Gold Probes Back Above $1800

Gold has traded with an 1800 handle for the first time in 7-weeks. A pretty positive technical picture is helping to underpin the yellow metal, as is continued uncertainty surrounding Europe. It looks like former ECB Vice President Lucas Papademos has been tapped to head an interim “100-day” government. The first order of business is to assure the troika that fundamental changes will be made to ensure the next tranche of bailout money isn’t immediately flushed. Ah, but the new PM in-waiting is a troika man…

Meanwhile, the market continues to squeeze Italy, with yields continuing to establish new euro-era highs, on their relentless march to 7%. Italian Prime Minister Silvio Berlusconi has lost his Parliamentary majority and is apparently on the verge of resigning. I’m not sure who the frontrunners are to replace him, but like in Greece, I would expect at least some contenders to have troika credentials.

Sean Egan of Egan-Jones estimated today on CNBC that the hole in Europe’s finances is a whopping €2.5 trillion. He made a couple of suggestions of how that hole might be filled, most of which are implausible. Basically, austerity isn’t going to close the collective budget gap, nor will Europe be able to grow its way out of debt. Finally, he offer up “massive printing of currency” as a possibly solution, stressing that this would only be possible when the public is ready for it. In other words, the public needs to be afraid — really afraid — before they can have a massive currency devaluation foisted upon them.

Although Egan doesn’t explicitly say it, I was left with the impression that of the solutions proffered, printing may be the most likely. And quite honestly, how else does Europe fill a hole that big in a politically feasibly manner. As is so often the case over the course of history, printing and devaluation is the path of least resistance.

However, Bundesbank president and ECB council member Jens Weidmann took the opportunity to again rain on the easy-money parade, saying that the ECB can’t finance EU “public debt via the money printing press.” Leave it to a German to remove the punchbowl just before the party gets started. Weidmann cites the “key lesson from the experience of hyperinflation after World War I.” Of course, the hyperinflation of Wiemar Germany is the defining moment in German economic history. They have every reason to be concerned about the impact of unrestrained money supply growth to pay down those monstrous debts.

Or perhaps Herr Weidmann — and the rest of Germany — simply isn’t afraid enough yet…

with Katie Stockton – Chief Market Technician, MKM Partners

JK Comment: A nice compliment to Pete’s Daily Market Report yesterday. On gold, Katie states, “I don’t think gold ever even stopped it’s uptrend,” she says, pointing out that the support line runs through about the $1,600 an ounce level. She sees no nearby resistance and “doesn’t think we’re in store for a retest anytime soon.” And as the moderator puts bluntly at the close of the video: “Gold, Buy it here and Buy it Now!”

08-Nov (Bloomberg) — European Central Bank council member Jens Weidmann said the ECB cannot bail out governments by printing money.

“One of the severest forms of monetary policy being roped in for fiscal purposes is monetary financing, in colloquial terms also known as the financing of public debt via the money printing press,” Weidmann, who heads Germany’s Bundesbank, said in a speech in Berlin today. The prohibition of monetary financing in the euro area “is one of the most important achievements in central banking” and “specifically for Germany, it is also a key lesson from the experience of hyperinflation after World War I,” he said.

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PG View: Leave it to a German to spoil the easy-money party. Of course, the post WWI nightmare inflation is the defining moment in German economic history, so they have every reason to be concerned.

08-Nov (ZeroHedge) — We had a feeling that the modest upward blip in Greek August deposits by corporations and households, to the tune of €1.4 billion, was a “transitory” event. It was. According to just released data by the Bank of Greece, the September collapse in gross deposits from €188.7 billion €183.2 billion was the largest ever, and took the total to an amount last seen in June 2007. Indicatively Greek deposits peaked at €237.8 billion in September 2009. Said otherwise, in addition to being massively undercapitalized, banks cash in the form of deposit liabilities has plunged 23% from its all time highs.

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08-Nov (Wall Street Journal Blogs) — Italian Prime Minister Silvio Berlusconi failed to muster a majority in a key vote in the lower house of parliament on Tuesday, likely setting in motion a chain of events that could lead to his resignation and the possible formation of a national unity government charged with steering Italy out of the euro-zone debt crisis.

“It is clear the government no longer has a majority,” said Pier Luigi Bersani, leader of Italy’s biggest opposition party, speaking after the vote.

Mr. Berlusconi’s governing coalition garnered 308 votes, seven votes shy of a majority needed in the 630-member lower house of parliament. That means the parliament approved the routine budget bill that was on the ballot, but only because 321 lawmakers abstained from voting.

