Key News

• Commodities, Stocks Rally as Alcoa Earnings Top Estimates, Dollar Declines (Bloomberg)
• Latvia `on the Edge' After Government Mortgage Plan, Cicero's Oates Says (Bloomberg)
• Final estimate for US budget deficit at $1,400bn (Financial Times) The government took in $2,100bn in fiscal 2009, a 16.6 per cent drop from the previous year as the recession led to sharp declines in individual and corporate income taxes, CBO said.

  On the other half of the ledger, outlays increased 17.8 per cent to $3,500bn, CBO said.

  Among the most expensive items were $154bn for bail-outs under the troubled asset relief programme, $91bn for the Fannie and Freddie bail-outs, and $100bn under the massive stimulus package approved in February.

  Excluding items in the stimulus package, spending for unemployment benefits more than doubled to $120bn, CBO said.

Quotable

“The world always makes the assumption that the exposure of an error is identical with the discovery of truth--that the error and truth are simply opposite. They are nothing of the sort. What the world turns to, when it is cured on one error, is usually simply another error, and maybe one worse than the first one.”

                             H.L. Mencken

FX Trading - The Greatest Currency Ever ... (Go Ahead and Google It!)
It almost seems as if we’re witnessing a veteran prize fighter on the decline, not only failing to win fights but taking brutal beatings along the way.

While the case can certainly be made that the US dollar has many years ahead as world reserve currency, the sentiment is that it does not.

Holding the “official” number one spot – world reserve currency – keeps the US dollar under the spotlight. And the US economy is right there with it. So even though the US wasn’t the only nation to fall into a major slump after a global crisis brought on global recession, it is the nation that gets judged most critically and often receives the most blame.

Don’t get me wrong: the US is no bastion of prudent finance; especially not lately. And the markets are biting down hard on that fact vis a vis the US dollar. But in doing so, it seems there’s very little bite left for any other currencies whose economies are in similar positions. It’s mob mentality at its finest.

So perhaps investors are just jumping on a sure thing – the dollar must go down. Perhaps other countries and other currencies are irrelevant to most. Though it might be hard to make that specific case as investors are finding plenty of money to funnel into emerging markets stocks and currencies. (See below.)

MSCI Emerging Market stock index, weekly:

Singapore dollar and South African rand (USDSGD and USDZAR) weekly:

But what about gold? It’s hitting new all-time high after new all-time high.

Must it go up just because the US dollar is going down? Maybe. Or perhaps vice versa. Perhaps gold is going up because investors really would prefer to steer clear of all currencies made of paper, especially the US dollar.

It’s been the mantra of gold bugs for as long as I can remember: paper currency is crap.
They are that convicted in their faith in the ultimate destruction of fiat and ultimate refuge of hard money – “Gold is the greatest currency ever created.” If you Googled ‘greatest currency ever’ I’d bet you’d find several articles trying to sell you on the unparalleled merits of gold as a currency.

Ok, we understand that (and will do our best to ignore the fact that the gold standard didn’t seem to work out as perceived. Don’t get me wrong, I love the idea of having a real money standard that will discipline politicians—for that reason alone we it would get my vote; but history shows countries cheated during the gold standard era and booms and bust didn’t go away).

We caught Jim Rogers for a brief moment on CNBC yesterday. Not surprisingly he was all over commodities – that’s the only place he’s putting his money, in case you were wondering. And whether or not he meant it, he categorized gold as a commodity when citing those commodities that were going through the roof, as they say.

Technically, gold is a commodity. But to investors, it’s only a commodity when it fits the commodity story; otherwise it’s a currency when it can fit the currency story.

My point is: right now it seems to be a better fit for the currency story that gold bugs love. If it were a commodity story, then maybe we’d see things a little different from what the charts below tell us:

Gold, Crude Oil, CRB Weekly – last FOUR quarters ...

Gold, Crude Oil, CRB Weekly – last EIGHT quarters ...

New highs for gold; not so much for crude oil and the commodities index. Keep the global recovery and commodities story in your back pocket for another day.