GOLD STOCKS JUST HIT ANOTHER NEW HIGH

After the market's horrendous performance in May, it's tough to find an asset sitting at a yearly high right now. One of these investment rarities is an asset we've told you about repeatedly in DailyWealth: Gold stocks.

During the market panic of late 2008, we called gold stocks one of the great "rebound trades" you could make to play a market rally. We've also written (here and here) on how gold stocks spent much of 2009 in "cheap mode."

On Friday, the big gold stock fund (GDX) confirmed our bullish thesis by striking a new 2010 high of $54.06 per share… And it's just pennies away from its December 2009 high of $54.78.

As noted in this Growth Stock Wire essay, the gold stock sector is a relatively tiny one… so it doesn't take much interest from big mutual and hedge-fund managers to push the sector to new highs. With gold over $1,200 an ounce now, people are paying even more attention to the precious metal… Expect GDX to continue higher and higher.

Chinese currency soars most since 2005

The yuan rose the most since a July 2005 revaluation and forwards jumped after China’s central bank ended a two-year peg before a Group of 20 summit this week.

The currency advanced 0.42 percent to 6.7976 per dollar as of 5:30 p.m. in Hong Kong, the biggest gain since July 2005, according to data compiled by Bloomberg. The 12-month non- deliverable yuan forward rose 1.1 percent to 6.6425, implying traders are betting on a 2.3 percent appreciation.

A stronger yuan will help curb inflation in the world’s third-largest economy and shift investment toward service industries from export-manufacturing, the People’s Bank of China said yesterday. The move may also deflect criticism from President Barack Obama and other G-20 leaders, who say China relies on an undervalued currency to promote overseas sales.

“It will be a very gradual appreciation but it could be front-loaded,” said Nizam Idris, a Singapore-based currency strategist at UBS AG, the world’s second-largest foreign- exchange trader. “The yuan will appreciate about 4 percent this year and 5 percent next year.”

Asian currencies gained, with South Korea’s won strengthening 2.6 percent to 1,171.95 versus the greenback and the Taiwan dollar climbing 0.6 percent to NT$31.999. The MSCI Asia Pacific Index of regional stocks jumped 2.4 percent and oil rose 1.7 percent on speculation a stronger yuan will boost the purchasing power of the world’s most-populous nation. China’s government bonds gained and stocks rose.

The yuan’s spot rate touched 6.7958 earlier today, the strongest level since the central bank scrapped a peg against the dollar on July 21, 2005 and strengthened the currency by 2.1 percent in a single day.

Limited Gains

The move signals that “the recovery in the Chinese economy is on a more solid footing,” Philippine central bank Governor Amando Tetangco said in an interview yesterday. “This bodes well for intra-Asian trade and consequently growth for our economies. This could also encourage capital to flow into the region.”

Chinese authorities had prevented the currency from strengthening against the dollar since July 2008 to help exporters cope with the global financial crisis. The currency appreciated 21 percent in the three years after a managed float against a basket of currencies was introduced in 2005.

Gains this time around may be more moderate because the yuan has already strengthened 16 percent against the euro this year, eroding earnings for Chinese exporters in the European Union, the nation’s largest market. The yuan may climb 1.5 percent against the dollar to 6.7 by Dec. 31, according to the median estimate of 14 analysts surveyed yesterday by Bloomberg.

Testing the Bank

“Investors are buying and testing the central bank’s bottom line,” said Liu Dongliang, a Shenzhen-based analyst at China Merchants Bank Co., the country’s fifth-largest lender by market value. “But the central bank may take action when volatility is excessive.”

The People’s Bank set its daily yuan reference rate unchanged at 6.8275. The currency is allowed to fluctuate up to 0.5 percent from the official rate.

The central bank, which has accumulated $2.4 trillion in reserves by intervening in currency markets, said over the weekend it will allow greater currency “flexibility,” while maintaining the trading band, curbing inflows of short-term speculative capital and preventing “excessive” fluctuations.

