NOTICE: Reason For Lack Of Posts Earlier

For whatever technical reason, access to posting was blocked this morning and earlier this afternoon. I didn't post the usual fare because I couldn't. Thanks for your patience; unless there's another bug, I'll be posting on schedule. This afternoon's wrap-up will be a special one covering the entire day.

Return To The Endgame

There wasn't much discussion about gold specifically in this week's Financial Sense Newshour podcast, but there was some discussion of Jim Puplava's deflation-to-hyperinflation scenario in the third segment [.mp3 file] right after the interview with Gerald Celente. Celente made the point that Americans tend to not believe that government officials are incompetent because they're awed or impressed by pomp.

Puplava believes that the U.S. dollar will go down substantially once the U.S. economy hits the shoals and another round of quantitative easing is put in place. That QE2 will tip the U.S. economy into an inflationary spiral.


I can see his point, but I'd like to disagree regarding the fate of the U.S. dollar.

The fact is, a rising U.S. dollar fits in well with the huge load of public debt that the U.S. has to refinance. If the greenback keeps going up over time, then foreign creditors will be more willing to buy U.S. Treasury securities at low rates. If I (a Canadian) buy a six-month U.S. Treasury bill at 0.19%, and the Canadian dollar drops 2% against the greenback over that period, I've made 2.19% over six months: 4.42% annualized. That's a better rate than I could get with a six-month Canadian T-bill. As long as the greenback has a tendency to rise, I'd be willing to do my part to keep U.S. T-bill rates lower than they otherwise would have been.

And people wonder why there hasn't been much bite in the renminbi-revaluation barks. If the PRC has to revalue the renminbi upwards, then the value of their Treasury security holdings will go down in their own currency's terms. That means losses. It also means the PRC government can scale back on their Treasury holdings for business reasons. In order to keep investing, they would have to peg the value loss as a loss leader.

I've written it before, and will likely write it again, but I think D.C. authorities have come to a decision to sacrifice export growth for the sake of the fisc. The larger the trade deficit, the more capital inflows there are. The more capital inflows, the more funds are available for U.S. Treasury purchases. The more funds available, and deployed, the lower U.S. interest rates will be despite the huge increase in funded Treasury debt. Rising demand for borrowed funds (the exploding deficits) meets rising supply (foreign capital.) As an extend-and-pretend strategy, there's a lot to recommend it. Japanese investors can be assuaged by pointing to the rise in the U.S. Dollar Index and saying their currency gains will come eventually.

In addition, thanks to the Eurocrisis, there's an "altruistic" reason for it. Poor Europe needs a lower Euro to gets its export-driven economy moving again. Why not let the Euro fall to give 'em a hand, while saying in the next breath that the currency losses suffered by foreign investors for most of '09 have been more than made up for in '10?

There's only one potential drawback to this plan. Since the renminbi is pegged to the greenback, a rising greenback pulls the renminbi up with it. PRC officials might complain that the greenback is going too high. If not, however, it can be said that a greenback rise amounts to an upvaluation anyway. It's an argument that misses the point, but could assuage those who think that mainland China has had it too good for too long.

Best of all: it allows for U.S. inflation, provided that the rate is less than that of other major currencies. All it takes is for the U.S. to 'lose' the competitive-devaluation race with other nations that want to inflate faster. All that's required is throwing exporters under the bus.

This aspect means that gold and the greenback will rise in tandem over time.

Given the pragmaticality of this option, I think the U.S. dollar will not collapse except by accident.


One final point I'd like to make: gold and the greenback rising together means that a rising gold price does not make the greenback look bad. Given the current crisis, it makes the Euro look bad.

Gold Fluctuates In Morning Trading, Shoots Up Later

It's been a bit of a wild ride for the metal as the $1,200 level held. Starting regular trading in the midst of a decline, gold shot up with the release of the disappointing non-farm payrolls data. Failing to gain traction, the metal floundered around until a decline set in that drove it from above $1,206 down to $1,198. Ending the decline at 10:00 AM ET, the metal recovered the entire loss within the next hour. That recovery was followed by a pullback, as the overall $1,200-$1,207 range had held except for spikes, and then replaced by an up-surge. As of 11:53 AM, the spot price was $1,210.50 for a gain of $2.70 on the day. The Kitco Gold Index attributed +$13.30 to predominant buying and -$10.60 to strength in the greenback.

The U.S. Dollar Index, after flailing about itself, went on a mid-morning run that took it all the way up to above 88. Before doing so, it endured a pullback that brought it down to 87.6. As of 11:56, it was at 88.00.

