09-Feb (MineWeb) — China’s industrial development is still very much a work in progress. The likely next phase is a rebalancing of wealth away from industry and towards households. Given the demonstrable appetite for gold among Chinese consumers, this should be a major supporting factor for global gold demand.

According to World Gold Council data, Chinese gold consumption totaled 207.4 tonnes in 2003. By 2009 it had more than doubled to 457.7 tonnes. More recently, gold imports from Hong Kong, widely regarded as a proxy for total gold imports, tripled in 2011.

China only began deregulating its gold market a decade ago. Until the Shanghai Gold Exchange opened in late 2002, the government held a monopoly on gold ownership. It is possible that the growth in Chinese gold demand could merely represent catch-up, but this seems unlikely given how rapidly China’s economy grew over the same period. Ordinary Chinese have been growing steadily wealthier, meaning more and more people have had the wherewithal to buy gold.

[source]

09-Feb (CNBC) — The European Central Bank’s second injection of long-term liquidity into markets could reach as much as 1 trillion euros ($1.33 trillion), analysts predict.

Initial estimates for the February 29 operation of three-year, long-term refinancing operations (LTROs) suggested that there would be only about a 100 billion euros take-up by Europe’s banks, but those estimates have shot up in recent weeks after the success of December’s operation became clear.

[source]

PG View: …and people thought the first ECB LTRO was huge at €489 bln!

09-Feb (Bloomberg) — The agreement reached by Greek political leaders to win the nation’s second bailout may be “analytically questionable,” Pacific Investment Management Co.’s Mohamed A. El-Erian said.

“It is very unlikely to lead to growth, jobs, financial stability and new investments,” El-Erian, chief executive and co-chief investment officer of the world’s biggest manager of bond funds, said in a radio interview today on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “This agreement will be very difficult to sell when the principals, those who have agreed, have to go to their constituents.”

[source]

09-Feb (USAGOLD) — Gold rebounded smartly on news that Greece had struck a deal with the troika. Greece gets their second bailout in exchange for even deeper austerity. That a bargain had been reached was confirmed by both ECB President Draghi and Greek PM Papademos, but other sources are saying the parties need an additional 15-days to iron-out the details…

Wait, another 15-days? Back in October of last-year the the troika agreed in principle to give Greece a second bailout in the amount of €130 bln. I sort of presumed the negotiations have dragged on for 4-months because they were working out the details. Perhaps now they must address the reality that €130 bln simply isn’t enough.

The IMF on the other hand doesn’t seem quite so sure, saying that despite the Greek political agreement, talks are “ongoing” and that “prior actions” are likely to be required before the new loan program is approved. Meanwhile there is another strike planned for tomorrow amid that heaping additional austerity on top of already oppressive austerity will lead to civil unrest.

The ECB also held steady on rates as was widely expected. During his press conference Mr. Draghi said he anticipates that interest in the central bank’s second 3-year LTRO slated for the end of the month will be “substantial.” You may recall that the ECB’s initial offer of essentially free and unlimited 3-year money resulted in a huge uptake of €489 bln. Given the subsequent expansion of acceptable collateral, that number may pale in comparison to the next one.

The BoE held steady on rates, but expanded their asst purchase target by an additional £50 bln. QE is alive and well in the UK.

All of this pushed gold to retest the high for the week at 1751.63. While this level remains intact thus far, today’s events add to an already strong fundamental case to buy gold.

• US wholesale sales +1.3% in Dec, above market expectations of 0.4%; inventories +1.0%.
• ECB holds refi rate steady at 1.0%, in-line with expectations.
• BoE leaves repo rate unchanged at 0.5%, expands QE by an additional £50 bln, in-line with expectations.
• Canada new home price index +0.1% in Dec; +2.5% y/y.
• UK industrial production +0.5% m/m in Dec, above market expectations of +0.2%, vs -0.5% in Nov; -3.3% y/y.
• UK manufacturing production +1.0% m/m in Dec, above market expectations of +0.2%, vs -0.1% in Nov; +0/8% y/y.
• South Korea PPI falls to 3.4% y/y in Jan, vs 4.3% in Dec.
• BoK holds repo rate steady at 3.25%.
• New Zealand HLFS unemployment rate falls to 6.3% in Q4, vs 6.6% in Q3.
• China CPI accelerates to 4.5% y/y in Jan, vs 4.1% y/y in Dec; PPI falls to 0.7% y/y, vs 1.7% in Dec.
• Japan consumer confidence index (sa) improves to 40.0 in Jan, vs 38.9 in Dec.
• Bank Indonesia Rate cut 25bp to 5.75% from 6.0%.

