Europe Problems Persist into Holiday Week

19-Dec (USAGOLD) — Gold is consolidating around $1600 as the market continues to digest the unending string of events and non-events in Europe. Last week’s losses stemming from a realization that the stability pack agreed to my ‘most’ EU members was nothing more than a hodgepodge of vague promises that may or may not be ratified sometime in March. By the end of the past week, investors were once again inclined to take advantage of the discounted pricing to snap up an asset without counter-party risk.

This week began with the IMF at center stage, looking to raise about €200 bln for a European bailout fund. The source of those funds are to be loans from eurzone nations, many of which don’t have two centimes to rub together. It is of course ludicrous to expect the likes of Greece, Portugal, Spain, Italy, Ireland (and others) to pony up into an IMF slush fund that is clearly too small to make any meaningful difference anyway. If they have the money to put into the IMF, they’d be better served using it to make a dent in their own fiscal imbalances, rather than risking that their money goes to some other country.

Some of the 27 members have already said that they won’t be contributing, most notably the UK. In a matter of hours, the IMF bailout fund shrunk by 25% from €200 bln to €150 bln. The US has been silent on the issue, but it is widely believed that a direct contribution to the IMF to be used in bailing-out Europe is a little to overt to be politically acceptable.

The long-term uptrend in gold remains intact and some of the major banks are predicting the average price next year will be in excess of $2,000 per ounce. The reason of course, is that the underlying fundamentals haven’t changed a bit. In fact, many of the policymakers in Europe continue to search for a way to circumvent the current treaties that prohibit direct ECB buying of sovereign debt. In the meantime, ECB chief Mario Draghi confirmed today that cheap ECB money borrowed by European commercial banks can be used to buy that sovereign debt though. This is similar to the quid pro quo arrangement the Fed established several years ago when our commercial banks were in dire need of liquidity and had loads of MBSs to unload.

19-Dec (The Wall Street Journal) — The head of the European Central Bank said Monday it embarked earlier this month on “major” liquidity providing steps for banks in the euro-zone to prevent a recession, as its mandate prevents it from buying bonds to finance governments.

The European Central Bank is aiming to avoid the possibility of an economic slowdown or even a recession next year by providing unlimited liquidity to euro-zone banks, which are to face a credit crunch, ECB President Mario Draghi said.

Banks will be experiencing a very difficult period of funding constraints in the first quarter and probably throughout 2012, and the ECB “wants to avoid a further slowdown in economic growth and a possible recession,” Mr. Draghi said at his first hearing at the European Parliament’s Committee on Economic and Monetary Affairs since he took over the helm at the ECB on Nov. 1.

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¥959,111,159,657,593

It takes a while to turn those 13th, 14th and 15th digits, but there will be a 16th soon… A recent estimate says the ¥1 quadrillion level is likely to be reached by the end of the fiscal year in March.

That’s more than ¥7.5 million in debt for each citizen.

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19-Dec (GoldCore) — Bullion banks remain positive on gold for 2012 with major banks predicting an average gold price of between 13% and 28% above today’s spot at $1,595/oz. It will be interesting to see if these forecasts get as much international media coverage as the poll of 20 hedge fund managers has.

UBS have reiterated their bullish outlook for gold and believe gold will average $2,050/oz in 2012. This is 28% above today’s spot price of $1595/oz.

Goldman Sachs said overnight that gold will average $1,810/oz in 2012 – which is 13% above today’s spot price.

Barclays Capital have said this morning that gold will average $2,000/oz in 2012 – which is 25% above today’s spot price.

Gold will move higher due to “structural pillars of support” in an environment of negative real interest rates and rising inflationary pressures, as well as continued central bank buying.

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17-Dec (Barrons) — It’s one thing for $1.2 billion to vanish into thin air through a series of complex trades, the well-publicized phenomenon at bankrupt MF Global. It’s something else for a bar of silver stashed in a vault to instantly shrink in size by more than 25%.

That, in essence, is what’s happening to investors whose bars of silver and gold were held through accounts with MF Global.

The trustee overseeing the liquidation of the failed brokerage has proposed dumping all remaining customer assets—gold, silver, cash, options, futures and commodities—into a single pool that would pay customers only 72% of the value of their holdings. In other words, while traders already may have paid the full price for delivery of specific bars of gold or silver—and hold “warehouse receipts” to prove it—they’ll have to forfeit 28% of the value.

…That has investors fuming. “Warehouse receipts, like gold bars, are our property, 100%,” contends John Roe, a partner in BTR Trading, a Chicago futures-trading firm. He personally lost several hundred thousand dollars in investments via MF Global; his clients lost even more. “We are a unique class, and instead, the trustee is doing a radical redistribution of property,” he says.

