We’ve Heard it All Before…

18-Jan (USAGOLD) — The IMF needs more money, the Greek deal is just about to go through, and the US needs to raise the debt ceiling…again. All of those things should sound painfully familiar:

The IMF said today that they need to raise an additional $600 bln to bolster their bailout fund. Of course the IMF members are for the most part exactly the same countries that are in need of the bailouts. Rather than pledging it to the IMF and having it potentially go elsewhere, cash strapped members would probably be better served marshaling any limited resources they might have and applying it prudently in the hope of bettering their own situation.

The US is the largest contributor to the IMF and our ability to print an endless amount of dollars is certainly appealing in an environment where almost everyone is under some form of fiscal duress. However, increasing our contribution to the IMF needs to pass through Congress and there is no way it would ever get approved, especially in an election year. The response from the Treasury Department was swift an unequivocal according to this Dow Jones headline: US Treasury Says No Intention To Seek Additional Resources For IMF.

Quite frankly it was silly of Mme. Lagarde to ask. Unless of course the intent was to cast the US as being part of the problem, rather than part of the solution. So when the wheels fall off in Europe, with adverse global repercussions — including in the US — the IMF has a scape goat: If only America had been willing to chip-in a little more…

There are reports again today that an agreement between Greece and private holders of Greek debt is hand. The latest proposal calls for those bondholders to get about 32 cents on the euro, plus some longer-term debt. That 68% scalping is a far cry from the 50% haircut the bondholders allegedly “volunteered” for back in October. They’re still apparently haggling over the coupon on the longer-term debt, which is exactly what caused the talks to breakdown late last week.

Finally, the US Congress is expected to hold symbolic votes to disapprove of President Obama’s request to raise the debt ceiling by another $1.2 trillion. As part of the contentious debt ceiling debate last year, Republicans secured the ability to vote on so-called “resolutions of disapproval” when a debt ceiling hike is requested. This allows them to be “on the record” as against a hike, but there’s no way for them to actually block it. Even if such a measure made it through the Democrat controlled Senate, it would be vetoed by the President and the debt ceiling would get raised anyway. It’s political theater at its finest.

It’s also worth noting that Dec TIC data released data revealed ongoing foreign selling of US Treasuries. China reduced its holding of Treasuries in Nov to $1,132.6 bln, the lowest level in more than a year and down 2.7% from a year ago. Switzerland was the largest seller, shedding $17.8 bln in US debt in Nov. However, the most relentless seller remains Russia, which has nearly halved its Treasury holdings in the past year to a mere $90 bln.

It remains to be seen, when the bond market will start to react accordingly. The turmoil in Europe continues to drive investors into the perceived safety of US debt, but clearly some aren’t buying into the “safety” narrative. Interestingly, China and Russia are two of the most aggressive buyers of gold. A reallocation from low yielding bonds and the associated currency risk into gold strikes me as pretty prudent. The dwindling foreign demand for our debt will ultimately factor into the Fed’s decision to ramp up the “artificial demand” that they provide through quantitative measures. When that happens, the long standing uptrend in gold is likely to re-exert itself with a vengeance.

18-Jan (MNI) — Yet another record sum parked at the European Central Bank’s overnight deposit facility highlights ongoing market tension and could reignite concerns that the central bank’s massive liquidity injections are failing to spur lending.

On Wednesday, Eurozone banks deposited a new record high of E528 billion overnight with the ECB, up from E502 billion the previous day. Levels have spiked ever since the ECB injected nearly E490 billion of 3-year loans into the banking system just before Christmas in an effort to avoid a credit crunch in the euro area.

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18-Jan (BusinessInsider) — So the ratings agencies have finally followed through on the big threat and downgraded a number of the eurozone’s credit ratings, including France and Austria, both of which have now lost their coveted Triple AAA status. Italy, Portugal and Spain were downgraded a further two notches.

…But note the way the ECB balance sheet is expanding: The consolidated assets of the European system of Central Banks is now 4.4 billion euros or $5.7 billion. In effect, the consolidated ESCB balance sheet is almost two times that of the Fed and its increase over the last 6 months is almost equal to the entire increase in the Fed’s balance sheet over the last several years.

The figures on the ESCB balance sheet neither includes the recent half billion euro Long Term Refinancing Option (LTRO) introduced last December, nor further mooted policies in that direction. CLSA has suggested that the speculation on the February 29th LTRO is EUR1trn. Some have suggested even higher numbers.

Bottom line: the system of European Central Banks (ESCB) has been engaged in massive QE and much more is in the pipeline.

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18-Jan (Reuters) — The International Monetary Fund is estimating it needs to raise up to $600 billion in new resources to lend to countries struggling with the fallout from the growing euro zone debt crisis, IMF sources said on Wednesday.

