09-Jan (Bloomberg) — Consumer borrowing (CICRTOT) in the U.S. surged in November by the most in 10 years, showing households are optimistic enough to take on debt and banks are willing to lend.

Credit increased by $20.4 billion, the biggest jump since November 2001, to $2.48 trillion, Federal Reserve figures showed today in Washington. The advance was almost twice as big as the highest forecast of 31 economists surveyed by Bloomberg News.

Increasing borrowing signals a drop in unemployment (USURTOT) is giving households the courage to take advantage of holiday discounts, buy cars and finance higher education. At the same time, dependence on credit means the job market has yet to improve enough to provide the incomes needed to sustain consumer purchases, which account for about 70 percent of the economy.

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PG View: Wow! That’s a big miss; +$20.4 billion on expectations of +$7.0 bln. Can this all be attributable to revived confidence? I find myself wondering if some consumers are running up their credit cards on rising expectations that everyone with a Fannie/Freddie mortgage is going to get refi-ed for free this year.

09-Jan (Financial Times) — Germany issued debt on Monday for the first time with a negative yield, meaning that investors were in effect paying Berlin for the privilege of lending it money.

A €4bn auction of six-month bills drew a negative yield of 0.0122 per cent in a sign of Germany’s haven status amid the eurozone debt crisis.

But demand for the debt was down with the so-called bid-to-cover ratio dropping to 1.8 times from 3.8 times at the previous auction a month ago.

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PG View: It is any surprise that demand is down in an environment where investors have to pay the government for them to use their money, because of the perception of safety. Of course this has been the case in real terms (factoring inflation) for some time now, and seems unlikely to change any time soon. As long as real interest rates are negative — and certainly with negative nominal rates — the dominant long-term uptrend in gold remains protected.

09-Jan (CNBC) — Commercial banks’ overnight deposits at the European Central Bank hit a new record high of 464 billion euros, data showed on Monday, and traders said they could hit half a trillion euros by next week.

High deposits indicate banks prefer the safety of the central bank for their funds to higher rates they could get by lending to each other.

Banks are awash with cash after taking an unprecedented 489 billion euros in the ECB’s first-ever three-year liquidity operation late last month, and are mulling what to do with the money in the longer term.

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The Homeric Choice: Scylla, Charybdis and Gold

06-Jan (USAGOLD) — Gold winds down the first week of the new year more than 3% higher than the closing price of 2011. The yellow metal continues to trade in close proximity of the 200-day moving average (1633.00) and a definitive close above this level is still awaited to bolster bullish sentiment. The high from 2-weeks ago at 1641.65 is an important level to watch as well.

Renewed euro weakness was a central theme of the past week, and despite the corresponding dollar strength, gold has displayed impressive resilience. A decent German bund auction failed to allay worries about upcoming periphery debt sales. A point that may have been driven home when the French saw their borrowing costs rise this week amid persistent rumors of an impending downgrade. Spain and Italy will attempt to sell bonds next week and global investors will be eying demand closely. They’ll also be watching to see if the ECB steps in to cover and absence of “real” demand; primarily as an indication of the central bank’s relentless creep toward full-on quantitative measures.

The marked retreat in the euro, particularly against the dollar and yen, suggests the market isn’t terribly optimistic. There continues to be strong interest in dollar swaps and parking of funds in the ECB’s overnight facility, suggestive of ongoing stresses in the European banking system, or perhaps preparation for a black swan event. Deposits in the ECB overnight facility hit a new record high of €455.3 bln last night.

Black swans by their very definition are difficult to predict, but clearly what everyone remains worried about is the EU fracturing. If Greece for example were to exit the EMU — as they again threatened to do last week — it might well stop at Greece, but then again it might not. There are many respected economists and analysts that maintain that the monetary union can’t possibly hold together in its current form. Many banks and corporations have taken proactive steps to shield themselves against this possibility. Building a cash buffer — accumulating both euros and dollars — is a piece of that reality. It is also widely believed that the EFSF/ESM is a very flimsy firebreak between Greece and the rest of the periphery.

What policymakers in the eurozone (and elsewhere for that matter) are desperate to prevent is a disorderly breakup. If some event were to trigger such a disorderly breakup, the global repercussions would make what happened in 2008/2009 look like a walk in the park by comparison. For the same reason, the ECB would almost assuredly move aggressively to prevent such a catastrophe. I’ve always believed that the Germans need to be scared just enough to squelch their fears about inflation. If that point is reached, the ECB will follow the QE path blazed by the BoJ, Fed and BoE before it. As for the rule of law; sometimes its just easier to ask forgiveness than permission.