…Adding insult to the injury: Of the 28% haircut, attorney and liquidation trustee James Giddens has frozen all asset classes, meaning that traders have sat helplessly as silver prices have dropped 31% since late August, and gold has fallen 16%. To boot, the traders are still being assessed fees for storage of the commodities.

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PG View: Yeah, if someone other than you is holding (what you think is) your gold and/or silver, you’re a “unique class” until you’re not… The MF Global trustee seems inclined to ignore individual property rights and the CME is inclined to protect the interest of its shareholders, while investors who thought they owned gold and/or silver get the shaft. Buy physical and take delivery.

19-Dec (ZeroHedge) — In a just released piece by Goldman’s Eugene King which explains the firm’s justification for why gold will peak at over $1900 in 2012, and which we will discuss in greater detail shortly, Goldman brings up a very interesting point, namely that the ongoing weakness in gold stocks, and the broad decoupling of gold miners from gold price can be attributed to one primary thing: the emergence of synthetic means of expressing a position on the gold market and “bypassing” direct gold cost pass thru exposure in the form of gold stocks.

Supposedly this is a good thing, although we would caution that this is potentially a very insidious scheme to allow the world’s cash-rich entities (read banks full of those ones and zeros that these days pass for “money”) to procure real gold assets at very cheap prices and valuations, even as the broader retail investors proceeds to chase paper gold in the form of “synthetic CDOs” such as GLD (which as we first noted over a week ago may well disappear when the paper claims collapse and suddenly everyone has a claim on the underlying physical), only after the fact realizing they merely used gold as a paper pass thru equivalent.

…So while we appreciate the fundamental and technical reasons for why gold stocks are underperforming, the sinking feeling we have is that as synthetic exposure in the form of CDOs has surged in the past decade, allowing more and more retail investors to foolishly believe they are invested in “actual gold” (and not paper claims thereof), this has acted as a grand distraction preventing those who want real exposure in the form of controlling the underlying asset from expressing their interest in the right way. Because all it would take is for banks with a glut of credit money to bid up all the gold miners, and thus control the entire physical gold supply chain, at which point the “distraction” of precious metal ETFs can simply go away.

Our advice, as always, stay away from ETFs: they are nothing short of what synthetic CDOs were back during the credit bubble years.

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PG View: Yes indeed; the explosion of artificial paper supply over the last several years has made it difficult for the real underlying asset to find its true price…and mining shares have suffered accordingly.

19-Dec (Financial Times) – Dominique Strauss-Kahn, the former head of the International Monetary Fund, made a defiant return to public life on Monday warning European leaders that they were in denial about the Continent’s economic crisis and have only weeks to come up with real solutions.

…He said that European leaders had consistently underestimated the severity of the financial crisis and made repeated mistakes in focusing on cutting debt at the expense of growth.

“The problem is that they are still in denial,” he said.

…What’s more, Mr Strauss-Kaun said the firewall to staunch the spread of the crisis “doesn’t really exist”. The €500bn European Stability Mechanism would only be operational in months when “the question is a question of weeks. The question is not a question of months.” And he was sceptical about whether the IMF would be able to raise an extra $200bn in funding when the US did not want to contribute more.

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18-Dec (Financial Times) — Mario Draghi has warned of the costs of a eurozone break-up, breaching a taboo for a president of the European Central Bank, even as he sought to play down market expectations about the ECB’s role in combating the sovereign debt crisis.

Mr Draghi’s willingness to discuss a scenario for Europe’s 13-year-old monetary union that his predecessor, Jean-Claude Trichet, simply described as “absurd,” highlights the high stakes in the eurozone debt crisis, which has rattled global financial markets.

In his first interview since becoming ECB president on November 1, Mr Draghi said struggling eurozone countries that quit the currency bloc would face still greater economic pain. For remaining members, European Union law would have been broken and “you never know how it ends really,” he said.

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19-Dec (Washington Post) — European ministers will try to come up with €200 billion ($261 billion) in new loans to the International Monetary Fund on Monday to boost a firewall against the debt crisis and make up for Britain’s refusal to pitch in.

Even if the European Union finance ministers manage to cobble together the promised sum in their afternoon conference call, that amount is widely seen as insufficient to calm market worries that the eurozone does not have the funds to rescue large economies like Italy and Spain.

…Reaching the €200 billion target for loans to the IMF may be difficult after the U.K., the largest economy among the 10 EU states that don’t use the euro, said it won’t contribute. Hungary, Romania and Bulgaria have also ruled out sending any additional money to the Washington-based fund.

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PG View: The UK and some of the Eastern European countries have already said “no” to providing additional funds to the IMF. Let’s be honest here though, the likes of Greece, Italy, Portugal, Spain et al really have nothing to give either. Not that that will necessarily stop them… They’re just loans after all; more paper, more promises, more debt.