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08-Nov (The Wall Street Journal) — —Greece’s Socialist Prime Minister George Papandreou is expected to name former European Central Bank Vice President Lucas Papademos as prime minister of an interim government, barring any last-minute hitches, a senior party official said Tuesday.

The announcement is expected later in the day and follows days of talks between the Socialist government and the opposition New Democracy party over a new leader to head the government.

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PG View: All of the serious contenders to succeed Papandreou as Greece PM had ties to the troika (ECB/EU/IMF). Looks like the ECB candidate is about to be installed.

08-Nov (CNBC) — James Rickards says it is the US, not China, that is the biggest currency manipulator. He also reiterates his assertion that if President Obama is going to fulfill his 2010 promise to double exports within 5-years, the only way to accomplish that is to “trash the dollar.”

PG View: Gold is of course the classic hedge against a declining dollar and the inflation that results.

07-Nov (Financial Times) — Chinese gold imports from Hong Kong, a proxy for the country’s overall overseas buying, leapt to a record high in September, when monthly purchases matched almost half that for the whole of 2010.

The buying spree follows a sharp drop in the price of the precious metal. After hitting a nominal all-time high of $1,920.30 a troy ounce in September, gold fell to a three-month low of $1,534 an ounce later in the month. Chinese investors snapped up the metal as prices fell.

Analysts expect the September import surge to continue until the end of the year as Chinese gold buyers snap up gold in advance of Chinese New Year, China’s key gold-buying period.

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PG View: Gold went on sale in September and the Chinese snapped it up!

Gold Continues to Retrace September Losses

07-Nov (USAGOLD) — Gold continues to advance on strong safe-haven interest and the 61.8% retracement level (an important Fibonacci level watched by technicians) has been surpassed at 1772.88. The yellow metal is trading comfortably back above the 50-day moving average and the 20-day has crossed back above the 100-day. All of this is strongly suggestive that the dominant uptrend in gold is re-exerting itself.

Europe remains a mess. While Greece’s embattled Prime Minister George Papandreou has agreed to step down to make way for a unity government, formation of the new government has proven more difficult than expected. Meanwhile, rumors that Italy’s PM Berlusconi will also resign have been refuted, even as yields on Italian sovereign debt reached 14-year highs. The yield on 10-year bonds traded as high at 6.67%, dangerously close to the perceived tipping point into insolvency of 7%.

Germany pretty much put an end to speculation that Europe’s gold had been pledged to collateralize the new and improved leveraged EFSF. German Economy Minister Philipp Roesler said quite succinctly that, “German gold reserves must remain untouchable.” Germany however continues to think that periphery nations that are in trouble — like Italy for example — should sell their gold to lesson the need for bailouts from core-Europe. Nonetheless, as we saw when the topic of Greek gold sales was broached earlier in the year, even in the direst of circumstance, sovereigns continue to view their gold as “untouchable.”

That’s quite a fascinating mindset; that even on the verge of default — when all liquid assets should arguably be in play — nobody wants to give up their gold, or even pledge it as collateral. Such a mindset probably hurries countries like Greece and Italy along the path to default, but presumably they’re thinking that the integrity of their gold reserves will give them at least something to build off of on the other side.

This is hardy a mindset that one would associate with a “barbarous relic.” In fact, this makes gold exactly the kind of asset that everyone should seek to own as a hedge against any number of risks.

JK Comment: The Daily Ticker guys offer some interesting insight on the evolving situation in Europe, and how “contagion” may not be limited to the shore’s of Europe.

07-Nov (ResourceInvestor) — Senior German politician, Gunther Krichbaum, a lawmaker in German Chancellor Angela Merkel’s governing coalition and Chairman of the Committee on the Affairs of the European Union of the German Bundestag has proposed that Italy sell its sizeable gold reserves in order to lower its debt.

Krichbaum, who chairs the German parliament’s European Affairs Committee, was quoted as saying in the Rheinische Post that Italy’s gold reserves are relatively high and could be used to pay off their sizeable debt.

Using periphery nations’ gold reserves as collateral has been on the agenda in Germany for some months with many influential German politicians calling for debtor Eurozone nations to sell their gold reserves.

Angela Merkel’s budget speaker and his opposition counterpart urged Portugal to consider selling their gold in May of this year.

…Gold’s value as money and as a strategically important monetary asset is being slowly realized again.

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07-Nov (Reuters) — Germany Economy Minister Philipp Roesler said on Monday the country’s gold reserves with the central bank cannot be touched, adding his voice to opposition to an idea reportedly discussed at the G20 summit of using reserves to boost euro zone bailout funds.

“German gold reserves must remain untouchable,” Roesler, who is head of the Free Democrats (FDP), a junior partner in Chancellor Angela Merkel’s coalition, told ARD television.

