What Yen Intervention Means for Gold
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On Tuesday, Japan did something it hasn't done since 2004. It sold yen to push the value of its currency lower. A weaker yen helps Japanese exports and is a tool for fighting deflation in the country. Japan officials didn't say how much yen they sold, but it drove the dollar 3% higher against the currency.


As we know, a stronger dollar will push oil prices lower. And it will affect stocks, too.


Japanese stocks are up 2% across the board. We'll see if it affects U.S. stocks going forward. Declines are likely to be short-lived as the market adjusts to the yen intervention. This will be the dip to buy for investors who missed the start of the current rally.


Speaking of deflation, bond fund giant PIMCO recently laid down a derivative position that would cost the company $810 million if the U.S. economy experiences a 10-year deflationary spiral.


PIMCO believes inflation is the bigger long-term threat. Now, PIMCO is not forecasting runaway inflation, but it's clear that PICMO, like Warren Buffett in his recent comments, does not see the double-dip recession as likely.


Bearish investors should take note when big money takes macro positions like this.


The Empire State Manufacturing Survey, a measure of manufacturing activity in New York, fell to 4.1%. Any number above zero shows growth, but economists were looking for the index to hit 8%.


In a separate report, Industrial Production for August came in as expected.


These reports would seem to confirm what we already know: that the economic recovery is moving slower than we would like. Of course, the economy is still growing. And it appears that the "soft patch" we hit at the end of the second quarter is easing.


Is that enough to keep investors bullish and buying stocks?


If you're bullish, and believe the U.S. economy will continue to grow, then there's nothing about these reports that will change that.


And let's not forget yesterday's retail sales numbers. Retail sales for August were much better than expected. Consumer spending accounts for around 70% of economic growth, so after employment numbers, retail sales is the number to watch.


Gold hit another new high on Tuesday at just over $1,278 an ounce. And it's likely to move even higher. As countries around the world seek to keep their currencies weak to bolster exports, gold will continue to be seen a store of value.


Not only that, but this is the time of year when gold miners adjust their hedging contracts. In order to lock in higher sales prices, miners will buy futures contracts that will allow them to sell at higher prices. That puts upward pressure on gold prices.


And the gold rally can be a self-fulfilling prophecy. As investors buy shares in the Gold Trust ETF (GLD), the trust buys more gold. It reportedly bought 6.08 metric tons of gold on Tuesday.


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As always, let me know what you're thinking: ianwyatt@wyattresearch.com.

Posted 09-16-2010 3:53 PM by Ian Wyatt