Gold reverses course, Beijing negotiations loom, Fed adjourns

DAILY MARKET REPORT

Gold reversed course overnight and is trading $9 higher this morning at $1315 once again repeating the Fed Week pattern we have all come to know and understand. As we pointed out on Monday, when the market opened sharply lower – Quite often, Fed Week ends much differently than it begins. It looks like this rendition will follow the script though it is still early in the game. Silver is trading higher as well – up 13¢ at $16.54.

Aiding gold in its recovery are concerns about the upcoming trade talks in Beijing. The United States is threatening deeper restrictions on Chinese exports including telecommunication products, China, for its part, is doing what it can to weaken the yuan against the U.S. dollar. Both actions look like preliminary shots across the other’s bow. A CNBC headline reflected the consensus opinion on the Beijing negotiations: “Stocks are heading for a tumble at the open on waning hopes of real progress in the US-China trade talks”.


Quote of the Day
“A lot of the bank issues in the United States and around the world have been solved. But migrating the problem to the sovereign balance sheets. So the banks look pretty good, but the Fed has $4 trillion of debt on its balance sheet. And it’s even more, we are not in a European audience. In Europe they would really know what they meant because all the European banking system is fixed but Europeans are all also buying up all the debt. The budget deficits haven’t contracted, they’ve widened. The banks buy the debt, then walk over to the European Central bank, finance it. Get new money, so they can buy the next round of debt. So, you have countries with way bigger deficits, as a percentage of GDP than the U.S., that are borrowing money for ten years, at 3.0% or 2.5%. Really? And the banks look OK. It is the sovereigns that look risky, like Greece. You wonder is the next crisis going to be a sovereign crisis? And if it is, it will just be a continuation. People will look back and say ‘what we really did, we didn’t fix the outcome of the financial crisis. We left that open and as a result, its really been a thirty-year workout.’” – Lloyd Blankfein, Goldman Sachs [Source: CNBC]


Chart of the Day

Chart note: During that 18-year period from 2000 to present, the one-year Treasury provided a positive real rate of return in only six years.  The rest of the time, the real rate of return was negative.  The real rate of return is also important in the context of Federal Reserve interest rate policy in that it signals the performance of the dollar against other currencies and gold.  At the moment, the consensus opinion is that the Fed will keep interest rates below the inflation rate in order to keep the economy from swinging into a downturn, a situation causing some analysts to question the longer-term staying power of the recent rally in the dollar.  Tomorrow we will take a look at the real rate of return on gold.

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