Intervention Risk

“We can’t exclude the possibility of yuan depreciation,” said Shen Jianguang, Mizuho Securities Asia Ltd.’s chief economist for Greater China, who said a 2.5 percent drop is possible this year if the dollar-euro rate is unchanged. Even so, he added, China needs to show flexibility in its currency before the G-20 summit in Toronto on June 26-27.

U.S. Senator Charles Schumer said lawmakers will push ahead with proposals for trade sanctions until they are convinced the advance is fast enough to allow fair competition.

Textiles makers stand to lose the most from appreciation and some would “face bankruptcy” with profit margins as low as 3 percent, Zhang Wei, vice chairman of the China Council for the Promotion of International Trade, said in March. Europe’s debt crisis has added to pressure on their earnings. Swift Umbrella Co., based in the southern Chinese province of Fujian, was forced by European buyers to cut prices 6 percent this year, Xu Youchuan, sales manager, said in a June 2 interview.

Shrinking Surplus

China’s balance of payments indicates no need for “large changes” in the yuan, which is “not too far from equilibrium level,” the central bank’s statement said. The current-account surplus, the widest measure of trade, narrowed 32 percent to $297 billion in 2009, government data show.

Exports have been rebounding, exceeding imports by $19.5 billion in May, from a $1.68 billion surplus in April and a deficit of $7.24 billion in March. Overseas sales jumped 48.5 percent in May from a year earlier, customs bureau data show.

The World Bank said last week that a stronger currency would help China cool inflation, which accelerated to a 19-month high of 3.1 percent in May, higher than the government’s full- year target of 3 percent.

Bonds Rally

Bonds rallied with the yield on the 2.38 percent note due in May 2015 dropping five basis points to 2.8 percent. Relaxation of the yuan’s fixed exchange rate will spur capital inflows, helping ease a shortage of cash in the economy, Yang Hui, a fixed-income analyst at Citic Securities Co., China’s largest listed brokerage, wrote in a report today. It will also weaken expectations for an interest-rate increase, Yang wrote.

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, gained 2.9 percent to 2,586.21. Companies focused on the Chinese market, including Beijing-based computer maker Lenovo Group Ltd. and Shanghai-based China Eastern Airlines Corp., said in March that they would gain from lower import costs and stronger consumer purchasing power.

The Chinese consumer “is feeling wealthier as a result of appreciation,” said Jing Ulrich, the chairperson for China equities at JPMorgan Chase & Co. “In the Chinese low-end manufacturing industries, what we will see is that the sector will move up gradually along the value chain.”

New week, new record: Gold makes new highs for third straight day

Gold rose to a record in London and New York as other commodities gained on speculation demand for raw materials will increase and as investors bought the metal to protect wealth from Europe’s financial turbulence.

China, the world’s third-largest economy, said it may allow the yuan to move higher, making commodities priced in other currencies less expensive for Chinese consumers. Bullion gained in eight of the past nine weeks on speculation debt-cutting measures by European nations will slow expansions. Other precious metals rose to the highest levels in at least a month.

“Gold is benefiting from other commodities,” said Jesper Dannesboe, a senior commodity strategist at Societe Generale SA in London. The China news “is a catalyst, a trigger for buying today. People are still worried about sovereign debt levels.”

Gold, up 15 percent this year, is heading for its 10th consecutive annual gain, the longest winning streak since at least 1920. Bullion has outperformed other commodities as global equities slipped, and this month reached all-time highs in euros, sterling and Swiss francs. Holdings in exchange-traded funds backed by gold reached records, while coin sales from mints accelerated, tightening supplies.

Gold for immediate delivery added as much as $8.50, or 0.7 percent, to $1,265.30 an ounce and traded at $1,260 at 11:41 a.m. in London. It surpassed the previous all-time high of $1,262.50 set June 18. The metal for August delivery was 0.2 percent higher at $1,261.10 on the Comex in New York after reaching $1,266.50.

The metal rose to $1,259.50 an ounce in the morning “fixing” in London, used by some mining companies to sell output, from $1,256 at the afternoon fixing on June 18.

