Monday, May 15, 2006


Metals Correct As China 'Revalues' US$: Update

An update. "The U.S. dollar rebounded from a one- year low against the euro on speculation the five-week slide versus the common currency doesn't reflect the outlook that the Federal Reserve may continue to raise interest rates. The dollar appreciated to $1.2796 against the euro at 5 p.m. in New York, after sliding to $1.2972, the weakest since May 5, 2005, earlier today. The U.S. currency rose to 110.33 yen from 110.02 on May 12."

"It advanced against all 16 of the most actively traded currencies tracked by Bloomberg. Bets to sell the dollar against six of the most actively traded currencies rose to the largest amount since December 2004, according to data from the U.S. Commodity Futures Trading Commission. So-called short dollar positions against the euro, yen, Swiss franc, British pound, Australian dollar, and Canadian dollar widened to $20.4 billion in the week ended May 9."

"'The dollar sell-off has been very sharp and overdone,' said Michael Woolfolk, a senior currency strategist at Bank of New York in New York. 'It was a matter of when, not if, we'd see a corrective dollar relief rally.'"

The original post: Some reports on the active currency and precious metals trading. "China's currency, the yuan, broke through the long-standing barrier of eight to the US dollar, in a swift response to last week's decision by the US Treasury not to declare China a 'currency manipulator.'"

"The People's Bank of China sets each morning a central parity rate for the yuan, beyond which it is permitted to trade, in either direction, by 0.3 per cent through the day. The bank set the rate at 7.9982, up from 8.0082 on Friday. Last July the bank switched from a peg of 8.3 yuan to the US dollar to a valuation against a basket of currencies, albeit one in which the greenback continues to dominate, and at the same time revalued by 2.1 per cent."

"Most analysts believe China will not pursue further revaluations by step, but will continue to let the yuan steadily trade up. Goldman Sachs China strategist Thomas Deng said: 'Our currency analysts reaffirm their dollar-bearish view, and expect the yuan to appreciate against the US dollar to 7.34 in a 12-month horizon, representing over 9 per cent of potential currency gains.'"

"The United States, which has been coping with a record-high trade deficit with China, welcomed the rise in that country's currency. 'Greater flexibility in China's exchange rate is something we've long advocated,' Treasury Department spokesman Tony Fratto said Monday in response to the appreciation in China's currency, called the yuan or the renminbi."

"The dollar may fall for a fifth week against the yen, the longest stretch since December 2004, as investors slow purchases of U.S. assets and anticipate the end of the Federal Reserve's cycle of interest-rate increases, a Bloomberg survey showed."

"'I am getting more and more dollar bearish,' said Tohru Sasaki, chief strategist in Tokyo at JPMorgan Chase & Co. and a former chief currency trader at the Bank of Japan. 'Nothing, not even strong economic data, could stop the dollar's falling recently. The market's focus is shifting from interest rates to the global imbalances.'"

"Gold futures tumbled as much as $32 an ounce Monday to touch a one-week low as a rally in the U.S. dollar helped extend a pullback from 26-year highs. Friday marked the beginning of a '10% to 20% correction that can literally take place in a manner of days, but more likely weeks, since copper, gold and silver had extremely high overbought readings,' said Peter Grandich."

"Gold for June delivery fell to a low of $679 an ounce on the New York Mercantile Exchange, a level it hasn't seen since May 8. The contract was last down $28.80, or 4.1%, at $683 an ounce. The precious metal has now lost $49 since reaching a high of $732 in electronic trading on Friday."

"July silver dropped $1.015, or 7.1%, at $13.22 an ounce after reaching $13.05, its lowest level since April 28. July copper shed 13.9 cents, or 3.6%, to $3.725 a pound.
June palladium was knocked down by $27.35, or 6.9%, to $371 an ounce. It touched a four-year high of $409 on Friday. July platinum slumped $40.50, or 3.1%, to $1,278 an ounce, after running up 11% the prior week."

"Prices for platinum failed to find support even after Johnson Matthey said platinum supply was in deficit for a seventh year in 2005 due to surging demand. The London consultancy also said trend should accelerate this year amid increasing demand for the metal from Europe's automobile industry."

The correction I've been waitng for. Long and strong again at $678 an oz.
Anybody got any information regarding the selloff of metals and buyup of bonds?

I am suspecting some central bank(s) are behind the moves. Maybe Japan and/or China. Maybe EU. This can't be a pure market play, can it? A correction is due, but not on all fronts.

What's your take on this?
'The International Monetary Fund is in behind-the-scenes talks with the US, China and other major powers to arrange a series of top-level meetings about tackling imbalances in the global economy, as the dollar sell-off reverberates through financial markets.'

