17-Nov (Bloomberg) — Ireland’s government laid out plans to raise sales tax and pledged to consider “ambitious” asset sales in documents shown to lawmakers in Germany before their Irish counterparts, drawing criticism from opposition politicians in Dublin.

The draft documents, provided to the German parliament’s budget committee by Chancellor Angela Merkel’s government and obtained by Bloomberg News, detail a proposed increase in value- added sales tax next year to 23 percent from 21 percent. The document is prefaced with an unsigned “Letter of Intent” from Irish Finance Minister Michael Noonan and Irish Central Bank Governor Patrick Honohan to European officials.

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PG View: This article clearly illustrates how the sovereignty of EU member states is eroding, driving home the point of the recent Ambrose Evans-Pritchard piece entitled The great euro Putsch rolls on as two democracies fall.

17-Nov (MarketWatch) — Mariano Rajoy’s center-right opposition party is favored to win Sunday’s election in Spain, but he is unlikely to have any time to savor his victory as fears grow that the debt-laden nation may end up needing a bailout given its skyrocketing borrowing costs.

The election comes at a tense moment for Spain, with markets refocused on the hard times facing one of the euro zone’s weakest links.

After a historically expensive auction Thursday, government bond yields ES:10YR_ESP -0.55% hit euro-era highs atop 6.8%. A level of 7%, which Italy has been fighting off, is viewed as unsustainable. Spain’s IBEX-35 stock index has slumped 16% year-to-date.

Analysts say that Sunday’s election could offer at least short-term relief for investors. A switch to the Popular Party from the embattled Socialists could buy Spain some time to take the necessary measures to win back the confidence of investors.

[source]

PG View: It is likely that yet another embattled incumbent government in the EU will fall this weekend.

Gold Retreats Into the Range

Gold has come under more intense selling pressure, retreating within its range, after failing to register a sustained push back above the $1800 level. Given the ongoing sovereign debt turmoil in Europe, and the corresponding interbank liquidity crisis, its not surprising to see periodic bouts of deleveraging as institutions and individual investors seek to raise cash. However, dips in the physical gold market continue to attract buying interest.

The World Gold Council reported that central bank gold demand hit a 40-year high in Q3, driven by a “a slew of new entrants…wishing to bolster gold holdings”. So not only is central bank gold demand increasing, but it is broadening as well. That’s important, though hardly surprising; as faith in sovereign debt and currencies continues to erode. With such assets losing their appeal, the options for alternative reserve holdings narrow pretty quickly. Arguably it is gold — because of its global appeal and liquidity — that ends up being the preferred choice.

I had a lengthy conversation with a very well connected banking source in Germany yesterday and the tenor of that discussion was disturbing to say the least. He contends that the German citizenry is sufficiently fed-up to the point of being prepared to allow the monetary union to collapse. This is a markedly different anticipated outcome than the one I envision, but my contact is a very sharp guy, well connected and has been involved in the German banking industry for decades. I never dismiss anything he says. Just maybe the Germans will be the ones that finally capitulate to the reality that you don’t extract the EU from a sovereign debt crisis by incurring ever-more sovereign debt. The bitter pill that will undoubtedly lead to a protracted recession — or worse — must be swallowed now, before that pill is simply too big to choke down.

I on the other hand continue to believe that as the risk of a eurozone collapse ratchets higher, it will strike enough fear in the hearts of Germans that they will ultimately cave to the demands of those that believe the ECB should be monetizing sovereign debt like mad. Despite a decidedly different mindset when it comes to debt and inflation risks, politicians in Germany are still politicians; disinclined to inflict pain on their constituents if there is a way it can be easily avoided and with the necessary political cover. But as I said, my source’s alternate view now gives me some pause.

Mervyn King suggested today that the UK may need additional stimulus to insulate it from the worsening crisis on the Continent. And of course, the Fed has pretty consistently maintained that it stands ready to intervene further to ward off recession — a recession that is all-but assured if Europe starts contracting.

Either way though, I think gold continues to serve in its long standing role as solid and dependable reserve asset when just about everything else is being called into question. For the individual saver and investor, gold performs a similar duty as a reliable alternative means of saving and a critical hedge of the more traditional asset classes.

17-Nov (Bloomberg) — Bank of England Governor Mervyn King’s alarm over the danger posed by Europe’s debt crisis suggests officials may be ready to add more stimulus as soon as next month to shield Britain from further turmoil.

King added his voice yesterday to growing global frustration with Europe’s inability to tame its crisis, saying failure to deal with it would lead to “significant adverse consequences.” The Bank of England cut its growth and inflation forecasts, a month after raising its bond-purchase target by 75 billion pounds ($118 billion) to aid the recovery.

