By Claudia Assis
April 5, 2011 (MarketWatch) — Gold futures rose to a record high Tuesday, shaking off early weakness to find firmer footing in fears of a potential U.S. government shutdown, conflict in the Middle East and North Africa, and Europe’s sovereign debt crisis.

Gold for June delivery rose $19.50, or 1.4%, to $1,452.50 an ounce on the Comex division of the New York Mercantile Exchange.

… In addition to all the overseas reasons to seek safety in gold, investors also flocked to the metal on fears that the U.S. government may run out of money by Friday if parties don’t reach an agreement about the federal budget, said Adam Klopfenstein, a senior market strategist at Lind-Waldock in Chicago.

“A lot of people are uncomfortable with going into that without some safety net,” he said. “People want some protection” and traditionally gold is seen as both a storer of wealth and a safe haven from turmoil, he added.

Moody’s Investors Service pegging Portugal’s bailout as “inevitable” fueled the rally in both gold and silver, said Jeffrey Clark, an analyst with Casey Research.

“That’s a strong statement, but there’s no denying it’s Portugal’s turn. … We’ve seen this movie before, and gold is up because there’s probably not a happy ending here. Sovereign debt issues continue playing across Europe, and the bigger concern is that these debt issues will spread outside of Europe, including to the elephant in the room, the U.S.,” Clark said in an e-mail interview.

[source]

Gold Surges to Record on Hedge Against ‘Chaos;’ Silver Tops $39
by Pham-Duy Nguyen
April 5 (Bloomberg) — Gold futures surged to a[n intraday] record of $1,458.60 an ounce as sovereign-debt concerns boosted demand for the precious metal as an alternative asset. Silver prices topped $39 an ounce. Gold futures for June delivery … extended its rally to a record after the end of regular trading. Gold for immediate delivery rose as much as 1.6 percent to an all-time high of $1,457.45.

… “Once a central bank goes down the expansionary path to fight recession, it is much easier to keep pumping money than to reverse course when inflation starts to bite into purchasing power,” said Michael Pento, a senior economist at Euro Pacific Capital Inc. in New York.

The Fed has kept its benchmark rate at zero percent to 0.25 percent since December 2008 to stimulate the economy. President Barack Obama is negotiating with congressional leaders to prevent a government closure as the budget deficit soars.

“What’s looming ahead is the fear that if there is a shutdown in government, who’s going to want to own paper currency?” Klopfenstein of Lind-Waldock said.

Dennis Gartman, an economist and the editor of the Suffolk, Virginia-based Gartman Letter, told clients to sell Japanese equities and buy gold. Japanese stocks fell the most in three weeks after Tokyo Electric Power Co. began dumping radioactive water from its Fukushima Dai-Ichi nuclear station into the sea.

[source]

by Neil Charnock
April 5, 2011 (MarketOracle) — … Considering that gold’s role in the monetary system was so understated a few years back it is no surprise that mainstream investors are taking time to correctly weight it back into their investment modelling. We are at a critical point in history, things are changing rapidly.

… I do not believe the sky is on fire or that civilization as we know it is about to end unless you are one of the unfortunate who lose everything. Currencies, banks, governments and corporations will come and go – the question is; are you prepared?

… One of the things that bother me about some of the data I have seen on the internet is the notion that banks create money out of thin air. Hear me out please as this is very important. Many investors in the UK, Europe and the US lost everything and are living in cars for the want of facts. FACT: there is a big difference between your local bank and a Central Bank. Unfortunately there is no differentiation from some analysis on this division and yet it is critical when we try to work out how this current financial mess we find ourselves in will pan out.

… This is a simplified outline and therefore there are some minor points not fully explained. A complete explanation that covers further detail is beyond the scope of this essay. Trading banks are both dealers and producers. They are not just a business where you keep your savings and borrow money as most of the public think. This system is rigged in their favour it is true. For a start, when you deposit money, it becomes their asset (as far as they are concerned – by an accounting measure) on their own balance sheet becoming part of their reserve requirements. If this does not disturb you I don’t know why – it is the essence of the rigged nature of the game.

They are dealers; they provide the shop front that facilitates lending and borrowing. You deposit and they lend against it. You provide the asset (your savings) that gives them some of their ability to produce their stock in trade, which are loans. These have to be repaid at interest. Your deposits are not enough in this day and age. Trading banks also go to the wholesale money markets and buy (borrow) money themselves which they then loan out at a profit, a higher interest rate…

They are also producers in effect as they transform cash issued by the government (via Central Banks) into more convenient checks and digital deposits or demand deposits, which are supposed to have greater security than cash. They also transform short-term deposits into longer-term loans. In the process, it can be said that they do the financial intermediation and maintain liquidity in the system at a very basic level. The Central Banks are there as the back stop lender to the banking system amongst other activities.

… The banking crisis is forcing governments to act with injections of capital and new red tape which makes the situation worse.

Perversely a part of this action has included offerings of our money to banks that have misappropriated these bail outs in part via bonuses to higher level employees. Governments are also trying to stop a repeat of the GFC without the full understanding of the root cause, only the symptoms seem visible to them.

[source]

Politics and Gold

Gold has surged to new record highs above 1450.00 as the political circus over the budget and debt limit ramps-up ahead of a potential government shutdown on Friday. The President has summoned leaders from both political parties to the White House this morning with the hope of nudging them toward some kind of compromise that will allow the government to continue functioning after the end of the week. While Mr. Obama has expressed optimism that something can be worked out, it seems that the parties have dug in their heels.