The Bundesbank (German central bank) and a spokesman for Merkel already said over the weekend that they too ruled out the idea reported discussed at the summit of Group of 20 leading economies last week.

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PG View: …which begs the question: In the midst of a major financial crisis, why would any particular asset be deemed untouchable by pretty much everyone from Germany to Greece? Whatever the reason, that’s the kind of asset I want.

07-Nov (Reuters) — Benchmark Italian government bond yields rose on Monday to their highest since 1997 — approaching levels seen as unsustainable — as political turmoil threatened to drag the euro zone’s third largest economy deeper into regional debt crisis.

Italy faces a crunch vote on public finance in parliament on Tuesday and the centre-left opposition said it was preparing a motion of no-confidence in the government that would bring Prime Minister Silvio Berlusconi down even if he should survive Tuesday’s vote.

…Italian yields earlier hit their highest in 14 years at 6.67 percent. Many analysts say yields above 7 percent would make funding costs unsustainable.

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07-Nov (CNBC) — Italy’s economic problems took center stage Monday as its government, led by increasingly threatened Prime Minister Silvio Berlusconi, faced yet another key vote.

The health of the euro zone’s third-largest economy has come into focus despite Berlusconi accepting IMF monitoring and surviving several confidence votes in recent months.

Italy’s size makes the potential consequences if it were to fail more wide-ranging than the much smaller Greece.

“Italy has much more systemic implications,” Thanos Vamvakidis, Head of European G10 FX Strategy, BofA Merrill Lynch Global Research, told CNBC Monday.

“It’s too big to fail, too big to save.”

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07-Nov (IBTimes) — Gold prices climbed from eastern Asia to Western Europe Monday as worries about Europe’s sovereign debt crisis spreading to Italy offset news that Greece’s prime minister will resign.

George Papandreou offered to resign Sunday after his shock call last week for Greeks to vote on whether to let the European Union save the nation from default. Presumably his successor will be able to work with the EU and the International Monetary Fund towards what is being termed an “orderly” default.

Such encouragement as Papandreou’s imminent resignation produced among traders early Monday was offset by growing fears that Italy is close to taking Greece’s place as the next nation in need of a rescue.

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07-Nov (AP) — Premier Silvio Berlusconi rejected reports that he would resign so a new government could more forcefully push through economic reforms, even as Italy’s borrowing rates spiked Monday to a euro-era high.

In the last few weeks, Italy has become the new focus of the eurozone debt crisis, as its debts are huge, its growth is slow, and its economy too large to bail out. Investors want the government to quickly pass measures to boost growth and cut debt, but Berlusconi’s majority in parliament is weakening by the day.

There is growing concern that Berlusconi himself is the problem because he no longer commands enough loyalty among lawmakers to ensure the quick reforms that European and international financial officials say Rome must achieve to avoid a dramatic debt crisis like that bringing Greece to its knees.

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07-Nov (Reuters) — Greek political leaders were set to choose who will lead a new coalition on Monday and push through a bailout before the country runs out of money in mid-December, with local media tipping former ECB deputy head Lucas Papademos for the job.

With the European Union demanding a quick resolution to Greece’s political crisis, Prime Minister George Papandreou sealed a deal on Sunday with the opposition on a crisis coalition to approve an international financial aid package.

Details of the deal remain sketchy, and both sides must now agree on a common candidate for prime minister. Papademos, who as Bank of Greece governor oversaw its joining the euro zone, is front runner, Greek media said.

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04-Nov (Bloomberg) — Ruling party lawmakers urged Greek Prime Minister George Papandreou to step aside and allow the formation of a new government that can approve a European Union aid package needed to avert default.

Odysseas Vodouris, a deputy in the Pasok party, said a confidence vote tonight signaled the end of Papandreou’s administration and colleague Vasso Papandreou said the motion would support the formation of an administration of national consensus. Lawmakers will later start a roll call televised on state-run Vouli TV with results expected at midnight in Athens.

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04-Nov (The Wall Street Journal) — Stocks tried to scramble back at the last minute, in incredibly thin volume, but still ended the day and week lower, capping their worst week since mid-September.

What drove this dismal performance? One word, two syllables, rhymes with “syrup.” As in, “Pour the syrup out of that bottle, fill the bottle with whiskey and drink yourself into a stupor over all the money you’ve lost this week.”

The Dow ended the day down 61 points and the week down 2% at 11983.24. This was the first weekly decline since the week of Sept. 23.

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04-Nov (ABC News) — It will be the latest sobering economic milestone that few were hoping to see: The U.S. national debt – any day now – will soar above the $15 trillion mark.

