With unemployment still near 9% and the “real” unemployment rate at 15.7%, “we can’t afford not to do more,” says Christina Romer, the former chair of the President’s Council of Economic Advisers.

It’s a “mistake” for the Fed to end QE2 in June as planned, Romer continues. “The evidence is it’s been very effective. I don’t understand why we’d be dialing back that tool.”

More controversially, Romer lauds QE for helping to weaken the dollar. A weaker dollar makes U.S. goods more competitive overseas, boosting exports and GDP growth, and ultimately hiring. While that’s true, she seems to overlook the impact a weak dollar has on ordinary Americans in terms of falling buying power and punishment for savers and those living on fixed-incomes.

PG View: Of course Ms. Romer ignores the real impact of inflation on working families. It’s far easier for politicians to confiscate wealth stealthily via inflation — as they’ve been doing for decades — than to sit down and have a serious talk about spending cuts and tax hikes.

By Dan Caplinger
April 7, 2011 (TMFool.com) — For U.S. investors, a rising stock market has probably helped beef up your net worth. But before you pat yourself on the back for a job well done, you need to consider one disturbing fact: in terms of global purchasing power, the value of your portfolio may well have gone down, not up.

Relatively few investors in the U.S. pay much attention to the foreign currency exchange markets, unless they’re planning a trip abroad for the summer. But lately, currency movements have played a huge role in the financial markets, and all indications are that they’ll remain important both in the immediate future and for some time to come.

Lately, the dollar has been under pressure versus nearly every major currency on the planet. …… The source of currency woes for the U.S. rests largely in the Federal Reserve’s interest rate policy. The European Central Bank is expected to raise interest rates today, with Switzerland potentially following suit. In doing so, they’ll join countries around the world, including Brazil and most recently China, in tightening monetary policy to combat inflationary pressures.

Meanwhile, the Fed seems bound and determined to keep interest rates low for the foreseeable future. That has unmistakable benefits for borrowers, including the U.S. government. But it also discourages savers from holding onto greenbacks.

… Given that you’re likely to get paid in dollars for the rest of your life, moving some of your investments away from dollar-denominated assets could help hedge your bets if the dollar falls further.

[source]

RS View: As far back as fifteen years ago I regularly espoused the same sentiment represented in that concluding remark as being the basis of an ideal diversification — that is, while working for an income that represents 100% exposure to the dollar itself, it makes natural sense to mitigate the depth of that exposure by putting 100% of savings completely outside the dollar system — i.e., in physical gold. “…And it’s worked out pretty well so far.“

by Carlos X. Alexandre
April 07, 2011 (MarketOracle) — The topic of a reserve currency to replace the dollar never gets old, and the logic behind it is a bit fuzzy. First and foremost, why is the dollar the reserve currency of choice? Does America threaten to bombard any country that chooses to keep its reserves in euros, yen, Swiss francs, or gold, instead of adorable Benjamin Franklins? Let’s look at the landscape first…

… I understand that most people are trying their best to develop systems that contribute to global economic stability, but when the word “potentially” is included in the excerpt above, one can only wonder whether an SDR could “actually” be exchanged for “freely usable currencies” under extreme conditions…

… a complex issue is that with China now the second-largest economy in the world, the G20 wants the yuan to be part of the SDR’s basket of currencies. Reuters reported on March 30 that Xu Hongcai, a Chinese economist and department deputy director at the China Center for International Economic Exchanges, stated that, “Nations around the world have no way of restricting dollar issuance by the Federal Reserve. The current international monetary system lacks both stability and fairness.”

The article also points out that “Beijing has repeatedly warned that loose U.S. monetary policy threatens the dollar, but it has continued to accumulate dollar assets at the same time, adding about $260 billion of Treasury securities last year, according to U.S. data.” Maybe they are implementing the “dollar cost averaging” strategy.

I don’t think that Mr. Hongcai is crazy, just frustrated that the game has changed. But I’m going to agree with him for a change, and propose that the Chinese government should start dumping the dollar tomorrow and start buying all other currencies and precious metals. Why does the Chinese government keep buying the greenback? If I don’t like something, I shop around for alternatives.