FY2011

The first order of business is to come to a decision on budgetary matters for the remainder of FY2011. A patchwork of CRs is no way to run the world’s largest economy, particularly during a time of economic duress. Arguably the uncertainty is hindering the recovery as our Representatives squabble over ‘chump change’. As I pointed out in yesterday’s report, (citing PIMCO’s Bill Gross) when unfunded entitlements are factored into the equation, we’re already facing a “$75 trillion total debt burden“. So, whether you’re talking about cutting $30 billion or $100 billion from current spending levels, in the long-run it’s all rather pointless. It’s theater for those who still think $100 billion is a lot of money.

FY2012

When Paul Ryan, Chairman of the House Committee on the Budget, offers up a plan for the FY2012 budget that he claims will reduce the deficit by $4 trillion, it certainly sounds more serious. The “T” word still has some impact. However, $4 trillion is still just over 5% of that $75 trillion total debt burden and the plan calls for that reduction over a 10-year period, or $400 billion per year. More serious? Yes. Serious enough? Doubtful.

Rep Ryan’s plan is called the The Path to Prosperity: Restoring America’s Promise — catchy — and is being pitched as a choice for two futures. According to Ryan (who cites the CBO), on the current borrow-and-spend path, the US economy will reach a critical debt-induced tipping-point by 2037. In looking at the above chart, no rational American would choose the “current path”. Yet American’s are deeply divided on how a more sustainable path might be achieved, how the burden should be shared, or whether it should be shared at all. Even ardent supporters of drastic budget cuts and deficit reduction, when polled on specific programs tend to favor continued funding for most of those programs. The job of actually cutting is not going to be an easy one and the backlash against Ryan’s proposal has already begun in earnest.

March Madness

In March alone, the Federal government spent eight-times the amount of revenue that it took in. The difference was of course borrowed. I think everyone would acknowledge that something must be done in order to prevent a full-fledged debt crisis in America. Sadly, I thik Bill Gross’ guess on what that ‘something’ might be is closest to the truth. In PIMCO’s Investment Outlook for April, Gross said, “Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies – inflation, currency devaluation and low to negative real interest rates.”

Early in the month of March, Erskine Bowles, the co-chair of President Barack Obama’s National Commission on Fiscal Responsibility, told the Senate:

“I think we face the most predictable economic crisis in history. A lot of us sitting in this room didn’t see this last crisis as it came upon us. But this one is really easy to see. The fiscal path we are on today is simply not sustainable.

“This debt and these deficits that we are incurring on an annual basis are like a cancer and they are truly going to destroy this country from within unless we have the common sense to do something about it,” said Bowles.

Admiral Mike Mullen, chairman of the Joint Chiefs of Staff, has been saying for nearly a year now that the greatest threat to America is not a military one. In Mullen’s opinion, “The biggest threat to our national security is our debt.”

The $14.29 Trillion Debt Ceiling

Yesterday Treasury Secretary Geithner sent a letter to Senate Majority Leader Harry Reid, predicting that ” the debt limit will be reached no later than May 16, 2011″ and that there would be dire consequences if that were allowed to happen. Geithner acknowledged that his options for delaying reaching the debt ceiling have become increasingly limited as the debt has grown. He dispelled the notion that further delay could be achieved by, for example, selling the Nation’s gold reserves. Geithner warned that such a move “would undercut confidence in the United States both here and abroad.” Hardly what one might expect if you view gold as a useless relic.

Geithner attempts to provide some comfort by reminding us that “increasing the limit does not increase the obligations we have as a Nation; it simply permits the Treasury to fund those obligations that Congress has already established.” What he doesn’t say, is something I’ve been saying for years; the US government has never met a debt ceiling it couldn’t meet and ultimately exceed. According to the Treasury Secretary there is simply no option, the debt ceiling must be raised or the US faces a default. However, in doing so, it pushes us toward that same end result.

The recent collapses of the governments in Portugal and Canada, along with the geopolitical unrest throughout the Middle East and North Africa remind us of just how quickly governments can become destabilized. I don’t think America is anywhere close to that point yet, but faced with a possible shut-down of the government and the inability of the government to finance the debt going forward, Geithner warns that “government payments would have to be stopped, limited or delayed, including military salaries and retirement benefits, Social Security and Medicare payments, interest on the debt, unemployment benefits and tax refunds.” One would have to acknowledge that we seem to be hurdling ever-closer to the precipice.

Gold has served as a store of wealth for thousands of years, through wars, economic calamity an of course political uncertainty. Gold is a physical asset that is not simultaneously someone else’s liability. It tends to be non-correlated with more traditional asset classes like stocks and bonds. Perhaps most importantly, given Mr. Gross’ warnings, it tends to have an inverse correlation with the dollar. The appeal of gold as a shelter for stormy-times is likely to continue to grow, even as supplies become tighter, which will have a supportive impact on the price.

Apr 5, 2011 (CBC News) — Gold prices rose to a record Tuesday as investors looked for safe havens amid worries about risks ranging from political turmoil in Libya and the nuclear crisis in Japan to the threat of sovereign debt default in Europe.

June gold was trading up $18.70, or 1.3 per cent, at $1,451.70 US an ounce in New York early in the afternoon after climbing to a record $1,455.50 an ounce earlier.

[source]

by Vanessa Miemis
4/4/2011 (Forbes) — There has been much speculation recently about the role Facebook Credits could play in becoming a global virtual currency, and even the possibility of Facebook becoming a bank. In many ways, it already is becoming a bank – just not in the traditional sense. Facebook is harnessing the power of the social graph, and has certainly adopted an expanded definition of what ‘currency’ means.