16-Dec (Fitch Ratings) — Fitch Ratings has placed the ratings of all investment grade rated eurozone sovereigns and their debt with Negative Outlook onto Rating Watch Negative (RWN). The euro area country ceiling of ‘AAA’ is unaffected. The rating actions are as follows:

- Belgium ‘AA+’/'RWN from ‘AA+’/Negative Outlook (‘F1+’ Unaffected)
- Spain ‘AA-’/'F1+’/RWN from ‘AA-’/'F1+’/Negative Outlook
- Slovenia ‘AA-’/'F1+’/RWN from ‘AA-’/'F1+’/Negative Outlook
- Italy ‘A+’/'F1′/RWN from ‘A+’/'F1′/Negative Outlook
- Ireland ‘BBB+’/'F2′/RWN from ‘BBB+’/'F2′/Negative Outlook
- Cyprus ‘BBB’/'F3′/RWN from ‘BBB’/'F3′/Negative Outlook

…Following the EU Summit on 9-10 December, Fitch has concluded that a ‘comprehensive solution’ to the eurozone crisis is technically and politically beyond reach.

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Fitch Affirms France at ‘AAA’; Outlook Revised to Negative

16-Dec (Fitch Ratings) — Fitch Ratings has today affirmed France’s Long-term foreign and local currency Issuer Default Ratings (IDRs) as well as its senior debt at ‘AAA’. Fitch has also simultaneously affirmed France’s Country Ceiling at ‘AAA’ and the Short-term foreign currency rating at ‘F1+’. The rating Outlook on the Long-term rating is revised to Negative from Stable.

…Relative to other ‘AAA’ Euro Area Member States, France is in Fitch’s judgement the most exposed to a further intensification of the crisis.

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16=Dec (Bloomberg) — Switzerland’s economic growth will almost grind to a halt next year as the franc’s appreciation and floundering global demand hurt exports, according to the KOF Economic Institute.

The economy will expand 0.2 percent next year and 1.9 percent in 2013, the Zurich-based institute said in a statement today, cutting previous projections. Swiss National Bank President Philipp Hildebrand will meet with the government today after the SNB yesterday maintained its cap of 1.20 francs per euro to fight deflation and help exporters.

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16-Dec (MNI) — The European Central Bank has not yet launched its first ultra-long, three-year financing operation, but the move has already given a downward push to Eurozone bond yields.

Rates tumbled Friday in Italy, Spain, Portugal and other peripheral markets, partly in response Spain’s auction on Thursday, in which the government was able to sell nearly twice the amount of debt it expected at levels well below where secondary market bonds were trading.

That the newly auctioned Spanish debt will be eligible to be used as collateral in next week’s three-year LTRO was not lost on analysts.

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16-Dec (USAGOLD) — Gold probed briefly back above the $1600 level in overseas trading, bolstered by the oversold condition that developed earlier in the week and short-covering ahead of the weekend. The bottoming pattern that emerged at 1565.85/1560.70 now provides a good intervening barrier ahead of the September low at 1534.06. A close above $1600 today would offer some encouragement. More important, would be a short-term close above the 200-day moving average, which comes in at 1621.58 today.

There does seem to be some sense of relief in the eurozone, as evidenced by narrowing spreads. Speculation is that the ECB in loosening its collateral requirements may be providing essentially free money to commercial banks, which are in turn plowing that money back into the sovereign debt market. Such a funding loop is not really a solution to the problems plaguing Europe, but it seems to be providing some short-term relief.

Here in the States, some eleventh-hour wheeling and dealing seems likely to avert a midnight shut-down of the government. The House and Senate are expected to vote on yet another stopgap spending measure of about $1 trillion. Debate over an extension of the payroll tax cut and unemployment insurance continues.

• US CPI flat in Nov, below market expectations of +0.1%; core +0.2%, above expectations of +0.1%.

BY MOHAMED EL-ERIAN
15-Dec (ForeignPolicy) — Europe entered the year with an acute emergency in the periphery of the eurozone, the European Union’s elite 17-member club that shares a common currency. Misdiagnoses and inadequate policy responses allowed the contamination to travel sequentially from the outer reaches of the zone (Greece, Ireland, and Portugal) toward its inner core.

In this first of three morphings in 2011, Italy and Spain were disrupted as interest rates soared, turning liquidity concerns into solvency ones. France was then impacted, with its AAA rating threatened by its exposure to the neighborhood’s problems. Then Germany, Europe’s strongest economy and the one that everyone looks to for a solution, had to contend with the embarrassing failure of a highly visible government debt auction.

…These are consequential developments whose impact will be felt for years, and the latter is not limited to Europe. Virtually every country in the world is exposed.

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15-Dec (AP) — Congressional negotiators reached agreement Thursday on a compromise spending bill to avert a weekend federal shutdown. They also worked toward a deal renewing the payroll tax cut and unemployment benefits for another year but prepared a shorter version as a fallback.

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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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