As of this writing, the total debt is $14.97 trillion, so moving beyond the symbolic $15 trillion is a foregone conclusion. When the unwelcome milestone is reached, it will come at a volatile time both in this country and abroad.

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04-Nov (Financial Times) — US lawmakers and budget analysts are starting to contemplate the possible failure of a special congressional committee to reach a deal to cut America’s budget deficits.

With less than three weeks to go before a November 23 deadline to present a plan to save at least $1,200bn for the US government over 10 years, the 12-member panel – equally split between Republicans and Democrats – remains gridlocked.

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04-Nov (CNBC) — The eyes of the world have been trained on Greece for most of this week, but, as the Hellenic crisis approached breaking point, signs are that Italy will be the next focus.

“The whole stability of Europe depends on whether Italy gets its act together,” Commerzbank Chief Financial Officer Eric Strutz told analysts in a conference call on Friday.

Prime Minister Silvio Berlusconi’s élan was dented Thursday after he was forced to accept International Monetary Fund (IMF) oversight of Italy’s progress in implementing austerity measures at the Group of 20 nations (G20) meeting in Cannes, France.

While the move calmed markets slightly, there are plenty of warnings that the Italian problem has not gone away.

Yields on Italian 10-year, fixed-rate bonds rose toward record levels on Friday.

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04-Nov (Financial Times) — Italy’s borrowing costs rose sharply and shares in the country’s banks tumbled after leaders of the G20 failed to produce concrete plans to tackle the eurozone sovereign debt crisis.

At a summit in Cannes, the International Monetary Fund said it would monitor Italy’s promises of fiscal reform more closely but G20 leaders meeting in Cannes said they would delay a decision on increasing the fund’s financial firepower to help resolve the crisis until February.

Silvio Berlusconi, the Italian prime minister struggling to hold together a divided coalition government, insisted as the Cannes summit closed that his dwindling majority in parliament was “solid”.

He said the IMF had offered funding to Italy but that he had turned down the proposal as unnecessary. Christine Lagarde, IMF head, offered a different version of events, saying there had been no offer of funding.

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Europe’s Bailout “Bazooka” Fires Blanks

In less than a week, the euphoria that ensued following the announcement of a grand-deal to rescue the eurozone has all-but evaporated. The touted “big bazooka” tuned out to be loaded with blanks. Oh, there were few details provided for the plan from the get-go, but it was Greek Prime Minister George Papandreou pledge to take the latest bailout scheme to the voters that really started the unwind.

From that point the craziness really began: It would be a referendum on the bailout. No, it would be a referendum on Greece’s continued membership in the EU. Papandreou would resign. Papandreou would not resign. The referendum would proceed. The referendum will not be necessary of Papandreou can form a unity government…

Papandreou will apparently be subject to a confidence vote tonight. If he survives it will probably come with the loss of some power. If he doesn’t survive, maybe the new government will accept the latest bailout deal proffered, but maybe they wont…

One thing is certain, any sense that Europe has a handle on their issues has been dashed and interest rates in the periphery are reflecting the marked rise in uncertainty. Italy in particular is now under intense scrutiny, and is scrambling to reassure markets before their yields reach a critical tipping point. The G20 says Italy will be required to endure IMF scrutiny of its progress toward a balanced budget. PM Silvio Berlusconi was indignant, pointing out that Italy is in better financial shape than France or the UK.

That may be true Silvio, but pointing that out isn’t going to make you any friends within the union. German Chancellor Merkel and French President Sarkozy are already ‘cheesed’ beyond belief at Papandreou for queering the recently announced bailout deal. Given the tenuous position Italy finds itself in, I’m pretty sure you don’t want to incur their wrath as well. France is already fighting desperately to hang on to their triple-A rating, they certainly don’t need the leader of Europe’s third largest economy adding to their woes in an effort to save face.

US advice to Europe was essentially ‘go big, or go home.’ That may in fact be sound advice, but they also must be aware that more big borrowing — to paper over the big borrowing of the past — is not really a solution, but merely a kick of the can down the road. Also, Germany is keenly aware that it is they that must ultimately pay that tab; and quite franky, German taxpayers remain broadly disinclined to bailout those they perceived to be profligates, such as Greece and Italy.

If last week’s bailout plan was the “bazooka,” then clearly the next plan will have to be the ‘howitzer.’ If Europe is unable to prevent contagion from Greece to a larger economy like Spain or Italy (or perhaps even France), then even a howitzer will prove to lack sufficient firepower. The escalation from there may ultimately lead to weapons of mass financial destruction; in other words, printing with abandon to finance central bank and government asset purchases.

Such risks provide the incentive to bolster your protection against the further devaluation of fiat currency. Protection that is provided by gold.