13-Jan (USAGOLD) — Despite the marked revival on Friday of “risk-off” sentiment — and a corresponding jump in the dollar to new 15-month highs — gold continues to display remarkable resilience. The yellow metal closed down $8.75 going into the long holiday weekend, essentially right on the 200-day moving average. However, the market was still up more than $20 on the week and managed to set a new 4-week high on Thursday at 1661.76 before succumbing to those selling pressures.

The week went out with a flurry as S&P downgraded France, Italy, Spain, Austria and five other EU member-states. While these downgrades were widely anticipated, they really put a damper on the modest euphoria that sprang from generally favorable Italian and Spanish debt auctions earlier in the week. Fitch is expected to announce a number of downgrades as well by the end of the month. On top of that, efforts to finalize the details of the second Greek bailout broke down. It would seem the buy-in from private bondholders that we were assured was secured back in October, was a falsehood.

Weak December retail sales here in the US and a collapse in American exports to Europe sparked a flurry of downward revisions to US growth outlooks. Perhaps not surprisingly, Fedspeak that centered on the increasing likelihood of further accommodations escalated into the weekend. The dangerous passage between Scylla and Charybdis continues.

While heightened growth and systemic risks were at the fore this past week, a rather significant rise in Chinese gold demand caught the attention of investors in the yellow metal. This is an important underlying theme that we have been highlighting for a number of years. Several important news articles on this topic were posted on our Breaking Gold News page:

China’s Gold Imports From Hong Kong Reach Record on Demand
Don’t Believe In Gold? That’s Ok, Just Leave It To The Chinese
Chinese goldbugs take the lead

They’ll make for some interesting reading in between NFL playoff games. Our Broncos will have their hands full with the Patriots.

13-Jan (Bloomberg) — France and Austria lost their top credit ratings at Standard & Poor’s in a swathe of downgrades that left Germany with the euro area’s only stable AAA grade, hindering leaders’ efforts to stem the region’s fiscal crisis.

France and Austria were cut one level to AA+ from AAA and face the risk of further reductions, the rating company said in Frankfurt today. While Finland, the Netherlands and Luxembourg kept their AAA ratings, they were put on negative watch. Spain and Italy were also downgraded. The first gauge of the report’s impact will come on Jan. 16 when France sells as much as 8.7 billion euros ($11 billion) in bills.

“In our view, the policy initiatives taken by European policy makers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone,” S&P said in a statement.

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13-Jan (BBC) — France has lost its top AAA credit rating from Standard & Poor’s and many other eurozone governments have also been downgraded by the ratings agency.

Rumours of S&P’s move prompted stock markets to fall earlier in the day.

London’s FTSE 100 ended the day down 0.5% and Frankfurt’s Dax 0.6%, while the Dow Jones in New York fell 0.7%, although it was widely expected that the ratings cuts were coming.

Italy and Spain were also downgraded, but Germany kept its AAA rating.

Austria, like France has lost its top AAA rating, and been downgraded to AA+. Its economy exports a lot to recession-struck Italy, while its banks are facing losses on subsidiaries they own in financially troubled Hungary.

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PG View: I trust all the smart buyers of Italian and Spanish debt this week immediately dumped it on the ECB in the secondary market. I’m sure those that didn’t will be pledging it as collateral in the next ECB LTRO.

13-Jan (Financial Times) — Did China just overtake India as the world’s largest gold consumer?

Little more than a year ago it would have been almost laughable to ask that question. In 2010 India’s gold consumption was a full 46 per cent – or 275 tonnes – higher than China’s, according to data from consultants GFMS published in the World Gold Council’s quarterly reports.

Even three months ago it would have been a stretch. In the first nine months of 2011, Indian gold demand totalled 743 tonnes, compared to 612 tonnes for China.

But data released in the past few days suggests that China may have closed the gold gap, inching ahead of India in terms of overall gold demand in 2011.

[source]

13-Jan (CNBC) — Federal Reserve officials are seriously considering giving the US economy—and especially the housing market—an added jolt with more quantitative easing.

Fed officials are likely to discuss such a move at their Jan. 24-25 meeting, when the central bank [cnbc explains] will issue its first quarterly forecast on interest rates under the new communication policy.

Two of the new voting members this year on the Federal Open Market Committee [cnbc explains] , which sets interest-rate policy, have recently suggested they would support more assets purchases.

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PG View: The changing of the guard at the FOMC is likely to result in a more dovish bias. Is QE3 on the way?

13-Jan (Financial Times) — Talks over Greece’s debt restructuring collapsed on Friday, an unexpected breakdown that makes it more likely Athens will become the first government of a developed country in more than 60 years to suffer a full-scale default on its debt.

Lead negotiators for Greek bondholders said the latest offer made by Athens “has not produced a constructive consolidated response from all parties”– a clear reference to International Monetary Fund conclusions that bondholder losses must be increased significantly or a second Greek bail-out would have to be bigger than the agreed €130bn.

Government negotiators have been pushing for interest payments that would make the new bonds worth even less than the 50 per cent “haircut” in the bonds’ face value, which had led to a revolt among some debt holders involved in the talks.

