Gold’s Fundamentals Remain Positive

15-Dec (USAGOLD) — Gold rebounded in overseas trading, bolstered by physical demand and oversold pressures. However, a round of generally positive US data have tempered the safe-haven appeal of gold somewhat and the yellow metal gave back those earlier gains.

Nonetheless, as long as we remain in a negative real interest rate environment, the long-term uptrend in gold can be considered intact. Yesterday’s record low award rate for the US 30-year bond is just the latest indication that we’re going to remain in a negative interest rate environment for the foreseeable future.

The Swiss National Bank bucked pressure from exporters today, holding the EUR-CHF target steady at 1.20. They also held the Libor target steady at 0%, but said, “”the SNB stands ready to take further measures at any time if the economic outlook and the risk of deflation so require”.

Despite the CHF peg, apparently savers continue to seek shelter in the perceived safety of Swiss banks. Therefore a Swiss government panel is considering imposing negative nominal interest rates on foreign deposits. In other words, foreigners will have to pay for the privilege of allowing Swiss banks to use their money. Yes, negative rates are here to stay for a while…

I’ve also always said that the Germans are unlikely to succumb to the need for ECB printing until they’ve been sufficiently terrorized by the alternatives. With German leaders still adamantly opposed to a bigger bailout facility, euro-bonds and ECB sovereign debt purchases, it would seem that we’re not at that point yet. In the Kyle Bass interview I posted late yesterday, he seems to agree with me; suggesting their may have to be a sovereign default in Europe before the ECB commences with full-on quantitative easing. However, Bass contends that a breakup of the EMU is still inevitable.

Given the plethora of risks still lurking — sovereign debt, liquidity, contagion, systemic, counter-party — not to mention simple supply and demand dynamics, the safe-haven appeal of a hard asset like gold endures. These deleveraging sell-offs we see periodically are simply an opportunity to make your initial purchases or add to existing holdings at discounted prices.

• US Philly Fed index surged to 10.3 in Dec, well above market expectations of 5.0, vs 3.6 in Nov.
• US Industrial production -0.2% in Nov, below market expectations of +0.2%, vs +0.7% in Oct; cap use 77.8%.
• US TIC data showed a surprise outflow of $48.8 bln in Oct, vs upward revised $65.0 bln inflow in Sep.
• US Q3 current account deficit narrowed to $110.3 bln, near expectations, vs $124.7 bln in Q2.
• US NY Empire State Index surged to 9.53 in Dec, well above market expectations of 3.0, vs 0.6 in Nov.
• US PPI +0.3% in Nov, above market expectations of +0.2%; core +0.1%, below expectations of +0.2%.
• US initial jobless claims -19k to 366k for week ended 10-Dec, well below market expectations, vs upward revised 385k in previous week.
• UK retail sales -0.4% m/m in Nov, vs +1.0% in Oct; +0.7% y/y.
• Eurozone Reuters PMI – Composite (advance) better than expected at 47.9 in Dec, vs 47.0 in Nov. Manufacturing and Services rise as well.
• Germany and France PMIs improve as well.
• Italy CPI – EU Harmonized (final) confirmed at 3.7% y/y in Nov.
• Eurozone CPI steady at 3.0% y/y in Nov.
• Japan Tankan Index (Large Manufacturers) falls to -4 in Dec, vs 2 in Nov; Large Non-Manufacturers rises to 4.

15-Dec (AP) — China bought less U.S. Treasury debt in October and total foreign holdings dipped for the first time since July.

The Treasury Department says total foreign holdings of Treasury debt edged down 0.1 percent to $4.66 trillion.

China, the largest foreign holder, bought 1.2 percent less to bring its total holdings to $1.13 trillion. China had increased its holdings 1 percent in September after a reduction of 3.1 percent in August.

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China sold $14.2 bln in US bonds in Oct

14-Dec (Xinhua) — The U.S. federal government is again facing a looming shutdown by the end of this week, and agencies and departments are making contingency plans on Wednesday.

According to Kenneth Baer, spokesman for the Office of Management and Budget, federal agencies and departments are sending emails Wednesday to employees to notify them the next step should that comes to pass.

“In case Congress does not act, we are taking the steps necessary to be prepared if a lapse in funding should occur. That is why agencies are sending emails to their employees this afternoon to alert them to this possibility and how it would affect them,” said Baer in a statement.

The Congress has passed two short-term funding measures to keep the government’s doors open since the beginning of this fiscal year on Oct. 1, and the most recent of the stopgap continuing resolutions is set to expire Friday night.

