Gold Rallies, Then Falls on ECB Liquidity Pump

21-Dec (USAGOLD) — Gold surged back above the 200-day moving average on expectations that today’s ECB offering of unlimited 3-year money at about 1% would ease liquidity concerns and provide some sense of stability within the eurozone. The uptake on that cheap money was at the very high-end of expectations at €489 bln ($638 bln), with 523 banks participating.

The massive liquidity pump was viewed as a positive for a fleeting moment, but then the market started considering the real implications of so many banks needing nearly half a trillion euros. Upon that second examination, the market determined that the crisis within the EU banking system was worse than they thought and investors quickly switched to a “risk-off” mindset. Gold peaked at 1641.65 and then proceeded to retreat back into the range, moving into negative territory on the day.

It was widely perceived that the abundance of new-found cheap liquidity would be plowed back into sovereign debt markets, lowering refunding costs and providing additional stability within the eurozone. However, the evaporation of risk appetite gave the commercial banks pause and spreads widened. The ECB seemed to be the only one actively buying EU sovereign debt today. Some are already calling the LTRO scheme a bust, but it is in fact too early to tell.

The obvious reality here is that what the ECB created today is more debt. If I’ve said it once, I’ve said it a thousand times; you don’t extract yourself from a debt crisis by creating more debt. PIMCO’s Bill Gross tweeted the following this morning: What does #LTRO stand for? 1. A shell game; 2. Cash for trash; 3. Three-card “monti;” or 4. All of the above.

Undoubtedly the bulk of that €489 bln is going to be invested somewhere; after all these are loans that will have to be paid back, so the banks will have to find something to yield more than the approximately 1% they’re paying on this 3-year money. Speculation about quid pro quo arrangement with the ECB not withstanding, the banks seem to have at least initially determined that sovereign debt purchases are not their first order of business. Perhaps they’re holding out for higher yields. Perhaps they’ll look to buy back the gold they delevered out of last week first…

20-Dec (The Economist) — THE world’s recovery from recession is slowing, according to The Economist’s measure of global GDP, based on 52 countries. Third-quarter growth expanded by 3.6% across the world, down by 1.5% from the same period in 2010.

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21-Dec (Bloomberg) — European banks borrowed enough cash from the European Central Bank at its first three-year offering to refinance almost two-thirds of the debt they have maturing next year amid concern that markets will remain frozen.

The 523 euro-area lenders took a record 489 billion euros ($638 billion) from the Frankfurt-based central bank in 1,134- day loans today, more than economists’ median estimate of 293 billion euros in a Bloomberg News survey. That equals about 63 percent of the European bank debt maturing in 2012, according to Goldman Sachs Group Inc. analysts.

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21-Dec (HousingWire) — The National Association of Realtors revised its existing home sales downward 14.3% in the period from 2007 to 2010, after the group said its data diverged from actual market conditions.

The trade group announced the revisions Wednesday in its monthly existing-sales report. November sales rose 4% from last month and 12.2% from a year ago. Jed Smith, the head of quantitative research at NAR said in a conference call that numbers in reference to supply and demand in the market are unchanged.

Lawrence Yun, NAR chief economist, said about half of the revisions came from a decline in for-sale-by-owner transactions. NAR said those sales dropped from 16% of the market in 2000 to 9% in 2010.

Multiple listings, geographic population shifts and house flipping also contributed to the revisions, Yun said.

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21-Dec (FT Adviser) — Britain’s deteriorating public finances and growth outlook have substantially reduced its ability to maintain its triple A credit rating, Moody’s, the credit ratings agency warned on Tuesday evening in a shot across the coalition government’s bows, reports the Financial Times.

In its annual report into UK sovereign debt, Moody’s maintained the stable outlook on the top-notch rating, but warned that in addition to domestic risks, Britain would not be immune from a crisis in the eurozone. It has placed all of its European ratings, not just those in the eurozone, under review in a move it said “could lead to a repositioning of a large number of sovereign ratings”.

