places to go where you can get higher yields.

I get a kick out of some people that call the desk here, and say… “I’m looking for a high yield of around 8-10%, with no risk… Do you have that?” Sure, right here in my back pocket! NOT!

The FOMC meeting will be a two-day meeting, so get the board games out, find the deck of cards, and make sure you have good batteries for the Battleship Game! When the Fed Heads get tired of the board games, and all, they’ll announce tomorrow afternoon that they are going to leave rates unchanged, and that while they see improvement in the economy, sans the 3.5% third quarter GDP, it’s too soon to remove the accommodating rates… How do I know that? I don’t… But, I’ll bet a dollar to a Krispy Kreme that what they say is pretty darn close to that!

The key will be to see if the Fed Heads, led by Big Ben Bernanke, leave the words “extended period” unchanged regarding how long the low rates will remain… For if they do, the dollar will immediately be sent to the woodshed once more, without passing Go, and without collecting $200! So… The statement following the rate announcement is the key tomorrow.

So… The euro (EUR) is 1-cent higher this morning, the Aussie dollar (AUD) is about 1-cent higher, and so on… Those that bought at yesterday’s blue light special prices will be smiling like a Cheshire Cat this morning!

OK… I have to talk about this… For I’ve received a ton of emails about it…

Quite a few readers have sent me a recent Nouriel Roubini interview, knowing that Mr. Roubini has long been a fave of mine.

Well… Mr. Roubini talked about the dollar being “the mother of all carry trades”, which I told you had become the new funding currency for the carry trade a few months ago…

Mr. Roubini also talked about how this was fueling a huge run-up in the prices of risk assets… I’ve also told you about that, and how, should the US do the double dip, a huge sell off of stocks would probably occur, and cause an adverse affect on the risk assets of currencies and commodities.

So, all in all, nothing new… So I was surprised that readers wanted me to comment on this. Well, the caveat here is that Mr. Roubini is calling for a massive sell-off of the risk assets when the correction comes… He doesn’t specify when this will happen.

I’ve also said that the risk assets have gone too far too fast, and that a correction is due… So, let’s move on from there.

I see where Marc Faber is saying that the correction will net the dollar 10% versus the euro… Again, he doesn’t say when this will happen, just that it will…

But again, as diversification people, with our eyes fixed on the horizon that shows that the only way the US government can repay their debts is with cheaper dollars… We just batten down the hatches for this correction, for we know that on the other side of the correction is another massive move upward.

There was something else that I wanted to talk about… And it’s something that I’m sure I’ll get a few emails about… Good and bad… But here goes… Did you see that Ford (F) announced a nice profit for the last quarter… CAPITALISM ISN’T DEAD! Three cheers for capitalism!

So way to go Ford! Didn’t take bailout money… And one year later books a profit! Whereas GMAC is in need of additional bailout money, and Chrysler is fiat now… Great use of taxpayer money wasn’t it?

Here I go again… Sorry, didn’t mean to go on a tangent about this stuff… It’s just that I have no idea why this doesn’t just tick off any American who reads about it! But not to worry, the government has more plans to spend money they don’t have!

Hey! Earlier I talked about Australia’s rate increases… Well, the Reserve Bank of Australia (RBA) is running scared these days… Scared that their rhetoric about rate increases is going to push the Aussie dollar to parity with the green/peachback… So guess what the RBA members have decided to do? You’ve got it! They’re going to “tone down” their interest rate hike rhetoric… RBA Governor Stevens said that the 28% gain in the Aussie dollars this year versus the US dollar would be a good inflation fighter, and allow him to slow down the rate increases.

Well… Don’t get off the Aussie dollar love train just because the RBA Governor suggests that he could slow down rate increases. The Aussie dollar already enjoys more than 300 BPS of yield differential to the US dollar, Japanese yen (JPY), Canadian dollar (CAD), and Swiss franc (CHF)!

And the Lisbon Treaty that was hung up in the Czech Republic has finally been signed by the Czech Republic’s President, thus completing the rounds and putting the Treaty in place. Now, I’m not a big fan of the Treaty, but… It’s what the Eurozone needed to remain viable, and so it it’s done. This removes the albatross from around the euro’s neck, and will shut up those people who keep talking about a collapse of the European Union, and the euro.

Chris Wood is filling in for good friend David Galland this week on David’s daily letter called Casey’s Daily Dispatch… He had this to say yesterday, which I believe just about sums it all up regarding the Fed and Treasury here in the US…

“A group of federal agencies including the FDIC, Federal Reserve, and Office of Thrift Supervision just released new guidelines for how banks deal with troubled commercial real estate loans. And get this:

“Under the guidelines, loans to creditworthy borrowers that have been restructured and are current won’t be classified as high risk by regulators solely because the collateral backing them has declined to an amount less than the loan balance.

“Yes, you read that correctly. Banks won’t have to show losses ‘solely’ because the collateral has fallen in value below the loan. Perhaps most incredible is that this move is being applauded by the business community. The next step will be a federal move to facilitate refinancing that same collateral.”

That’s pretty amazing, don’t you think? First the financial institutions were allowed to drop the “mark-to-market” on their collateral… And now this… And people still question why foreigners are growing very weary of these things, and becoming quite scared regarding their dollar-backed holdings? They shouldn’t question any longer, eh?

And then there was this…

Remember how excited I was that Ron Paul’s bill to audit the Fed was going to discussion? I thought, surely this would be it… The Fed would finally get audited, and treated like the corporation they are! But, then Ty Keough sent me this, and my hopes were dashed…

Representative Ron Paul, the Texas Republican who has called for an end to the Federal Reserve, said legislation he introduced to audit monetary policy has been “gutted” while moving toward a possible vote in the Democratic-controlled House.

The bill, with 308 co-sponsors, has been stripped of provisions that would remove Fed exemptions from audits of transactions with foreign central banks, monetary policy deliberations, transactions made under the direction of the Federal Open Market Committee and communications between the Board, the reserve banks and staff, Paul said today.

“There’s nothing left, it’s been gutted,” he said…

OK… To recap… Gold is soaring! Gold has reached a new record all-time high! The dollar has given back some of its gains in the past four days as traders begin to realize that the Fed is going to keep rates unchanged tomorrow. The government is up to its usual tricks regarding collateral and the bill to audit the Fed.

By Chuck Butler

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