'Analysts believe the weakening of the dollar is the beginning of a long-awaited readjustment in the global economy. After the Federal Reserve appeared to hint last week that it could pause in its series of interest rate rises, attention in the markets switched to the weaknesses of the US economy.'

'David Bloom, currency strategist at HSBC, described the switch of focus as a 'regime change'. 'I'm saying don't use the philosophical methodology you used last year: chuck it away. The market has wholesale changed the way it looks at the world,' he said, predicting that the euro could rise to $1.40 over the next 12 months, from its current level close to $1.29'

'Few analysts expect IMF discussions to result in a concerted deal on stemming the dollar sell-off; but governments and central banks will want to avoid a crisis.'

'We are in meltdown mode,' said David Brown, chief European economist at Bear Stearns. 'It's all being whipped up into a bit of a selling frenzy. The dollar has a massive portfolio of negatives against it.'

'Brown added that the dollar's woes were likely to be exacerbated by central banks shifting their reserves towards other currencies, including the euro. He added that with the US current account deficit with the rest of the world worth 7 per cent of its GDP in 2005, the White House and the Federal Reserve would probably be happy to watch the dollar decline. 'I don't think Washington's going to be concerned,' he said.'
Fed's next move will be real critical. Stakes are getting higher and higher with every meeting.
Certainly a great day to buy (for those who kept their powder dry).

There do seem to be some strange contradictions at work here -- with no let up in the discussion of forward dollar-weakness, along with a parallel sell off in commodities.

I smell the Fed all over this.
I am suspecting some central bank(s) are behind the moves.

I think it's much more straightforward than that. This was in today:

Rather, Monday's move looks like fast money taking profits, along with perhaps a glimmer of recognition that a four-year commodities boom may not last forever.

"In this market, in the last two months we've had an incredible, unpredictable run-up in commodity prices," says Victor Lazarovici, an analyst at BMO Nesbitt Burns. "It's been largely driven by hedge funds and broader funds suddenly deciding they want to take positions in this asset class. It's a lot of new money, and, I guess, nervous money."

ironically, a yuan revaluation will increase the deficit for the short-term. will people suddenly switch the goods they buy? will the chinese suddenly buy more american good? probably not for now. especially if you consider some of the goods we buy. are we going to not buy chinese made textiles because the price just went up a little?
Both IMF and Nervous Money theories can have some merits. I guess we might know for sure with the benefits of history. Though, I am still leaning towards this is out of some intervention from the authorities.

The real game is on going forward.
there is a lot of "static" money, like huge pension funds, that are just getting into the commodities field. they are just realizing the benefits of diversification into gold and etc. the smart money is just starting to get in. the rest are probably opportunists who don't wanna miss the next sharp rise in an investment, even if it's gold and etc.
The rest of the week is important. Let's how it develops.
Rather, Monday's move looks like fast money taking profits


...along with perhaps a glimmer of recognition that a four-year commodities boom may not last forever.

No, only another decade or so. ;)

"In this market, in the last two months we've had an incredible, unpredictable run-up in commodity prices," says Victor Lazarovici, an analyst at BMO Nesbitt Burns.

Incredible? Yes. Unpredictable? Not entirely. This guy must also moonlight in real estate.

"It's been largely driven by hedge funds and broader funds suddenly deciding they want to take positions in this asset class. It's a lot of new money, and, I guess, nervous money."

There's truth in this. The broader funds are looking for an inflation hedge, too, given the in-your-face dollar devaluation. IMO, hedge funds are a convenient excuse when better information is lacking, since they're secretive, sinister and all-powerful (of course).
ResourceInvestor is running a story that the President of India and his Financial Minister promised to "affect the price of gold" this week. Never mind the stupidity of that policy, it does give some insight into the fears of the fiat makers right now. The desire among central-bankers to manipulate gold prices down must be overwhelming -- which smart kids should see as a sign to buy.
there is a lot of "static" money, like huge pension funds, that are just getting into the commodities field.

I partially agree, john_law. There is a lot of static money in commodities, and there's pension fund money in commodities, but the pension fund money is not static. Pension funds are some of the biggest backers of hedge funds and VC firms; in fact, they're notoriously speculative. If you doubt this, read the July 05 Forbes article In at the Top. The first few lines read:

Public pensions are rushing into real estate the way they rushed into tech in the late 1990s. Maybe it's a good time to get out.
I'd argue that pensions funds aren't buying into a major top in commodities, unlike their real estate investments.
Here's something we all can agree on:

From Daily Reckoning...