So far this morning, gold has been put through a tug-of-war. There hasn't been much rallying, but this morning's decline was more than erased all told. There may be more disappointing surprises in store for the metal this afternoon, but gold has acted fairly well so far.


Update: So far, the only surprise has been a pleasant one. The rise that started late morning not only held but also extended. Pausing at 12:10 PM ET, the metal reached $1,216 before pulling back a couple of dollars an ounce. That dip prefaced a renewed rally that pulled the metal up to $1,220.00 before halting. That peak, made at 12:40, preceded a mild pullback that brought the metal down a few dollars an ounce. As of the end of the pit shift, or 1:30 PM, the spot price was $1,217.30 for a gain of $8.40 on the day. The Kitco Gold Index assigned +$18.75's worth of change to predominant buying and -$10.35's worth to greenback strength.

The U.S. Dollar Index peaked as of noon, at 88.17, and then drifted down to the 88 level. Reaching it after 12:50, the Index passed a little below it and then continued drifting. As of 1:40, it was at 87.98.

It took some time, but the weakness in the U.S. equity markets seems to have buoyed gold. The risk-appetite play works both ways.


Update 2: The buoyancy held through the rest of the session. Instead of the usual quiet, there was a wavy up-and-down motion that moved gold between $1,215 and $1,220. The quiet came after 4:00 PM ET, when the metal stayed at the top of the range and drifted there until the close. As of the end, the spot price was exactly $1,220.00 for a gain of $12.20 on the day. The Kitco Gold Index (KGX) attributed +$26.55 to predominant buying and -$14.35 for greenback strength. As for ex-greenback performance, measured by predominant buying/selling, the KGX made a new record today.

Until the noontime shoot-up came along, gold was vering towards a loss on the week. Instead, the metal ended this week with a slight gain, for the second weekly rise in a row. From last Friday's $1,214.30, the weekly gain was $5.70 or 0.469%.

After hanging around 88, the U.S. Dollar Index climbed definitively above it in the later part of the afternoon. Starting at 1:50, the Index's rise was smooth until it stalled at 3:45. Pulling back a little, it fluctuated between 88.2 and 88.35. As of 5 PM, it ended the week at 88.30.

Its daily chart, from Stockcharts.com, shows the ascending triangle formation being firmly broken through on the upside:



Once it got through 87.5 and stayed there, it hardly looked back. This time, the ascending triangle worked.

I did demur from making an outright prediction yesterday, because I wasn't sure of the timing. Once the 87.5 level was firmly breached, though, the Index didn't pause for much. The main cause was the continued fall in the Euro, which broke through US$1.20 today.

Again, the greenback is back in overbought territory. Its RSI line, found on the top of the chart, is above the overbought level of 70. As it turned out, being near overbought levels yesterday didn't hamper today's rise all that much. Moreover, the MACD lines at the bottom of the chart turned from a bearish configuration to a bullish one. With the exception of the RSI line, which tends to indicate a pullback at overbought levels, the technical position of the Index is pretty good.

That's not to say there won't be a pullback Monday, but I believe the 87.5 hurdle is now cleared. The Index should be in for a bit of a run in the near future.

Turning to gold, its own daily chart shows today's rise undoing most of yesterday's fall:



Most, but not all. As it turned out, the falling of gold's own RSI level to near-neutral territory heralded an upturn. The interday low today was lower than yesterday's, due to gold's early morning spill, but the fear induced by the falling stock market made for enough bullishness to bring it to well above the $1,200 level. Although a driver is needed, sub-$1,200 does approach bargain-hunting territory.

Gold's MACD lines are still in a bearish configuration, and they missed a recent chance to switch into bullish mode. That doesn't mean a serious decline is ahead for the metal. But, it does mean that an upward run has not been foreshadowed; if there is to be one, it'll be a surprise. Gold may continue to muddle along, seeing as how bargain hunting is still around. Yesterday's portent of a Fed Funds rate hike seems to have gone nowhere.

Last Tuesday, gold was at the peak of its six-session upwards run. Although another record was not made, the metal had been approaching it. That day was the cut-off for this week's Commitment of Traders records, as graphed here. Total open interest was virtually the same as the previous week's, and there was an interesting decline in one of the categories on that peak day: non-commercial longs, supposedly the dumb money, actually shrunk a little from the previous week (when gold was lower.) Non-commercial shorts also shrunk a little. Commercial shorts went up by 1.07%, but the category that expanded most definitively was commercial longs. On a contract basis, commercial longs expanded more than commercial shorts. Percentage-wise, they were up 3.44%. Perhaps the commercial money isn't as dumb as it appears in this week CoT info, and that increase signals a resumption of the rally sometime. Or, commercial longs are going up for delivery purposes to satisfy demand for physical bullion. Perhaps it's both.

