Jan 25 (The Street) — Gold prices reversed directions Wednesday and popped higher after the Fed said it would maintain low interest rates until late 2014, a year longer than previously stated. The Fed also promised to stay accommodative. “That’s really really dovish and you are seeing a lot of people running into gold,” says Phil Streible, senior commodities broker at RJO Futures.

The Fed said that inflation remains subdued, which Streible said was a good thing for gold. “Inflation will be created … [the Fed is] artificially creating inflation for the next couple of years.” The U.S. dollar index sold off on the news as more easy money means a devalued dollar. When paper currencies lose value, gold becomes appealing as a safe haven asset.

“The Fed telling us no rate increase to at least 2014 is a sharp rally promoter for gold,” says George Gero, senior vice president at RBC Capital Markets, “as low interest rates to continue will make gold a good alternative hold and not expensive to maintain” The rise in gold also triggered short covering where investors who had been betting against gold bought back positions.

[source]

25-Jan (FRB) — Following careful deliberations at its recent meetings, the Federal Open Market Committee (FOMC) has reached broad agreement on the following principles regarding its longer-run goals and monetary policy strategy. The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January.

The FOMC is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.

Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee’s policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee’s goals.

The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee’s ability to promote maximum employment in the face of significant economic disturbances.

The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee’s policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants’ estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC’s Summary of Economic Projections. For example, in the most recent projections, FOMC participants’ estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent, roughly unchanged from last January but substantially higher than the corresponding interval several years earlier.

In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee’s assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate.

25-Jan (MarketWatch) — Gold prices rallied Wednesday, reversing course as the Federal Reserve’s monetary policy committee extended its pledge to keep interest rates at exceptionally low levels to late 2014, which will help boost demand for the precious metal.

“The Fed telling us no rate increase to at least 2014 is a sharp rally promoter for gold as low interest rates to continue will make gold a good alternative hold and not expensive to maintain,” said George Gero, a vice president with RBC Capital Markets, said in emailed note.

[source]

Information received since the Federal Open Market Committee met in December suggests that the economy has been expanding moderately, notwithstanding some slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed. Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that over coming quarters, inflation will run at levels at or below those consistent with the Committee’s dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

[source]

25-Jan (USAGOLD) — Gold fell lower overseas as fresh concerns about Portugal were heaped upon the continuing Greek impasse. The latest suggestion that Portugal will need additional bailout funds sent yields and CDS premiums soaring. The ECB apparently has failed to enter the secondary market to support Portuguese bonds and one trader suggested in the WSJ that they may be holding out until they can determine what they’re liabilities are with Greece.

In the absence of a voluntary deal with private Greek bondholders, the public sector is under increasing pressure to bridge the gap. Basically, the ECB will take a drubbing on the Greek bonds it is holding, so why add insult to injury by loading up on more Portuguese debt, if there is little hope they will be able to repay either…

As the euro extended losses, the firmer dollar weighed on gold. While gold is now off its intraday low, it’s probably unlikely to move too much ahead of the FOMC statement at 17:30GMT today.

The FOMC is expected to hold steady on rates, but give a much clearer indication of its future intentions on Fed funds. They will likely extend ZIRP expectations beyond mid-2013 into 2014. While there seems to be a definitive move toward inflation targeting, I wouldn’t expect anything very overt this time around. While recent hints of a recovery in housing will probably leave further MBS purchases on hold for now, today’s pending home sales data suggests that the optimism may have been premature. The same can perhaps be said about Europe…

• US NAR pending home sales index -3.5% to 96.6 in Dec, below market expectations, vs 100.1 Nov.
• US FHFA home price index +1.0% in Nov to 183.8, above market expectations, vs 182.1 in Nov.
• Germany Ifo Business Climate rose to 108.3 in Jan, above market expectations of 107.6, vs 107.2 in Dec; Expectations 100.0, Current Assessment 116.3.
• Italy retail sales -0.3% in Nov; -1.8% y/y.
• UK Q4 GDP – 1st Release -0.2% q/q, below expectations of -0.1%, vs 0.6% in Q3; 0.8% y/y.
• Japan exports -8.0% y/y in Dec, vs -4.5% y/y in Nov; imports +8.1%.
• Japan trade deficit narrowed to -¥205.1 bln in Dec, vs -¥684.7 bln in Nov.
• Singapore CPI moderates to 5.5% y/y in Dec. vs 5.7% y/y in Nov.
• Australia Q4 CPI unch q/q, vs +0.6% in Q3.
• Bank of Thailand cut overnight repo rate by 25 bp to 3.00%.

