The Weak Dollar is Just Icing on Gold’s Value

The President was in China this past weekend, trying his best to get the Chinese to agree to a greater flexibility for the renminbi (CNY)… Well… There were a few stories this past weekend that hinted about the Chinese agreeing to do so… But I prefer to go with this story that appeared on Reuters last night… “The Chinese government has sought to distance itself from speculation surrounding a central bank statement earlier this week that was interpreted as a shift in currency policy towards a stronger yuan. However, a report on Saturday by Xinhua, the state-controlled Chinese news agency said that the government would not allow the currency to gain against the dollar in the short term.”

Wang Qing, chief Asia economist for Morgan Stanley in Hong Kong, said in a report to clients: “I consider this article an official effort by Chinese authorities to dismiss the renewed speculation of yuan appreciation in the near term.”

So much for that visit to China, eh? Put that one down next to the visit to Copenhagen earlier this year. Ahem… Three strikes and you’re out… But, getting back to the trip to China… The Asia-Pacific members had some pretty tough questions for the US President, especially regarding his commitment to free trade… And then they let him know that China is going to fight protectionism, and keep the renminbi on a leash.

On Friday, we had the currencies add a bit to their Thursday rally as the risk aversion campers were sent home without a ball. No need to go away mad… Just go away! There was a bit of interesting data reaction that happened on Friday, which only gave me some hope of returning to fundamentals… The U. of Michigan Consumer Confidence Index fell in October, which wasn’t expected one iota… And… The dollar sold off! That’s exactly what should happen when a country’s economic data prints badly! So Hurray! YAHOO! But… Just like I always say… On swallow doesn’t make a summer, and one reaction to a data print doesn’t make for a shift in fundamentals… But could it be a start? Yes, it could… But we’ll need to see more of this type of trading after data prints to indicate that the old “trading theme” has been put in our rear view mirrors, and that fundamentals have returned… But wouldn’t that be a happy day? Oh happy day…

There was good news in Asia overnight, as the Japanese printed a third quarter GDP report that showed an annualized rate of +4.8%! That was 2.9% higher than the “experts” forecast for Japan! So… Even Japan is joining the other Asian and pan-Asian countries (Australia) in posting strong economic growth!

The Asia-Pacific leaders pledged to keep stimulus measures in place until there’s “durable growth.” Hmmm… Here’s hoping that the Asia-Pacific leaders let us know when that happens, because 4.8% annualized growth for Japan sure seems like “durable growth” to me!

And… In keeping with our hopes that fundamentals return to currencies and commodities… The strong economic data for Japan did not quash the yen (JPY)! In fact, the yen has traded stronger versus the dollar overnight!

And speaking of trading stronger versus the dollar overnight… Have you seen the price of gold? WOW! Gold has set yet another all-time record high overnight of $1,133! It has since given back some of that to trade at $1,127… But still… WOW!

About 10 days ago, the dollar was looking as if it was going to make a comeback/correction… I even saw a poem a trader wrote about it being the end of euro strength… But here we are 10 days later, and the dollar is looking quite weak again. The euro (EUR) is back to pushing the envelope to 1.50 versus the dollar, and I just told you about gold’s run versus the dollar.

Of course this doesn’t mean that a correction couldn’t take place today, tomorrow, or the next day… I’m just pointing out something that I’ve told you all about for years now… And that is: short term forecasting for currencies is usually wrong! So then, people ask me… Why do you write a daily letter about currencies, Chuck? Ahhh, grasshopper, because, someone has to make sense of this daily noise, and… You never know when a “turn” might happen in the currencies.

The Aussie dollar (AUD) spent the overnight sessions trying to get past 0.9350, but failed to do so, especially on the back of a note from a local bank analyst who went out on a limb and said the Reserve Bank of Australia (RBA) would be on hold at their next meeting on December 1st… Well, that may be… But I still believe the RBA will hike rates in December! But if they don’t, then we could look for an even larger hike when they come back in January! So, this keeping the Aussie dollar below 0.9350 won’t last long, in my humble opinion!

We could get some traction from the euro and other Euro-type currencies this week, as the Euro Finance Week in Frankfurt will take place with top leaders speaking on the financial crisis and lessons to be learned from it… German Chancellor Angela Merkel, who’s always good for some interesting quotes, will speak, as will European Central Bank (ECB) President, Jean-Claude Trichet.

Speaking of Euro-type currencies… The Norwegian krone (NOK), continues to follow the Big Dog, euro… But when the euro gets going, the krone normally outperforms it… So… The euro is the key here.

OK… For some time now, I’ve been trying to point out to you that monetary inflation is going to sneak up on us and rip apart our investments… My good friend, David Galland, had this to say in his Friday letter… Here’s David!

“Just because it’s not readily apparent doesn’t mean it’s not there. Of course, I’m referring to the government’s monetary inflation, which, thanks to a combination of factors, still hasn’t jumped out of the closet to scare bond markets into cardiac arrest.”

David then went on to show his readers a table that had useful details on the progression from normal to very much not normal, leading up to the German hyperinflation of the early 1900s… David then says, “As you can see, the situation in Germany was not so bad – until it was.”

OK… You know, the soaring gold price has been mostly tied to the weak dollar… But, you would have to think that “smart investors” with an eye on this monetary inflation is having some push to the price of gold too… I know that’s why I own gold… The weak dollar thing is just icing on gold’s value in my opinion… The inflation hedge… The deflation hedge… Or… As I call it… The “uncertainty hedge”.

And then there was this… The other night I was discussing the health care stuff, and told the person I was talking to that the stimulus bill, you know the one that was pushed through so fast last winter because we as a country were “near total collapse”? Well, the stimulus bill had hidden in it, part one of the Obama Health Care Plan… Hmmm didn’t know that? Well, yes, grasshopper… It’s the “death panels” as Sarah Palin coined them… They are called the rationing and enforcement board. And… The President has already funded them with $20.6 billion of taxpayer money!

Now… I’m not going to get into a discussion of the health care here… My point was simply to show that when bills are passed, it is important that they are read aloud to the people, to keep from “hiding” things in the bills… $20.6 billion of money that the government did not have!

OK… Enough of that… My good friend, Dr. Dave Janda, was the first to expose this “hidden gem,” and he’s been on the speaking circuit trying to get anyone who will listen to understand what’s going on.

By Chuck Butler

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