09-Feb (Bloomberg) — Greek political leaders struck a deal on a package of austerity measures, clearing the way for a swap to cut the nation’s debt and win its second rescue in two years.

Greek Prime Minister Lucas Papademos called European Central Bank President Mario Draghi to tell him “an agreement has been reached,” Draghi said at a press conference today in Frankfurt. An announcement from Papademos’s office is expected shortly, a Greek government official who declined to be identified said today by telephone.

The accord came less than four hours before euro-region finance ministers hold an emergency meeting in Brussels to discuss the 130 billion-euro ($172 billion) lifeline and the swap that will impose a loss of about 70 percent for investors.

[source]

08-Feb (24hGold) — The interminable extension by the US Federal Reserve on the 0% rate into 2014 represents history in the making. It is the adoption of pure heresy in monetary policy, making it mainstream. Worse, it forces foreign central banks to adopt the same destructive policy in the Competing Currency War. Once upon a time, the highest priests from the central bank would admit in a guiding tone that accommodation on interest rates must be temporary. Nowadays it is engrained in the market mindset and permanent in monetary policy. The chronic 0% means the entire financial and monetary system is totally irreparably broken. The old pendulum where the tilt was toward bonds during recession, then toward stocks during recovery, that is all gone, shattered by the endless financial crisis. One must incorporate a new thinking, that the entire financial and monetary system is totally irreparably broken, then adapt in fierce defense. Larry Fink of Blackrock private equity firm made news today by suggesting that 0% bond yields offer no return on investment. How true! He did not offer any accurate reflection of reality that the financial structures are broken, nor that all attempts at remedy were flimsy and misdirected. He gave the ALL IN signal for buying stocks in 2012, thus putting on the risk trade. The immediate ancillary signal is to back up the truck and load up with GOLD also.

[source]

08-Feb (ABC News) — TAPPER: President Obama is going to be introducing his outline for a budget. Fed Chair Bernanke has said the lack of a budget having been passed by the Senate has had an adverse affect on growth because it’s created uncertainty. Harry Reid has said that he doesn’t think there’s a need to introduce a budget this year. Who do you — who does the president think is right, Harry Reid or Ben Bernanke?

[a lot of dancing around by White House spokesman Jay Carney]

CARNEY: Well, I don’t have an opinion to express on how the Senate does its business with regards to this issue.

…I have no opinion — the White House has no opinion on Chairman Bernanke’s assessment of how the Senate ought to do its business.

[source]

PG View: I’d like Senator Reid to share with us when exactly there might be a need to introduce and pass a budget again. I mean, it’s been more than 1,000 days since the last one…

08-Feb (MNI) — For three years European leaders have battled the debt crisis mostly by imposing ever-greater austerity on their citizens and yielding more and more fiscal control to Brussels.

The strategy has produced important successes. Twenty-five EU members now support a new fiscal compact — clear budget rules backed by quasi-automatic sanctions. Taxes have been raised, cherished social programs cut, and deficits are now in decline almost everywhere across the Eurozone.

But one group has not had much of a role in the process: voters. Although European leaders frequently say that markets don’t appreciate the time it takes for political democracies to work, very little about the Eurozone’s rush to fiscal integration has actually been democratic.

But that is likely to change in the months ahead as voters in France, Greece and possibly Ireland finally get to have their say.

[source]

PG View: There isn’t any unanimity even among eurozone politicians, let alone voters. Which is exactly why allowing the voters a voice has been studiously avoided. As representatives of the people, the politicians would then be obliged (if they want to keep their jobs) to follow the direction of the majority, which would severely limit their options with regard to addressing the European sovereign debt crisis.

06-Feb (USFunds) — After prices fell 10 percent in December, many investors wondered if the bull market in gold was running out of steam. That was before Federal Reserve Chairman Ben Bernanke swooped in with a “red cape” and fired the bulls back up. Since the Fed reassured the world that interest rates will remain at “exceptionally low levels” for another two years, gold has jumped more than three percent.

UBS described the situation simply, “if investors needed a (further) reason why they should be long gold now, they got it yesterday … a more accommodative policy is a very good foundation for gold to build on the next move higher.”