25-Jan (Reuters) — The Federal Reserve looks set to keep monetary policy on hold on Wednesday, even as it releases forecasts expected to show interest rates will be near zero for at least two more years.

Given recent improvement in the U.S. economy, the central bank will probably remain non-committal regarding the prospect for additional bond purchases, but will leave the door open to further action if Europe’s banking problems spill over into the United States.

As part of an effort to provide more insight on its thinking to financial markets and the public, the Fed will begin publishing individual policymakers’ projections for the appropriate path of the benchmark federal funds rate.

In so doing, the Federal Open Market Committee, the central bank’s policy-setting arm, will probably reveal that it does not expect to begin raising rates until at least early 2014.

[source]

25-Jan (Dow Jones) — Portugal’s default insurance costs continued marching to record highs Wednesday as the yield on its 10-year bond rose toward record levels from July 2011 on concerns about the implications of the Greek debt restructuring talks.

Portuguese five-year credit default swaps–derivatives that function like a default insurance contract for debt–were trading near levels where Greece’s CDS were trading last April.

Around 1050 GMT, Portugal’s five-year CDS were 31 basis points wider at 1,310 basis points, reversing from a tighter open, according to Markit. This means it now costs an average of $1.31 million a year to insure $10 million of debt issued by the country.

[source]

PG View: Portuguese yields are surging in search of the ECB bid, but one trader thinks the central bank is waiting to see what its Greek liability is first.

25-Jan (BusinessReport) — Portugal needs an additional 30 billion euros in EU/IMF rescue funds to solve a credit crunch in the recession-hit economy and may have to negotiate an extension for its bailout, the head of the country’s industry confederation said on Wednesday.

Antonio Saraiva, the leader of the influential lobby group with vast collective bargaining powers, told Reuters the 78-billion-euro bailout that runs through 2013 did not take into account massive debts by inefficient, loss-making public companies, especially in the transport sector.

[source]

24-Jan (TheHill) — Senate Republicans slammed their Democratic colleagues on Tuesday for not passing a budget in exactly 1,000 days, accusing Democrats of shirking their duty in a period of soaring deficits.

Four senators at a Tuesday news conference said President Obama should be more of a leader on reining in deficits. GOP lawmakers have for months pointed out the time elapsed since the Senate last passed a budget.

“It is imperative that we get our federal budget under control and the first step – the minimum thing that Congress should do – is follow the law that it passed to put discipline on itself,” said Sen. Ron Johnson (R-Wis.), who also called the lack of a Senate budget “a national scandal.”

[source]

24-Jan (Financial Times) — The European Central Bank and other public sector holders of Greek sovereign debt must participate in the same voluntary restructuring as private sector bondholders, the Institute of International Finance has demanded.

The IIF, which represents banks and other private sector Greek sovereign bondholders, said a failure to do so would be a betrayal of principles agreed at an October 26 summit of policymakers which thrashed out the broad terms of a deal centred on a 50 per cent haircut of the bonds’ value.

[source]

24-Jan (Bloomberg) — The International Monetary Fund cut its forecast for the global economy as Europe slips into a recession and growth cools in China and India.

The world economy will expand 3.3 percent this year and 3.9 percent in 2013, compared with September forecasts of 4 percent and 4.5 percent, the IMF said. The euro area may enter a “mild recession” this year and contract 0.5 percent compared with a previous estimate of a 1.1 percent expansion. The U.S. outlook was held at 1.8 percent growth.

“The near-term outlook has noticeably deteriorated,” the IMF said in an update of its World Economic Outlook report. “The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere.”

The forecasts hinge on increased efforts in the 17-country euro area to fight the financial turmoil, which the IMF calls the “most immediate policy challenge.” The report called on European policy makers to increase the size of the region’s rescue fund and for the European Central Bank to continue its support of the region to limit contagion to other countries.

[source]

22-Jan (Reuters) — The Federal Reserve could take the historic step this week of announcing an explicit target for inflation, a move that would fulfill a multi-year quest of the central bank’s chairman, Ben Bernanke.

An inflation target would be the capstone of Bernanke’s crusade to improve the Fed’s communications, an initiative aimed at making the central bank more effective at controlling growth and inflation. It would, at long last, bring the Fed into line with a policy framework used by most other major central banks.