It is these twin fears that are underpinning the gold market: The fear that the whole system could still come crashing down around our ears, as it nearly did just a couple of short years ago. And the fear that the central banks will do whatever it takes to prevent that from happening. Truly we are between Scylla and Charybdis.

The central banks are trying to sail exactly between the two beasts, hoping to stay just out of reach of both. It’s not an easy task though, as measures taken by one central bank have negative implications on others seeking to save their own bacon. One slight over or under reaction could trigger a string of events that may well hurdle the fleet into the maw of one of those monsters.

As the legend goes, Odysseus chose to confront Scylla (a six-headed monster) and risk losing a handful of sailors, rather than to risk the loss of his entire ship to Charybdis (a whirlpool). It is my belief that most central banks view systemic risks, austerity and deflationary depression as that whirlpool. That would make expansive monetary policy and inflation Scylla in this analogy — the lesser of two evils. The Fed’s move toward inflation targeting is a pretty clear indication of where our own central bank stands on this issue.

By the 8th century BC, when Homer is thought to have written the Odyssey, gold already had a long history of being used as money. And the striking of gold coins would commence just a century or so later. So when you think about how best to protect your wealth from stormy seas and sea monsters, choose something that has withstood the test of time. Choose gold.

06-Jan (USAGOLD) — Gold has been rather choppy today, pushing to a new 2-week high in early NY trading following a better than expected nonfarm payrolls report, but then reversing course and falling to fresh intraday lows as the euro came under renewed selling pressure. The EUR-USD rate fell to new 16-month lows below 1.2700 and the corresponding rise in the dollar tempered enthusiasm for gold.

While the 200,000 increase in nonfarm payrolls and the drop in the unemployment rate to 8.5% was seen as broadly encouraging, the shrinking labor force and a return to the 28-year low of 64% in the participation rate leaves investors feeling skeptical. Also, it is the persistent uncertainty regarding Europe that sits like a lead weight on market sentiment. If Europe, doesn’t pull itself out of the fire and at least back into the frying pan, there is a broad consensus that markets beyond the Continent will pay a price as well.

• Labor force -50k in Dec. Participation rate ties 28-yr low of 64% set in Jun. Hourly earnings +0.2%. Workweek ticks higher to 34.4.
• Canada employment +17.5k in Dec, in-line with market expectations, unemployment rate ticks higher to 7.5%.
• US nonfarm payrolls +200k in Dec, above market expectations of +150k, but at the whisper. Unemployment rate drops to 8.5%.
• Switzerland CPI -0.2% m/m in Dec; -0.7% y/y.
• Eurozone economic confidence slips to 93.3 in Dec, vs upward revised 93.8 in Nov.
• Eurozone consumer confidence confirmed at -21.2 in Dec.
• Eurozone industrial confidence steady at -7.1 in Dec; services weaker at -2.1.
• Eurozone business climate improves to -0.31 in Dec, vs positive revised -0.42 in Nov.
• Eurozone retail sales -0.8% m/m in Nov, below market expectations of -0.4%, vs negative revised 0.1% in Oct; -2.5% y/y, vs negative revised -0.7% y/y in Oct.
• Germany manufacturing orders -4.8% m/m in Nov, well below market expectations of -1.6%, vs negative revised 5.0% gain in Oct; -4.3% y/y.

06-Jan (Chart of the Day) — Today, the Labor Department reported that nonfarm payrolls (jobs) increased by 200,000 in December. For some perspective, today’s chart illustrates the percent increase in the number of jobs for every decade since the 1940s (the data goes back to 1939). Today’s chart illustrates that up until this millennium, the number of jobs at the end of a decade has always been at least 20% greater than 10 years prior. During the last decade (2000s), not only was that 20% plus growth not achieved, the decade actually ended with less jobs than when it began. This negative job growth is particularly noteworthy due to the fact that the US population had increased by 10% during the same time frame. Two years into the current decade (see gray column), today’s chart illustrates that job growth is positive. If job growth during the current decade were to increase at the same pace as what occurred during the first two years, the decade would end with a 10% gain in jobs (see gray dot). This is certainly better than the decade just passed, however, it is well off the 20% plus pace of decades past.

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06-Jan (Bloomberg) — Federal Reserve officials are nearing agreement on adopting an inflation goal as Chairman Ben S. Bernanke extends his push for improving transparency and communications with the public.

“We are very close to having inflation targeting in the U.S.,” James Bullard, president of the Federal Reserve Bank of St. Louis, said in a radio interview yesterday on Bloomberg Surveillance hosted by Tom Keene and Ken Prewitt. “We are getting closer to being able to make a committee-wide statement about these longer-term policy goal issues.”