To gold bugs, two more years of near-zero, short-term interest rates means negative real interest rates are here to stay, and this has historically been a strong driver for higher gold prices.

…One of the main weapons central bankers have employed is money supply, which has created a ton of liquidity in the global system. Global money supply rose 8 percent year-over-year in December, or about $4 trillion, according to ISI.

[source]

08-Feb (Bloomberg) — The unemployment rate’s unexpected drop to a three-year low has overshadowed a less-positive labor- market development: fewer Americans are looking for work.

Last week’s Labor Department announcement that the jobless rate fell to 8.3 percent in January sent stocks and bond yields higher. The same report showed the share of working-age people in the labor force had declined to the lowest level in 29 years.

The so-called participation rate was cited by Federal Reserve Chairman Ben S. Bernanke yesterday to support his assessment that the rate of unemployment obscures vulnerabilities in the job market. Bernanke, speaking to the Senate Budget Committee, confirmed the Fed’s stance that interest rates will stay low at least through late 2014, and repeated his view that the job market is a “long way” from returning to normal.

[source]

08-Feb (USAGOLD) — Gold has been rather choppy today as hopes for a Greek deal continue to rise and ebb. Initial indications from the ECB that they might be willing to “not make a profit” on their holdings of Greek bonds (Does that mean take a loss?) were received enthusiastically, but subsequent comments indicated that this was far from being a ‘done-deal.’ That pushed the yellow metal back down into the range.

The market has since found some support as San Fransisco Fed’s Williams said that QE3 would be warranted if the recovery falters, or if inflation falls significantly below 2%. If you’re still using the Dow as your barometer of the overall health of the US economy (a NYT article suggests what we’ve been saying for years…you shouldn’t be), another good dose of asset purchases just might push the DJIA the final 10% back to its all-time high. Such a move would also likely push gold to new all-time highs as well.

• Canada housing starts fell to 197.9k in Jan, above market expectations of 195k, vs 199.9k in Dec.
• Switzerland unemployment rate (sa) steady in Jan at 3.1%.
• Germany current account €19.3 bln in Dec, vs upward revised €14.7 bln in Nov.
• Germany trade surplus narrowed to €13.9 bln in Dec, vs negative revised €14.9 bln in Nov.
• Germany exports (sa) -4.3% m/m in Dec, well below market expectations of -1.3%, vs 2.6% in Nov; imports -3.9% m/m.

08-Feb (NYT Magazine) — Why do we still care so much about the Dow? It remains not only a rough measure of stock performance but also the most frequently checked, and cited, proxy of U.S. economic health.

…It would be extremely convenient if there were still one number or index we could check to make sense of our economy, especially during times of chaos. But the stock market might actually be our worst option. Rather than being a useful indicator, it’s an anxiety-amplification device.

…The Dow doesn’t adjust for inflation either. Passing 12,000 points, as it did in early 2011, is incorrectly considered the equivalent to that supposedly magical moment in 2006, especially because we were in a bubble then and are coming out of a recession now.

…Yet the Dow’s biggest flaw, perhaps, is that it doesn’t help us to make sense of an increasingly interconnected global economy…

[source]

PG View: This is a position we’ve espoused for years. While the author says “The Dow is also reluctant to add or subtract new companies”, the complexion of the Dow has in-fact changed dramatically over the years. Pitching weak components and replacing them with better performing shares results in positive distortions in my humble opinion.

See our VideoBrief entitled Is the DJIA a viable economic indicator? from 2009.

08-Feb (MarketWatch) — Gold futures veered between gains and losses Wednesday after a strong performance a day earlier and as the euro pared gains, pushing the U.S. dollar marginally higher against major currencies.

Gold for April delivery fell 50 cents to $1,747.90 an ounce on the Comex division of New York Mercantile Exchange.

The metal surged 1.4% on Tuesday on news Greece was close to a deal on austerity measures thought to be key for a second bailout package.

[source]

07-Feb (WSJBlogs) — Investors on both sides of the Atlantic are nervously vacillating between worrying about rampant inflation and Japanese-style deflation.

What they want is some way to protect themselves against both extremes. The question is: how?

The latest Credit Suisse Global Investment Returns Yearbook, produced by London Business School academics Elroy Dimson, Paul Marsh and Mike Staunton offers some useful insights from history. Much of their work is based on an analysis of investment returns from 19 major developed countries, stretching back to 1900, though they also offer some shorter-run insights from a broader range of countries that include many emerging markets.