While the IMF estimates it will need $500 billion of the money to lend to member countries in need, the remaining $100 billion will be used as a “protection buffer,” the sources, who were present at an IMF board meeting on the issue on Tuesday, told Reuters.

The IMF also estimated there would be a $1 trillion global financing gap over the next two years if global economic conditions worsened considerably, the sources added.

…Getting more resources from advanced economies, such as the United States, is going to be difficult, if not impossible. With a strained budget at home, some U.S. congressional Republicans have threatened to yank $100 billion in U.S. money to the IMF if the funds are used to bailout more euro zone countries.

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PG View: They’re right, getting more money from cash strapped IMF contributers — and the US is the largest — is going to be all-but impossible. I suspect the temptation to simply create SDRs out of thin air will be significant…

18-Jan (Bloomberg) — Greece and its private creditors are beginning a final push to renegotiate debt as a member of the investor group said they are likely to get cash and securities with a market value of about 32 cents per euro of government bonds.

“I’m highly confident the deal will get done,” Bruce Richards, chief executive officer of New York-based Marathon Asset Management LP, said in a telephone interview yesterday with Bloomberg Businessweek.

Marathon, which has $10 billion under management, is on the committee of 32 private creditors formed in November to negotiate with Greece, the International Monetary Fund and the European Union.

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PG View: That 68% scalping is a far cry from the 50% haircut private bondholders were originally asked to “volunteer” for…

17-Jan (Financial Times) — Central banks increased the amount of gold they lent for the first time in a decade in 2011, as they used their bullion reserves to help commercial banks raise US dollars.

Although central banks hold one-sixth of all the gold ever mined in their reserves, their activities in the bullion market are opaque, with not a single institution revealing its day-to-day operations. In addition to holding gold for their reserves, some central banks also trade the metal, lending it on the open market in order to obtain a yield.

…The increase in lending came as eurozone commercial banks, suffering a shortage of dollar liquidity, rushed to borrow gold from central banks and later swap it on the market in exchange for dollars.

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PG View: One thing is clear, and we’ve been saying it for some time now, Europe is mobilizing its gold. The implication is that gold sold into the market in the latter part of last year was borrowed gold. It’s got to be repaid at some point… What isn’t clear, is if any actual metal changed hands or location. Probably not. Just more fun with paper and computers.

18-Jan (USAGOLD) — That’s the biggest monthly rise in core PPI since June 2009.

17-Jan (CNBC) — Rating agency Fitch said on Tuesday that Greece would default on its debt, although it said that such a default was likely to take place in an orderly manner.

“It is going to happen. Greece is insolvent so it will default,” Edward Parker, Managing Director for Fitch’s Sovereign and Supranational Group in Europe, the Middle East and Africa told Reuters on the sidelines of a conference in the Swedish capital. “So in that sense it shouldn’t be a surprise to anyone.”

The Fitch comments come after Moritz Kraemer, head of Standard & Poor’s rating agency’s European sovereign ratings unit, said on Monday Greece would default shortly on its debt obligations.

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17-Jan (CNBC) — The Treasury on Tuesday started dipping into federal pension funds in order to give the Obama administration more credit to pay government bills.

Treasury started suspending reinvestments in a federal pension fund known as the G-Fund in order to avoid hitting the country’s $15.194 trillion debt limit.

…The House of Representatives is expected to vote Wednesday on the Obama administration’s request to increase the debt limit by $1.2 trillion.

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17-Jan (MarketWatch) — Gold futures pushed toward $1,660 an ounce on Tuesday, moving in the opposite direction to a weakening U.S. dollar and finding lingering support on Europe’s recent debt downgrades.

Gold futures for February delivery rose $28.30, or 1.7%, to $1,658.90 an ounce on the Comex division of the New York Mercantile Exchange.

Gold buyers are concerned with currency devaluation and loss of purchase power, and they note “the downgrades of the euro zone countries means fiscal stimulus is not far behind,” George Gero, a vice president with RBC Capital Markets, said in emailed comments.

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17-Jan (USAGOLD) — Gold jumped to new 4-week highs in overseas trading after some more favorable European economic data and bond market activity inspired further risk appetite. This despite S&P’s follow-on downgrade of the EFSF from AAA to AA+. The dollar retreated as the euro found some bids. However, upside momentum in the single currency seems to have already evaporated, knocking the yellow metal off its intraday highs.

More modest Dec inflation in the eurozone, along with a marked rebound in German investor confidence offset the recent S&P downgrades to some degree. While Spanish refinancing costs fell, Portuguese yields remain elevated near record highs in advance of an important auction on Wednesday. Last week’s S&P downgrade of Portugal to junk status prompted Citi to remove the country from its European Bond Index. Since many bond funds mirror that index, there is an expectation of reduced demand for Portuguese debt. Additionally, Chinese growth slowed, but not as much as expected, allaying some concerns about a hard landing.

