01-Mar (ZeroHedge) — SNB +230%; Fed +222%, BOJ +125%, BOE +87%, PBOC +93%, ECB +51%.

PG View: Pretty strong evidence that the rally in bonds — and perhaps by extension the rally in stocks — is nothing but a charade.

01-Mar (Bloomberg) — Greece will probably default this year on European governments’ holdings of its sovereign debt, according to Jacob Kirkegaard of the Peterson Institute for International Economics.

The country published the formal offer last week for its agreement to exchange bonds for new securities, with private- sector investors taking a loss of 53.5 percent. While the European Central Bank won’t take direct losses from the swap agreement, the writedown may make it more politically feasible for governments to lose money on Greek debt, Kirkegaard said.

…“If I were a buyer of industrialized sovereign credit- default swaps, I would strongly begin to doubt that I would ever get a payout,” he said.

[source]

29-Feb (GoldAlerts) — Commenting on the sell-off, CIBC World Markets wrote in a note to clients that “Gold – looks like a large seller of gold in the market. a 10k contract traded, down ticked the price by $40/oz. roughly 200k contracts trade per day, but unusual to see such a large single trade. not likely due to contract expiry either. That transaction represents 1mln oz of gold.”

[source]

PG View: The above is an alert from yesterday that quotes CIBC World Markets (the investment banking subsidiary of the Canadian Imperial Bank of Commerce) as having witnessed the rumored large sale of paper gold on COMEX.

01-Mar (The Wall Street Journal) — —Fresh U.S. Treasury data suggest that China has lost its taste for investing as much of its $3.2 trillion in foreign-exchange reserves in U.S. dollars and may be increasing its holding of euro-denominated securities during a time that a debt crisis has roiled European markets.

Economists have long warned that if China started to cut back its purchases of U.S. securities, U.S. interest rates could climb, damaging the U.S. economy. China’s diversification of its vast reserves, however, hasn’t caused disruption so far, partly because of strong global demand for U.S. securities as a safe haven during troubled times.

…But the data, which provide one of the very few clues about how China invests its reserves, suggest that the percentage of dollar holdings in China’s foreign-exchange reserves has fallen to a decade-low of 54% from 65% in 2010. Purchases of U.S. securities equaled just 15% of the increase in China’s foreign-exchange reserves in the 12 months, down from 45% in 2010 and an average of 63% over the past five years, according to calculations based on information published by the U.S. Treasury and the Chinese government.

[source]

PG View: Further confirmation of an already well established trend.

The article goes on to say: Where did the money not invested in dollars go? China’s SAFE won’t say.

I think we all know where a pretty sizable chunk of FX reserves not invested in dollars is going…

MarketWatch (Mar 1) by Steve Beck — “Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce — gold’s price as I write this — its value would be about $9.6 trillion. Call this cube pile A.

“Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?”

Anyone for pile A? No, I didn’t think so. It’s as though Buffett, in one fell swoop, reduced the gold investor to a blustery, slightly deranged Yukon Cornelius wandering the financial markets with a metaphorical pickaxe in hand, singing an off-key melody of “Silver and Gold.”

But before you shamefully squirrel away your private gold stash into some spider hole, let’s take a closer look at Buffett’s argument and determine if there is in fact a case for gold as a portfolio tool.

It’s bold to call Buffett ignorant, but according to the rules of logic and their Latin parlance, in this instance he may be. His argument is ignoratio elenchi — an ignorant conclusion, or put simply, he’s missing the point. According to logic, because X is true, it does not necessarily follow that Y is false.

Buffett suggests that because someone would not exchange pile B (the best of productive, corporate America) for pile A (a massive cube of all the world’s gold), then gold should not be in your portfolio. You don’t have to be an investment sage to know that you shouldn’t take all your cash to buy a pile of metal. (Although, to be slightly playful with this point, if you owned all the gold in the world, you would quickly become the world’s gold market-maker — and market makers generally do quite well in driving up an asset’s value.)

In the end, a modest exposure to gold can help you create a diversified hedge that protects your portfolio from both the U.S. debt burden and the vagaries of the world economy.

[Source]

JK Comment: YES!! This ‘argument’ by Warren Buffett receives a great deal of attention, too much perhaps. It seems that literally every critic (and there are plenty in the mainstream financial press) of gold ownership inevitably references Buffett when discounting the role of gold diversification. Last year, Wells Fargo Wealth Advisory made a point of using it when they dubbed gold a bubble. I’ve long waited for an analyst who isn’t directly involved in the gold market to point out the nonsense in Buffett’s argument. Here it is. My compliments, and thanks, to the author, Steve Beck.

01-Mar (SeekingAlpha) — On Wednesday, February 29, gold plunged 5.0% and silver plunged 5.7% presumably because traders had incorrectly bet that Ben Bernanke would use the occasion of his semi-annual Congressional testimony to either announce or telegraph a third round of quantitative easing (QE3).

