Silver and Gold Rally, But Still Aren’t in the “Mainstream”


01/11/11 St. Louis, Missouri –

When I came in and turned on the currency screens, this morning, I saw that the Aussie dollar (AUD) has fallen about 1-cent overnight. Queensland flooding took a turn for the worse as parts of downtown Brisbane were evacuated overnight and rail freight operator QR National closed rail lines servicing mines northwest of Brisbane. Add to that the calls now for the Reserve Bank of Australia (RBA) to only raise rates 25 BPS in 2011, when it was previously thought that 50-75 Basis Points (1/2 to 3/4%) would be the call to charge for the RBA in 2011. I think this is just a knee-jerk reaction to worsening floods.

Now… Add to that trading in the Aussie dollar, the calls from Brazilian Finance Minister Guido Mantega, who has said that he’s “confident that the real’s 2-year 37% currency rally is over.” Let me tell you what this means, folks… If the Finance Minister (FM) thinks he can no longer lose money shorting his currency to weaken, then watch out, here comes the intervention like we’ve not seen before! And unless the markets want to take up the fight against the Brazilian government, then the end result will be a weaker real (BRL) versus the dollar.

Up to now, the markets have played along with the Brazilian government… And why not? The markets have far deeper pockets to fight a central bank, especially the Brazilian Central Bank, for it’s not like going up against Japan or China! And let’s not forget that Brazil enjoys a very nice wide and positive yield differential versus the world…

So, to keep up with the Joneses, or whatever you want to call it… Japan has announced that they too (like China) will buy Eurozone periphery country debt. This news allowed the euro (EUR) to gain versus the dollar to near 1.30… But soon that euphoria had cold water thrown on it, as Japan announced that they would use their current stock of euros in reserve to buy the bonds, instead of buying euros to purchase the bonds. So, it’s a bittersweet announcement for the euro… Yes, another deep pocket investors has lined up to buy their beleaguered periphery countries’ bonds, but, no new euros will be bought in the transaction… And with that, the euro quickly dropped 1/2-cent.

Yesterday’s price action in euros was interesting (to me, that is)… The single unit did slip below 1.29 briefly, but quickly recovered back above the 1.29 figure… So I sat here thinking to myself… Could 1.29 be a “base” for the euro? Hmmm… I guess we’ll have to wait-n-see… I’m not getting that strong of a feeling about it here, like I did last year, when the euro was falling through the 1.20s and I said that 1.19 would be the low… (It did get to 1.1877 before turning around in June)… But… If we see more of this bouncing off 1.29, we could very well be seeing the euro’s resistance line.

Next up to the debt problem plate, batting third, is Portugal… Yes, now the markets have shifted their attention to Portugal’s problems… The good thing here, is that eventually there will be no more European periphery country’s to bash! So… Tomorrow, Portugal is planning a 10-year bond auction… This seems to be the trip-wire for these periphery countries, as Greece had to be bailed out 17-days after their failed 10-year bond auction last winter, and I don’t think Ireland got the chance to issue bonds before they were bailed out.

What’s bad for Portugal is good for gold and silver, though. These precious metals are up this morning of the first time in a few days. Gold is up $6, and silver is up 28-cents. Speaking of silver… Did you happen to see the price and liquidity warning on the website? Here’s a snippet…

Our inbound silver deliveries have been delayed. We only sell bullion which is physically under our control, so we find ourselves currently unable to offer silver on our own market. Naturally, the market remains open for all our customers to quote their own prices; but as we ourselves currently have no silver to offer, there is a tendency to higher prices for both buyers and sellers. Buyers are advised to be appropriately cautious when confirming their order’s limit price. We are advised silver be delivered on Tuesday 11th Jan 2011.

Now… I know that Tuesday January 11th is today…and this warning is a couple of days old. But, isn’t that the kind of news that a bullion bank that is short silver would NOT want to be hearing? Yes, siree Bob! You got that right! Because the demand for the metal must be HUGE to have caused a supply problem… And… It’s the type of information that should send silver flying to the moon! But… Mysteriously, here we are, with silver not even starting its engines for the at flight to the moon.

Every interview I do regarding gold and silver, I tell the interviewer that I don’t have to guess at demand for metals, I can see it right on my trading desk, as the metals traders sit right next to me! The demand for physical gold and silver is crazy! However, gold and silver are not “mainstream” yet, which puts a lot of weight behind my thought that these two are not even close to a top. That’s right… At your next cocktail party, or quilting get-together, ask to see a show of hands of those who own gold or silver… And not the ETF! You can’t get gold and silver out of an ETF! I’m talking about physical metals!

So… I see where the 10-year Treasury yield is back down to 3.29%… Still quite higher than the 2.63% we saw on November 11, 2010… I’m sure that this backing off of the 10-year Treasury’s yield has something to do with QE2 (the second round of quantitative easing)… And if the bond vigilantes are really involved here, then one would expect the 10-year yield to rebound higher from here. If the bond vigilantes are not really involved here, then the thought that the Treasury Bubble was about to be popped will not come to fruition at this time.

The US data cupboard is pretty barren today, with only the ABC Consumer Confidence report, which is a much smaller version of the actual Conference Board’s Consumer Confidence… Tomorrow, we get the ball rolling with some real meat/data… The Monthly Budget Statement/Deficit will print, along with the Fed’s Beige Book… Then on Thursday, the trade deficit for November prints along with PPI… So, a boring data day today, but we heat up as the week goes on.

So… Once again, the president does his best to tick off our strongest ally (the UK)… Yesterday, President Obama called France “the US’s strongest ally”… Now… I don’t care about these little ditties to build up relationships, etc. I just found the statement to be a slap in the face to the UK…especially in the face of public statements that French President Sarkozy has made about the US and the way we’re going about dealing with our financial mess. But, the real kicker with Sarkozy is his call to lessen the dollar’s role as the reserve currency of the world… (And we buddy up with the guy?)

That reminds me of the origin of the dollar’s problems, besides the creation of the Federal Reserve in 1913… And that is when it was removed from the Bretton Woods Agreement, and was no longer backed by gold… If my memory serves me correctly, it was a Frenchman who pushed the envelope on getting the gold window closed back in August of 1971… That’s right! The French President, Charles de Gaulle, called the US’s bluff that they had enough gold in their vaults to back the debts they had racked up from the Vietnam War, and Johnson’s “great society”… So, here we are 40 years later, and another French President is talking about lessening the dollar’s role as the reserve currency of the world… Hmmm… Now there’s lots of food for thought today, eh?

Then there was this, in The Economist

China can be expected to pull ahead of the US as the world’s biggest economy within 10 years, possibly as soon as 2019. Much of the hand-wringing about this historic shift is over matters of little importance. China can overtake America without any loss in American living standards, and a larger Chinese market should be quite good for developed nation economies.

Hmmm… I don’t agree with The Economist here, because if China takes over as the world’s biggest economy they’ll also have the reserve currency, and THAT WILL BE A LOSS OF AMERICAN LIVING STANDARDS!

To recap… The dollar rally continues, but more against the Aussie dollar and Brazilian real this morning than the euro, as the euro has gained some strength overnight from a story that the Japanese will join China in buying Eurozone periphery country debt. Gold and silver are up this morning for the first time in over a week, as Portugal is due to auction 10-year bonds, which could be the harbinger of a bailout for Portugal.

Chuck Butler
for The Daily Reckoning