But here’s where the story gets tricky, because China needs to maintain the economically beneficial peg, and floating the yuan is the equivalent of taking a cyanide pill for back pain….

In short, if the yuan floats freely, China will sink fast and freely as well. But the rhetoric that the dollar is a bad idea never dies, and when the SDR is pushed to play a bigger part as a reserve currency, China does not want to be part of it. What gives? One cannot have one’s cake and eat it too. Let’s propose to make the yuan the main reserve currency and wait for China’s response.

[source]

By Claudia Assis
April 7, 2011 (MarketWatch) — Gold futures crawled higher Thursday, shaking off the weakness that permeated part of floor trading to make history a third time. Gold cinched a settlement and an intraday nominal record highs, its third consecutive, and helped silver, the poor man’s gold, reach another 31-year high close.

… Gold for June delivery added 80 cents, less than 0.1%, to settle at $1,459.30 an ounce on the Comex division of the New York Mercantile Exchange. The contract, gold’s most active, climbed as high as $1,466.50 an ounce earlier, according to a preliminary tally available at the CME Group’s website. CME owns and operates Comex. May silver added 16 cents, or 0.4%, to $39.55 an ounce.

Silver and gold’s runs are the response to geopolitical and inflation fears, said George Gero, a vice president with RBC Wealth Management. … At such prices, however, both silver and gold are starting to look in need of a correction, said Michael K. Smith, president of T & K Futures and Options Inc. in Florida. “This just got to be too far, too fast,” he said. He got out of silver earlier this week as prices started to close in on $40 an ounce, and has tried to dissuade his clients from buying both metals at the current prices.

“I’ve been getting all kinds of calls,” people who just months ago could not be persuaded to buy silver at $20 an ounce, he said. “That’s a great kind of good contrarian indication. I tried to dissuade everyone to buy, or at least procrastinate.”

Once silver prices shave about $5 dollars and gold takes off $40 to $50, he’d be a buyer again, he said. The same fundamentals that have driven the run — notably, fears of inflation — are still in place, Smith added.

[source]

Frank Tang
Apr. 7, 2011 (Reuters) — Gold was little changed Thursday afternoon, retreating from a record high after another strong earthquake hit Japan. In early trading, gold rose to a record for a third straight session on inflation worries and expectations that the European Central Bank’s first rate hike since 2008 would weaken the dollar.

Crude oil and global equities also retreated after a strong earthquake shook Japan, pressuring gold.

Spot gold hit a record US$1,464.80 an ounce and was later down 0.1% to US$1,456.14 at 1:14 p.m. EDT

… The traditional inverse correlation between gold and the dollar appeared to be strengthening this week to a negative 0.8, as gold hit successive records, but the link could be erratic in the near term.

… Among other precious metals, silver gained 0.2% at US$39.50 an ounce, just off the previous session’s 31-year high at US$39.75. Silver has not shaken its image of an unpredictable metal with high volatility and chronic oversupply, but investors seem set on driving prices beyond the recent 31-year high.

On fundamentals, industrial demand for silver is expected to rise less than 10% this year, after prices more than doubled to 31-year highs since late 2010, the head of metals research and consultant GFMS said on Thursday.

[source]

By Kate Rogers
April 07, 2011 (FOXBusiness) — A new study from Junior Achievement USA and the Allstate Foundation found that 81% of teens said the recession has made them more eager to learn about money management. However, less than half of them have discussed financial planning with their parents, who they said are their number-one resource on this subject.

Talking finances with children today has become taboo or off limits for parents, because adults feel their own financial knowledge is not up-to-par. Having a serious discussion about money has become in some ways as awkward as talking about sex with kids, according to Jack Kosakowski, president and CEO of Junior Achievement.

“Most parents feel inadequately prepared to have that (money) discussion, because nobody ever had that talk with them,” Kosakowski said. “So ignorance gets passed on generation to generation.” [And from one buggy committee or party to the next...]