…Officials say that while monetary policy ultimately determines the rate of inflation, labor markets are often affected by structural issues beyond the central bank’s control. Because of that, they are hesitant to put a fixed number on the level of unemployment that can be achieved without generating a self-defeating inflation.

[source]

24-Jan (USAGOLD) — Gold is in retreat as renewed concerns about Greece temper risk appetite. The euro has retreated, bolstering the dollar in the process. EUR-USD has fallen back below 1.3000.

The Eurogroup has rejected the latest Greek debt swap deal, arguing that the coupon is too high. Basically, policymakers in Europe want private bondholders to “voluntarily” accept a 68% haircut and a coupon on their new bonds somewhere around half of the current market rate (which itself is probably reflective of mispriced risk). Meanwhile, S&P has said that they will likely downgrade Greece to “selective default” once these ridiculous negotiations are concluded.

The dollar is also getting an assist from yen weakness after the BoJ came out with a weaker view of the Japanese economy. The BoJ says the eurozone crisis is having a negative impact on Japan’s recovery and will likely lead to contraction this fiscal year.

The Fed is expected to further refine their communications at the end of a 2-day FOMC meeting that begins today.

Silver is consolidating recent strong gains; trading within Monday’s range.

• Canada retail sales +0.3% in Nov, above market expectations of +0.2%, ex-autos +0.3%.
• Eurozone Markit PMI – Composite rose to 50.4 in Jan, above market expectations of 48.6, vs 48.3 in Dec; Manuf 48.7, Services 50.5.
• Eurozone Industrial Orders -1.3% m/m in Nov, above market expectations of -2.0%, vs negative revised 1.5% in Oct; -2.7% y/y.
• BoJ holds overnight call rate steady at 0%-0.1%; Asset purchase target steady at ¥20 trillion.
• RBI holds repo rate steady at 8.5%.

24-Jan (Reuters) — Standard & Poor’s will likely downgrade Greece’s ratings to “selective default” when the country concludes its debt restructuring, but that will not necessarily destroy the credibility of the European Union, an official with the ratings agency said on Tuesday.

[source]

24-Jan (CNNMoney) — Greece and its creditors in the private sector are grappling over a key detail of a deal aimed at reducing the nation’s overwhelming debt load, according to a top eurozone official.

Disagreements remain over the interest rate private investors will be paid on new bonds they receive in exchange for existing Greek government debt, said Jean-Claude Juncker, who heads the Eurogroup of finance ministers from the 17 nations that use the euro.

…The European Union has stipulated that the interest rate on the new bonds must be “clearly below 4%” in order for Greece to reach its long-term debt reduction target, said Juncker. But the terms being discussed imply interest rates “well beyond 3.5% before 2020,” he added.

[source]

PG View: A yield below 4% clearly fails to accurately reflect the risk of an investment in Greece. The private bond holders recognize this but the Eurogroup finmins know that an accurately priced bond means Greece will default. PIMCO’s Bill Gross, thinks Greece goes broke anyway. One thing is certain, calling this deal “voluntary” — while maintaining a straight face — must be getting really difficult.

Silver Leads Gold to a Strong Weekly Close

20-Jan (USAGOLD) — Gold is well bid going into the weekend, poised to post its third consecutive higher weekly close; with silver leading the way. The yellow metal has been underpinned by relative calm in Europe this week, amid much back slapping that the ECB’s massive LTRO several weeks ago is proving to be a “game changer” after all. Additionally, many continue to believe that the Fed may be forthcoming with further accommodations — focused on the housing market — when the FOMC meets on Tuesday and Wednesday next week.

When the ECB pumped an astounding €489 bln in cheap money into the banking system late in 2011, at least initially the banks turned around and deposited it right back with the central bank. That’s not exactly what the ECB had in mind and they were forced to ramp up their bond buying in the secondary market to prevent periphery yields from blowing out. This past week however, bank interest in the periphery bond market finally materialized, perhaps as a result of some arm twisting in the wake of last week’s S&P downgrades. Concerns about this week’s auctions proved unfounded and sovereign spreads narrowed.

So congratulations to the ECB — and the self-serving banks that are playing along — you solved the short-term funding crisis. However, the underlying debt crisis remains. The massive debt overhang, both in the periphery and in core Europe, is still there. It ain’t going anywhere, amid persistent worries of a new recession and ongoing calls for austerity. The LTRO did nothing but buy some time; another kick of the can as it where. Once Europe catches up to the proverbial can again, the debt crisis may in fact be even bigger. Do they kick the can again?