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21-Dec (Financial Times) — The European Central Bank reported stronger than expected demand for an unprecedented offer of unlimited three-year loans on Wednesday, after banks were urged to take the funds as part of concerted efforts to ease severe strains across the eurozone financial system.

Over 500 European banks took €489bn worth of loans from the ECB’s longer-term refinancing operations, or LTROs, the central bank said.

That is the largest amount ever allocated in a single ECB liquidity operation. The previous record was €442bn in one-year loans offered in June 2009.

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By Brett Arends
20-Dec (MarketWatch) — If the Italians can’t persuade the bond markets to keep them in business, they have another card up their sleeve.

Few people realize it, but Italy holds the world’s fourth biggest stockpile of gold, at 2,452 tonnes. That’s even more than France, and more than twice as much as China.

Only the U.S., Germany and the International Monetary Fund hold more.

The question here is whether some of the troubled European countries — such as Italy and France — are going to have to start selling off the national gold pile to meet their bills.

Some wonder if they already have.

…I continue to suspect that, sooner or later, China is going to move some of its massive $3 trillion-plus reserves into gold, the only currency that no other country controls.

…When that bullion changes hands, it may be the moment when power shifts from the rulers of yesterday to the rulers of tomorrow.

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PG View: Mr. Arends point about the transfer of power is an important one; it may give the current holders of gold pause when it comes to selling. Investor fear of official gold sales undoubtedly played into last week’s sell-off, but I think the author correctly ascertains that any movement of physical gold from its essentially bankrupt current owners into stronger hands is medium to longer term bullish.

By Nouriel Roubini
20-Dec (Financial Times) — For the last three years the world’s biggest economies – the US, eurozone and China – have been living up to the infuriating euphemism so beloved of policymakers: ”kicking the can down the road”. They have been avoiding the tough decisions that are required to address their fundamental economic, financial and fiscal problems.

The US has postponed its fiscal consolidation and avoided the other structural reforms – investments in infrastructure, education and skills and changes to energy policy – that are required to restore its potential growth rate. The eurozone has been in denial of the fact that some of its member states are insolvent, as well as unable to survive and grow in a monetary union. China has persisted in its weak currency, to support its export and investment-led growth model where savings are too high and consumption too low.

In all cases political constraints – the approaching elections in the US and leadership transition in China at the end of 2012, and the inability of the eurozone’s 17 governments and coalitions to coordinate policies coherently while staggered elections and changes of government take place – have led leaders to avoid the short-term pain and political costs of tough decisions that will yield benefits only over the medium term.

…By 2013 at the latest, but possibly already in 2012, a perfect storm of a double-dip recession in the US, a disorderly scenario in the eurozone and a hard landing in China could materialise.

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PG View: I frequently disagree with Roubini, but concur that the ‘can kicking’ does need to stop at some point.

By Bill Gross
19-Dec (Financial Times) — Gresham’s law needs a corollary. Not only does “bad money drive out good,” but “cheap” money may as well. Ultra low, zero-bounded central bank policy rates might in fact de-lever instead of relever the financial system, creating contraction instead of expansion in the real economy. Just as Newtonian physics breaks down and Einsteinian concepts prevail at the speed of light, so too might easy money policies fail to stimulate at the zero bound.

Historically, central banks have comfortably relied on a model which dictates that lower and lower yields will stimulate aggregate demand and, in the case of financial markets, drive asset purchases outward on the risk spectrum as investors seek to maintain higher returns. Near zero policy rates and a series of “quantitative easings” have temporarily succeeded in keeping asset markets and real economies afloat in the US, Europe, and even Japan. Now, with policy rates at or approaching zero yields and QE facing political limits in almost all developed economies, it is appropriate to question not only the effectiveness of historical conceptual models but entertain the possibility that they may, counterintuitively, be hazardous to an economy’s health.

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20-Dec (The Wall Street Journal) — U.S. home building climbed to the highest level in 19 months during November and construction permits grew, with most of the increase in housing starts coming from multifamily construction.