The U.S. Dollar Index's own CoT graph ends with data from a time when the Index bumped up against 87.5 but failed to follow through. Total open interest shrunk for the fifth week in a row, to a level not seen since early last October (before the Index's bull run began.) Commercial longs hardly budged, while non-commercial longs shrunk. Non-commercial shorts actually increased, which did gibe with the Index's ranging until today. Commercial shorts dropped by a whopping 9.09%, which did show some foresight. It's a little odd that the Index contract would be relatively quiet when the Index itself is shooting up. Perhaps the action's shifted to the dollar-Euro contract instead.

Moving back to gold, a post-pit Wall Street Journal report ascribes the noontime jump to renewed safe-haven buying and concern about the sovereign debt of Hungary.

"It's the continued haven buying and concerns about what new headlines there could be over the weekend," said George Gero, vice president with RBC Capital Markets Global Futures in New York. Investors often turn to the metal as a store of value at times of economic and geopolitical uncertainty.

So-called safety buying of gold let up in recent days when Europe's debt problems did not appear to be worsening. However, investors again sought gold as a store of value when the euro dipped below $1.20 for the first time in four years and comments from an official with Hungary's ruling party indicated the nation may be suffering similar debt problems as Greece.

The report also quotes another expert as saying that yesterday's remarks from FOMC voting member and inflation hawk Thomas Hoenig about the recovering economy also put some pressure on gold and helped push up the greenback.

Overall, it wasn't a great week for gold but today's rise made it a good one. If further good economic data from the U.S. comes, though, there will be some pressure put on the metal. That's the downside of being a safe-haven asset.

Thanks for reading, and enjoy the weekend heat as summer approaches.

Where's The Inflation?

Holdings for the GLD have increased quite a bit over the last month, but it isn't the only inflation-related ETF whose holdings are jumping up. Also increasing is the iShares Barclay's TIPS ETF, as recounted by Paul Amery in a Seeking Alpha article.

Trouble is, as Amery points out further, there's no sign of inflation anticipation heating up in the raw markets for those bonds. He also notes that the inferred M3 money supply is dropping year-over-year right now.


For gold, this is explained by the metal acting as a disaster hedge. The rise in the TIPS ETF, though, suggests that gold is also rising on anticipated inflation. What makes the TIPS more vulnerable is they're tied specifially to U.S.inflation, not world inflation like gold is. If U.S. inflation doesn't rise, while that of other countries does, then the TIPS will be hit more squarely than gold would be.

New Royal Canadian Mint 5-Ounce Coin Out

Limited to a mintage of only 200, the new Royal Canadian Mint 5-ounce coin features a design that's been adapted from the original 1935 $500 bill.

Have a gander:

The list price is pretty steep: C$9,495.95

Gold Jewelry Hallmarking In The U.K. Drops By 11.8%

According to a report in Professional Jeweller, hallmarking of gold jewelry overall has declined 11.8% year-over-year. Higher gold prices were blamed, even though the steepest decline in hallmarking was for 9 karat jewelry.


Presumably, the steep decline in 9 karat pieces was due to them being sold to a more price-sensitive clientele. That group seems to have little crossover with the other categories. The drop in demand for 9-karat category was not compensated for by an increase from people who would otherwise have bought 14 karat.

Controversial Kitco Commentator In Debate This Coming Weekend

Jon Nadler of Kitco is going to be debating Frank Holmes of U.S. Global Investors as part of the Cambridge House World Resource Investment Conference.

Topics covered are expected to include the future of paper money, gold’s utility as a safe haven for wealth, the role of central banks in gold pricing, and the impact of Asian economies on gold. Nadler and Holmes will talk about how high the gold price should go, relative to currencies.

Fitch said he thinks this type of debate is needed because of the widespread view among investors that the U.S. economy is a house of cards and the U.S. dollar is falling down, leaving gold as potentially the only hard asset that can act as a store of value.

He describes the 30-minute debate as a bear versus bull type argument....

It's hard to decide which will be the most interesting part of the debate: the speakers or the audience reaction.


Update: Kitco News has a brief report on who said what, noting that it was "amicable." Video clips are embedded in the report. Those who want to see a video record of the entire thing can go to this page here.