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Credit and Gold Boot Camp!


At the end of the day the US consumer remains the key to all global markets, since a retrenchment might spark a credit contraction, which would put at risk the entire boom.


The Fed policy decision is today at 2:15 pm.

I'll be on Power Lunch today at 12:40 pm. as part of CNBC's Boot Camp on Gold, with today's Power Lunch interview sure to focus on the global credit boom, and an intensified secular erosion in the 'value' of the US Dollar as the 'world's' reserve currency.

This is the dominant macro-monetary dynamic, and it does continue to sustain the longer-term secular uptrend in gold.

Regular readers know the following factoids:

Russian money supply is expanding at a 50-70% twelve-month pace, depending on which 'aggregate' we are looking at.

Russia's property market is exploding, with housing starts expanding at a 50% year-over-year rate.

Russia's official FX Reserves have exploded higher, now in excess of $370 billion, with new record highs set virtually every week.

Similarly, China's FX Reserves blew-out to the upside with a $135 billion expansion during the 1Q, while the Trade surplus continues to reach record heights.

Subsequently, China also reveals record growth in local deposits, which has created a 'feeding-frenzy' among local bankers in terms of making loans, driving 1Q domestic bank lending figures to record highs (at triple the 4Q quarterly expansion).

This is then reflected in near record Foreign Direct Investment in the 1Q, and the resultant rabid resurgence in 'Projects Underway,' as the Chinese juggernaut is moving forward at intensifying speeds.

India is hot, with the Rupee having trended higher against the USD, a symptom of exploding trade, rapidly rising official FX Reserves, and accelerating domestic output and consumption growth.

We can also cite the fact that countries such as Pakistan and the Philippines both just revealed that their official FX Reserves have reached record highs.

We can focus on the US Dollar, and while its decline is not really intensifying amid JPY weakness and CNY-INR-RUR strength, the inherent weakness in the value of the dollar IS seen via a 'broadening' depreciation.

Europe is booming, and that 'boom' has extended to places like Slovakia, Romania, Estonia, and Hungary, not to mention Sweden and Norway.

Indeed, Slovakia and Romania has just recently cut official short-term interest rates, evidence of the 'broadening' USD decline thought-process in motion, as these Central Banks are 'easing' monetary policy in an attempt to squelch the strength of their own currencies.


Naturally, this all 'fits' perfectly with the continued upside surge in Emerging Markets, as stock index linked ETFs roar and soar to new highs.

However... there are some 'troubling' signs, in terms of thinking that Gold is a sure bet to eclipse last May's $731 high basis the spot price.

In other words, I might be 'betting' small amounts here, or, I might even be 'checking' here (doing nothing in poker lingo), but I am certainly not willing to go 'all in' at this point in time. Not when I observe the following market 'tells,' in terms of negative divergences:

During the bulk of the secular bull move beginning in 1999 Gold has 'appreciated' against most all 'paper-assets.' Into the May-2006 high of $731, Gold was rallying against nearly every global currency and most all global stock indexes.

At the moment neither of those things are true.

Gold is not breaking out against all currencies.

And, Gold is not leading the equity indexes higher.

And also, less noted, the Gold-Silver Ratio is rallying, a negative sign.

These influences seem problematic in the med-term.

First, it is indicative of the push in the monetary-credit reflation to the extreme, even as reflected by the explosive credit-risk expansion taking place in the US equity market via booming private equity investment.

Gold's underperformance also reflects the strength of Eastern European currencies, many of which have hit new record highs against both the EUR and the USD, though these countries continue to 'push' in terms of domestic monetary conditions.

The fact that currencies such as the Slovak Crown pushed to record highs versus the Euro to the point of 'cracking' the ERM 'corridor' when contemplated against the fact that residential credit to Europeans (EUR) spiked to new record highs in March exemplifies just how strong the SKK is, a fact also reflected by a med-term decline in SKK-Gold.

Intensified hawkishness from the ECB poses a risk to Gold.

Or, Gold's 'underperformance' might be symptomatic of the intensifying risk associated with the US housing-consumer environment.

Indeed, at the end of the day the US consumer remains the key to all global markets, since a retrenchment might spark a credit contraction, which would put at risk the entire boom, including the explosive growth in China and India, among others.

Right now, a contraction in US credit is the major risk to Gold.

This is why thoughts of a return to Fed monetary 'largesse' down the road is supporting the current push in Gold towards $700, and global stock indexes to newer new highs.

But this might also be why Gold is beginning to lag, predicated upon the belief that if credit does begin to contract in the US, it could lead to debt liquidation, at which point the Fed will not matter for a period of time.

During that period, all monetarily reflated assets would be at risk.

My firm has been using our trusty macro-data-scalpel to dissect the micro-fundamental figures offered on US credit by the Fed, every day, every week, every month, and every quarter.

To date, my firm has seen some slowing in Bank Credit, but mostly in Securities Held (Treasuries and Agencies), and somewhat in Commercial and Industrial Loans, but not within real estate, home equity, and consumer loans, as per the weekly bank lending data.

Moreover, the latest monthly report from the Fed, detailing March Consumer Credit, reveals a boom in borrowing.

For now, this is supportive to Gold, but I worry when I note the latest weekly US Chain Store Sales numbers, particularly in light of a horrific employment report posted on Friday.

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