… As I’ve been conducting research for The Future of Facebook Project, the experts and thought leaders interviewed shared some compelling views about the evolution of virtual currencies, and Facebook’s potential role in their development. A big takeaway is that while we typically associate currency directly with money, the rise of the social web and quantification is shifting that reality to become more inclusive of kinds of capital that were formerly intangible.

Money is a tool we use for arms-length transactions, where there isn’t an assumption of any kind of relationship or trust between parties. But as data is being mapped at an accelerating rate – from self-quantifiation, to the contextual and relational data about our location and interactions, to our preferences and opinions, to our exchanges and transactions – we are being granted access to a much richer base of information in our decision-making toolkit.

… Trust networks are able to be tapped for recommendations and referrals, while predictive analysis algorhithms can suggest the kinds of people, products, services, or events that would resonate with our personalities or value set. … These contextual clues around data become currencies in themselves, as they give us more information in order to make a choice or decide who to trust.

… Facebook Credits are a virtual currency used within Facebook for the purchase of virtual goods related to applications managed on the Facebook platform. … What happens when individuals and companies become more comfortable with the idea of accepting virtual currencies in exchange for various types of interactions, goods or services?

“Increasingly as we move later into the decade, physical currency will be harder to differentiate from virtual currencies like Facebook Credits,” said Brett King, author of Bank 2.0. …… In the longer term, Facebook Credits could become truly disruptive by becoming a currency for peer to peer lending, microtransactions, and for usage by the unbanked in emerging markets around the world.

… As venture capitalist Eghosa Omoigui posited, “I suspect that Facebook may eventually have to create a trading platform that allows them to constantly mark-to-market what those Credits look like.”

[Further] … “the ability to move any form of asset between the virtual world and the physical world needs a commonality of understanding of identity,” said JP Rangaswami, Chief Scientist for salesforce.com.

[source]

RS View: See also my March 31st post. Increasingly, as an economic necessity to facilitate a functional benchmark of comparative value, any and all private and national currencies (be they virtual and/or tangible) will each float on trading platforms by which they are individually marked-to-market against a single, universal standard of savings — gold.

Tue, Apr 05 2011
(FXstreet.com) — Gold futures are rallying in morning trade over North America, reaching a fresh record high directly ahead of the anticipated FOMC minutes release. The most active contract for June delivery has peaked at $1452.0/ounce where it runs into technical resistance.

[source]

Gold, Silver Prices Pop Higher
by Alix Steel
April 5, 2011 (TheStreet) — Gold and silver prices were reversing earlier losses Tuesday as U.S. data disappointed. Gold for June delivery was up $17.90 to $1,450.90 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,452, a record, and as low as $1,431

Silver prices were up 45 cents at $38.94 an ounce.

Gold and silver were soaring after the U.S. reported that activity in the services sector slowed in March. The Institute for Supply Management’s non-manufacturing report fell to a reading of 57.3 from 59.7 in February. The dip was larger than expected.

… The SPDR Gold Shares exchange-traded fund hasn’t added tons since March 17 before the U.N. declared a no-fly zone over Libya. Tonnage has decreased 15 tons to 1,211.22.

[source]

By Katrina vanden Heuvel
Tuesday, April 5 (WashingtonPost) — There’s a janitor who lives in a studio apartment just outside of Stevens Point, Wis. He works cleaning the math and science buildings at a state university, a job he’s been doing for about 18 months, after a year of unemployment. He’s 43 and last year made $24,622. He doesn’t have kids, so he doesn’t qualify for a child care tax credit. He doesn’t own a home or a hybrid car — those credits don’t apply to him either. He hasn’t been enrolled in school since the 10th grade, so he definitely doesn’t qualify for any education credits or deductions. He just learned that Gov. Scott Walker’s new budget has slashed his benefits and that next year he’ll be bringing in about 16 percent less per month. And when he sits down to do his taxes next week, he’ll find that he paid the federal government around $1,400 in 2010.

About a thousand miles to the east, in Fairfield, Conn., General Electric, one of the world’s largest multinational corporations, posted a $14.2 billion profit for 2010. When its accountants were finished working their magic, the company didn’t owe a single dollar in federal taxes.

“People can think what they think,” said Jeff Immelt, GE’s CEO, in response to a growing anger to this story, first reported last week by the New York Times. What else is there to think, one wonders, but that with the muscle and money of lobbyists and lawyers, with the access and influence built over generations, GE has done not just the audacious but the outrageous. And it is not alone.

Exxon Mobil, for example, made $19 billion in profits in 2009 but paid no federal income taxes. In fact, it received a $156 million rebate from the IRS. Bank of America received a $1.9 billion tax refund from the IRS last year, even though it made $4.4 billion in profits and was handed a nearly $1 trillion bailout by taxpayers. The list, inconceivably, goes on.

And yet the conversation in Washington hasn’t turned to aggressively closing the loopholes that GE’s lobbyists created for its accountants to exploit. It hasn’t turned toward ending the ridiculous tax breaks on corporate dividends and capital gains that allow hedge fund managers and the very wealthy to pay the government a lower percentage than their middle class employees. Instead, Congress is debating whether $33 billion in cuts to the social safety net is enough to make the Tea Party happy.

[source]

by Sergei Balashov
April 5 (ProactiveInvestors) — Gold prices rallied today as safe haven demand strengthened amid the civil war in Libya and concerns over Europe’s debt crisis.

Moody’s today further cuts Portugal’s sovereign rating by one notch from A3 to Baa1, while indicating that further downgrades are possible. This is the credit rating agency’s second downgrade of Portugal in three weeks.