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15-Dec (Bloomberg) — French leaders are girding for the loss of the nation’s top credit grade, with the central bank governor taking a swipe at Britain as he called debt-rating companies “incomprehensible and irrational.”

Standard & Poor’s said last week it may lower France by two levels in a euro-area downgrade stemming from the failure of the region’s leaders to arrest a debt crisis that began in Greece in 2009 and now presents the biggest threat to the world economy.

“A downgrade doesn’t strike me as justified based on economic fundamentals,” Bank of France Governor Christian Noyer told Le Telegramme, a newspaper based in Brittany. “Or if it is, they should start by downgrading the U.K., which has a bigger deficit, as much debt, more inflation, weaker growth and where bank lending is collapsing.”

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14-Dec (CNBC) — With no workable solutions in sight and a sovereign debt crisis only likely to get worse, the European Union is likely to see an ultimate breakup, widely followed hedge fund executive Kyle Bass told CNBC.

…”They’re going to have to restructure a lot of their debt. Eventually the (European Monetary Union) is going to have to break up,” he said. “The adjustment mechanism that these countries need is a much weaker currency.

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PG View: Bass highlights the persistent threat of a euro break-up that has the market in full-on deleveraging mode. Bass says that the recent coordinated central bank liquidity scheme was just an “airbag” for the eurozone. The takeaway here is that the central banks aren’t even trying to avert a crash at this point, but merely seeking to soften the blow and hope Europe can limp away from the inevitable collision with reality. When the collision occurs, that’s when Bass thinks the ECB will start printing.

14-Dec (Reuters) — Europe’s “no pain no gain” attitude to solving its sovereign crisis risks exacerbating the bloc’s problems, choking off the very growth needed to raise the money to pay down the debt.

From Athens to Dublin, and almost everywhere in between, administrations are imposing wave after wave of spending cuts and tax increases to persuade investors they are serious about improving their public finances and persuade them to start buying euro zone sovereign debt again.

…”You don’t cut your way to growth.”

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13-Dec (HousingWire) — The National Association of Realtors will revise its existing home sales figures downward dating back to 2007. It said new figures would be released Dec. 21.

The expected revision has been awaited since February when analytics firm CoreLogic challenged NAR on its numbers, suggesting they were far too rosy.

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PG View: Revisions are likely to make the housing crisis look even worse than previously thought. Corelogic data suggest there hasn’t been any rebound at all. That could deal a heavy blow to already fragile consumer/investor sentiment.

14-Dec (MarketWatch) — Gold futures fell more than 5% Wednesday, a selloff that deepened as the euro dropped below the $1.30 level, signaling a new level of anxiety about the Europe’s debt crisis and prompting the metal’s breach of some long-held technical levels.

Gold for February delivery dropped $87.50 an ounce, or 5.3%, to $1,575.60 an ounce on the Comex division of the New York Mercantile Exchange. It fell as low as $1,645.80 an ounce.

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PG View: As long as we remain in a negative real interest rate environment — and today’s 30-year auction is a pretty good indication that we’re here for the long-haul — any pullback in the price of gold is merely a correction.

14-Dec (USAGOLD) — Gold extended to the downside once again, falling below the 200-day moving average, after the Fed refused to spike the eggnog with further accommodations on Tuesday. Additionally, the German’s were out in all their ‘grinch-yness’ today, further amplifying the delveraging pressure.

German Chancellor Merkel reiterated that €500 bln was the max for the EDM/EFSF, which is a speed bump at best if Europe continues to unravel. She also shot down once again any notion that euro-bonds were a viable option. Meanwhile, Bundesbank President and ECB council member Jens Weidmann restated his opposition to ECB bond buying.

As a result of all this “bad cheer,” the euro tumbled below 1.3000 for the first time since January. The corresponding strength in the dollar is adding further pressure to gold. Stocks are under broad pressure. Italian yields have hit euro-era highs.

• US import prices +0.7% in Nov, just below expectations, vs -0.5% in Oct; export prices +0.1%.
• Canada leading indicator +0.8% in Nov, above market expectations of +0.3%, vs +0.3% in Oct.
• Eurozone industrial production -0.1% m/m in Oct (sa), below market expectations of unch, vs -2.0% in Sep; 1.3% y/y.
• Spain CPI – EU Harmonized (final) confirmed at 2.9% y/y in Nov.
• UK claimant count lower than expected at +3k in Nov; unemployment rate remains at 17-year high of 8.3%.
• Norges Bank cut policy rate by 50 bp to 1.75% on concerns over eurozone growth prospects.
• South Korea unemployment rate (sa) steady at 3.1% in Nov.