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PG View: If you recall, this deal was allegedly agreed to back in October. As recently as yesterday, finalization was deemed to be “imminent.” The sticking point of course is buy-in from private holders of Greek bonds, who have seen the size of the haircut they are expected to “voluntarily” accept ratchet steadily higher.

13-Jan (The Wall street Journal) — The Standard & Poor’s ratings agency could announce the downgrades in the credit ratings of a number of European governments as early as Friday, said people familiar with the matter.

One person familiar with the matter said an S&P notice is being circulated among euro-zone governments and that an announcement “could be imminent.”

[source]

13-Jan (USAGOLD) — Gold is lower weighed by tempered risk appetite and a rebound in the dollar. While their were generally favorable results to today’s Italian debt auctions, ratings agency Fitch quickly rained on the parade, saying that they would give their verdict on the six EU countries they have on ratings watch negative by the end of the month. Italy is of course one of those countries. Downgrades are considered likely and could be as large as two-notches.

Additionally, there are now rumors circulating that S&P may downgrade a number of EU countries as soon as today. That may include the long awaited French downgrade. The USD-EUR, which approached 1.2900 after the Italian auctions, has come under intense selling pressure, plunging back below 1.2700.

• University of Michigan consumer sentiment jumped to 74.0 in Jan, above market expectations of 71.0, vs 69.9 Dec.
• US import prices -0.1% in Dec, in-line with market expectations; exports -0.5% as European troubles weigh.
• US trade deficit widened to -$47.75 bln in Nov, bigger than the -$44.7 bln expected, vs -$43.3 bln in Oct.
• Eurozone trade surplus (sa) jumped to €6.1 bln in Nov, vs €0.5 bln in Oct.
• UK output PPI (nsa) 4.8% y/y in Dec, below market expectations of 4.9%, vs 5.4% in Nov; input PPI fell to 8.7% from 13.6 in Nov.
• Japan M2 increased at a 3.1% y/y pace in Dec, vs 3.0% in Nov.
• BoK held repo rate steady at 3.25%, in-line with expectations.
• China FX reserves fell to $3,181 bln in Dec, vs $3,202 bln in Nov; first drop in over a decade.

13-Jan (AP) — A number of euro countries, including Italy, could see their credit ratings downgraded by the end of this month as they struggle to cope with too much debt and slowing economic growth, Fitch Ratings said Tuesday.

Though the agency remains confident that the 17-nation eurozone will not break up over the next year, it is concerned about the weak economic outlook and is urging the European Central Bank to step up its involvement in solving the crisis, notably by buying more government bonds in the markets.

[source]

PG View: Well that’s a punch in the gut to the improved sentiment that emerged following today’s Italian bond auctions…

13-Jan (Financial Times) — China’s gargantuan stash of foreign exchange reserves has got a little bit smaller, shrinking in the final quarter of 2011 for the first time in more than a decade.

China’s reserves fell by $20.5bn as its trade surplus decreased and capital flowed out of the country, much like other emerging markets.

It was the first drop since the Asian financial crisis in 1998, but Beijing still controls almost $3.2tn in official currency reserves – an unprecedented amount for any country and nearly triple Japan’s reserves, the world’s second biggest.

…Beijing has tried to diversify into everything from oil and gold to stakes in listed companies in Europe and property in Manhattan.

[source]

13-Jan (Financial Times) — Italy successfully sold about €4.75bn of bonds on Friday, capping a relatively strong week for European government short-dated debt auctions as investor sentiment towards the eurozone shows signs of improvement.

In Friday’s auction, Italy sold €3bn of benchmark securities due in November 2014 at a yield of 4.83 per cent, far lower than the 5.62 per cent yield set at the last comparable bond auction. Italy also priced €779m of its 4.25 per cent bond due in 2014 at a yield of 4.29 per cent and a further €971m of a 4.5 per cent bond that matures in 2018, which carries a yield of 7.75 per cent.

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The following is an excerpt from Richard Russell’s Dow Theory Letters

11-Jan (Dow Theory Letters via FinancialSense) — For a decade I have been urging my subscribers to move into gold — either physical bullion or other wise. Now I am at it again: PLEASE MOVE INTO GOLD. Those who think gold has lapsed into a bear market simply do not know what they are talking about. Gold has simply been correcting in an on-going bull market.

This is a time when almost every central bank in the world is grinding out paper currency, grinding it out by the car-load. This is a time when people are searching for safety. People are frightened and confused. Where is the land of safety?

There is only one safe asset on the planet: that safe asset is gold. Uninformed people believe gold is just a commodity. Wrong, gold is absolute money. Gold alone is the world’s only completely safe currency. Gold has no counter-party against it, and no central bank has ever found a way to create gold.

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12-Jan (USAGOLD) — Gold has pushed to more 4-week highs, bringing the 1662.60 resistance level mentioned yesterday within striking distance. Risk appetite has improved further, following generally positive results at today’s Spanish and Italian debt auctions. There is a glimmer of optimism that the ECB’s LRTO operation may finally be showing some results; banks are using cheap ECB money to buy European sovereign debt, rather than simply parking it back with the ECB.

