01/06/11 St. Louis, Missouri – Well… Remember last year, when I kept wanting the markets to stop lumping the risk assets together and get back to the fundamentals of each risk asset? Well, it sure looks like that’s what’s happening right now. US stocks are on a roll, and the currencies and commodities are not! Of course I was thinking last year, that US stocks were a house of cards that would come crumbling down at any time, and therefore I did not want currencies and commodities to be dragged down by this crumbling down of stocks… I guess I was as wrong as two shoes regarding the stocks, eh?

But savvy investors were smarter than me on this one… Seeing the recovery of the US coming, they bought stocks at lower prices ahead of the recovery… Now… I can’t believe I just typed that sentence! Yes, stock buying did happen… But ahead of a recovery? I don’t think so, Tim! Yes, the recent data seems to suggest that a recovery is taking place, but at what cost? And… Does it have strong legs? I guess we’ll have to wait-n-see, but I would bet a dollar to a Krispy Kreme that this recovery will all fade with the strong winter winds…

So… The dollar rally that began on Tuesday continued yesterday and throughout the overnight sessions of Asia and Europe. The euro (EUR) has lost another figure, and looks like it could lose yet another today, as it hovers just above the 1.31 handle. Gold has lost more ground, as, again, those who thought the US economy was in trouble, since the FOMC had left rates unchanged, and was going ahead with QE2, are bailing out of gold… Now… most likely, these investors had nice profits in gold… And I’m one that always says that it’s not a profit until you take it… But… Are they going to buy back in at some point? If they don’t, I think they will be sorry.

Why? Well… Haven’t we seen these harsh sell offs of gold several times over the past couple of years? And what’s happened each time we’ve seen a harsh sell off? It has not only recovered lost ground, it has gone on to set new all-time record highs… Yes… That’s true! For instance, last February was the first of these major short-term sell offs with gold falling $51 in two days (2/3-2/5), only to see it then recover to a new all-time record high of $1,140 on March 3rd. Then there was the $81 fall in one week (5/14- 5/20), only to see it then recover to a new all-time record high of $1,260 on 6/21… There are quite a few more of these to document in 2010, but I won’t bore you with the numbers; I think you see what I’m saying here… Just that we’ve seen these sell offs before, when it looked like the long term rally of gold was over, only to see the shiny metal recover and set new all-time record highs… Should we expect this to happen again? I don’t see why not, do you?

Marc Faber says that gold and silver prices will soar in 2011… And silver guru, Ted Butler, believes that we’re almost to a bottom for the precious metals… Well, these guys seem to believe that the recovery will happen again, eh?

Well… The dollar and stocks got a big boost yesterday when the ADP Employment Report printed and showed an increase of new jobs for December of 297,000… WOW! That’s awesome! But is it reality? Remember last month, when the ADP report showed us that jobs created in November totaled 93,000, but the Jobs Jamboree held each month by the Bureau of Labor Statistics (BLS), reported that only 39,000 jobs were created in November? Well, if that’s the way it was in November, we should expect a number below 297,000 from the BLS… But… I’ve got to say this, right here, right now, and that is… Whatever the BLS prints this week, it’s going to be far better than the last month, and probably better than any month we’ve had in years, which would signal a more positive labor picture here… We can only hope, eh?

What will be interesting, though, is the fact that Big Ben Bernanke will be giving his testimony to the lawmakers on the “hill” immediately after the Jobs Jamboree ends… I think people are going to be quite confused when the FOMC chairman tells lawmakers that the FOMC is going ahead with their $600 billion quantitative easing… Big Ben is going to have to do a Lucy, cause he’s got some “splainin’” to do!

So… Even the news that China is going to buy Spanish debt isn’t helping the euro… Hmmm… And the fact that a 20.6% rise in German Factory Orders in November isn’t helping the euro, leads back to what I said yesterday, and that is… You can tell when the dollar is in a mini-rally trend, as no data, or news that would normally help a currency, does the trick.

You would think that knowing that the Fed has bought $170 billion of bonds under the QE2, and had already bought $1.75 trillion in QE1, would be enough bad news for the US dollar to cause it to sell off… But, apparently, no one cares about the ballooning balance sheet at the Fed except me… But maybe, just maybe the markets have become comfortably numb with this ballooning balance sheet at the Fed…

The dollar strength we’re seeing this week is so strong that even the two currencies that have gained versus the dollar (come hell or high water) – the Swiss franc (CHF), and Chinese renminbi (CNY), have lost ground versus the dollar this week! Actually, the movement in the renminbi is fine with me, as I don’t want this currency to be a one-way street, with upward movements against the dollar, daily. You’ve got to see a pause for the cause every now and then, folks.

The Canadian dollar/loonie (CAD) and the Aussie dollar (AUD) swapped places today… Yesterday, the Aussie dollar was trading right at parity, and a little above it throughout the day, and the loonie was trading just below parity… This morning, we have the opposite going on, with the loonie above parity, and the Aussie dollar just below it… As far as the Aussie dollar is concerned, it’s a game of give and take right now, with the floods causing an economic slowdown, while the strong positive yield differential for the Aussie dollar gives it support. Should that be a “buy on the dips” scenario? I hope so…

And the Brazilian real (BRL) is going to have to dig in for another attempt to stem its rise by the Brazilian government… The government imposed an increase to the reserve requirements on short dollar positions… It is thought that this increase in the reserve requirement, could very well see at least $10 billion worth of dollar shorts reversed. That could be a good thing for the dollar, folks… Again, though… The Brazilian government needs to get out of the currency manipulation business, and focus on things like the poverty in that country!

Then there was this… “World food prices continued to rise sharply in December, bringing them close to the crisis levels that provoked shortages and riots in poor countries three years ago, according to newly released United Nations data. Prices are expected to remain high this year, prompting concern that the world may be approaching another crisis…”

The way I understand this to work, is that the developing countries experience rising inflation during food shortages, on a larger scale than developed nations, like here in the US (although, I’ve heard the argument that the US is a banana republic before, and couldn’t argue with the facts)… So, if that’s the case, inflation must be soaring in the developing countries, because food inflation (the government says it’s 2-3%) is much higher…

The thing that someone, somewhere has to take into consideration regarding these inflation figures, is the way companies have reduced the size of packages while keeping prices the same, so therefore price inflation doesn’t exist… But when you order a sandwich for $7 and it’s half the size that it used to be, or when you put a roll of toilet paper on the shelf next to the old roll, and see it’s 1/4 the size of the old roll, you realize what’s going on… My box of Shredded Wheat continues to shrink, but the price remains the same… I get less for the same price… Come on!

To recap… The dollar rally that began Tuesday continues this morning, with the euro losing more ground to the 1.31 handle despite the fact that German Factory Orders soared over 20% in November, and that China said it would be continuing to buy Spanish debt. The Aussie dollar and loonie swapped places overnight, with the loonie being the currency trading above parity. Gold has suffered another one of those harsh multi-day sell offs… We’ve seen many of those in the past couple of years, only to see gold recover and climb to a record high… Will we see that again?

Chuck Butler
for The Daily Reckoning