14-Dec (The Wall Street Journal) — The number of unemployed Britons has soared to the highest level for 17 years, increasing pressure on Prime Minister David Cameron to do more to fuel growth and raising fresh questions about the wisdom of his government’s fierce austerity drive.

The jobless total rose 128,000 in the three months to October to 2.64 million, the highest level since the third quarter of 1994, the Office for National Statistics said Wednesday. The jobless rate rose to 8.3%, its highest level since the three months to January 1996.

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14-Dec (The Wall Street Journal) — Italy and Germany successfully sold bonds on Wednesday, but the stark contrast in their borrowing costs underscored investors’ fragile faith in Italian debt and the perceived safety of German debt.

The rise in Italy’s borrowing costs at Wednesday’s auction to a euro era high will do little to allay fears over the country’s ability to continue raising funds at sustainable levels, with Barclays Capital estimating Italy will need to sell around €220 billion of bonds in 2012.

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14-Dec (Reuters) — The Federal Reserve on Tuesday warned that turmoil in Europe presents a big risk to the U.S. economy, leaving the door open to possible further steps to boost growth even though it noted a somewhat stronger labor market.

The central bank said the U.S. economy was “expanding moderately” despite an apparent slowing in the world economy. But while there had been “some” improvement in the job market, unemployment remained elevated and housing depressed, it said.

“Strains in global financial markets continue to pose significant downside risks to the economic outlook,” the Fed said after a policy meeting, alluding to pressures stemming from the debt crisis in the euro zone, which has raised concerns about tighter credit in the United States.

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13-Dec (CNBC) — European policymakers are taking a page out of their American counterparts’ playbook to address their burgeoning sovereign debt crisis, banking analyst Dick Bove said.

The European Central Bank already has begun its own version of quantitative easing, the program used by the Federal Reserve [cnbc explains] to recapitalize banks during the financial crisis that exploded in 2008, said Bove, vice president of equity research at Rochdale Securities.

At the same time, Bove said the ECB is well on its way to a “partial nationalization” of European banks, in which it will take equity stakes in the institutions as it seeks to stabilize the financial system.

…A move starting Dec. 21 that will allow European banks to borrow at low rates and in turn buy up sovereign debt looks, to Bove, “suspiciously like quantitative easing.”

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PG View: This indeed is very much akin to the Fed allowing US commercial banks to dump MBSs of dubious value onto the Fed’s balance sheet in exchange for dollars, which were in turn plowed back into the Treasury market. The net result of such “policy” however is that private lending suffers as the sovereign debt market is artificially supported. While this may ward off sovereign downgrades and allow for more reasonable refunding costs, it all-but assures a moribund recovery or perhaps a return to recession as private companies are starved of funding.

13-Dec (Financial Times) — Eurozone banks are increasingly tapping emergency central bank funding in a sign of growing problems in the region’s financial system.

Eurozone banks deposited €346.4bn, the most since June 2010, at the European Central Bank on Monday night, the latest figure, suggesting banks are hoarding money instead of lending to rivals because of fears of counter-party risk.

The continent’s banks are also heavily relying on emergency borrowing facilities offered by the ECB. Overnight lending at the central bank, which incurs a penal interest rate and has been high for almost two weeks, hit almost €9bn on Monday.

One trader said: “The financial system is no longer functioning properly…”

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13-Dec (The Wall Street Journal) — Fact No. 1: European governments are among the biggest holders of gold on the planet. Fact No. 2: Massive debts owed by some of those governments are fueling a political crisis in Europe and turmoil in markets around the world.

Those two facts lead to an obvious question from a lot of investors: Why don’t those governments sell gold to pay off their debts?

If only it were that simple.

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PG View: While Europe does indeed have a great deal of gold, it simply isn’t enough in comparison to the massive amount of debt. At least not at these prices…

13-Dec (Bloomberg) — European banks, under pressure from regulators to bolster capital, are selling some of their fastest-growing businesses to competitors from outside the region — at the expense of future profit and economic growth.

…Such sales risk hurting long-term profit, just as Europe enters recession, investors say. It’s the unintended consequence of the decision by European regulators to make banks increase core capital to 9 percent by June instead of 2019. Unwilling to raise equity because their share prices are too low, lenders are selling profitable assets because they’re struggling to find buyers willing to pay enough for their troubled loans to avoid a loss that would erode capital. Investors say the sales risk leaving banks focused on a stagnant economy and deprive them of economic growth from outside the region.

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