The survey found that 90% of teen respondents said the recession has pushed them to save more, and 78% said they will spend less due to the economic downturn. “Our experience has shown that it doesn’t sink in until its personal,” Kosakowski said of the recession. “Parents got laid off. At one point, kids may have had an open checkbook with parents, and all of a sudden parents had to start making tougher decisions. But as horrible as it has been, the silver lining is that it really was a wake-up call to realize that its not a bottomless pit of available funds.”

Kids are also unsure about how the credit system works. … The best time to start talking to kids about money is as early as possible, Kosakowski said. Parents should start as early as kindergarten with simplistic lessons about wants and needs, and saving even a little bit of money for the future.

[source]

By Lailany P. Gomez
Thursday, April 07, 2011 (Manila Times) — The country’s foreign exchange reserves surged by almost half to register a new high in the first quarter of the year, the Bangko Sentral ng Pilipinas (BSP) said on Thursday. In a statement, the BSP said the country’s gross international reserves (GIR) jumped by 45.55 percent to $66.2 billion at end-March from $45.599 billion in the same three-month period in 2010.

Deputy Gov. Juan de Zuniga Jr. said the appreciable buildup in the GIR level was mainly because of the proceeds of the national government’s global bond issuance—composed of the $1.5-billion dollar-denominated bonds and $1.25-billion peso-denominated bonds—the BSP’s foreign exchange operations, income from investments abroad and revaluation gains on the central bank’s gold holdings on account of rising prices.

Gold holdings of the central bank appreciated by 19 percent to reach $7.08 billion at end-March from $5.951 billion in the same period in 2010.

… The end-March dollar reserves could cover 10.2-months of imports of goods and payments of services and income. … The BSP holds international reserves for the foreign exchange requirements of the country in case the domestic commercial banks’ supply of the greenback and other convertible currencies falls short of demand.

The foreign assets that the BSP holds are mostly in the form of investments in foreign-issued securities, monetary gold and foreign exchange, of which 13 percent is in US dollars.

Monetary authorities are looking at the country’s GIR level this year to reach $68 billion to $70 billion.

[source]

RS View: Add the Philippines to your list of central banks who are not displeased by rising gold valuations. Future strength in gold as a reserve asset is necessarily welcomed as the international playing field is brought to a more neutral level in which the dollar loses its commanding perch on the high ground.

By Jijo Jacob
April 7, 2011 (IBTimes) — The runaway rise in gold prices is here to stay. And that is not just bad news to the U.S. economy. A sustained gold and oil boom indicates that the dollar is slipping into grave danger and the economy closer to collapse. “… when these commodities go up in price it is a sign that the U.S. dollar is dying and that our country is getting closer to economic collapse,” Michael Snyder wrote in Daily Markets on Thursday.

In simple words, the gold and silver boom indicates that investors everywhere in the world are losing trust in the dollar and the U.S. government treasuries. And they seek out something they can trust more.

… Synder blames the quantitative easing for the loss of dollar value. He says the policy of pumping huge amounts of money into the financial system is highly inflationary and a form of cheating.

He says it is “like playing Monopoly with someone that reaches under the table and pulls out a bunch of extra money when they are almost broke.”

… the rest of the world is now seriously doubting the sustainability of U.S. government debt. And this is reflecting in the commodities boom.

[source]

Gold Firms as ECB Tightens and EU Prepares to Bailout Portugal

[ BREAKING: USGS has reported a magnitude 7.1 earthquake 41 miles East of Sendai, Japan. Tsunami warnings have been issued for the NE coast of Japan. ]

Gold has pushed to yet another record high as inflation concerns prompted the ECB to hike rates for the first time since 2008. This move was widely expected as central bank rhetoric about rising price risks escalated in recent weeks. ECB President Trichet said the ECB has not decided if this was the first of a series of rate hikes, but market consensus is running about 75-100 bps in tightening for this year. The BoE chose to hold steady on rates today, which was also widely expected.

The ECB hike however comes at an interesting time. Yesterday Portugal asked for an EU bailout, despite repeated assurances over the past several months that a bailout would not be necessary. I say interesting because the reason Portugal needs a bailout is that their refinancing costs are too high…their interest rates are too high. Raising the benchmark rates in the eurozone, while providing relief to periphery countries with interest rates already well above those benchmark rates seems to make little sense. Ahhh, but nobody ever said a central bank needs to make sense. It is likely that the Fed will find themselves in a similar situation in fairly short order, faced with the prospect of raising rates and essentially eroding the the value of their massive balance sheet.