…It is likely not a coincidence that the last time big traders crowded into the gold trade, it also preceded a large drop in gold and silver.

…Given the size of the sell-offs, I have to assume that the traders who were betting on QE3 or otherwise over-leveraged for short-term bets are washing out of these trades. These weak hands can cause a lot of noise when they all try to exit the same trade at the same time. Once this washout exhausts itself, both gold and silver will offer the intrepid trader and investor the next big buying opportunity in these precious metals.

[source]

01-Mar (USAGOLD) — Gold moved off Wednesday’s low, bolstered by overseas bargain hunters, but the market remains on uncertain footing in the wake of yesterday’s sharp sell-off. We’ve seen this kind of activity before though, and historically such drops have proven to be buying opportunities.

I’ve heard quite a few explanations for Wednesday’s precipitous drop: Month-end position squaring. Smash-down on ‘first notice’ day for Mar silver. Rumors of a very large sell order from an Asian name. Beneficiaries of the ECB’s €529.5 bln LTRO quickly seeking to turn their euros into dollars. Heightened expectations that the latest LTRO was the last. Bernanke playing coy about the likelihood of additional QE. The BoE’s Martin Weale saying there may not be a case for further stimulus.

Truth be told, it was likely a culmination of all (or some) of the above. A bit of a perfect storm, which created a cascading affect as stop-loss orders were triggered on the way down.

Interestingly, the sell-off came on a day when the ECB pumped an additional massive amount of liquidity into the European banking system. At €529.5 bln, the LTRO was in-line with expectations, although there was a point several weeks ago when expectations were running closer to €1 trillion. Perhaps the market was disappointed in the size. There were also reports that at least some of the 800 banks that participated in the LTRO were swapping their fresh horde of euros for dollars. Add to all that increased speculation that the ECB is done with such operations and markets that are clearly addicted to central bank liquidity fixes can quickly start ‘jonesing’.

Similarly, in testimony before House Financial Services Committee, Fed chairman Bernanke suggested that the current policy stance was “conditional.” The implication being that improvements in the economy might warrant a scaling-back of Fed accommodations. Nonetheless, Mr. Bernanke characterized the recovery as “uneven and modest,” suggesting tighter policy was not imminent.

Some seemed to be thinking that Bernanke was likely to telegraph QE3 in his testimony, which will be repeated before the Senate today. With Operation Twist ongoing through June and some recent improvements on the employment front, I didn’t think anything overt was likely. With gasoline prices on the rise and making headlines, it in fact seemed quite unlikely that Bernanke would say anything that might further spur energy prices.

The bottom line is that the fundamentals for the gold market have not changed. While the short to near term technical picture was dealt a blow, the medium term range defined by the 1920.50 all-time high from August and the December low at 1522.40 remains intact, as does the long-term uptrend. Initially here, I’m watching the halfway back point of yesterday’s sell-off at 1739.63.

• US personal income +0.3% in Jan, below market expectations of +0.4%; PCE +0.2%, on expectations of +0.4%.
• US initial jobless claims -2k to 351k in week ended 25-Feb, below expectations of 355k, vs upward revised 353k in previous week.
• Eurozone unemployment rate rose to 10.7% in Jan, above market expectations of 10.4%, vs upward revised 10.6% in Dec.
• French unemployment rate ticks higher to 9.8% in Q4.
• Switzerland Q4 GDP (sa) +0.1% q/q, above market expectations of -0.1%, vs upward revised +0.3% in Q3; 1.3% y/y.
• Eurozone Markit PMI – manufacturing in-line and steady for Feb at 49.0.
• Switzerland SVME Manufacturing PMI improved to 49.0 in Feb, but missed expectations of 49.5, vs 47.3 in Jan.
• Eurozone CPI – Flash Estimate 2.7% y/y in Feb, above market expectations of 2.6%, vs 2.6% in Jan.
• China CFLP PMI – Manufacturing edges higher to 51.0 in Feb, vs 50.5 in Jan.
• China HSBC/Markit PMI – Manufacturing improves to 49.6 in Feb, vs 48.8 in Jan.
• Thailand CPI 3.35% y/y in Feb, vs 3.4% in Jan.
• Indonesia CPI 3.56% y/y in Feb, vs 3.65% in Jan.
• India Trade Balance-CC -$14.8 bln in Jan, vs -$12.7 bln in Dec.

01-Mar (GoldCore) — There was blood in the gold and silver trading pits yesterday as leveraged longs got their heads handed to them on a plate.

The massacre was attributed to a host of different reasons – from month end book squaring, to the positive PMI numbers to Bernanke’s suggestion that ultra loose monetary policies may soon come to an end.