• BoC leaves policy rate steady at 1.00%, in-line with expectations; maintains neutral stance.
• NY Empire State index surged to 13.48 in Jan, above market expectations of 10.5, vs 8.19 Dec.
• UK CPI (EU harmonized) +0.4% m/m in Dec, in-line with expectations, vs +0.2% in Nov; a tick higher to 4.2% y/y. Core 3.0%.
• German ZEW investor confidence rebounded to -21.6 in Jan, well above market expectations of -49.8, vs -53.8 in Dec.
• German ZEW current situation improved to 28.4 in Jan, above market expectations of 25.0, vs 26.8 in Dec.
• Eurozone Dec HICP revised down to 2.7% y/y, vs 2.8% y/y previously; core steady at 1.6%.
• Japan Tertiary Industry Index (sa) -0.8% in Nov, vs upward revised 0.7% in Oct.
• China GDP slowed to +8.9% y/y in Q4, vs 9.1% y/y in Q3; retail sales +18.1%; industrial output +12.8%; fixed investment +23.8%.

16-Jan (Financial Times) — Standard & Poor’s on Monday stripped the eurozone’s bail-out fund of its AAA credit rating, potentially constraining its ability to contain the region’s debt crisis and focusing attention on efforts to create a more robust successor.

S&P lowered the European Financial Stability Facility’s rating to AA+, following its decision on Friday to remove the triple-A ratings of France and Austria, two of the find’s guarantors.

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16-Jan (The Wall Street Journal) — Iranian authorities sent police into the streets of the capital Monday to crack down on informal currency trading and support the rial, signaling Iranians’ heightened insecurity over their dwindling buying power and Tehran’s increasingly hard-handed efforts to stave off economic panic.

The move follows last week’s steep Iranian Central Bank interest-rate increase, a bid to try to stem the growing demand for U.S. dollars in the country as the economy lurches amid fears over a new round of sanctions promised by the U.S. and Europe.

Iran’s rial currency has declined 40% to 55% against the dollar on the black market since December. Iranian inflation, meanwhile, now exceeds 20% a month, according to the Central Bank.

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16-Jan (Der Spiegel) — Ever since the European Central Bank began flooding the markets with cheap money, European banks have rediscovered their taste for sovereign bonds. But the crisis is far from over, as Standard and Poor’s recent raft of downgrades showed. Some bankers are saying it’s just a matter of time before yields on peripheral bonds shoot up again.

…Indeed, the problems are too far-reaching to be solved with a single measure from the bank’s bag of tricks. But for all intents and purposes, the ECB’s new strategy is just that — a trick. By flooding the banks with cheap money, it is artificially generating demand for sovereign bonds. In doing so, it can also cut back on its own bond purchases, which have also been highly controversial within the bank itself.

For the banks, it’s a fantastic deal. They can borrow money from the ECB for three years at the prime interest rate, which currently stands at 1 percent. If they used that money, say, to buy Italian bonds last Friday, they would get the much higher interest rate of 4.83 percent. Then they could turn around and deposit these bonds at the ECB as security, and borrow even more money at 1 percent.

This new ECB strategy would appear to benefit all the major players: the banks, the cash-strapped countries and the ECB itself. But it has also triggered worries that Draghi has merely created a kind of financial perpetual-motion machine. In any case, the strategy does nothing to alter the fact that the institution ultimately bearing the risks is still the ECB — and, with it, the taxpayers.

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by Julian D. W. Phillips
13-Jan (The Gold Report) — You heard the saying, but what does it really mean? We live in a world where performance is stressed. Hedge funds can be measured on a monthly basis. Twenty percent charges on profits are levied by fund making their view short-term. Daily assessments are made, comparing one sector to another giving the impression that short-term performance is what it’s all about. But is it? No it is not.

Just look at where real wealth resides and why it’s there. Old Money means wealth held for many generations. How can wealth be held in this way, and how was it made up? While that’s a huge subject and one we cannot cover here, it’s important for you to realize that this was not made on a monthly, trading basis. It certainly was not made through day or week or month trading.

…Investments that have done well in bad times since 2007 will continue to do well. Leading that pack are gold and silver bullion as well as the derivatives and mining company shares producing them.

…With little sign of the hoped-for, effective reforms of the financial system and future stability and growth, the time to move out of that global cash has not arrived, and the only globally-accepted, all situations “cash” is gold!

There will be the occasional situation where individual companies or assets outperform gold, but a core investment for the bulk of investors that want wealth protection remains precious metals –in particular gold and to a lesser, but potentially more profitable, silver.

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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.

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