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06-Jan (USAGOLD) — Labor force -50k in Dec. Participation rate ties 28-yr low of 64% set last June. Hourly earnings +0.2%. Workweek ticks higher to 34.4.

05-Jan (USAGOLD) — A more risk averse tone today has gold under modest pressure, but downticks below $1600 have been tentative thus far. In fact, the yellow metal is showing good resilience in the face of renewed dollar strength.

Better than expected US jobs data has been offset by heightened concerns in Europe. Today’s French bond auction didn’t go as well as hoped and borrowing costs rose, as did the OAT-Bund spread, amid persistent rumors of an impending French downgrade. The market is also looking forward nervously to next week’s Spanish and Italian debt auctions, with yields on 10-year BTPs continuing to probe above the troubling 7% level. European financial shares, and in particular Italian financials (most notably UniCredit) are getting shellacked today.

The euro has come under more intense selling pressure, trading with a 1.27 handle against the dollar for the first time since September 2010. EUR-JPY set a fresh 10-year low at 98.48.

Our sources in Europe have made note of robust demand for gold coins and rising premiums. Our call volume from Europe has increased notably of late as well. While European banks are accumulating cash (both euros and dollars) as a buffer against persistent uncertainty, European citizens it would seem are growing increasingly suspicious of “cash”. They are instead turning to a reliable and liquid store of value that knows no nationality.

• US ISM non-manufacturing index rose to 52.6 in Dec, below market expectations of 53.0, vs 52.0 in Nov.
• Canada Ivey PMI rose to 63.5 (sa) in Dec, well above market expectations of 58.0, vs 59.9 in Nov.
• US initial jobless claims -15k to 372k in the week ended 31-Dec, below market expectations of 375k, vs upward revised 387k in previous week.
• US ADP employment survey +325k in Dec, well above market expectations of +175k, vs +204k in Nov.
• Germany retail sales unexpectedly fall -0.9% m/m in Nov, on expectations of +0.2%, vs negative revised -0.2% in Oct; 0.8% y/y.
• UK CIPS Services PMI better at 54.0 in Dec, vs 52.1 in Nov.
• Eurozone PPI +0.2% m/m in Nov, y/y pace moderates to 5.3% from 5.5% in Oct.
• Eurozone industrial orders (sa) +1.6% m/m in Oct, below market expectations of +2.5%, vs -6.4% in Sep; 1.8% y/y.

05-Jan (Washington Post) — The specter of Europe’s debt crisis returned Thursday after a brief respite, as bank stocks fell sharply on worries about losses on government debt and a French bond auction drew lackluster demand from investors.

Financial stocks slumped across Europe as it became clear banks would have troubled raising billions in new capital in coming months. In Italy, trading in UniCredit shares was halted after they lost a quarter of their value since yesterday morning, when the bank admitted it had to offer huge discounts to new investors to attract capital.

The banks need the money to cover potential losses on government debt, whose value has plummeted across most of Europe in recent months on fear of defaults. Many countries in the region have to roll over billions in debt in coming months, putting huge focus on their bond auctions.

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France sold 7.96 billion euros ($10.2 billion) of debt, with borrowing costs rising in its first bond auction of the year as credit companies threaten to cut the nation’s AAA rating.

The government sold 4.02 billion euros of benchmark 10-year bonds at an average yield of 3.29 percent, from 3.18 percent on Dec. 1. France, which also auctioned 2023, 2035 and 2041 securities, had aimed to sell a maximum of 8 billion euros. French 30-year bonds pared their declines.

…France has the biggest debt burden of the six top-rated euro nations, at 85 percent of gross domestic product. The extra yield investors demand to hold French 10-year bonds instead of benchmark German bunds rose to 204 basis points on Nov. 17, the most since 1990, as concern deepened Europe’s debt crisis was spreading. While the gap was 145 basis points at 12:24 p.m. Paris today, it compares with a premium of 44 basis points for AAA rated Finland and 37 basis points for the Netherlands.

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PG View: The EUR-USD fell to new 15-month lows, probing below 1.2800. The real test will be the Spanish and Italian auctions next week. Italian 10-year bonds are already back above the troubling 7% level as Italian financial shares get hammered, led by UniCredit.

04-Jan (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke sent a staff study on the U.S. housing market to House and Senate committees today discussing policy options to help clear away one of the biggest drags on the economy.

“The challenge for policy makers is to find ways to help reconcile the existing size and mix of the housing stock and the current environment for housing finance,” according to the paper sent to members of the Senate Banking Committee and the House Financial Services Committee. “Fundamentally, such measures involve adapting the existing housing stock to the prevailing tight mortgage lending conditions.”

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PG View: A reminder that the primary cause of the original crisis several years ago, remains a major problem to this day.