My biggest concern is that resource stocks are getting overheated, especially precious metals and energy stocks. Sure, political risk has not diminished, and may actually take energy prices higher. And yes, the managed fall of the dollar could quickly turn into a debacle. But it's also possible we're seeing a short-term blowoff in this commodity rally that will take gold near $1,000 and oil near $100 before losing momentum. What do I mean?

A lot of money is chasing after commodities and commodity stocks right now. I wouldn't call it a bubble. But the constant mention of price targets for gold and oil is starting to become a self-fulfilling phenomenon. It might not seem like it, because the fundamental drivers of the precious metals and energy bull markets are still there. The dollar is backed by mountains of debt and oil demand is growing faster than oil supply. Those trends haven't changed.

But when everyone is on the bullish side of the oil and gold trade, the trade has run its course. Notice I said "the trade." The trend is still on the side of oil and gold. But the smart speculative money right now is looking at out-of-the-money put options on gold stocks like Newmont. And if you consider that heresy, try this on for taking a look at the chart below.

You can see that once gold busted out over $500, it's been nothing but new multidecade highs. I know gold is making up for lost time with its latest run. But even gold bulls shouldn't expect more of the same without correction or interruption.

It wouldn't surprise me to see gold correct back down to around $550 by the end of the summer. This would come in the context of a deep sell-off in bonds and stocks as well. How could that be, you may be wondering? Wouldn't gold go up on inflation fears? Wouldn't gold go up on DE-flation fears?

If and when global liquidity begins to tighten in earnest, it will be bad for all asset classes. Gold will do relatively better. But from its current perch, it is not, relatively speaking, a screaming buy. Be prepared for a dip. And if you haven't bought yet, that will be your chance to make amends.

John (in VA), enjoying the debate immensely so far, but I'd like to center it on the long-term. Again, short-term gyrations don't concern me; however, where and when gold & silver will ultimately peak do. Thoughts on that??

That goes for all the other participants too, who's comments are greatly appreciated.
From a WSJ article I am hopeing to get a link to:

'The U.S. has better issues than exchange rates on which to apply its diplomatic leverage with China. These include the absence of real property rights and theft of intellectual property, an opaque system for adjudicating commercial disputes, and the Communist Party's habit of manipulating the domestic financial system and steering capital to political cronies.'

'More broadly for the U.S., global investors don't look kindly on countries that appear to be cheerleading a decline in the value of their own currencies. We doubt
anyone at Treasury would publicly admit to agreeing with the headline in Saturday's Journal that 'U.S.
Goes Along with Dollar's Fall to Ease Trade Gap.' But someone gave our reporters that idea, and it's a
dangerous sign that such a message is prominent in financial markets.'

'More than one government has been broken by too-clever-by-half politicians who thought they could
'manipulate' a little devaluation in order to shrink a trade deficit. The plunge in U.S. stocks late last week, amid dollar weakness and inflation fears, ought to be a warning to Mr. Snow, and to the White House. Markets are already nervous that the Fed may have
misjudged inflationary pressures, and a run on the greenback would only make the Fed's choices more
difficult. As for President George W. Bush, the very last thing he needs right now is a dollar crisis.'
Here is why the market fell today.,,1774162,00.html

That won't last forever. I wonder if the central bank actually sold physical gold or was allowed to do a naked short ?

All it is going to take is a few inflation numbers from this week's reports and gold will be back at $725.
I'm enjoying it as well, tj, and I appreciate your perspective. As for where PMs will top out, I have absolutely no idea, and that's precisely why I'm not in them. My personal experience with friends who invested in the gold bubble of the early 80s is that nobody had any clue when to get out and the vast majority held on too long and got burned. Same thing in dot-com, by the way. It's awfully difficult to close out your position when it's going up 5% a day. When I invest in stocks (and I'm not here to pump stocks), I calculate a rough fair market value using a number of fundamental variables and I try to buy below that value. When the stock surpasses that value, I sell it. With PM's, what's the get-out price?
A day like today would be an opportunity to test your buying and selling connections. For instance, when prices were falling this morning, would your sale source have closed his window?

Would your buy source have dropped his prices accordingly?
I guess it's really a somewhat educated gamble.
I am still amazed that people are compairing the metals market of today with the 80's. Not compairable. They really must not understand the dollar. I've already read two articles today talking about a bust in the PM's market bubble.I'm surely living in the twilight zone. What happened, did the dollar get a steroid shot? Corrections occur,and should be expected. This was nothing, wait for a real gut wrencher. If today's little move has worried "investors" then they will be flushed in a hurry.
'I am still amazed that people are compairing the metals market of today with the 80's.'

