China & Russia Build Gold Reserves.
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    In This Issue.

    * Euros & A$'s give back Monday's gains.

    * Gold attempts to rally 3-consecutive days.

    * U.S. Manufacturing Index climbs back above 50.

    * China's Manufacturing Index remains above 50 .

    And, Now, Today's Pfennig For Your Thoughts!

    China & Russia Build Gold Reserves.

    Good day. And a Tom Terrific Tuesday to you! I was thinking about something that I saw on ESPN this past weekend on the way to work this morning. It was a collection of videos of soldiers returning home, and all the ways they surprised their family. Talk about heartwarming, and something that I hope every soldier gets to experience, a safe return home. There's more talk about what the Fed is going to do in the markets this morning, and the currencies have slipped from yesterday's mixed bag of results. But none of this means as much as a soldier returning home safe.

    I guess that video really made an impression on me, eh? OK. The Reserve Bank of Australia (RBA) did leave rates unchanged last night, there was a small possibility of a rate cut going into the meeting, but that was snuffed out quickly by the RBA. Remember, that after the last rate cut to an internal rate of 2.75%, the RBA said they would be monitoring the economic data for any clues as to whether another rate cut is needed. A key piece of data will print tonight, in the form of Retail Sales. We saw some stronger data last week from Australia, but these days, it's more of a "what have you done for me lately" mentality in the markets, so the Retail Sales figure will be the latest to give us an indication of what the RBA might do at their next meeting in August.

    The RBA has really been a thorn in my side now for the last year, and I don't see why they would stop digging at me now. Therefore, I suspect the RBA will cut rates at their next meeting in August. I'll be on vacation when they meet, which is just as well, that way, I don't say bad things about them the next day! The Aussie dollar (A$) has given back the 1/2-cent it gained yesterday. Up one day, down the next. That's been the life of the A$ recently, as the weight of the slowdown in China and their own political risks has been too much for the A$ to mount a multi-day rally.

    This morning, the euro is giving back the ground it gained Monday. Yesterday, I talked about the euro, and how an analyst had compared the euro to the yen when the yen was considered a safe haven and became so strong in spite of a weak economy. They based that on a strong Current Account Surplus, and low inflation. Well, there's another thing to look at. with the euro. the spread differential between their German Gov't bonds and U.S. Treasuries. Any time that spread begins to widen the euro rallies, and vice versa when the spread narrows. I would look for euro strength this week, as the ECB will keep rates steady, and maybe talk about the nascent recovery in the Eurozone economy, which would support the current positive spread in yields.

    But this morning, the yield spread is narrowing, and thus the euro is weaker. There was some news from the Eurozone that has gone basically unnoticed by the markets, which is a good thing, for the news that came out late yesterday was that the Portuguese Finance Minister had resigned.

    Speaking of Treasuries. I did forget to mention yesterday that the ratings agency, Fitch, kept the U.S. credit rating at AAA, which was good news, but. also kept their outlook for the U.S. at "negative". that's not good news.

    Did you see that the U.S. ISM Manufacturing Index did indeed climb back above 50 in June? Yes, the report yesterday showed an index number of 50.9 (May's # was 49) . This was a good print for the U.S. and the dollar, but in reality, the manufacturing sector has taken such a HUGE hit in the past 5 years, that I just don't see this sector recovering to what it once was, and the jobs? They're gone, folks. But don't let that thought get in the way of a feel good piece of data like the ISM.

    Today, we'll see the May (yes, a huge lag) color of Factory Orders, and the June vehicle sales, of which we should see some good data on cars sold in June. If we do, then vehicle sales for the first 6 months will have been quite strong. Do, we count this as a good indicator that the U.S. consumer is recovering and buying a new car? Or. do we worry about how the new car was purchased. and consumer borrowings , etc. ?

