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11.21.14 - Chinese Central Bank's Surprise Rate Cut

Today, in an unexpected move, the Chinese central bank cut interest rates for the first time in two years. The bank announced it was cutting its benchmark lending and deposit rates, effective on the 22nd.

With this move, China joined other world central banks in a race to cut interest rates, attempt to stimulate their national economies and, in the process, undermine the value of their currencies.

First the US Federal Reserve minutes showed the Fed is in no hurry to raise interest rates any time soon, leaving them near zero. Then Japan announced a stimulus package that goes even beyond what Quantitative Easing involved. The ECB has announced its own bond buying program as well. Now China, whose economy has been slowing as of late, has joined the party.

The surprise move by China helped buoy gold, which is now heading for its third-straight weekly gain.

Also contributing to gold's rise has been rising physical demand, particularly in China.

Despite the 3-week rally, gold still represents one of the most attractive bargains in the investment world, as stock markets continue to be overvalued.

Ahead of China's announcement, the president of the European Central Bank Mario Draghi, made a speech at a European banking conference in Frankfurt. He said that the euro zone economy is likely to remain stagnant in the short-to-medium term. He added that the central bank stands ready to act fast to combat low inflation and that the inflation situation in the euro area has become increasingly challenging.

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11.20.14 - Interest Rates to Remain Low?

Yesterday saw the release of the minutes from the Federal Reserve Open Market Committee's meeting in late October and the reports indicate the members of the committee saw little reason to shift course. In other words, the Fed is not ready to start raising interest rates.

In fact, Fed officials are increasingly worried about signs that inflation is rising too slowly.

The minutes also showed that members of the committee are complacent about signs of economic weakness in Europe and Asia, as well as recent market volatility.

If the minutes are to be believed, the Fed plans to hold short-term interest rates near zero for a “considerable time.”

As if on cue, two economic reports in the US were released today and both came in shy of estimates.

The number of Americans filing new claims for unemployment benefits fell less than expected last week. Moreover, the prior week's data was revised to show 3,000 more applications received than previously reported.

The four-week moving average of claims - considered a better measure of labor market trends as it irons out week-to-week volatility - increased 1,750 to 287,500.

Wall Street and the Obama administration are spinning these numbers, but the economy continues to disappoint no matter how one looks at it.

This was further confirmed by the U.S. Manufacturing Purchasing Managers Index report, an industry report from financial data firm Markit. It showed the U.S. manufacturing sector slowed in November, falling to its lowest rate of growth since January while a gauge of new orders also fell for a third straight month.

The Immigration Angle

With President Obama poised to take executive action on immigration, there is an economic aspect now being discussed.

President Barack Obama’s unilateral amnesty will quickly add as many foreign workers to the nation’s legal labor force as the total number of new jobs created by his economy since 2009. The plan will distribute five million work permits to illegal immigrants and also create a new inflow of foreign college graduates for prestigious, salaried jobs.

Obama has already provided or promised almost five million extra work permits to foreigners, while his economy has only added six million jobs since 2009.

The five million work permits will add to Obama’s prior giveaways, which have provided work permits to almost one million foreigners.

This suggests that federal employment figures are being skewed by these numbers and the amnesty program will likely intensify this phenomenon.

Gold's Recovery

Finally, gold bulls are coming out of the woodwork as prices for the yellow metal rebound off four-and-a-half-year lows.

Market pundit Peter Boockvar, chief market analyst at The Lindsey Group, an economic advisory firm, is the latest to call a bottom for gold:

"Bottom line, gold is money and is not just a contra dollar play, it is a contra fiat currency asset in a world where fiat currencies are being created to an extent the world has never seen.”

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11.19.14 - More Fed Watching

Traders on Wall Street, economists and mainstream investors are all awaiting the release of the Federal Reserve minutes later today.

The dollar strengthened overnight on speculation those minutes could reveal that the Federal Reserve Open Market Committee sees the US economy as stronger relative to other world economies.

As usual, traders will be looking for clues on when the Fed will raise rates.

The Fed minutes from its October 28-29 policy meeting are due at 2 p.m. Eastern Time.

One possible concern regarding US interest rate policy is the prospect that, similar to what occurred from 2004-2006 under Fed Chairman Alan Greenspan, the Janet Yellen Fed's ability to tighten long-term interest rates may be limited. The bond market is signaling that the past may be prologue as Yellen’s Fed prepares to raise rates next year. The yield on the 10-year U.S. Treasury note has fallen 0.71 percentage points in 2014 even as the Fed wound down its bond-buying program and mapped out a strategy to raise the benchmark federal funds rate from near zero, where it has been since 2008.

Greenspan's inability to overcome market forces to raise long-term rates back in 2004-2006, which he called a “conundrum”, contributed to the worst financial crisis in 80 years in 2007-2008.