The civil war in Libya keeps driving up oil prices with Brent crude having topped US$120/lb in London, boosting gold’s appeal as an inflation hedge.

[source]

by John Nyaradi
Tuesday, April 5, 2011 (MarketWatch) — In recent weeks, uber investors Bill Gross and Warren Buffett made headlines with their negative views on the U.S. Treasury bond markets.

… Pimco founder Bill Gross lambasted our elected representatives in his April Investment Outlooks for letting the U.S. debt situation get so far out of hand and said that he has been “selling Treasuries because they have little value within the context of a $75 trillion total debt burden.”

In fact, last month it was widely reported in the general media that Mr. Gross took his government related debt to zero in his $230 billion Total Return Fund, the first time it has held no government debt in more than two years. And he has also been quick to point out that investors in U.S. debt are being “under rewarded.” All of this is startling, considering that Pimco is traditionally a major holder of U.S. debt and one of the biggest players in the global bond market.

However, Mr. Gross is not alone in his bleak assessment of the situation and the likelihood that the 30 year rally in the bond market could be nearing its end.

Famed investor Warren Buffett joined the chorus against U.S. Treasuries recently when he said in a speech in New Delhi that investors should stay away from long term fixed-dollar investments because of his forecast for weakness in the U.S. dollar. Apparently Mr. Buffett is also reducing his long exposure to the long bond market and focusing on what he seems to love to do best, which is buying companies around the world.

It’s difficult to argue with this kind of brain power.

[source]

By Soo Ai Peng and Tony Zhou
Tuesday April 5, 2011 (Reuters) – China’s central bank increased interest rates on Tuesday for the fourth time since October, raising suspicions that data next week may show inflation rose more than expected in March.

The tightening of monetary policy adds to six official increases in bank reserves over the same period and follows a declaration by China’s top leaders that controlling inflation was their most important task this year.

Benchmark one-year deposit rates will be lifted by 25 basis points to 3.25 percent and one-year lending rates will be raised by 25 basis points to 6.31 percent, the People’s Bank of China said in a statement on its website. The rises take effect from April 6.

“The March inflation figures must be very high,” said Xu Biao, economist with China Merchants Bank in Shenzhen.

… Inflation worries are increasing globally. Most central banks in emerging markets in Asia have raised interest rates as the region emerged strongly from the global financial crisis. The European Central Bank is expected to raise interest rates on Thursday for the first time since the crisis…

[source]

by Randy Fabi
Tue Apr 5, 2011 (Reuters) — Oil is a good short-term bet for another five months due to upcoming peak U.S. summer driving season, while prices in the long-term are likely to double along with gold in five years, said a leading fund manager.

Crude oil prices, which surged to a 2-½ year high above $121 for Brent on Monday, will continue to climb until at least September when the Atlantic hurricane season typically begins, said Frank Holmes, chief executive and chief investment officer of U.S. Global Investors.

… He believes that economic growth in emerging markets, especially China and India, will boost the countries’ middle class and translate into purchases of cars and homes which will drive oil and commodities demand. “In the next five years, oil can double and I think gold can double because 50 percent of the world’s population is growing their money supply by more than 15 percent a year,” Holmes said.

… He expected gold , which hit a record of $1,447.40 an ounce last month, to rally in the second half of the year.

[source]

April 5 2011 (Bloomberg) — Platinum and palladium prices might advance because new mines might be delayed after Zimbabwe’s government ordered Anglo Platinum and other mining companies based outside the country to cede majority stakes to Zimbabweans, TD Securities said on Friday.

Palladium’s shortage might widen while platinum might move into deficit earlier than forecast in 2013 if there was a reduction in new capacity in Zimbabwe, TD Securities said in a report.

“Resource nationalism has become an increasingly important issue in recent years,” Bart Melek, an analyst at TD Securities in Toronto, said.

… Zimbabwe said in a March 25 decree that overseas mining companies had to explain within 45 days how they would cede 51 percent of their local assets to “indigenous” Zimbabweans. The move comes at a time when Australia, Canada, Chile, Venezuela, Peru and the Democratic Republic of Congo had considered raising taxes or taking stakes in mining companies to boost budget revenues, TD Securities said.

… The investment climate in South Africa, which accounts for about 74 percent of the global mined platinum supply, might worsen after Zimbabwe’s move because it might embolden ANC youth leader Julius Malema to again make calls for the nationalisation of its mines, Melek said. Most of the 215 000-ounce global platinum output growth by 2013 would be in South Africa, which would also account for about two-thirds of the palladium production rise.

“Less production growth due to uncertainty in South Africa’s business climate would no doubt send this market into a chronic deficit and prices surging in fairly quick order,” Melek wrote.

[source]

RS View: Another timely reminder — as a gold-minded investor, choose the metal, not the mine.

Gold is slightly easier this morning as silver pulls back from an unsuccessful challenge of 39.00. The metals markets seem to be largely ignoring Fed Chairman Bernanke’s assertion that “the increase in inflation will be transitory.” PIMCO’s Bill Gross deemed Beranke’s comment “pollyannish,” warning that the inflation risk remains high.

The PBoC raised rates by 25 bp for the second time this year as it continues to battle inflation. The 1-year lending rate now stands at 6.31%.

Moody’s cut #Portugal’s sovereign debt rating by another notch to Baa1, citing uncertainty.