    We'll also get to hear NY Fed President Dudley speak about the economy. I find it interesting that a couple of weeks prior to the FOMC meeting at which Big Ben Bernanke threw his cat among the pigeons, that Dudley was making comments about how the "Fed has been consistently too optimistic about the strength of the economy ever since the 18-month recession ended in June 2009." But then on FOMC day, he was right there with Big Ben. I'm reminded of an old saying that my football coach used to say to us. But in an effort to be a kinder, gentler Chuck, I'll keep that saying to myself, although I have used in the Pfennig before.

    But FOMC comments that are all over the playing field on what's going to happen is really confusing bond holders. And I saw where $80 Billion left bond funds in June ($71 million in bond mutual funds, and $9 million bond ETF's), so even bonds get whacked by the paper trades. The 10-year and longer maturity yields are rising, which means that bond prices are falling and the further you go out on the yield curve the pain becomes real bad. The Fed will be able to keep yields on 2-year and shorter maturities pretty low, given their call to keep interest rates near zero for some time. So. a mass exodus from Treasuries could be among us, folks. I saw where an analyst at Deutsche Bank forecast the yield on the 10-year Treasury to rise to 2.75% by year-end, and 3.25% by next June.

    As I told you last week, a 3% yield in the 10-year would dictate that Mortgage rates would rise to over 5%... Now put that in your recovering Housing sector pipe and smoke it. As the robot in Lost in Space used to say. "That does not compute Will Robinson, that does not compute". Yes, a 5% mortgage rate will not compute / help the housing sector. but that would be an initial problem, right? I mean U.S. Consumers would eventually grow Comfortably Numb with 5 or 6% mortgage rates. Shoot Rudy, my first mortgage had a 13% rate on it, and it was tied to 1 year T-Bills.

    Gold is up again today, with the gain this morning around $6. IF it can hold these gains, Gold could notch a 3-day gain, which would represent a strong bounce off of its 34-month low that Gold experienced Friday morning, before turning around. I found this quote from the great Richard Russell on the turnaround Friday, let's listen in. "I thought it significant that when gold was declining, there was no end of publicity about the "dreadful action" of gold. But when the gold miners surged on Friday, not a word appeared about the bullish action of gold and the gold miners, not a word!"

    When I left the office yesterday afternoon (later than usual I might add!), Gold was kicking some tail and taking names later, and it was nice to see once again. With the way Gold is hated these days the contrarian view would be to buy when an assets is so hated as Gold was last week. Could last week's drop below $1,200 be the bottom the shiny metal has been in search of? I guess we'll have to wait-n-see, but my Spider-sense is tingling.

    Yesterday, I saw a story flash across the one of the TV screens that carries Bloomberg TV, that said that JP Morgan issued a "go overweight commodities now" call to its customers. JP Morgan said that "it's our first overweight call on commodities since September 2010." Hmmm. Now, my conspiracy blood is boiling folks. Why, now? Did commodity prices get whacked low enough by the price manipulators to allow investors the ability to buy at very cheap levels, and then watch as commodities rise from all the new activity? Of course that's what happened, you know it, I know it, the guy down the street washing his car with his shirt off, knows it! Too bad nothing will be done about this.

    The Chinese Manufacturing Index was weaker in June, but did remain above the 50 level at 50.1, which is the lowest level in 4 months (previous month was 50.8) The Chinese allowed a ½% gain in the renminbi / yuan fixing overnight on the data. That, and the better than the average bear manufacturing index in the U.S. inspired the Chinese to book the appreciation.

    It was raining again this morning on my way to work. UGH! Last summer we had a drought. This summer it's been so wet, that farmers almost didn't get their corn fields planted.

    For What It's Worth. I've been chronicling the building of Gold reserves in China and Russia for a couple of years now, and I love it when someone else sees what I see, usually a couple of years after I first saw it (not patting myself on the back, just stating that goes on). So, here's a snippet of a story I found on Titled: Russia & China Building Their Gold Reserves.