Stronger Yuan

A stronger yuan will help curb inflation in the world’s third-largest economy and shift investment toward service industries from export-manufacturing, the People’s Bank of China said yesterday. Chinese authorities had prevented the currency from strengthening against the dollar since July 2008 to help exporters cope with the global financial crisis.

“The impact on China in the short term will be neutral for gold prices,” Wallace Ng, executive director with Fortis Nederland NV in Hong Kong, said in an interview with Bloomberg Television. A stronger yuan will benefit gold prices in the longer term because it will increase the purchasing power of Chinese investors, he said.

The dollar was little changed against the euro today, rebounding from a loss of as much as 0.8 percent. All six main industrial metals on the London Metal Exchange rose and crude oil futures climbed in New York.

Russia Buying

The MSCI World Index of equities is down 3.8 percent this year, and raw materials as measured by the Reuters-Jefferies CRB Index have slid 7.2 percent. Returns on benchmark U.S. Treasuries have gained 4.5 percent this year.

Russia’s central bank bought 26.6 metric tons of gold in the past quarter, taking holdings to 668.6 tons, and the Philippines increased holdings by 9.5 tons in March to 164.7 tons, the World Gold Council said on June 18. The Saudi Arabian Monetary Authority reported last quarter that it “modified from first quarter 2008” its holdings to 322.9 tons, from 143 tons after adjusting accounts, the council said.

“This creates speculation that Asian and Middle Eastern central banks want to own more gold,” Societe Generale’s Dannesboe said. “It just adds to the bullish story.”

Bullion has advanced in 2010 even as the dollar, which usually moves inversely to gold, has strengthened as the euro slumped on concern about sovereign finances in Europe. The single European currency has dropped 13 percent against the dollar this year.

‘Strong Interest’

Gold reached a record 1,051.27 euros an ounce, 870.65 British pounds and 1,451.16 Swiss francs on June 8, Bloomberg data show.

“It is clear that there is extremely strong interest in gold,” said Gavin Wendt, senior resource analyst with MineLife Pty Ltd. in Sydney. “This is all a direct consequence of investors seeing gold as a more attractive investment class, and this trend will only continue to grow.”

Assets in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, were unchanged at a record 1,307.96 tons on June 18, according to the company’s website. Global holdings of the metal by ETFs increased 0.2 ton to an all-time high 2,044.87 tons on June 18, according to Bloomberg data tracking 10 providers.

Silver for immediate delivery in London climbed as much as 1.5 percent to a five-week high of $19.4575 an ounce and last traded at $19.3575. Platinum gained 0.7 percent to $1,599.30 an ounce, the highest price in a month, and palladium was up 2 percent at $500 an ounce.

Gold RUSH: Gold shatters all-time record

Gold futures rose to a record $1,263.70 an ounce in New York as Europe’s fiscal woes and dimming prospects for the U.S. economy prompted investors to step up purchases of bullion as an alternative asset.

The metal has climbed 15 percent this year, outperforming equities and bonds, while the euro slumped 14 percent. A majority of Greeks believe the country may go bankrupt, an opinion poll showed. Spain has 24.7 billion euros of maturing debt in July and may need to use a financial lifeline from the European Union.

“The problems over in Europe are just as pernicious over here in the U.S.,” said Michael Pento, the chief economist at Delta Global Advisors Inc. “You can’t trust sovereign debt and sovereign currency. Gold is the only real honest money that we have.”

Gold futures for August delivery rose $9.60, or 0.8 percent, to $1,258.30 on the Comex in New York, the highest settlement for a most-active contract ever. The metal has gained 2.3 percent this week and risen four weeks in a row.

Before today, the record was $1,254.40 on June 8. This month, the metal reached all-time highs in euros, U.K. pounds and Swiss francs. Gold for immediate delivery reached a record $1,262.50.

Yesterday, reports showed U.S. jobless claims rose unexpectedly and manufacturing in the Philadelphia region missed forecasts by analysts.

“People are looking at the euro as a wake-up call and they’re skeptical of a U.S. recovery,” said Adam Klopfenstein, a senior market strategist at Lind-Waldock, a broker in Chicago. “The big fear is that there are going to be other governments who are going to have sovereign-debt risks. People are clamoring to get into gold.”