Home construction last month increased 9.3% to a seasonally adjusted annual rate of 685,000 from October, the Commerce Department said Tuesday. The results were better than forecast. Economists surveyed by Dow Jones Newswires expected housing starts would rise by 0.3% to an annual rate of 630,000.

The increase in November was driven by a 25.3% increase in multi-family homes with at least two units, a volatile part of the market.

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20-Dec (Bloomberg) — Russia’s central bank boosted its gold holdings to 28.1 million troy ounces last month, from 28 million at the end of October.

The stockpile was valued at $48.2 billion as of Dec. 1, compared with $48.6 billion a month earlier, Bank Rossii said on its website today.

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20-Dec (Reuters) — Greece sold 1.3 billion euros ($1.69 billion) of three-month T-bills on Tuesday, with the yield rising by 5 basis points compared to an auction in November, its debt agency PDMA said.

The sale’s bid-cover ratio was 2.91, down from 2.94 in the previous auction. Greece paid a yield of 4.68 percent, up from 4.63 percent in the Nov. 15 sale, PDMA said.

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PG View: While the prospect of unlimited cheap money from the ECB improved the prospects for Spanish refunding efforts today, Greece was not so fortunate.

20-Dec (Irish Times) — Spain sold €5.64 billion of bills, more than the maximum target, and its borrowing costs dropped as the European Central Bank prepared to start offering banks unlimited three-year loans later today.

The Madrid-based treasury said it sold three-month debt at an average yield of 1.735 per cent, compared with 5.11 per cent at an auction on November 22nd.

It sold six-month paper at 2.435 per cent, down from 5.227 per cent last month.

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20-Dec (USAGOLD) — Gold has pushed more convincingly above the $1600 level, establishing new highs for the week. Focus remains on recapturing the 200-day moving average, which comes in at 1623.17 today. Risk appetite seems to be reemerging amid relative calm in Europe stemming from an encouraging Spanish bill auction. Meanwhile, the results of today’s Greek auction weren’t nearly as positive. Certainly nothing has been resolved in the eurozone, but there haven’t been any new earth-shattering headlines thus far today.

Persistent uncertainty about the situation in Europe, along with plenty of concerns about our own fiscal situation here in America remain broadly conducive to gold. While the range established back in September is intact, some repair of the technical picture — which eroded with last week’s steep deleveraging sell-off — is needed to encourage additional buying interest.

The Russians continue to do their part; adding to their gold holdings again in November. As is typically the case with deleveraging sell-offs in gold, demand for physical has been robust. It is encouraging to the long-term uptrend that this continues to be the case.

I’m also still quite astounded by yesterday’s realization that Japan’s debt load is fast approaching ¥1 QUADRILLION. It’s troubling how quickly we all became accustomed to bandying-about amounts in the trillions, but 1,000 trillion is a number still in the mind-boggling realm. We’re still not hearing much about Japan, even though they have a higher debt/GDP ratio than even the worst offenders in Europe.

• US housing starts +9.3% in Nov to 685k, well above market expectations of 630k, vs 627k in Oct.
• Canada CPI +2.9% y/y in Nov, in-line with expectations. Core +2.1% y/y, just below expectations of +2.2%.
• German PPI +0.1% m/m in Nov; +5.2% y/y.
• Switzerland trade balance CHF3.0 bln in Nov, vs CHF2.2 bln in Oct.
• Germany Ifo business climate improves to 107.2 in Dec, above expectations of 106.0, vs 106.6 in Nov; expectations better at 98.4.
• Sweden Riksbank cuts repo rate 25 bp to 1.75%, in-line with expectations.
• Italy industrial orders (sa) -1.6% m/m in Oct, below expectations of -1.3%, vs -8.2% in Sep; -4.8% y/y.
• Japan Leading Index (revised) -0.3% m/m in Oct.
• Japan Coincidence Index (revised) 1.4% m/m in Oct.
• Hong Kong CPI (composite) moderates to 5.7% y/y in Nov, vs 5.8% in Oct.

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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