Swiss peg franc to the euro–that’s one less safe haven in the financial markets and one more reason to favor gold

And then there was one less—safe haven in the financial markets, that is.

Yesterday the Swiss National Bank moved to fight the damage done to the Swiss economy by a rising Swiss franc by pegging the currency to the euro at a ratio of 1.20 francs to the euro.

The franc tumbled 8.2% against the euro immediately and 8.8% against the dollar.

The Swiss National Bank has tried to intervene in the currency markets by selling francs in order to force the currency lower. That hasn’t worked and cost the bank about $23 billion in losses last year and $12 billion this year.

A peg to the euro won’t require the bank to flood the market with francs and thus won’t expose the bank to currency losses but it does impose other costs on the Swiss economy. The bank will simply print francs to keep the currency peg in force but that will result in a potentially huge inflationary surge in the money supply. To counter that, the bank will have to intervene to try to soak up some of those extra francs. This process, called sterilization, is never perfect and the peg will almost certainly increase the inflation rate in the country.

But that’s a price that the bank is willing to pay in order to avoid having Swiss exports priced out of world markets by the rising franc—or having Swiss companies move jobs overseas to cheaper currency countries.

The world’s financial system will pay a price too. Read more

Update Freeport McMoRan Copper & Gold (FCX)

On July 21 Freeport McMoRan Copper & Gold (FCX) reported second quarter earnings of $1.43 a share, 7 cents a share above Wall Street projections. Revenue climbed to $5.81 billion, a 50.5% increase from the second quarter of 2010. (The stock is member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )

There were three especially positive parts of the Freeport McMoRan story this quarter.

Sales grew from last year’s levels. Sales of copper climbed to 1 billion pounds (from 914 million in the second quarter of 2010), molybdenum to 21 million pounds (from 16 million) and gold to 356,000 ounces (from 298,000.)

Cash costs fell with net cash costs for copper, for example, dropping to 93 cents a pound from 97 cents a pound in the second quarter of 2010.

And projects that are estimated to add 20 million pounds of molybdenum production in 2013 and 975 million pounds of copper production by 2016 continued on track at very modest capital cost. Read more

The financial markets are not amused by the weekend’s Keystone Cops routine in Washington this weekend over raising the debt ceiling. But you can’t call this a rout or a panic by any definition.

U.S stocks are down—but by just 0.51% for the Standard & Poor’s 500. In Europe German stocks are up—the DAX Index has edged 0.2% higher—but the wider STOXX 50 Index is off 1.05% on a Moody’s Investors Service downgrade of Greek debt that is equivalent to a default rating. In Asia the always-volatile Shanghai Composite Index fell 2.96% over night—but is partly a reaction to the wreck of two high-speed trains in China that has reopened the controversy over corruption in the building of the country’s high-speed rail network. The less volatile Hong Kong Hang Seng Index was down 0.68%.

Of course, if there were going to be a financial market rout, you’d expect it to show up first in the bond and gold markets. Remarkably U.S. Treasuries are just about flat as of 11:15 a.m. New York time. The 2-year Treasury note is down just 0.03% to yield 0.39%. (Not exactly the kind of ultra-high yield you’d expect in a panic.) The 10-year Treasury is down 0.19% to yield 2.98% and the 30-year is down 0.69% to yield 4.29%

That isn’t to say there’s no fear in this market. Gold (futures for August delivery) is up to a new all time high of $1615.70 an ounce as of 10:40 a.m. in New York.

The big test will come later this week when the Treasury auctions $99 billion in notes–$35 billion each of two and five-year notes, and $29 billion in seven-year notes. Watch demand to see how many investors are buying as well as price.

Technicians are saying that we’re seeing what they call a climax top in silver. I think we’re in for some profit taking on both precious metals with silver facing the biggest drop. (Remember I’m not a technical analyst. Which is why I subscribe to several technical services.)

What’s a “climax top”? Technicians such as John Murphy (who writes one of the  pay-to-read technical services that I pay to read on Stockcharts.com) say such a top comes after a spectacular upward run and is characterized by heavy volume. Since the start of April, for example, Silver Wheaton (SLW) has been falling on rising volume. To take another example, iShares Silver Trust (SLV) has shown the heaviest volume in its trading history with the biggest volume during the day to the downside.

Gold and gold stocks are likely facing a correction too but they don’t look as over-extended as silver where the RSI (relative strength index) shows silver at its most overbought level in five years.

Update Freeport McMoRan Copper & Gold (FCX)

On April 20 Freeport McMoRan Copper & Gold (FCX) reported first quarter earnings of $1.57 a share, 28 cents a share above the Wall Street analyst consensus, and 57% above the $1 a share reported in the first quarter of 2010. Revenue increased by almost 31% from the first quarter of 2010 to $5.71 billion versus the $5.31 billion Wall Street projection.

Sales for the first quarter totaled 926 million pounds of copper, 480,000 ounces of gold, and 20 million pounds of molybdenum. That was down from sales of 960 million pounds of copper in the first quarter of 2010 but was well above the company’s own estimating in January of 840 million pounds. Sales of gold and molybdenum, however, climbed from that quarter in 2010 when they totaled 478,000 ounces of gold and 17 million pounds of molybdenum.

A good part of the company’s jump in earnings is attributable to the rising price of copper and gold. Freeport McMoRan expects prices to stay near current levels for 2011. For the year the company’s financial estimates assume gold at $1400 an ounce (versus $1500 on April 20) and copper at $4.25 a pound (versus $4.30 on April 20). The company is confident enough in those projections to announce a supplemental dividend of 50 cents a share to shareholders of record on May 15. The supplemental dividend, to be paid in June, is in addition to the company’s regular quarterly dividend of 25 cents a share.

The increase in Freeport McMoRan’s earnings from higher copper and gold prices isn’t exactly a surprise. Read more