    "Western economic commentary on China and Russia is usually colored by monetarist assumptions not necessarily shared in Moscow and Beijing. For this reason, Russian and Chinese fiscal and monetary policies are misunderstood in financial markets, as well as the reasons their governments buy gold.

    China has been notably relaxed about her own people acquiring gold, and the government itself appears to be absorbing all of China's mine output. Russia is also building her official reserves from her own mine supply. The result over time has been the transfer of aboveground gold stocks towards these countries and their allies. The geo-political implications are highly important, but have been ignored by western governments.

    China and Russia see themselves as having much in common: they are coordinating security, infrastructure projects and cross-border trade through the Shanghai Cooperation Organization. Furthermore, those at the top have personal experience of the catastrophic failings of socialism, which have not yet been experienced in Western Europe and North America. Consequently neither government subscribes to the economic and monetary concepts prevalent in the West without serious reservations.

    It seems that the leaders of both Russia and China are also painfully aware of the importance of currency stability in a way the West is not. The comparison with the West's reckless monetary policies is stark. It follows that Russia and China are increasingly concerned about the major currencies, given both countries have substantial trade surpluses. Their exposure to this currency risk explains their keenness for gold. Furthermore, they know that if the renminbi and the ruble are to survive a western currency crisis, they must have the sound-money credibility provided by a combination of monetary restraint and gold backing. And the reason China is happy to let her citizens plough increasing amounts of their savings into gold is consistent with ensuring her people buy into sound money as well.

    While the Chinese and Russian governments are authoritarian mercantilists, there are elements of the Austrian School's economics in their approach. The tragedy for the West and Japan is they have embarked on the opposite weak-money course that can only end in the ultimate destruction of their currencies, leaving Russia and China as the dominant economic powers."

    Chuck again. Yes, you may recall me being the first one on your block to tell you that the Chinese were hoarding so much Gold to eventually back their currency with the shiny metal, and some time later, adding that Russia was also leaning in that direction. It's all in the plan to remove the dollar as the reserve currency of the world, folks. So, yes, the dollar might be a little stronger right now, does it mean the Chinese are going to trash their plans? Hardly.

    To recap. The mixed bag of currency gains have given way to selling this morning. But Gold is up again this morning, marking 3 consecutive days of gains. The RBA left rates unchanged, but the markets have shifted their focus on the August RBA meeting, and believe that a rate cut will come at that time, thus selling in the A$ this morning. U.S. Manufacturing Index climbed back above 50, and China's version of the index remained above 50.

    Currencies today 7/2/13. American Style: A$ .9170, kiwi .7777, C$ .9485, euro 1.3025, sterling 1.5165, Swiss $1.0540, . European Style: rand 9.9105, krone 6.0825, SEK 6.6815, forint 225.15, zloty 3.3245, koruna 19.9460, RUB 33.05, yen 99.80, sing 1.2675, HKD 7.7535, INR 59.66, China 6.1773, pesos 12.96, BRL 2.2290, Dollar Index 83.25, Oil $98.14, 10-year 2.46%, Silver $19.61, Platinum $1,379.75, Palladium $688.75, and Gold. $1,258.05

    That's it for today. The really Big Boss, Chairman & CEO-EFC Rob Clements, was in the office yesterday. That's the first time in a couple of years. Rob is always so nice and cordial with a cheery smile that greets you. Great to see him again! He brought the new director of HR to meet us. Now that's a job that I would have to make a ton of money at, to make up for all the headaches! Good luck to Claudia our new HR director. I was all alone again last night, as everyone was gone, which was fine, because I had an awful night with my stomach, and didn't get much sleep, which won't play well when I'm here late again today, but I'll do my best to not yawn or fall asleep during meetings! And with that. Let's go make this a Tom Terrific Tuesday!

    Chuck Butler
    EverBank World Markets

    Posted 07-02-2013 11:59 AM by Chuck Butler