Gold Temporarily Loses its Uncertainty Hedge

Good day! And a wonderful Wednesday to you! A very confusing day for yours truly yesterday. I have my beliefs, and they have been proven to be true for a long time now. But now there’s something gnawing at those beliefs now… and then a wrench gets thrown into the works. I’m telling you now, so you can listen to me later: Confusion reigns…

So I’m going to stray a bit from my normal go-through on the markets. I’ll still give a brief update, and then I’m going to go into all this confusion. If that doesn’t interest you, then after the update, simply skip ahead.

OK. The currencies, which had backed off their lofty Monday values on Tuesday, remained in a tight range yesterday afternoon and overnight. This morning, Germany business sentiment, as measured by the think tank Ifo, showed a fourth-consecutive improvement in the business climate for Germany. Here are the Ifo readings for the past four months:

Oct. 106.5
Nov. 106.7
Dec. 107.3
Jan. 108.3

I think this plays well with my thought that things will settle down and stabilize a bit in the eurozone this year.

Given the improvement in manufacturing that I reported yesterday, and the improvement in the Ifo, I would think that the European Central Bank (ECB) would think twice about cutting rates further. But then, I’ve said that a couple of times before and the ECB with its new president, Mario Draghi, went ahead and cut rates any way!

Oh, well. As I said above, the currencies are range trading, with the euro a quarter cent below 1.30 this morning. I don’t know how many times I watched the euro climb above 1.30 yesterday, only to fall back below the figure and then do it all over again.

There’s a report out this morning from the U.K. that we should look closely at. Why? I hear you asking. I’ve said this at least a couple of dozen times in the past three years, but we as a country have followed the U.K. and their problems. Whatever happens there, we see it here about six months later. So it is with the great concern that I tell you that the U.K. economy contracted (-0.2%) more than forecast in the fourth quarter, which has analysts and the markets thinking that the U.K. is headed for its second recession in the past three years.

For when the realization hits here, more QE will come. I’ve seen more and more calls that the Fed is headed back to QE. Ahem. They won’t call it that. The Fed has been skewered for two rounds of QE. They’ll use another term and attempt to throw the markets off the scent of QE.

Gold lost some ground yesterday. My interview with the’s Alix Steel went OK. I don’t think she liked my thoughts on the stabilization of Europe putting pressure on gold, as the “uncertainty” fades a bit but then is picked up by the goings-on in Iran.

Yesterday, I told you about a story I read that reported Iran would accept gold from India for Iranian oil. I then saw a story titled “The Demise of the Petrodollar.” I can tell you that since last year, when I began giving presentations on the dollar losing its status as the reserve currency of the world, I have highlighted most of the things in this report. But it’s a good read, and can be found at:

Let’s get into this and see where it takes us!

First of all, ever since I began managing the risk of the currency book at Mark Twain Bank in 1992, I have been a believer in “trends”: weak trends, strong trends and no gray area. The dollar would go into a weak trend for a fundamental reason and not come out of the trend until that fundamental reason was corrected or well on the way to correcting. And then a strong trend would begin for another fundamental reason, and so on.

I believed that trends are what move assets, not charts. A trend, however, is not a one-way street. And those of you who have heard me speak over the years know that I always make a point of that. I never believed the dollar would collapse, or even remain in a weak trend for longer than previous trends lasted. The longest trend was a weak dollar trend that began with the meeting at the Plaza Hotel in New York City. The Plaza Accord sent the dollar on a weak trend that began in 1985 and lasted 10 years.

We have just passed the 10-year mark for the current weak dollar trend. So it’s time to rethink all this, right? Can the dollar remain in the weak trend for longer than 10 years? And what could bring it out of the weak trend? Remember, the fundamental reason it went into the weak trend to begin with: exploding debt. In 2001, the debt to current account level hit 4.5%, which was an indicator that the dollar was about to experience a currency crisis, for historically, that had been the case.

What has happened to that so-called exploding debt in 2001? The explosions have gotten larger and larger and larger, until they are completely off the charts! I like to tell people all the time that the U.S. needs to go down the road to debt reduction before the dollar can leave the weak trend. But the U.S. hasn’t even found that road!

So the other day, I was sitting at home, reading, and I just fell right out of my chair. The thought entered my mind that maybe, just maybe, the dollar is in serious trouble, even more serious than having the reserve currency title stripped from it. The total of unfunded liabilities in this country today is greater than $117 trillion! And in three short years, those unfunded liabilities will be greater than $143,685,000,000,000! And if the taxpayers are tapped to pay for this, they will have to cough up $1,175,537,000 apiece!

I was looking at these numbers and thought if the markets think Greece can’t pay its debts, how are we going to pay for this? The answer that most people that follow this stuff give is we’ll just print dollars to pay out debts. And that’s where the rubber meets the road with dollar value. It just won’t have any.

So here’s the confusion a longtime belief of trends beginning and ending, and now evidence that the current weak trend won’t end!

And just when I’m consigned to believing this is all going to hell in a handbasket, I receive a voice over video from Byron King of Outstanding Investments at Agora publishing, in which he tells me that all this debt and problems with the dollar are going away because the U.S. will make themselves energy kings once again, due to the shale discoveries and the technology to get the oil and gas.

So there! I’ve had readers over the years tell me that I’m a cheerleader for dollar weakness. Hmmm… I guess they never read the Pfennig between 1996-2001, when the dollar was king. But nevertheless, they didn’t let that get in the way of throwing barbs at me.

Look, I’m no geologist. I don’t know if what Byron King is telling us will come to fruition. All I do know right now is that if nothing changes and we continue down the same road, our future doesn’t look so bright.

So confusion reigns with me this morning. I’ve got all these thoughts shooting into my head. I need to get a tape recorder to record all these ideas! HA!

So even in the face of all these conflicting thoughts, I find humor. Call me different, but you don’t have to call me crazy.

Then there was this: In keeping with my thought I put forth in the Pfennig last week, that we’re all one big happy family, with the U.S. and China needing each other, and both needing Europe to remain intact. A guy that I don’t really care for, but makes this point for me, George Soros, had this to say in Davos this week: “The euro must survive because the alternative, a breakup, would cause a meltdown that Europe, the world, can’t afford.”

Just to repeat what I put out last week on this, China needs Europe to remain a good market for their exports. China exports more to the eurozone than to the U.S. So if Europe were to go into a tailspin, China would lose a very important market, which means they would have less money at their disposal. Less money for China means they would cut back their buying of U.S. debt. Uh-oh! So we’re all one big happy family.

To recap, the currencies range traded all day yesterday, and in the overnight sessions, albeit with slippage from their lofty levels of Monday. German Ifo business sentiment posted its fourth-consecutive month of improvement, and, taken with the improvement in manufacturing, is sending signals that stabilization is beginning. Gold dropped $11 yesterday, as the “uncertainty hedge of gold takes a step back with the goings-on in the eurozone. And Chuck is very confused this morning.

About Chuck Butler 105 Articles

Affiliation: EverBank

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter.

With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News, World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune.

Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.

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