Good point. Think about how much more debt the individuals, businesses and governments have today versus the last metals runup. How many more papers dollars/yen etc., have been created?

Then there is this to consider; why didn't gold go up in the 90's? There was inflation and accomodative central banks. Is there a deflationary under-current below what the CB's have done in the last 6 years?
'I am still amazed that people are compairing the metals market of today with the 80's.'

The truth is, there are both similarities and differences. Again, as Buffet said recently, rallies begin with fundamentals then the fundamentals attract speculation, and eventually the speculation becomes dominant. Between this market and that of the 80's, I think you could say that the fundamentals differ but the speculative components have much in common.

One could just as well say that the NASDAQ run-up was nothing at all like the stock market of the late 1920s, and that's true, from a fundamentals perspective. Yet they both were overcome with speculation and they ended in very similar ways.
Good point Ben.

I do not deny golds fundementals. It is the ultimate play on the weakening USD, the commodities bull market, political tensions, Gov't mis-mangaement and inflation hedge rollerd up into one investment.

But...I believe alot of the run-up is due to the fact that nearly all Govt's in developed countries are expanding their money supply at an alarming rate. That alone will cause gold to spike but also...there is sooooo much $$$ in circulation out there that more people have the means to buy gold (and silver, oil, stocks)

Everything is going nuts, not just gold.

I'm as big of a housing bear as anybody else, but unless this madness stops, it would not surprise me in the least to see RE take off again in a couple of years (much like GB and Australia have this year)

Too much $$ chasing too few goods. Inflation is running about 7%-8% right now. I don't care what the gov't says.
Ben said:

Then there is this to consider; why didn't gold go up in the 90's? There was inflation and accomodative central banks. Is there a deflationary under-current below what the CB's have done in the last 6 years?

SOFTBALL!!!! I got it!

TOP TEN list of ways gold was held down in the 90's:

1) Coordinated, aggressive selling and leasing by all major CBs
2) Cheap Oil (among other commodities)
3) King Dollar
4) Post-Soviet, pre-9/11 world stability
5) Volcker after-effects
6) Easy high returns in equities and emerging markets
7) Early deflationary effects of global trade
8) "Manageable" deficits
9) Mining over-production and forward sales.
10) Russian resource fire sales.

... and more.

Hmmmm... gotta put together a list of why now it is definitely NOT like the 90's.


John in VA,

Seems our primary disagreement still stems from where we are in the gold boom cycle. You believe it's late (e.g., Tech in 2000, Housing in 2006) whereas I believe it's early (e.g., Tech in 1996, Housing 2002). Keys to either position are:

1) Fundamentals -- What are they, what direction are they headed, and for how long?
2) Historical Precedents -- How has gold responded to the fundamentals previously?
3) Boom Indicators -- What telltale signals are there for boom phases, and what are they saying now for gold?

We'll have to address each in turn. More to come!
how can PMs be in a bubble when the inflation adjusted price of gold at the top wass about $2100 and the inflation adjusted price of silver at the top was around $120?

look at the soft grains, they've barely moved.
I sold half of my gold ETF position early last week -- it seemed like a correction was coming. By Friday I was regretting it... But this morning, I was rather amused and bought back my position at a discount.

I sold the last of my SLW position on Friday (averaged 75% profit). Wow, I was lucky there (it tanked 13%). SLW was very flat since SLV IPO'd, and I didn't want to stand around anymore.

I made a few bucks on CUP's intraday bounce. That was a stupid idea on my part; I got lucky.

However, overall, my portfolio took the biggest bashing of its life yet.
Wow... 27 posts on this post? Ben that has to be a record for M&M
Seems our primary disagreement still stems from where we are in the gold boom cycle. You believe it's late

Just to clarify my position, tj, I don't claim to know whether it's early or late in the cycle, and I think the nature of speculative bubbles is that it's impossible to know. The housing bubble certainly went on much longer than I thought it would, as did the NASDAQ in the late 1990s. If I had to hazard a guess, it would be that gold will go up further, and possibly much further. My contention is that the parabolic price rise shows that PMs are attracting a lot of speculative money and that a bubble has developed. And while I'm certainly not going to crow about yesterday's minor correction (which I belive will most likely reverse), it does suggest that volatility in the market is increasing with speculation.
Another thing that strikes me as odd, is that I keep hearing the word "bubble" attached to gold. What bubble? Did I miss somthing? Two news stories this morning, one headline"Has the Gold bubble burst". Oh well, nothing I can do about, it is educational to watch all the "knees jerk" in reaction to a pull back. No market goes straight up without correction(except of course real estate)which as we all know only goes up! :- )
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