“We’re on the knife-edge of another recession,” said Richard Barwell, an economist at Royal Bank of Scotland Group Plc in London and a former Bank of England official. “They’re increasingly coming to the conclusion that there’s more weakness in the U.K. than they thought. We originally forecast another 50 billion pounds in February. They could easily bring that forward.”

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16-Nov (Forbes) — “There is definitely going to be another financial crisis around the corner,” says hedge fund legend Mark Mobius, “because we haven’t solved any of the things that caused the previous crisis.”

We’re raising our alert status for the next financial crisis. We already raised it last week after spreads on U.S. credit default swaps started blowing out. We raised it again after seeing the remarks of Mr. Mobius, chief of the $50 billion emerging markets desk at Templeton Asset Management.

…”Prior to the bursting of the credit bubble, the public was shocked to learn that our biggest investment banks were levered 30-to-1. When asset values fell, those banks were quickly wiped out. But now the Fed is holding many of the same types of assets and is levered 51-to-1! If the value of their portfolio were to fall by just 2%, the Fed itself would be wiped out.”

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PG View: There has been much discussion about over-leveraging of light of the recent collapse of MF Global, but pay particular attention to the gearing being employed by the Fed. Of course many of the assets on the Fed’s balance sheet have already lost far-more than 2%, but if you don’t mark to market (because there is no market) you can perpetuate the illusion of solvency for a while. Of course if push comes to shove, the Fed can always print and monetize those assets. Which of course they probably will at some point.

17-Nov (Financial Times) — Central banks made their largest purchases of gold in decades in the third quarter, as a sharp drop in prices in September accelerated the shift to bullion as a means of diversification.

The scale of the buying, at 148.4 tonnes on a net basis, was far bigger than previously disclosed, surprising some traders.

…The WGC declined to identify of the central banks behind the majority of the buying citing “confidentiality restrictions”, saying only that “a slew of new entrants emerged wishing to bolster gold holdings”.

Central banks are one of the most important drivers of the gold market but few disclose details about the changes in their bullion reserves.

[source]

17-Nov (New York Times) — Spain paid a record interest rate to sell 10-year debt and French securities came under increasing pressure as the widening euro-zone crisis sent European stocks lower Thursday and weighed on prospects for U.S. markets.

The Spanish Treasury paid 6.97 percent in an auction Thursday to sell 10-year bonds — the most it has had to pay since 1997, before the advent of the euro — and well above the 5.43 percent it paid at a comparable auction in October. France paid 2.8 percent to sell bonds maturing in July 2016, up from the 2.3 percent it paid in October.

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16-Nov (Mineweb) — A loss of faith in the political system and the currencies that underpin it has been growing over the past few months. Its most visible manifestation is the “Occupy movement that has moved from Wall Street all over the world.

Its second most visible manifestation, some would argue, is the price of gold and the throngs of investors that are buying the yellow metal in all shapes and forms.

Speaking to Mineweb.com’s Gold Weekly podcast, Erste Group gold analyst, Ronald Stoeferle says that in recent months there has been a distinct shift in investor attitudes and a growth in fear.

“Where before at the end of presentations I was asked whether or not gold was in a bubble and what my long term price targets are, no I am increasingly asked for my views on gold confiscation and what the chances are like for further riots in the streets,” he said.

“The monetary aspect of gold is getting more and more important. People don’t want to make big money, they just want to preserve their purchasing power and their wealth.”

[source]

16-Nov (ABCNews) — Don’t look now, members of the “supercommittee” battling the national debt, but the amount the U.S. owes topped the $15 trillion mark Wednesday afternoon.

That’s a lot of George Washingtons, as you can see here live at USdebtclock.org.

With a week until the committee’s deadline to reach agreement on cutting $1.2 trillion to $1.5 trillion from the federal deficit over the next 10 years, the Joint Select Committee on Deficit Reduction still has no agreement to stem automatic cuts to the budget.

…A sense of deep pessimism has gripped the supercommittee, and judging from the limited public statement by panel members, a debt bargain could be out of reach.

[source]

By Bruce Krasting
16-Nov (EconMatters) — I’m not surprised that the halo effect of political changes in Italy and Greece had a very short half-life. Why would it? Nothing has changed.

I’m not surprised that the contagion has worked its way to France. After all, the ECB intervention policy insures that France becomes a target. “If you can’t sell Italy, sell France”, is the market’s response.

But I’m absolutely blown out by the pace of things. France’s bonds are being devalued on a daily basis. Italy has been functionally shut out of the new issue market. Market liquidity has dried up. What were once routine transactions are now difficult to price. E100mm bond transactions for France and Italy were normal; today E25mm is a market amount.

What is becoming scarily clear is that there is no more announcements coming that are going to make a difference. All the news is out on expanding the EFSF. The only thing that could reverse this tide is an agreement to “federalize” the debts of Europe. This would leave Germany (massively) on the hook. There is zero chance of this happening.