President Obama has called House leaders from both parties to the While House this morning with the hope of hammering out a budget compromise that will avert a government shutdown on Friday.

by Terrence P. Jeffrey

(CNSNews.com) – The U.S. Treasury has released a final statement for the month of March that demonstrates that financial madness has gripped the federal government.

Link

The Honorable Harry Reid
Democratic Leader
United States Senate
Washington, DC 20510

Dear Mr. Leader:

I am writing to update you on the Treasury Department’s projections regarding when the statutory debt limit will be reached and to inform you about the limits of the available measures at our disposal to delay that date temporarily.

In our previous communications to Congress, we provided regular estimates of the likely time period in which the debt limit could be reached. We can now make that projection with more precision. The Treasury Department now projects that the debt limit will be reached no later than May 16, 2011. This is a projection based on the expected level of tax receipts, the timing of our commitments and obligations over the next several weeks, and our judgment concerning the level of cash balances we need to operate. Although these projections could change, we do not believe they are likely to change in a way that would give Congress more time in which to act. Treasury will provide an update of this projection in early May.

[source]

PG View: The very first “available measure” Geither addresses is the sale of the Nation’s gold. Of course, it’s not a viable measure because it “would undercut confidence in the United States both here and abroad.” No mention of the eroding confidence that stems from the ever-larger debt burden.

Geithner reminds us that “Increasing the limit does not increase the obligations we have as a Nation; it simply permits the Treasury to fund those obligations that Congress has already established.” What he doesn’t say, is that the US has never met a debt ceiling it couldn’t meet and ultimately exceed.

According to the Treasury Secretary there is simply no option, the debt ceiling must be raised or the US faces a default. However, there is reason to believe that raising that debt ceiling, pushes us irrevocably closer to that same end result. At best, we may be buying some time.

by Rachelle Younglai
April 4, 2011 (Reuters) — The United States will hit the legal limit on its ability to borrow no later than May 16, Treasury Secretary Timothy Geithner said on Monday, ramping up the pressure on Congress to act to avoid a default.

Previously, the Treasury had warned that the country could hit the $14.294 trillion statutory debt limit between April 15 and May 31.

… If the debt ceiling is not increased by May 16, Geithner said the Treasury has authority to take certain extraordinary measures to temporarily postpone the date the United States would default on its obligations.

[source]

April 04, 2011 (Xinhua) — South Korea’s foreign reserves rose to 298.6 billion U.S. dollars in March mainly due to increased conversion value of non-dollar denominated assets, the country’s central bank said on Monday.

… The March reading marked the record high of reserves and the fourth consecutive month of growth.

The increase was attributable to rising investment profits and growing conversion value [i.e., exchange rate] of non-dollar denominated assets caused by weaker dollar, according to the BOK.

The nation’s foreign reserves consisted of
271.71 billion dollars of securities,
21.93 billion dollars of deposits,
3.7 billion dollars of special drawing rights (SDR),
1.19 dollars of International Monetary Fund (IMF) reserve positions and
0.08 billion dollars of gold bullion.

[source]

RS View: A rationally structured portfolio of reserves, in light of the withering dollar, argues for significantly fewer dollar-denominated items (i.e., fewer U.S. securities and deposits) and significantly more of that universally translatable asset which, at the present time, occupies a space so unjustifiably neglected and underrepresented as a part of the BoK balance sheet.

By Myra P. Saefong
April 4, 2011 (MarketWatch) — Gold futures edged higher and silver soared 2% Monday as oil prices at 30-month highs stoked fears of inflation and helped fuel investment demand for the precious metals.

Gold for June delivery added $4.10, or 0.3%, to $1,433 an ounce on the Comex division of the New York Mercantile Exchange.

Silver for May delivery climbed 76 cents to settle at $38.49 an ounce, the latest in a string of 31-year highs. The metal had bounced off $38 an ounce in recent weeks. As it broke through that ceiling, more investors came to the market in hopes of $40 an ounce in the short term, said Jeffrey Christian, managing director of commodities consulting firm CPM Group in New York.

Silver past $38 is “very expensive,” he added. The average cost of metal at primary silver mines was $5.06 an ounce last year, four times what silver futures averaged in 2010, Christian said. Production costs for most of silver being sold are even lower as the majority of the metal in the market comes as a byproduct of gold and copper mining, he added.

…[Gold] prices are well supported all the way down to a range of $1,410-$1,415 an ounce, said Andrey Kryuchenkov, an analyst at VTB Capital in London. … At current prices, however, physical buyers are sitting out, he said. Their buying on the dips, however, will continue to sustain the uptrend for gold, Kryuchenkov said.

[source]

by Lesley Wroughton
Mon Apr 4, 2011 (Reuters) – A global coalition of development groups on Monday urged the International Monetary Fund to use windfalls from the sale of 403.3 tonnes of IMF gold to write off the debts of poor countries. … the windfall [was estimated] at $2.8 billion. The IMF declined to confirm the number.

… IMF would consider in the meeting on Wednesday three ways to use the gold profits: absorbing the funds into an endowment; placing the money into a reserve fund; and using it to assist poor countries hit by financial and other crises.

An IMF spokesman confirmed that discussions on the matter would begin shortly, ahead of meetings of global finance chiefs in Washington starting next week.

“The executive board will have a preliminary discussion on the use of excess gold profits soon,” IMF spokesman Alistair Thomson told Reuters. “We expect the Board will consider a range of possible options,” he added.