Both the BoE and the ECB held steady on rates. The BoE also held pat on their asset purchase target, and said that QE2 would wind down next month. It remains to be seen if QE3 may be in the offing. ECB chief Mario Draghi warned of substantial downside risks to Europe’s economic outlook in his press conference.

The euro has rebounded from its recent lows, putting downward pressure on the dollar. This is helping the yellow metal. A weaker greenback is also generally supportive to stocks, but gains in shares have been muted by weak US retail sales in Dec and a marked rebound in initial jobless claims last week, to just under 400k.

• US retail sales +0.1% in Dec, below market expectations of 0.3%; -0.2% ex-autos.
• US initial jobless claims surged 24k back to 399k for the week ended 07-Jan, above expectations of 375k, vs upward revised 375k in the previous week.
• ECB left refi rate unchanged at 1.0%, in-line with expectations.
• BoE held the repo rate steady at 0.5% and asset purchase target unchanged at £75 bln, said QE2 will be completed in early-Feb.
• France CPI (EU harmonized) edges up to 0.4% m/m in Dec; steady at 2.7% y/y.
• German CPI (EU harmonized) edges down to 0.7% m/m in Dec; 2.3% y/y, vs 2.4% y/y in Nov.
• Italy industrial production (sa) 0.3% m/m in Nov, vs -0.9% m/m in Oct; -4.1% y/y.
• UK industrial production -0.6% m/m in Nov, below market expectations of unch, vs negative revised -1.0% in Oct.
• Eurozone industrial production (sa) -0.1% m/m in Nov, on expectations of -0.2%, vs negative revised -0.3% in Oct; -0.3% y/y.

12-Jan (CNBC) — Successful Spanish and Italian auctions of shorter-term debt offered a welcome breather for crisis-weary European bond markets on Thursday, but analysts warned that the sale of 10-year bonds will provide a more accurate indication of market sentiment.

Spain easily raised double its target from the auction of bonds maturing in April and October 2016 and a new 3-year bond.

Meanwhile yields for Italian 12-month debt more than halved at its auction to 2.73 percent from 5.95 in December Stocks rallied following the auction results and the euro reached its highest level of the day against the dollar.

Analysts cheered the outcome of both auctions, but warned that it also raises questions about what will happen with longer-dated maturities.

[source]

PG VIew: Looks like the Spanish and Italian auctions dislodged some of that cheap ECB money, but EUR doesn’t seem all that enthused…

10-Jan (ZeroHedge) — We have often seen requests to show the price of gold going back as long as possible. Tonight we can oblige, with a gold price chart, indexed in 2010 British Pounds, going all the way back to 1265. To the surprise of many, the early 1980s gold price surge is not the only time in history when gold exploded as America’s game with inflation was almost lost. It appears that based on the surge in gold back in the late 15th century, there was actually quite a serious need for Columbus to go forth and find a source of gold, because last we checked Ferdinand and Isabella did not have Bernanke’s money printers back then. And yes, as Goldman says, there were no ETFs back in the 16th century to draw demand away from the real deal and into make believe exposure.

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PG View: The two charts presented in this piece provide some pretty important perspective to the recent 11-year rally in gold. As we’ve pointed out many times in the past, the yellow metal is still well below historic highs as measured in real terms. In other words, there’s room to run…

11-Jan (Reuters via MineWeb) — Gold rallied for a second day on Wednesday, hitting its highest in a month after a stronger euro helped boost the price above a key technical level and evidence of strong demand from major consuming nations further supported the market.

Gold has risen by 1.5 percent so far this week, in line with a modest pick-up in the euro, which is battling against fresh concerns about the ability of several euro zone nations to fund themselves given sovereign debt yields remain high and there is no immediate solution in sight to the crisis.

The gold price vaulted above the 200-day moving average around $1,635 an ounce on Tuesday, which prior to December’s sell-off had marked an important level of support, but since then has acted as stiff overhead resistance.

[source]

11-Jan (Reuters) — The worst is yet to come in the euro zone’s debt crisis but the currency union will survive 2012 intact, according to a Reuters poll of economists who say France will probably lose its top-notch credit rating.

While just nine out of the poll’s 64 economists said the bloc had turned the corner on a sovereign debt crisis, only 10 said the euro zone would not survive the year in its current form. The rest were reasonably confident it would.

A similarly firm majority of those surveyed in the last few days said France would lose its coveted ‘AAA’ rating in the next three months, while Belgium, Italy and Spain will suffer further cuts to their ratings.

[source]

11-Jan (CNBC) — Already mired in controversy about whether it should play a greater role in solving the European financial crisis, the European Central Bank is facing criticism over what they’ve already done to help — buying Greek debt.

Negotiators involved in lowering Greece’s private-sector debt (known as Private Sector Involvement) believe the ECB should also accept a haircut on the Greek debt on their books.

Their argument is as follows: the ECB bought Greek debt at a discount, or below face value, and yet they expect to be repaid at full face value. Private-sector creditors are asking: why should the ECB get 100 cents on the euro when they paid less than that? And should the ECB be making a profit on Greek debt as the country struggles on the massive weight of its obligations?

[source]