None of these reasons would justify the scale of the massive sell offs seen in gold and silver yesterday.

…Respected analysts such as legendary Jim Sinclair, John Embry and Jean-Marie Eveillard suggested that the sell off was due to manipulation by bullion banks.

[source]

01-Mar (NY Times) — The International Swaps and Derivatives Association said on Thursday that based on current evidence the Greek bailout would not prompt payments on the credit default swaps.

But the organization warned that the situation in Greece was “still evolving” and such payouts might be necessary in the future “as further facts come to light.”

In the midst of the Greek drama, credit-default swaps, financial instruments intended to protect against losses on debt, have been a point of concern.

As part of restructuring, bondholders will be required to take a 70 percent loss on their holdings. The deal was structured as a voluntary exchange, which would not have triggered the credit-default swaps.

[source]

PG View: This comes as no surprise as the ISDA was rightfully worried that the writers of such swaps wouldn’t be able to pay anyway; which likely would have required further bailouts for global financial institutions. The take-away though, is that CDSs on sovereigns aren’t worth the paper they’re printed on…

Gold and silver futures look set on Wednesday to post their biggest one-day losses year to date, but the declines “look overdone,” said Julian Jessop, chief global economist at Capital Economics, in a note.

“The trigger appears to have been disappointment that [Federal Reserve Chairman Ben Bernanke] failed to signal any further quantitative easing,” he said. But “such a signal was never very likely as early as today.”

Bernanke suggested in Congressional testimony that he is slightly more encouraged by the run of stronger economic data, notably from the labor market – and that’s no real surprise, said Jessop.

But Bernanke also described the recovery as “uneven and modest by historical standards” and said Europe still faces critical fiscal and financial challenges.

[source]

Gold plunged, heading for the biggest decline this year, on expectations that the Federal Reserve will refrain from taking new action to bolster the economy. Silver slumped the most since December.

The dollar rebounded after Fed Chairman Ben S. Bernanke, in congressional testimony, gave no signal that the central bank is considering additional measures to spur the economy. He said the inflation outlook is “subdued.” The greenback gained as much as 0.5 percent against a basket of competing currencies. Before today, gold prices climbed 14 percent this year, compared with a 10 percent gain in 2011.

[source]

PG View: On the heels of earlier suggestions that the ECB was hoping to turn off the liquidity spigot after today’s €529.5 bln LTRO, we’ve seen a rather significant round of profit taking in the yellow metal.

29-Feb (USAGOLD) — [REVISED] Gold eked out a new high for the year at 1790.55 in overseas trading before coming under heavy profit taking pressures, leaving important resistance at 1802.80 well protected. The ECB’s second LTRO came in at €529.5 bln, which was pretty much in-line with recent tempered expectations. While larger than the LTRO1 in December, LTRO2 was well shy of early high-end expectations that suggested the take-up could be as large as €1 trillion. Nonetheless, an additional €1.02 trillion ($1.37 trillion) in additional liquidity has been injected into the European banking system in the last 3-months.

Although the ECB stopped short of accepting Greek bonds as collateral, one can only imagine what other rubbish may have been pledged by the 800 banks that participated. The ECB has already expressed aversion to further balance sheet expansion, suggesting that LTRO2 will be the last. Germany’s Jens Weidmann warned that the ECB must not lose sight of its inflation fighting mandate and take on too much risk.

Heightened expectations that the ECB is going to turn off the liquidity spigot has prompted profit taking in the euro and the metals. The corresponding rise in the dollar is adding additional impetus to the corrective retreats. However, rest assured, further deterioration of the sovereign debt crisis and heightened growth risks on the Continent will almost assuredly lead to further central bank accommodations…and quite possibly LTRO3. And even if the ECB is truly on pause for a while, the other central banks may well end up picking up the slack.

While silver extended to a new 5-month high at 37.47, it too eventually succumbed to intraday corrective pressures.

• Chicago ISM rose to 64.0 in Feb, above market expectations of 61.8, vs 60.2 in Jan.
• US Q4 GDP revised up to +3.0%, above market expectations of 2.8%, vs 2.8% advance print.
• Switzerland KOF Leading Indicator -0.12 in Feb, below market expectations of -0.10, vs upward revised -0.15 in Jan.
• Sweden Q4 GDP (sa) Final -1.1%, well below market expectations of -0.4%, vs big negative Q3 revision to 0.9%; 1/1 y/y (nsa).
• German unemployment unch in Feb; rate ticks higher to 6.8% on Jan revision.
• Eurozone CPI -0.8% m/m in Jan, in-line with expectations, vs +0.3% in Dec; 2.6% y/y, core 1.5% y/y.
• Japan Markit/JMMA PMI slips to 50.5 in Jan, vs 50.7 in Dec.
• Japan Industrial Production (sa) – Preliminary +2.0% in Jan, vs negative revised 3.8% in Dec.
• Japan Housing Starts -1.1% y/y in Jan, vs -7.3% in Dec.
• Japan Construction Orders surge 24.6% y/y in Jan, vs 1.5% in Dec.