[source]

RS View: Unlike the economically unsound and withering “strong dollar policy”, policy makers are waking up to the bright realization that there is no downside to strong gold…

by Frank Holmes
April 4, 2011 (Mineweb) — Last week I had the pleasure of participating in a webcast for Bloomberg Markets Magazine regarding gold investing. It was a very insightful presentation and I suggest you view the replay at www.bloombergmarkets.com. What struck me on the call was the negativity surrounding the gold market. Call it a bubble, a frenzy or mania, there seems to be a large number of voices in the marketplace who just are not fans of gold, whether prices are moving up, down or sideways.

… The reality is that gold doesn’t possess the traits necessary for a financial bubble to form. Rodney Sullivan, co-editor of the CFA Digest, has done some great research on the history of markets and bubbles going all the way back to the 1600s. He discovered three key patterns in the 47 major financial bubbles that occurred over that time period.

These three ingredients of asset bubbles are financial innovation, investor exuberance and speculative leverage. The process begins with financial innovation, which initially benefits society as a whole. In the exuberance stage, usage of these innovations broadens; they become mainstream and attract speculation. The third step, the tipping point for a bubble to form, is when these speculators pile on massive leverage hoping to achieve greater success.

… Gold as an asset class is far from being overbought by speculators. Eric Sprott recently did a fascinating presentation explaining how underowned gold is as an asset class. Sprott wrote that despite a 30 percent increase in gold holdings during 2010, gold ownership as a percentage of global financial assets has only risen to 0.7 percent. That’s a big increase from the 0.2 percent level in 2002, but Sprott points out that it’s misleading because the majority of that increase was fueled by gold appreciation, not increased level of investment.

Sprott estimates that the actual amount of new investment into gold since 2000 is about $250 billion. Compare that to the roughly $98 trillion of new capital that flowed into other financial assets over the same time period.

[source]

Silver Leads Gold Higher

Gold is back within striking distance of its all-time high at 1447.40, underpinned by fresh 38-year highs in silver. The ongoing strength in silver has pushed the gold/silver ratio to a 28-year low. While the performance of the white metal is tough to argue with, silver is trading nearly 50% above its 200-day moving average, which warrants a measure of caution. By comparison, gold is a mere 8% above its 200-day MA.

Brent spot crude is presently about 33% above its 200-day MA, driven primarily by ongoing tensions in the Middle East and North Africa. The marked rise in energy prices is putting upward pressure on inflation expectations, which in turn is putting pressure on central banks to tighten policy, even though growth risks persist. Eurozone PPI accelerated to 6.6% y/y in Mar from downwardly revised 5.9% y/y in Feb. An ECB rate hike is pretty much baked into the cake at this point, despite the detrimental impact it would have on the debt saddled PIIGS. While the drive for a permanent EU bailout facility has been anything but smooth, there seems to be an expectation that the stronger EU nations are going to cover the higher refinancing costs in the periphery. However, recent regional elections in both Germany and France suggest that the taxpayers there aren’t so keen on that prospect.

Pressure to Tighten Policy

Last Friday’s robust jobs report ups the pressure on the Fed to tighten as well, although the likelihood remains much more doubtful in my opinion. A Fed rate hike, while the Fed is still engaged in QE2 makes no sense at all. That doesn’t mean I would rule it out completely, but it seems rather unlikely before QE2 winds down at the end of June. It also sort of presupposes that there won’t be a QE3, even if it’s in the form of reinvestment. The Fed is going to be very wary that removal of accommodations and possibly a rate hike would pull the plug on the stock market’s rally and weigh heavily on an already moribund housing market, destroying the wealth effect that the Fed worked so hard to create via ZIRP and QE.

The Options Stink

As the budget and debt ceiling debates continue in Washington, PIMCO’s Bill Gross warned in his April Investment Outlook, entitled Skunked, that our options all pretty much stink. Pick your poison: The burden of ever-more debt or austerity and tax hikes. Neither is a particular appealing option as there will be considerable pain involved, but clearly something must be done. However, our Representatives are squabbling over billions, when we face a multi-trillion dollar problem.

As we butt up against the $14.29 trillion debt ceiling, Gross accurately points out that the “true but unrecorded debt of the U.S. Treasury” is closer to $75 trillion. When the various unfunded mandates are factored in, our debt burden is close to 500% of GDP. Gross quips, “We are out-Greeking the Greeks.” The bond giant famously exited the US Treasury market entirely at the end of Feb because “[Treasuries] have little value within the context of a $75 trillion total debt burden.” Gross goes on to say that “Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies – inflation, currency devaluation and low to negative real interest rates.”

One method to help avoid getting your pocket completely picked is to save a portion of your wealth in something other than the dollar. The traditional alternative to fiat currency based savings is of course physical gold.

by Alix Steel
April 4, 2011 (TheStreet) — Gold prices were reaching for record highs Monday and silver was hitting a 30-year high as investors piled into the metals as protection against inflation.

Gold for June delivery was adding $8.40 to $1,437.30 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,440.30 and as low as $1,429.10

Silver prices were jumping 75 cents to $38.48 after hitting a 30-year record of $38.62 an ounce. Backwardation in silver has reversed, which means the spot month is now trading lower than future months.

… “While silver is overbought in the very short term, silver’s outlook remains bullish,” says Mark O’Byrne of Goldcore, a bullion dealer. “Silver remains the preserve of a handful of contrarian and hard money advocates and is only beginning to enter the consciousness of the mainstream.”

… Despite the threat that the European Central Bank will raise interest rates on Thursday, investors were piling into gold and silver. The idea that the ECB would have to raise rates regardless of anemic economic growth in Europe underscores how serious inflation actually is.

… Both metals will get some help from a weaker U.S. dollar, which could suffer if the ECB raises rates and boost the euro.

