Connie Madon
-

The rally in gold just doesn't want to quit. You are probably wondering what is going on. Central banks around the world hold gold reserves. Periodically, they buy or sell gold, depending on how they view world markets. Right now, central banks are net buyers, the first time since 1988.

A weak US dollar is the main stimulus for central bankers' gold purchases. India just bought 200 metric tons from the International Monetary Fund. Central bankers in Mexico, Russia, the Philippines, all have increased their gold purchases.

Why bother measuring the manufacturing sector? The main reason is that manufacturing accounts for 12% of our GDP. Growth in manufacturing indicates that orders are picking up. If orders are picking up, the next step is to hire more workers. Hiring more workers speeds the growth of our economy and at the same time puts unemployed persons back to work.

To further emphasize the depth of the problem, in 2015 interest due will be $533 billion, equal to 1/3 of the federal income taxes!

Right now, the Treasury is in a sweet spot with regards to interest payments. With interest rates at near zero, we are able to finance trillions of dollars of debt with practically no interest payments. That scenario is about to change. The change could be rather quick. If the economy heats up, interest rates will rise and so too will interest payments. Because the debt is so large, only a small rise in interest payments could increase the interest burden by a large amount.

The U.S. housing market continued to show weakness in the latest reading. Here are the Commerce Department's latest numbers:

• Housing starts dropped 10.5% to 529,000 units. The expected number was 600,000.
• Groundbreaking for single family homes fell 6.8% last month to an annual rate of 476,000 units.
• Starts for multifamily homes fell sharply to a 53,000 annual pace, a drop of 34.6%.
• Compared to October last year, housing starts fell 30.7%.

Who is Paolo Pellegrini? Pellegrini is a Rome-born analyst who helped hedge fund operator John Paulson make tons of money in the subprime crash of 2007-2008.

It was Pellegrini who led the number crunching on mortgages and home prices and came to the conclusion that housing prices were about to collapse. Paulson's hedge fund took advantage of this data and proceeded to make $3.5 billion on his trades.

Separate reports showed simultaneous improvements and declines in the U.S. economy.

First the good news. The Commerce Department reported that retail sales rose 1.4% in October, after falling 2.3% in September. It must be noted that September sales were revised downward from a previous -1.5%.

The boost came for auto sales, which rose 7.4%, after a drop of 14.4% in September. The sharp drop in September was mainly due to the termination of the "cash for clunkers" program.

We've got to congratulate Britain's prime minister, Gordon Brown, for his tough stand on bank bonuses. He plans to make some bank bonuses illegal, according to a Bloomberg article.

Regulators will be given "powers if necessary to tear up contracts that would result in payments being made that would cause instability," according to the Sunday Telegraph. Not only that, but the paper reports that City Minister Paul Myners told Sky News that "if those contracts are written, they will be voided under law."

It's Monday morning. Looking at the boards, the dollar is weaker and gold climbs to another record high. Spot gold in London traded at $1,133.07 per ounce. The December gold futures contract traded at $1,133.50 per ounce.

Again today, the dollar traded down, with the December dollar contract trading at 75.105, down 32 (prices as of 8:39 EDT). The other precious metals followed gold higher. December silver traded at $17.815 per ounce up 43.5 cents. Platinum was at $1,428.90 per ounce, up $41.20. Palladium traded at $365.15, up $8.40

The price of oil has risen from about $30 per barrel at the height of the economic recession to the present $77 per barrel. Much of the increase is due to the weakness in the U.S. dollar. Rex Tillerson, CEO of Exxon Mobil (XOM) told CNBC: "If you put the price of oil, which is priced in dollars around the world, and if you look at what some effects are with the weak dollar -- in our view that is contributing $20 to $25 dollars per barrel to the price."

Globally, Tillerson said, oil is well supplied with historic high inventory levels, especially in the U.S. This is causing the market to be a "bit soft," according to Tillerson.

Against this backdrop, Jamie Dimon of JPMorgan Chase (JPM) said "If some unforeseen circumstance should put this firm at risk of collapse, we should be allowed to fail."

Dimon went on to say writing in Friday's Washington Post: "The term 'too big to fail' must be excised from our vocabulary." Dimon also argued against limiting banks' size saying that increased scale can benefit customers.

The federal budget year ended in October. The October deficit number set a record of $176.4 billion, which was higher than the $150 billion economists had predicted.

For the budget year 2009, the deficit reached $1.42 trillion. That too was an all-time record. This year's deficit was $958 billion above the 2008 deficit. October was the 13th straight month to show a deficit.

The Federal Reserve and Wall Street executives are discussing a new way to provide bank capital in times of crisis. They want to issue a new security called a contingent convertible (CoCo).

What is a CoCos and how does it work? CoCos are hybrid securities, In normal times they operate like a bond and pay coupons to investors. However, in times of crisis they automatically convert into equity. If bank capital fell below prescribed limits they would trigger the conversion from bonds to equity.

A small ray of light was visible on the unemployment front. Government data showed that initial claims for unemployment fell to 502,000 on a seasonally adjusted basis. The prior weeek's reading was 514,000. Analysts had expected this week's number to be about 512,000.

The four-week moving average decreased to 519,000, the lowest since a matching level on November 29, 2008

The number of persons collecting long term unemployment benefits also fell to 5.631 million, but this number is meaningless because it doesn't count those who have exhausted their benefits.

Gold is trading at $1,118.00 per ounce. What is that number telling us? Pure and simple, the market is telling us that inflation is on the way. The Indian government just bought 200 tons of gold valued at over $7 trillion dollars. In other words they exchanged $7 trillion US dollars for the 200 tons of gold.

At the same time the December US dollar contract traded below 75.00 on a trade-weighted basis. What is that number telling us? Traders are turning in dollars for other investments, mainly stocks and commodities.

Mr Geithner has made this statement several times in the past. Yet, this year the dollar has fallen 7.6% and hit a 15 month low of 74.889 on Wednesday.

You are probably wondering why his words are being discounted. The dollar keeps falling. Let's look at the underlying conditions in the US economy that are working against a strong dollar.

Geithner cited unemployment as one factor. He said: "Unemployment is really very, very high, exceptionally higher in the United States. It is still rising. It's probably going to rise for a bit longer, until you see a longer period of growth take hold."