[source]

The Impending Unwind of the False Risk-On Signal

16-Nov (USAGOLD) — Gold remains choppy within the recent range, displaying a negative intraday bias at this point. Persistent turmoil in Europe pushed the EUR-USD rate convincingly back below the 1.3500 level; and while the euro attempted to mount a comeback in earlier trading, probes back above 1.3500 have proven unsustainable. The corresponding dollar strength has served to limit the upside in gold.

Given the worsening of the situation in Europe over the past several months, the rise in the EUR-USD rate to 1.4245 through the end of October — along with the strength in the stock market — was rather puzzling. The answer to the puzzle likely lies in a piece of Deutsche Bank analysis cited on the ZeroHedge blog this morning, under the title The Biggest Market Headfake Ever: Is A Wholesale French Bank Liquidity Run The Sole Reason For The Euro, And S&P, Surge?

In a nutshell, the major interbank liquidity squeeze in Europe has prompted “wholesale asset liquidations” and euro repatriation. That repatriation drives up the euro and “legacy correlation arbs” view that as an “empirical signal of equity ‘cheapness’”. In other words, the liquidity crisis in Europe has generated a false “risk-on” signal.

More than 61.8% of the EUR-USD rally from 1.3146 to 1.4245 has now been retraced and investors are starting to realize that this is truly a “risk-off” environment. While further dollar gains may keep a short-term cap on gold, it is likely to be simultaneously underpinned by renewed equity losses as that “headfake” gets unwound. Additionally, there are still considerably concerns here in the US that the Super Committee will reach a consensus before next week’s deadline. That would likely raise the specter of another US downgrade.

We can also be reasonably sure that in the absence once again of any meaningful fiscal reforms, the Fed will take another whack at our problems from the monetary side of the equation. So QE3 might be forthcoming even as most of Europe continues to cajole Germany to consent for the ECB to launch its own brand of quantitative easing. Yes, the entire global economy may be on the cusp of a massive liquidity infusion that could well drive gold on to new record highs.

16-Nov (CNBC) — Greece’s new government should comfortably survive a vote of confidence on Wednesday but Prime Minister Lucas Papademos faces a daunting task repairing shattered public finances, and cracks are already appearing in his crisis coalition.

Polls show Papademos, a former vice president of the European Central Bank, has the backing of three in four Greeks but the need to implement painful tax rises and spending cuts to secure fresh loans and stave off bankruptcy will sorely test that support.

[source]

16-Nov (Bloomberg) — Italian and Spanish 10-year government bonds rose for the first time in three days after the European Central Bank was said to buy the nations’ debt.

The advance sent Spanish five-year note yields down from a euro-era record. The ECB bought larger-than-usual sizes and quantities of the Italian debt, said two people with knowledge of the trades. Italian Prime Minister-designate Mario Monti will announce his new government today and Greek Prime Minister Lucas Papademos will face a vote to give him a three-month mandate to implement budget measures. German bonds underperformed French and Belgian debt after a sale of two-year notes.

[source]

15-Nov (MarketWatch) — Crude-oil futures closed above $99 a barrel Tuesday, buoyed by better-than-expected U.S. data on retail sales and manufacturing, but a stronger dollar and renewed worries about Europe’s debt outlook helped keep a lid on price gains.

Crude for December delivery rose $1.23, or 1.3%, to settle at $99.37 a barrel on the New York Mercantile Exchange. That was the highest closing level for a most active contract since July 26, according to data from FactSet Research.

“Retail sales were good, which would tend to suggest that demand for gasoline is going to get a little bit better,” said Phil Flynn, a vice president at PFG Best.

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15-Nov (MarketWatch) — Gold futures finished higher Tuesday after spending the session wavering between gains and losses, as traders mulled the metal’s safe-haven appeal against a backdrop of pressure from a stronger U.S. dollar and upbeat economic data, and support from growing euro-zone concerns.

For gold, the trading environment is filled with ingredients that make “quite a soup, and one has to watch the various ingredients all the time,” said Steve Gillette, president of Cirrus Commodities Exchange.

For now, “gold support comes from the general safe-haven notion, but waiting for the euro shoe to drop,” he said.

…“Gold is choppy within the recent range as heightened [European Union] contagion risks have bolstered the dollar somewhat,” said Peter Grant, senior metals analyst at USAGold-Centennial Precious Metals Inc.

“Yields have ratcheted uncomfortably higher in both the periphery and in some of the core-European countries,” he said. And “any sense of relief, associated with the recent changes in the governments of Greece and Italy, has quickly dissipated.”