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by Adrian Ash
April 4, 2011 (IBTimes) — The Gold Price rose early Monday in London, nearing last week’s high of $1439 per ounce as energy prices led a surge in commodity prices and Silver Bullion jumped 1.9% to fresh 31-year highs.

… “[The Dollar Gold Price] has closed near $1425 for the past four consecutive weekly sessions,” notes bullion bank Scotia Mocatta, “[and] appears to be consolidating the January to March up move.”

… “It is very difficult to fight the momentum” in Silver Prices, says a London dealer today. Breaking through $38.00 early in Monday’s trade, “it seems the stage has been set for another crazy leg of upward movement in silver,” says a Hong Kong dealing desk. “This is now a classical bubble when price movement itself becomes the reason for price movement.”

Back in the gold market, exchange-traded trust funds experienced a second week of outflows on the latest data compiled by London’s VM Group consultancy, with the giant SPDR Gold Trust shrinking to an 11-month low of 1211 tonnes.

… “[But] while the Gold Futures market is not overly bullish, the physical market is still a steady buyer,” says Standard Bank’s Walter de Wet, repeating his view that real interest rates “remain exceptionally low” and global liquidity continues to rise, pushing gold higher. “The physical market is once again adjusting to a higher Gold Price, which we view as bullish…We now see increased buying whenever gold dips towards $1400.”

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by Sam Bowman
April 4, 2011 (CSMonitor) — There are two insights about human behavior that are pretty fundamental to economics:

1. People respond to incentives.

2. Knowledge is limited.

… It’s hard to predict the consequences of any action that we take in our own lives. Now think about a society with millions of people, each with their own goals and preferences (which are constantly shifting). Governments hire armies of economists and other consultants to try to figure this sort of thing out, but they’re still naked in the dark.

… People respond to incentives. Knowledge is limited. They’re almost self-evidently true, but politicians (and quite a few economists) don’t seem to recognize this. We can’t make water run uphill and we can’t design a chaotic, cloud-like system like society. I wish our rulers would stop trying to do so.

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RS View: To the Wall Street and Ivory Tower snobs who can’t fathom why gold has a key role to play in reserves and savings of public and private portfolios, respectively, a humble acknowledgement of item #2 would contribute to their better understanding of gold’s utility as a vital safety net (i.e., immutable wealth against uncertainty) and an economic touchstone (i.e., a transglobal informational benchmark of value).

April 4, 2011 (Reuters) — Silver prices rallied to their highest in 31 years on Monday and are fast closing in on $40 an ounce, lifted by interest in the metal as a cheaper proxy for gold and expectations that industrial demand is set to improve.

But analysts remain wary of silver’s extreme volatility, which has led to some heart-stopping reversals in recent years. When commodities sold off heavily in mid-March, it dropped nearly 5 per cent in a single day, versus gold’s 2 per cent fall. Silver prices have had an impressive run higher since the financial crisis gripped markets back in late 2008, rallying from below $9 an ounce in October that year to a 31-year peak of $38.40 on Monday.

… Silver’s outperformance of bellwether precious metal gold is partly due to the much smaller size of the market. A lack of liquidity tends to mean any price moves are exaggerated, leading to overperformance in a rising market but underperformance when prices fall.

“There is a huge amount of speculative drive behind silver, and that is off the back of gold,” said Societe Generale analyst David Wilson. “It has such a head of steam it seems difficult to say it won’t (keep going), but there doesn’t seem to be that much of a reason for it to be as strong as it is.”

… Given the amount of silver held by ETFs, which is technically still available to the market, and comfortable mine output, the market is unlikely to be short of metal even though demand may rise.

… “When investor interest wanes in silver, there is every possibility of sharp falls in price amid liquidation and plentiful metal stocks,” said RBS in a report. “Equally, though, we must warn that because of its volatility, silver is too dangerous to short,” it added. “The message is, do not chase silver at these levels.”

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Gold is firmer this morning, led once again by silver, which has established new 38-year highs above 38.14. Oil prices have extended to new 30-month highs on continued turmoil in the Middle East and North Africa, driving broad-based inflation fears.

Eurozone PPI accelerated to 6.6% y/y in Mar from downwardly revised 5.9% y/y in Feb. Australia TDMI surged 0.6% in Mar, with consumer #inflation accelerating to 3.8% y/y. Core +0.3% m/m, +2.4% y/y.

Rising energy prices threaten to derail nascent economic recoveries in the industrialized world. Meanwhile, rising food prices are stoking the political unrest in the emerging world, adding further impetus to the rise in energy prices.

The Wikileaks/Financial Times revelations on significant gold buying interest in the Middle East — notably Iran’s central bank, Jordan’s central bank and Qatar’s sovereign wealth fund — brought to mind the story of Saudi Arabia’s King Ibn Saud and his sale of oil concessions to the major oil companies. In payment he received 35,000 British sovereigns — a coin many of you hold in your own sovereign wealth fund. The good king understood the difference between the value of gold and the value of a paper promise.

At the time (1933), the British sovereign’s value stood at $8.24 each, or $288,365 for the lot. The price of oil was about 85¢ a barrel, and a British sovereign could buy about ten barrels.

Today those same sovereigns would bring a little less than $12 million at melt value ($338.00 each) and a barrel of oil is selling for about $115. Thus, a British sovereign can buy a little under three barrels of oil — a statistic which gives you an inkling of gold’s current undervaluation.

For gold to buy the same amount of oil now that it did in 1933, the price would have to go to nearly $5000 per ounce — an interesting calculation for those who think gold is overvalued and in a bubble.