They offer up a few surprising conclusions, not least that equities don’t fare particularly well in periods of high inflation.

…On average, gold performed positively during periods of inflation and modest deflation and performed well in severe deflations.

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08-Feb (BBC) — It seems the European Central Bank has bowed to the reality that it could not expect to make a profit on the Greek bonds it has been buying at knock-down prices, while private sector bondholders were being asked to take such a big hit.

…For weeks, there has been a clear gap between the amount of debt relief for Greece that the private sector would “voluntarily” sign up to, and the amount needed for the IMF or anyone else to be able to say, with a straight face, that Greek sovereign debt was on a sustainable path.

This complicated climb-down by the ECB will do something to bridge that gap. But, as usual, this is only one piece of the horrendously complicated puzzle that is the Greek “bailout”.

[source]

PG View: So why wouldn’t the writers of all the other periphery debt on the ECB’s balance sheet also demand similar concessions?

08-Feb (The New York Times) — Greek political leaders continued to struggle Wednesday to secure agreement on new austerity measures to be presented to the country’s financial backers in the coming days.

Driving the talks has been a clear recognition that the ever-worsening collapse of the Greek economy will require another increase in bailout funds — money that will not be forthcoming until the rest of Europe is persuaded that Greece is serious about taking such steps as firing more public-sector workers and cutting private-sector wages.

The Prime Minister Lucas Papademos was to meet leaders of the three parties supporting his interim government later Wednesday to go over a draft agreement reached with the country’s international creditors.

…A surprise plunge in government revenues for January of this year — spurred by an 18 percent fall in value-added tax receipts, Greece’s primary revenue source — is the latest sign that the deep recession will cause Greece to once again miss its budget deficit target.

[source]

PG View: Greek budget revenues fell 7% y/y in Jan, on expectations of +8.9%. That’s a huge miss that reportedly amounts to €1 bln. Meanwhile VAT revenues plunged 18.7% y/y in Jan. This pretty much confirms that the €130 bln bailout that they’ve been struggling to hash-out for the last 5-months isn’t going to be enough…

06-Feb (The Wall Street Journal) — Robert Marcotte can’t afford to play it safe anymore. With interest rates likely stuck near zero for nearly three more years, the 61-year-old retired telephone-company manager is about to ramp up his holdings of stocks and municipal bonds, using money now at the bank in certificates of deposit.

“It gets me a little uneasy,” says Mr. Marcotte. “Since I’m not working, I am very risk-averse, but still need to generate income.”

The Federal Reserve is presenting a broad swath of conservative investors, from retirees and college savers to banks and insurance companies, with a tough choice: move into riskier investments or continue coming up short from low-risk investments that aren’t even keeping pace with inflation.

[source]

PG View: Too much risk — and mispriced risk at that — was arguably a significant factor that led to the global financial crisis. In driving investors — both institutional and individual — further out on the risk curve with perpetual ZIRP, the Fed may also be driving us back to the brink…

07-Feb (USAGOLD) — Renewed hope that a Greek deal is imminent has heightened risk appetite once again, lifting both the euro and gold. The yellow metal has rebounded more than $30 off the intraday low. More than half — and nearly 61.8% — of this week’s correction has already been retraced.

Rumors are circulating once again that Greek policymakers are finalizing details — which are reported to include additional harsh austerity measures — to clear the way for a second bailout. This second bailout was actually agreed to back in October with a price-tag of €130 bln. So here we are 5-months later and the details are still being hashed out, but one thing seems to be certain; €130 bln is no longer enough. Interesting too that the politicians are allegedly striking a deal for more austerity on a day when the two largest labor unions struck in protest of austerity.

There are already rumblings that the German parliament will have to approve any deal struck between Greece and the troika. If this is true, it seems unlikely that any deal will be finalized this week. Nonetheless, the market seems quick to latch onto anything remotely positive.

• German industrial production -2.9% in Dec, well below market expectations of -0.3%, vs positive revised unch in Nov; +0.9% y/y.
• UK BRC retail sales (same store) -0.3% y/y in Jan, second worst Jan on record.
• Japan Leading Index (prelim) +0.6% m/m in Dec, vs 0.9% in Nov.
• Japan Coincident Index (prelim) 2.9% m/m in Dec, vs -1.1% in Nov.
• RBA holds official cash rate steady at 4.25%.