By William H. Gross
04-Jan (PIMCO) — How many ways can you say “it’s different this time?” There’s “abnormal,” “subnormal,” “paranormal” and of course “new normal.” Mohamed El-Erian’s awakening phrase of several years past has virtually been adopted into the lexicon these days, but now it has an almost antiquated vapor to it that reflected calmer seas in 2011 as opposed to the possibility of a perfect storm in 2012. The New Normal as PIMCO and other economists would describe it was a world of muted western growth, high unemployment and relatively orderly delevering. Now we appear to be morphing into a world with much fatter tails, bordering on bimodal. It’s as if the Earth now has two moons instead of one and both are growing in size like a cancerous tumor that may threaten the financial tides, oceans and economic life as we have known it for the past half century. Welcome to 2012.

…For 2012, in the face of a delevering zero-bound interest rate world, investors must lower return expectations. 2–5% for stocks, bonds and commodities are expected long term returns for global financial markets that have been pushed to the zero bound, a world where substantial real price appreciation is getting close to mathematically improbable. Adjust your expectations, prepare for bimodal outcomes. It is different this time and will continue to be for a number of years. The New Normal is “Sub,” “Ab,” “Para” and then some. The financial markets and global economies are at great risk.

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04-Jan (ZeroHedge) — Wondering why gold has moved by over $20 in the last few minues? Wonder no more – according to a note just released by Citi analyst Tom Fitzpatrick, the gold correction “has run its course and a rally is now back on the cards.” Granted it is not all smooth sailing – “Gold may drop to $1,550 before turning”, but when the turn comes, Fitzpatrick sees it as going all the way up to $2,400.

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04-Jan (USAGOLD) — Gold is back below $1600 as yesterday’s improved risk appetite — driven by better than expected manufacturing data — proved short-lived. A more risk averse stance emerged today after two ECB dollar liquidity tenders garnered $31.7 bln uptake from eurozone banks. While this was lower than the $33.0 bln allotted in the 21-Dec operation, it is still a disturbingly high number, indicative of ongoing strains within the European banking system.

On top of that, the banks also parked a record high €453.2 bln at ECB overnight facility. So commercial banks in the EU are still clamoring for dollars, while hoarding euros with the ECB. This would suggest a troubling level of uncertainty that bodes ill for growth prospects and may suggest a rise in concerns about a possible breakup of the EU. Greece threatened this very thing earlier in the week if their latest round of bailout funds were not released in a timely manner.

As long as this uncertainty prevails, the quid pro quo that the ECB was expecting — we provide you with unlimited cheap euros and you plow them back into periphery sovereign bonds — seems unlikely to be honored.

The euro came under renewed selling pressure and all of yesterday’s gains have been erased. This buoyed the dollar, which in turn took some of yesterday’s shine off the yellow metal.

Portugal saw its short-term borrowing costs fall as it sold €1 bln in 3-month bills with an average yield of 4.346%, down from 4.873% in early December. There was also a solid 1.27 bid cover in today’s €4.057 bln German 10-year bund auction, but the market seemed nonplused. French yields rose ahead of Thursday’s OAT auction, amid persistent market chatter of an impending downgrade. Italy and Spain will be selling debt next week and there are real concerns that Italy in particular may have difficulty moving about €100 bln in redemption and coupon payments coming due early in the new year. Will the ECB step in to fill the demand void if one does indeed develop?

• US factory orders jumped 1.8% in Nov, in-line with expectations, vs positive revised -0.2% in Oct.
• Eurozone Markit PMI – Composite revised up to 48.3 in Dec, vs 47.9 preliminary print. Services revised up to 48.8, vs 48.3.
• Eurozone HICP inflation decelerated in Dec to 2.8% y/y, in-line with expectations, vs 3.0% y/y in Nov.
• UK CIPS Construction PMI 53.2 in Dec, vs 52.3 in Nov.

03-Dec (Reuters) – The Federal Reserve on Tuesday said it would begin publishing forecasts on the path of interest rates later this month, a significant milestone in Ben Bernanke’s push for greater policymaking transparency.

The move is meant to better align bets in financial markets with the views of policymakers at the central bank, and it could show that rates will be on hold for longer than previously expected.

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PG View: …because signalling 0% interest rates until mid-2013 was a failure, now it will be ZIRP from here to eternity…

03-Jan (MarketWatch) — Gold futures were back at $1,600 an ounce on Tuesday, rallying alongside oil and stocks and helped by a weaker dollar to start the new year on a high note after a 10% yearly gain in 2011.

Gold for February delivery rose $33.10, or 2.1%, to trade at $1,600 an ounce on the Comex division of the New York Mercantile Exchange. It traded as high as $1,602 an ounce earlier.

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