In the gold market where there’s smoke, there’s fire. If members within one class of investors — e.g., central banks, sovereign wealth funds or hedge funds — you can be assured that other members of that same group are similarly involved. Recent activity within the hedge fund industry with respect to gold is exemplary. It follows then that if Iran, Qatar and Jordan — themselves threatened by the popular Pan-Arabic uprisings — are acting on their interest in gold, can Saudi Arabia, the United Arab Emirates and Kuwait be far behind?

If so, they will join several nation states and a bevy of hedge and sovereign wealth funds in the pursuit. The problem they will encounter is an old one. There simply is not enough physical gold available at any given point in time to satisfy the needs of any one of these major players, let alone all of them. All of this, of course, will resolve itself in the price for which the metal sells.

I note with interest that Barclays Bank — one of the five members of the London Gold Fix and an institution well-situated to experience first-hand the interest in physical metal — has predicted a top price for 2011 of $1620 per ounce. Predictions by other Fix members are equally bullish. Scotia-Mocatta predicts a high range of $1500 to $1600 with a possibility of a spike higher. Deutsche Bank is predicting $1511 per ounce for 2011 and $2000 per ounce for 2012. Both Societe General and HSBC, the two remaining members, are calling for a top-end price of $1550 per ounce. These bullion banks are in a better position than most to ascertain the sources of physical demand, and they know better than anyone the extent of global interest among key players. By the way Goldman Sachs, though not a member of the Fix, is still widely monitored for its opinion on gold. It has set a price objective of $1690 per ounce for 2011.

Michael J. Kosares
Author: The ABCs of Gold Investing: How to Protect and Build Your Wealth with Gold
Founder: USAGOLD-Centennial Precious Metals

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By Claudia Assis and Virginia Harrison
April 1, 2011 (MarketWatch) — Gold futures settled lower Friday, a day after ending at a record high, hit by hawkish comments from a U.S. Federal Reserve official and a government report that showed the U.S. economy added jobs at the fastest pace since May.

Gold futures for June delivery lost $11, or 0.8%, to $1,428.90 an ounce on the Comex division of the New York Mercantile Exchange. Gold ended at a record of $1,439.90 Thursday.

“People are certainly concerned about what the Fed is going to do,” said Walter de Wet, an analyst with Standard Bank in London. Any talk about the end of monetary easing “is going to be perceived negatively for gold. With the unemployment figures, the market has leaned toward that happening sooner rather than later.”

Worries about loose monetary policy and currency debasement are one of gold’s main pillars of support as the metal is viewed as the ultimate way to store wealth.

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April 1 (Bloomberg) — Spencer Patton, founder and chief investment officer at Steel Vine Investments, discusses the outlook for gold and coffee prices. Patton, speaks with Lisa Murphy on Bloomberg Television’s “Fast Forward,” also discusses investment strategy.

Gold and silver discussion begins at 3:45 mark in video.

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India’s Demand For Gold Surges Along With Population

Much of the international discussion about populations and gold in recent years has centered on China as they vied with India to become the world’s largest consumer of the yellow metal. However, India is, and will remain, a powerhouse in global gold consumption. On Thursday, census data showed that the population of India now stands at 1.21 billion. That’s an increase of 181 million over the past decade, or as The Wall Street Journal put it, the “equivalent of about five Canadas.”

While population growth in India has slowed, it hasn’t slowed as much as expected, prompting the Planning Commission to push their estimate for population stabilization out more than 15-years to 2065. The UN estimates that India may surpass China as the world’s most populous nation as early as 2030. This reality may change a lot of assumptions about China definitively taking the global lead in gold consumption for good. China may maintain a short-term advantage due to its larger population (for now), more robust economic growth and relatively small per capita gold ownership. However, the rapidly rising population may prompt — or perhaps force — India to remove barriers that have impeded the inflow of foreign capital. If that happens, India could really take-off.

The Indian economy grew 8.7% last year and estimates for this year are running around 8%. Continued robust growth has contributed to the rapid expansion of the Indian middle-class. The new-found wealth of the middle and upper classes stokes a desire for gold. There is a strong cultural affinity toward gold in India, as a store of wealth and as gifts for weddings and various festivals. According to The World Gold Council, in the same decade that saw a 17.6% increase in the Indian population, Indian demand for gold grew by 25%, despite a 400% increase in the price of gold. Clearly the notion that Indian buyers are too price sensitive is misplaced.

And its not just the people of India that are buying. The government has been aggressively building its gold reserves as well. The most notable purchase was the 200 metric tonnes that the Reserve Bank of India purchased in 2009 from the IMF. Indian gold reserves now stand at 557.7 tonnes, ranking them 11th on the list of gold holding countries, but that’s only 7.9% of their total reserves. India’s official holdings — in total and as a percentage of total reserves — are likely to increase in the years ahead as well. It would seem the government’s view of gold, reflects that of the people.

The WGC projects that Indian demand for gold will continue to accelerate, “growing by almost 3% per annum over the next decade.” That’s nearly another 30% rise in demand in the next 10-years. The WGC went on to say that “Indian demand for gold will be driven by savings and real income levels, not by price.” This will continue to be a driving force in the gold market for decades to come. Further amplified by the same circumstances in China and elsewhere throughout the emerging world. Add to that, the heightened interest in gold throughout the industrialized world, along with tighter supplies, and you don’t need to be an economics major to come up with the likely price implications.

A recent WGC report said that “Indian demand for gold will be driven by the concept of enduring value, not price.” Couldn’t we all benefit from an asset with “enduring value” in our portfolios?