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Weldon's Money Monitor: Under the Metal 'Macroscope'


Oh, how I do love Oreos.


Gold rose about one-half of a percent yesterday, the day China finally adjusted their currency 'regime', moving to a basket-based focal point and imposing volatility bands in which the Chinese Yuan (CNY) can gyrate, while holding out the potential for a 'crawling corridor' policy to come next.

The U.S. Dollar (USD) is really the only currency caught in the crossfire, as the European currencies barely budged versus the greenback, and are already slipping backwards today. On the flip-side, the brunt of the Asian currency strength was linked to huge speculative short yen positions, and the move to incorporate the Singapore Dollar (SGD) more closely within the Chinese currency basket formula.

Thus, the Japanese Yen (JPY) spiked, aided by short covering, while the SGD soared, aided by a scramble to adjust portfolio coverage, to more closely represent the implied basket against which the CNY will trade.

Yet, there is a significant bigger picture dynamic evolving. We view this as the 'Oreo Cookie dynamic,' whereby export-driven China-centric Asia is one black cookie half, and export-driven EU-centric Europe is the other black cookie, both of which are pressing against the crème filling inside, representing the debt-driven, import crazy US consumer.

Moreover, from the currency perspective, the CNY move is more about China solidifying their power, crystallizing a Beijing-centric Asia as a hegemonic trading bloc, in direct competition with Europe, which faces an internally-generated competitive depression.

The move is brilliant. By incorporating the Malaysian Ringgit, the Thai Baht (THB), the Yen, and the SGD, China is moving in the direction that the EU had long planned to move, but is failing to now miserably, towards becoming a powerful global trading bloc, again.

Thus, the Asian currencies moved as much, if not more in some cases, against European currencies, than against the USD.

It comes down to being a competitive revolution versus a competitive depression.

But it also comes down to advantages within Asia itself, since we believe that there is no coincidence to the fact that the move comes within days of major technical breakdowns in a number of key Asian currencies, relative to the USD, including the SGD, JPY, and THB.

Consider this not-widely-discussed fact: Just days ago, the JPY had depreciated by more than 11%, in the year-to-date, with the USD having risen from 102.20 in January, to the high this week at 113.75.

This means that the Chinese currency had appreciated by 11% in the year-to-date, against one of its main trade partners and competitors, given that the CNY was pegged to the USD, resulting in an exact lock-step appreciation with the USD, against the JPY.

Ditto the huge move in the USD against the THB.

Perhaps the proverbial straw that broke the PBOC back: The SGD had violated the uptrend line dating back to 2001, and had fallen back below (USD above) 1.70--just two weeks ago.

Subsequently, the appreciation in the CNY versus the SGD, in the six-plus-month year-to-date period, had exceeded +6%.

The Chinese edge, gained over months of USD depreciation against all Asian currencies, was eroding, and eroding rapidly.

When the smoke clears, there are three main macro points:

First, the move by China should be viewed as an 'easing' of 'policy', despite the rise in the CNY, since China is really saying, we need to become more aggressive in our drive to compete.

Secondly, a 2% adjustment fails to meet the market's most pessimistic expectation, as per the pricing in the NDF market, where the implied appreciation upon de-pegging was priced at a minimum of 6%.

Given that the catalyst for the move appears, beneath the surface, to be the depreciation of other Asian currencies against the USD, we ask: when the basket-adjustment buying is done, might Asian currencies again come under pressure against the USD as a means to pressure the Chinese for more?

Thirdly, and most importantly with our context here and incorporating each of the first two points and our Oreo Cookie example: As a trade bloc, Asian nations would be more likely to desire reserve holding diversity away from paper currencies, particularly the Euro (EUR), and to a lesser extent (since they still desire our import generated USD based revenue back-flow) the USD.

This suggests that our long theorized move by Asian Central Banks, to hold some measure, percentage wise, of their reserves in gold, may be nearing.

While we are not sanguine about the bullish prospects for gold--priced in USD--given the talking-the-monetary-talk, and now walking-the-monetary-walk Fed, we continue to believe in the macro bullish prospects for gold priced in most all other currencies.

Thus, we go on a chart blitz, to reveal where our own trading focus lies.

We start with the picture presented by gold priced in Yen, seen first in the daily chart on display below, revealing a decline yesterday, but far from any kind of breakdown, as underlying support appears solid as defined by the first-quarter 2005 highs and the medium-term moving average.

The longer-term daily chart plot, seen below, reveals the macro nature of the recent upside breakout, essentially plotting our own famed 'Launching Pad Pattern.' Note how the longer-term moving average held solid as support during the recent downside correction. It would take a move back below 45,000 yen per ounce to invalidate the macro-bull trend.

Of even greater intrigue, and of greater macro-significance in our opinion, we note the action in SGD-priced gold, seen first in the long-term weekly chart below.

The steep uptrend since the secular low in late 2000 is being tested, seriously tested, aided by the recent failure to make a newer new high in 2005, setting up a potential head-and-shoulders topping pattern. We are keying off the recent swing low just below 700 SGD per ounce, as marked on the chart, a level below which the moving average has been violated, along with the uptrend line.

The shorter-term daily plot on display below gives a nice close-up, detailing the pertinent technical pivot points.

Still most bullish from the macro-perspective is Euro Gold, as noted in the chart below. Indeed, Gold in EUR terms is higher this morning, eclipsing the most recent mini-swing high, suggesting that it may have completed a downside correction measuring directly to the 38% Fibonacci retracement level, and, the still-rising short-term 50-day exponential moving average.

We continue to favor Gold in EUR on a longer-term basis.

In fact, one of the reasons we do not favor USD-based gold, can be seen in the final two charts of the day, both of which reveal the plot of gold, divided by the yield on the U.S. 2-Year Treasury Note.

Relative to implied Fed policy gold is breaking down.

Taking a giant step back, we observe the same yield-adjusted plot of gold, from the mega macro-monthly perspective, dating all the way back to the mid 1970s, as plotted in the chart shown below.

Fearful of the deflation risk associated with a burst U.S. stock market-derived wealth bubble, the Fed pumped money into the system like Jose Canseco pumped steroids. The result was unprecedented liquidity (much of it still floating around), record low interest rates and a spike in the price of gold, nominally, and more so relative to yields as defined by the chart.

Now, with the Fed fearful that reflation risk is driving another bubble, a bigger, far more dangerous macro-bubble in U.S. housing. The Fed is selling US Treasury securities from their own account, again, last week, for the third consecutive week driving yields to new move highs, and causing the near-4% 2-Year Yield to break out to the upside, violating a downtrend line that has been in place since the 1980 secular peak in interest rates and driving our yield-adjusted 'price' of gold to its own new lower low.

Folks, the 2-Year U.S. Note yield has just violated a 25-year downtrend.
We fear withdrawal, as the steroid juicer runs dry.

Thus, and this is not intended as specific advice, we are not enamored with USD-priced gold, and moreover, this is part of the reason we are favoring gold priced in other currencies, due to overt USD bullishness.

We maintain bullishness in EUR-gold and JPY-gold.

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