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15-Nov (Washington Post) — With the crisis in Europe still raging, analysts are frantically trying to game out what a euro zone implosion would mean for the United States. Yesterday, the Federal Reserve Bank of San Francisco put out a research note pegging the odds of a U.S. economic contraction in early 2012 at “greater than 50%,” noting that a European sovereign debt default (Greece, say) would very likely plunge us into recession.

Part of the reason for that is that Europe is one of our major trading partners — accounting for about one-fifth of U.S. exports.

[source]

PG View: While we may slip back into recession here in the US without any help from Europe, a sovereign default across the pond would certainly hurry things along.

15-Nov (Financial Times) — Eurozone bond markets suffered a mass sell-off on Tuesday as investor fears spread beyond Italy and Spain to triple A rated France, Austria, Finland and the Netherlands.

The premium that France and Austria pay over Germany to borrow rose to euro-era records of 192 basis points and 184bp respectively, levels investors say are no longer consistent with top credit ratings.

“Markets are losing patience so they are going for the jugular, which is the core countries and not the periphery,” said Neil Williams, chief economist at Hermes, the UK fund manager. “There is convergence but it is convergence on the ­weakest.”

Mike Riddell of M&G, one of Europe’s biggest fund managers, called it “probably the most worrying day” of the crisis so far.

[source]

15-Nov (TheHill) — Senate Majority Leader Harry Reid (D-Nev.) and House Speaker John Boehner (R-Ohio) met Tuesday, a sign they might take a larger role in deficit talks, congressional aides say.

A leadership aide said Reid and Boehner discussed a range of topics in Boehner’s office but declined to provide any details.

Some congressional sources interpreted the meeting as a sign that the deficit-reduction talks of the supercommittee are moving to the leadership level.

But leadership aides in the Senate and House say the meeting does not signal that Reid and Boehner are taking over the floundering negotiations.

[source]

PG View: If lawmakers once again prove unable to advance meaningful fiscal reforms, it becomes all-but assured that the Fed will take another whack at the problem from the monetary side.

15-Nov (USAGOLD) — Gold remains consolidative amid heightening of EU contagion risks. The EUR-USD rate has ticked back below the 1.3500 level as yields across the eurozone have continued to ratchet higher.

Italian 10-year yields traded back above the 7% level, just two-days after the fall of the Berlusconi government. Spain’s 12 and 18-month bond auctions disappointed, with yields rising markedly to reach 14-year highs. The spread between 10-year French OATs and German Bunds also hit a euro-era record wide. Europe appears increasingly on the verge of a true panic and all eyes are trained on the ECB, looking for some kind of reaction.

One might argue that full-on debt monetization is the only option at this point. In fact Grant Williams says exactly that in his most recent newsletter: “[Those in charge of Europe] are left with a stark choice – print money or allow the break-up of the Eurozone and the end of the common currency known as the Euro. At this point it really IS that simple.”

Despite some mildly encouraging economic data in the US, the stock market is heavy as a result of risk aversion associated with the uncertainty in Europe. The dollar has been buoyed by the renewed euro weakness. While that is serving to limit the upside in gold for the time being, a more threatening retreat in stocks, whether it be driven by euro contagion worries or our own ongoing economic malaise, may well prompt the Fed to react with more easy money of its own. Ultimately it is the likelihood of massive liquidity injections both in Europe and America that supports the underlying uptrend in gold.

• US business inventories unch in Sep, below market expectations of +0.3%, vs 0.4% in Aug.
• US retail sales +0.5% in Oct, just above market expectations of +0.4%, vs +1.1% in Sep; Ex-auto +0.6%.
• US PPI -0.3% in Oct, below market expectations of -0.1%, vs +0.8% in Sep; Core unch on expectations of +0.1%.
• US Empire State index rebounded to 0.61 in Nov, above market expectations of -2.00, vs -8.48 in Oct.
• France Q3 GDP (preliminary) +0.4% q/q, just above market expectations of +0.3%, vs negative revised -0.1% in Q2; 1.6% y/y.
• Germany Q3 GDP sa (1st release) +0.5% q/q, as expected, vs positive revised 0.3% in Q2; 2.5% nsa y/y.
• Eurozone Q3 GDP sa (1st release) +0.2% q/q, below market expectations of +0.3%, vs 0.2% in Sep; falls to 1.4% y/y.
• UK CPI – EU Harmonized +0.1% in Oct, below market expectations of +0.2%, vs +0.6% in Sep; moderates to 5.0% y/y.
• UK retail price index unch in Oct; moderates to 5.4% y/y.
• Germany ZEW economic sentiment drops to -55.2 in Nov, below market expectations of -53.0, vs -48.3 in Oct; Current situation falls to 34.2.
• Singapore retail sales (nominal) -0.1% y/y in Sep, vs positive revised 3.5% y/y in Aug.