Gold rises as US interest rates stay down

Gold rises, along with the euro and Australian dollar, after the S&P downgraded its outlook on the US. Gold rises above $1,500 and silver is trading above $44.

By , Guest blogger

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    Gold bars are displayed to be photographed at bullion house in Mumbai in this December 3, 2009 file photograph. Gold prices hit record highs for a second day in a row on Tuesday and silver touched a 31-year peak.
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Front and center this morning we have a currency and commodity rally going on for the ages! But first… Today is also my long time, good friend, and the Big Boss’ birthday! Yes… Happy Birthday, Frank Trotter! YAHOO!

OK… The currency and commodity rally for the ages… It’s as if the overnight markets guys and gals had the light bulb go on over their collective heads, and inside the light bulb was this thought… “Interest rates around the world are going up, but staying down in the US and S&P just downgraded the US’s outlook to negative, so why are we holding dollars?”… The rest is history as they say, with the euro (EUR) rallying to 1.45, the Aussie dollar (AUD) to $1.0650, and gold at $1,505…

It’s pretty amazing once the markets figure out something, it’s like they’re playing poker, and decide to “go all in”… For all the time before they finally figure something out, they hem and haw around giving this reason or that reason for supporting a sinking asset… In this case it’s the dollar… Look, I don’t want this to happen, but, the writing has been on the wall for some time now, and I said it would happen, so there you go!

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We also had Sweden’s Riksbank adding fuel to the fire that’s burning under the pole that the dollar is strapped to this morning, by hiking their internal interest rate 25 basis points (1/4%) bringing their internal rate to 1.75%… I expect the Riksbank to hike rates quite frequently this year, pushing their rate to 2.5% in the next year… The Swedish krona (SEK) received a ton of love after the rate hike, and has finally moved back to its level of 2008… You know, the levels we saw before the financial meltdown, the first of many things that have come along to rescue the dollar, but eventually allow it to be tied to the pole again…

As I said above, gold is trading above $1,500 this morning…and that move is responsible for helping the Aussie dollar reach a 29-year high at $1.0650! And don’t forget silver! Yes, silver is trading above $44 this morning! And once again, it’s important to remember that those who think that because gold and silver don’t pay interest, higher rates around the world would squash their bull market rallies, are wrong… Or at least to me they are… Instead, higher rates around the world squash the dollar, and gold and silver are being used as “dollar alternatives”…

Another thing throwing gas (literally) on the fire burning beneath the pole that the dollar is tied to, is the jump in the price of oil yesterday and overnight… Yesterday, the price of oil had slipped to $106.10, but this morning, it’s back to $109.80! And don’t think for a minute that investors aren’t using oil investments as dollar alternatives too!

With the rise in the price of oil, the “petrol currencies” of: Canada, Norway, UK, and even Mexico (with their depleting oil reserves) get an extra boost against the dollar. So… it’s an all-out rout on the dollar this morning… It’s like the overnight markets ambushed the dollar, captured it, and are now holding it captive!

The Canadian dollar/loonie (CAD) got an extra boost after their March inflation rate jumped to 3.3%! Looks like the Bank of Canada (BOC) is going to have to come back to the rate hike table sooner than they had previously thought! I really think that the BOC needs to get their heads on straight here, since they had backed away from the rate hike table, not wanting to attract attention to the loonie, as they didn’t want the currency to get too strong… But I would think that rather than not wanting to see the currency appreciate, that the BOC needs to accept a stronger loonie, and let it do some of the work of holding down inflation pressures… Look, if oil is going to remain above $100, and food prices continue to be more than “transitory” (as our Big Ben likes to say), inflation is going to remain a problem for the BOC and the Canadian people… So, go ahead, and accept a stronger loonie, BOC, you’ll be happy you did!

I guess that old kiss of death that I put on things from time to time, didn’t last too long for the New Zealand dollar/kiwi (NZD)… Yesterday, I was disappointed to see kiwi slip after talking about its steady rise in the past month… But today, kiwi has touched 80-cents… The last time kiwi was above 80-cents was three years ago! Kiwi’s high was reached in February of 2008, topping out at 0.8214… So… If kiwi is to return to its previous high, it still has a ways to go, eh?

The fact that the earnings season has been pretty good so far is weighing on the dollar, this morning, which should be good for the US… But markets are taking it as reason to rally versus the dollar, on the “boost to risk sentiment”… So… In that vein, today, after the market closes, Apple will announce first quarter earnings… If the “risk sentiment” is to remain, and continue to put pressure on the dollar, Apple’s earnings will need to be strong.

Portugal and Spain were able to auction bonds this morning without major problems, which is a good sign for them, and for the euro. So, watch for this, folks… Today or tomorrow we’ll see the media refocus on restructuring Greek debt, to take the heat off the dollar…

Yes, I don’t like being so cynical, but what can I do? I see it every time, and it’s so blatant! Of course, my beautiful bride would probably tell you otherwise… HA! But think about all this for a minute… I just call them the way I see them, and if that’s being a Smart-A** or cynical, so be it!

Not that too many people noticed it… But I left three zeros off my reporting of the National Debt yesterday… But we all know it’s $14+ TRIILLION at this point, and going up every second. But I do agree that when someone sees $14 trillion, they get the picture better if they see it as $14,000,000,000,000 … It makes one think about it a little more, rather than just saying $14 trillion, and letting it roll easily off the tongue…

As I look at the currency screens, all the currencies that should be in green are green, and all the currencies that should be in red are in red, except for one… The Japanese yen (JPY), which had been in rally mode for the past couple of weeks, just doesn’t mix well when the “risk on” is in full bloom like it is today…

Then there was this… From channelnewsasia.com…

China is set to designate one bank in Singapore to take on the role of clearing yuan trades as it gradually moves to internationalize its currency.

It is believed that either the Bank of China or the Industrial and Commercial Bank of China will be the clearing bank, according to analysts

Some analysts see this as a move by China to reduce its reliance on the greenback as a reserve currency.

Thio Chin Loo, Senior FX and Interest Rate Strategist with BNP Paribas, said: “So with the volatility of the US asset market over the last two years, it has probably caused some pain to the external balance sheets and therefore the need to want to diversify FX reserve holdings with the US dollar.”

China’s central bank may also grant the Monetary Authority of Singapore a qualifying foreign institutional investor status which allows the MAS to invest in Chinese financial products on the mainland.

The stories on China and their move toward a freely exchangeable currency are becoming more frequent, aren’t they? I think China is moving more quickly than they had previously planned, because of the things going on in the US.

To recap… Besides it being Frank Trotter’s birthday, the other big news for today is that we’ve had a currency and commodity rally versus the dollar for the ages! The euro is over $1.45, and gold is over $1,500! Rate differentials, S&P negative outlooks, and pretty strong earnings from US companies are all ganging up on the dollar this morning… Oil has rallied $3 overnight, and the Riksbank hiked rates 25 basis points.

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