In fact, another 3-year LTRO is already queued up for 29-Feb, where an even broader range of collateral is expected to be deemed acceptable. Certainly all that periphery debt bought this week will be pledgeable as collateral for even more euros at 1%. And why not? If it worked once, it’ll work again… Right?

Speculation is that this next operation will make the initial €489 bln LTRO look like chump-change. How does €1 trillion (~$1.29 trillion) grab ya? So goes the market chatter.

Throw some more quantitative easing from the Fed into the mix and one might surmise that it may be about to rain fiat currency. Generally tepid inflation data this week added to the sense that the central banks do indeed have some maneuvering room. Noted Fed watcher Jon Hilsenrath of The Wall Street Journal seems to think that additional Fed accommodation wont be forthcoming next week. However, there seems to be feeling within this more dovish FOMC that “if inflation falls below 2% and shows signs of staying there, more bond purchases would be justified.” If not next week, probably sooner rather than later.

Finally, take note of today’s sterling performance of silver; pushing above $31 for the first time in six-weeks and extending above 31.90 as stop loss orders got run. Silver leaves the 50-day moving average in the dust. Next resistances to watch are the 100-day MA at 32.64, the high from late-Nov at 33.65 and 38.2% Fibonacci retracement of the entire collapse from 49.78 to 26.04, which comes in at 35.10. Be aware that a breakout in silver (being a more speculative metal) often precedes similar activity in gold.

Daily Silver Chart

Daily Gold Chart with Silver Overlayed

Have a great weekend!

by Jon Hilsenrath
20-Jan (The Wall Street Journal) — Federal Reserve officials are waiting to see how the economy performs before deciding whether to launch another bond-buying program.

The Fed meets again next Tuesday and Wednesday, and officials are preparing to roll out a new communications strategy that is on track to include two key elements: their interest-rate projections and a statement explaining their objectives for inflation and employment.

Clarifying the central bank’s objectives could make easier the tasks of deciding whether to buy more bonds and explaining their reasons.

The Fed has purchased more than $2 trillion of securities since the crisis began…

[source]

20-Jan (Bloomberg) — European Central Bank President Mario Draghi’s unlimited three-year loans to euro-region banks may give Italy and Spain only temporary respite from the region’s debt crisis.

Two-year Italian and Spanish notes rallied since the ECB said Dec. 8 that it planned to offer as much liquidity as banks wanted in exchange for eligible collateral. The gain on the short end of the market outpaced longer-dated debt on concern the nations’ austerity plans won’t plug deficits and reduce Europe’s largest debt load. Yields on Italian two-year notes fell to the least relative to 10-year bonds in 21 months.

“This is about buying time,” said John Davies, a fixed- income strategist at WestLB AG in London. “It’s only when the market believes Italy and Spain have returned to sustainable debt levels that you can say the crisis has truly ended.”

…“For the time being, the ECB’s operations are working at the short end, but for the long end, we have a lot of uncertainties around,” said Frankfurt-based Werner Fey, a fund manager at Frankfurt Trust Investment GmbH, which oversees the equivalent of 6.5 billion euros of fixed-income assets.

[source]

19-Jan (Financial Times) — Investors bought inflation-protected Treasury securities at a negative interest rate for the first time on Thursday, demonstrating the depth of concerns that Federal Reserve efforts to stimulate the economy could lead to higher inflation in the future.

The $15bn in Treasury inflation protected securities, or Tips, were sold at a negative yield of about 0.046 per cent. Investors could still make money on their holdings because the principal of such securities increases if inflation rises.

[source]

19-Jan (CNBC) — The Federal Reserve is likely to step in with $1 trillion worth of easing that could be announced as soon as this month, according to a growing consensus of economists who see the recent uptick in economic growth as unsustainable.

With the Fed’s Open Market Committee set to meet next week, expectations are rising that the languishing housing market will drive the central bank to buy up mortgage-backed securities.

The goal of the purchases will be to drive down interest rates even further from current record-low levels, and, less obviously, to spur confidence that more monetary tools remain to stimulate the economy.

Of course, the announcement also could push stock prices higher, as did the Fed’s last balance sheet expansion begun in November 2010.

[source]

PG View: One can reasonably expect such a move would drive gold higher as well.