$1,600 Forecast

Gold may reach $1,400 this year and rise as high as $1,600 in 2011 should the Federal Reserve be forced to keep interest rates at a record low to stimulate the economy, said Pento of Delta Global.

U.S. lawmakers, debating a $50 billion jobs bill in Congress this week, are struggling to meet demands to spend more to boost the economy while cutting the government’s $1.5 trillion deficit.

“Smart money like hedge funds and big insurance companies have been accumulating gold,” James Dailey, the chief investment officer at TEAM Financial Asset Management LLC in Harrisburg, Pennsylvania, said in an interview in New York. “Gold has taken the monetary asset role.”

Gold may rally to $1,500 this year, he said.

Assets in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, increased 1.83 metric tons to a record 1,307.96 tons yesterday. Holdings are up 15 percent this year.

ETF Demand

Gold may climb to $1,400 in 2010 should the current pace of investment in ETFs continue, Goldman Sachs Group Inc. said in a report dated yesterday.

China should increase its holdings of precious metals and oil, Yin Zhongqing, the vice chairman of the finance committee of the National People’s Congress, said today at a conference in Shanghai. Gold accounts for 1.6 percent of China’s reserves, according to the World Gold Council.

Russia and the Philippines have increased gold holdings this year, the council said today.

“If we come to understand that gold is now a truly reservable asset, we can understand how it can be that bonds can rally on deflation news and gold can do the same,” said Dennis Gartman, an economist and the editor of the Suffolk, Virginia- based Gartman Letter. “Precious metals are no longer driven by fears of inflation, but by the notion that precious metals are currencies.”

Silver, Platinum

Silver futures for July delivery rose 40.8 cents, or 2.2 percent, to $19.184 an ounce on the Comex, capping a 5.2 percent gain this week.

Silver may outperform gold as a “cheap” alternative, Deutsche Bank AG said in a report. Silver will average $20 an ounce in the third quarter and $22 in the fourth quarter, the bank said.

Platinum futures for July delivery climbed $15, or 1 percent, to $1,587 an ounce on the New York Mercantile Exchange. The metal climbed 3.4 percent this week.

Palladium futures for September delivery gained $10.15, or 2.1 percent, to $491.40 an ounce. The metal gained 9.6 percent this week, the most since early March.

Former Fed chief Alan Greenspan: U.S. debt crisis coming soon

The aging economist argued recently that the US is about to run out of its ability to raise debt at low rates to finance its growing deficits.

His disagrees with most economists who worry about the effects of the US debt in a few years, but believe that very low borrowing costs will help American fund its government spending in the meantime.

U.S. discovers $1 trillion of untapped mineral resources in Afghanistan

And there are those who wonder why the US has spent countless dollars and thousands of dead soldiers protecting a few desolate mountain passes in Afghanistan. And no, it turns out it is not just the opium trade.

The NYT reports that "The United States has discovered nearly $1 trillion in untapped mineral deposits in Afghanistan, far beyond any previously known reserves and enough to fundamentally alter the Afghan economy and perhaps the Afghan war itself, according to senior American government officials."

The article continues, "The previously unknown deposits — including huge veins of iron, copper, cobalt, gold and critical industrial metals like lithium — are so big and include so many minerals that are essential to modern industry that Afghanistan could...

CHART OF THE WEEK: GOLD IS SKYROCKETING!

This week's chart is an update on our "take the global view" stance on valuing assets.

Longtime readers know we encourage folks to look at the world's assets through several different lenses. This exposes you to more knowledge, more perspectives, and thus, more opportunities.

One "lens" we're fond of is the price of gold as seen by a European. In U.S. dollar terms, gold is enjoying a modest uptrend. But in the eyes (and pocketbook) of a European, the price of gold is absolutely soaring in response to the deteriorating value of his paper money.

This is the market telling him "there's no such thing as a free lunch"… that the problem with massive nanny state socialism is, sooner or later, you run out of other people's money. Real wealth, as represented by gold, rises in response.