29-Feb (Financial Times) — The US economy grew slightly faster than previously thought in the final quarter of 2011 in another encouraging sign of stable recovery.

The Bureau of Economic Analysis revised its initial estimate of annualised growth in the fourth quarter from 2.8 per cent up to 3 per cent, ahead of market expectations of an unchanged estimate.

But the revision did not change the fundamental picture of a quarter where most growth was due to an inventory build up and final consumer demand was sluggish. It is unlikely to change US Federal Reserve chairman Ben Bernanke’s views ahead of testimony to Congress on Wednesday morning.

[source]

28-Feb (USAGOLD) — Gold is well bid this morning, underpinned by dollar weakness, firm oil and fresh 5-month highs in silver. The euro is surprisingly buoyant after S&P declared Greece to be in a “selective default’. Recent action by the credit rating agencies is making it increasingly difficult for policymakers to maintain their insistence that the bond swap is not a credit event, and therefore not a trigger for the credit default swaps.

Weaker than expected January durable goods orders and continued weakness in the US housing market through the end of last year has the stock market looking increasingly suspect up here in the vicinity of DJIA 13,000. Durable goods orders for January fell by 4.0%, on a larger than expected seasonal effect. The Case-Shiller 20-city composite home price index dropped 1.1% in December. While this was near expectations, the 4.0% y/y decline in 2011 suggests that recent talk of a housing market recovery is premature.

This grim economic news was tempered somewhat by a new 1-year high in consumer confidence in February. The negative wealth effect associated with persistent weakness in the housing market may ultimately lead to a reversal of the recent rise in consumer confidence.

Flows out of stocks, driven by heightened risk aversion, may well find their way into the metals market. Historically, there is an inverse correlation between gold and shares. It would be reassuring to see that more normal relationship reestablished.

• US consumer confidence jumped to 70.8 in Feb, above market expectations, vs upward revised 61.5 in Jan; highest level in a year.
• US Case-Shiller 20-city composite home price index (nsa) -1.1% to 136.7 in Dec, vs neg revised 138.2 in Nov; -3.99% y/y.
• US durable goods orders -4.0% in Jan, well below market expectations of -1.0%, vs positive revised +3.2% in Dec; -3.2% ex-trans.
• Germany GfK Consumer Confidence ticked higher to 6.0 for Mar, in-line with expectations, vs 5.9 in Feb.
• Germany CPI +0.7% in Feb, above market expectations of 0.5%, vs -0.4% in Jan; 2.3% y/y.
• Eurozone Economic Confidence higher at 94.4 in Feb, just above expectations of 94.0, vs 93.4 in Jan; consumer confidence weaker at -20.3.
• Japan Large Retailer Sales -1.0% y/y in Jan, vs positive revised -0.3% in Dec.
• Japan Total Retail Sales +1.9% y/y in Jan, vs +2.5% in Dec.

28-Feb (The Wall Street Journal) —The European Central Bank, responding to the latest rating agency downgrade of Greece, said it would no longer accept the country’s bonds as collateral for loans, but added the move was a temporary one that could be reversed once the new Greek bailout package goes into effect.

Until then, the ECB said it would be up to national central banks to decide whether to accept the bonds as collateral for their own emergency lending facilities. Greek banks, which would collapse without the support, would still be able to access loans directly from the Greek central bank’s lending window, albeit at a higher interest rate.

[source]

PG View: Any bank that didn’t use their Greek bonds as collateral in the Dec LTRO is out of luck tomorrow…

28-Feb (BBC) — Rating agency Standard & Poor’s has classified Greek debt as in “selective default” following the deal it made with creditors to reduce its debts.

S&P says the terms of that deal triggered the latest downgrade. Greek debt already had a “junk” grade rating from the agency.

Separately, the European Central Bank said it was suspending the eligibility of Greek bonds as collateral for loans to commercial banks.

[source]

28-Feb (The Wall Street Journal) U.S. home prices ended 2011 at the lowest levels since the housing crisis began in mid-2006, according to Standard & Poor’s Case-Shiller home-price indexes.

During the fourth quarter, home prices reached new lows, falling 3.8% from the pre and 4% year-to-year. Prices are down 33.8% from their peak in the second quarter of 2006.

“While we thought we saw some signs of stabilization in the middle of 2011, it appears that neither the economy nor consumer confidence was strong enough to move the market in a positive direction as the year ended,” said David Blitzer, chairman of S&P’s index committee. “After a prior three years of accelerated decline, the past two years has been a story of a housing market that is bottoming out but has not yet stabilized.”

[source]