In other news, the gold market is also watching for the release today of an opinion poll ahead of next week's Swiss gold referendum. Speculation has been building over Switzerland's gold holdings ahead of the November 30 vote on a proposal that would require the Swiss National Bank to hold at least 20 percent of its assets in gold.

Russia and the conflict with Ukraine is once again the focus of news reports as well.

Russia's central bank has been accumulating gold on a massive scale in an effort to protect itself from European Union and U.S. sanctions. The Russian economy is in real trouble with a serious surge in inflation combined with stagnant wages, pushing the country into a stagflationary quagmire. Much of Russia's national income has come from oil and gas revenue and the prices of oil and natural gas have been falling precipitously.

Meanwhile, one of the factors that has Russia in this fix, the conflict in Ukraine, shows no signs of letting up. The president of Ukraine, Petro Poroshenko, has declared his country is ready for "total war" with neighboring Russia as tensions between the two nations show no signs of ending.

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11.18.14 - Gold Rebounds

For the past few weeks gold has been under pressure from a stronger US dollar. That appears to be coming to an end, at least temporarily.

We have maintained all along that the US dollar cannot sustain strength for long given the US fiscal situation and Fed monetary policy.

Now, gold has rebounded to a two and a half week high as the dollar has retreated.

In fact, gold has rebounded 6.4 percent from a 4-1/2-year low of $1,131.85 on November 7.

Much of Wall Street and the Obama administration have been touting a strengthening economy in recent weeks and months. But Bank of America seems to have broken ranks with its latest forecast and there are other anecdotes that indicate the US economy isn't as healthy as some would have us believe.

There may not be a recession next year, but don't expect a year of stellar growth either, according to the latest Bank of America Merrill Lynch survey of fund managers.

Fewer than one in ten fund managers expect a recession next year, according to the poll, but almost 80 percent forecast "below trend" growth according to a new survey.

There are two phenomena that point to long-term weakness in the US economy.

First, while much has been written about millennial children boomeranging back to live with their parents, there’s another group of people who have been quietly doubling up: baby boomers and their own aging parents. And some expect this particular trend to hold as people live longer and require more expensive care at the end of their lives.

A recent survey by the American Institute of Architects found that dedicated guest rooms, including in-law suites (that can be as simple as a secondary master bedroom suite with a bathroom), have been gaining in popularity over the past couple of years. As many households become caretakers for aging relatives, separate living suites have become popular options for accommodations.

Of course not everyone has the money to make big changes to a home. Many can’t add on another suite.

Second, the news is not good on the other end of the age spectrum.

The number of homeless children in the U.S. has surged in recent years to an all-time high, amounting to one child in every 30, according to a report issued by the National Center on Family Homelessness. Nearly 2.5 million American children were homeless at some point in 2013. Child homelessness increased by 8 percent nationally from 2012 to 2013, according to the report.

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11.17.14 - Global Economy in the Spotlight

As we start another new week, the news is dominated by warnings about the global economy and financial markets.

The first warning came from the Prime Minister of the United Kingdom, David Cameron.

According to Cameron, the global economy is again showing worrying signs of an imminent financial crisis and he is warning of a dangerous backdrop of instability and uncertainty.

Writing in the U.K.'s Guardian newspaper, he said that this weekend's G-20 summit in Brisbane had further underlined the problems facing the global economy.

"Six years on from the financial crash that brought the world to its knees, red warning lights are once again flashing on the dashboard of the global economy," he said in the article published late Sunday.

Global trade talks have stalled, the euro zone is teetering on the brink of recession and emerging markets are now slowing down, he said. The spread of Ebola, the conflict in the Middle East and Russia's illegal actions in Ukraine are all adding to the global insecurity, according to Cameron.

The crisis may have already started in Japan, where the economy has in fact entered recession. This shock to the global economic system comes as euro zone economies stagnate.

The world’s third-largest economy contracted at a 1.6 percent annual pace in the July-September quarter, the government said Monday, confounding expectations it would rebound after a big drop the quarter before. Economists had forecast that the Japanese economy would actually grow by a healthy 2.2 percent in the quarter.

The big worry is that the slowdown in Japan could have a domino effect in other economies. Even China is showing signs of a slowdown.

Geopolitical tensions are not helping matters.

The war in Syria and Iraq is just one of the wild cards. Amid fresh clashes in Ukraine, tensions between Russia and the West are rising again. European officials were meeting this week to consider adding more Russian individuals to their list of sanctions. EU leaders could agree on new sanctions aimed at Russia's economy next month.

It's no wonder economists have trimmed their forecasts for U.S. economic growth in the fourth quarter with the rest of the world slowing down. Analysts see the economy growing at an annual rate of 2.7 percent in the current quarter, according to the Philadelphia Federal Reserve's quarterly survey of 42 forecasters, released on Monday. In last quarter's survey, growth for this quarter was forecast at 3.1 percent.

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