Clearly the bailouts have done little to improve the situations of Greece and Ireland. Both have experienced further downgrades of their sovereign debts and their borrowing costs have continued to rise, despite their bailouts. There is little reason to think Portugal is going to be any different. Perhaps more importantly, the Portuguese bailout moves Spain, Italy, Belgium and even France more into the direct sights of the market. German and French taxpayers are already in revolt at the prospect of footing the bill for the PIIGS bailouts, at the first real hint that the fourth largest economy in the EU — Spain — is queuing up for a handout, look for political firestorms to erupt.

by Ken Sweet
Thursday April 7, 2011 (CNN Money) — Oil, gold and silver have been hitting new highs and experts expect the momentum to continue. … For the third day in a row, gold hit a new record high Thursday, rising to $1,466.50 an ounce….

Worries about inflation have reared their ugly head again this week. Early Thursday, the European Central Bank raised rates for the first time since July 2008, in an effor to keep a lid on rising energy and food prices. The move comes one day after China’s central bank raised interest rates for the fourth time this year, in part to combat the country’s own inflationary problems. The worries have been exacerbated by the latest Fed minutes, which showed central bank officials at odds about rising prices. That could signal an interest rate hike sooner rather than later.

Unless that happens or the geopolitical situation actually stabilizes, gold prices will probably keep rising, said Carlos Sanchez, a precious metals analyst with the CPM Group.

… Sanchez expects gold prices to rise to as much as $1,550 an ounce in the next couple months. Other analysts are more bullish with Deutsche Bank analysts saying they expect gold to strike $2,150 an ounce by the end of 2012.

It’s not just gold. Silver has been on tear of its own, climbing at more double the pace than gold this year to hit a 31-year high this week. But some analysts believe that silver is due for a retreat, saying the recent investor interest in “gold’s poorer cousin” suggest the market is overbought.

“Should [retail investor] appetites wane, prices are likely to suffer from a sharp correction,” analysts with Barclays Capital wrote in a client note.

[source]

Apr 7, 2011
(Reuters) LONDON — Gold’s “super cycle” could see prices averaging $2,100 an ounce by 2014 and even approaching $5,000 later in the decade, Standard Chartered said in a report as demand rises in burgeoning Asian economies.

… In the decade to come, soaring demand in major consumers China and India, where incomes are rising, is likely to extend this further, the bank added. “We find that there is a powerful relationship between income per head in Asian emerging markets and the gold price, which suggests further significant upside for gold,” it said in the report.

“Also, our FX team is forecasting further (dollar) weakness against the Chinese yuan and Indian rupee.”

[source]

by Jan Harvey
April 7, 2011 (Reuters) — Gold hit a fresh record high near $1,465 an ounce on Thursday after European Central Bank president Jean-Claude Trichet indicated the rate hike announced by the bank earlier may not be the first in a series.

Spot gold hit a record $1,464.80 an ounce and was bid at $1,460.50 at 1420 GMT, against $1,457 late in New York on Wednesday. U.S. gold futures for June delivery were up $3.80 an ounce to $1,462.30, having peaked at $1,467.

… That came largely on the back of unrest simmering across the Middle East and North Africa, which has lifted risk aversion, and boosted oil prices to multi-year highs.

… “The tail risk event remains uncertainty in the Middle East leading to a supply side-driven spike in the oil price,” said Citigroup in a note. “Historically the biggest beneficiary under an oil price spike environment has been gold, with large amounts of petro dollars being recycled into the yellow metal.”

[source]

NEW YORK—Silver prices will likely peak around $50 this year on demand from investors who want a safe haven and inflation hedge, according to the chairman of an influential metals consultancy.

But reliance on such a fickle source of demand makes the metal vulnerable to a sharp price pullback, Philip Klapwijk, chairman of London-based consultancy GFMS Ltd., told Dow Jones Newswires in an interview.

“There is an element here of a bandwagon effect,” he said in comments coinciding with Thursday’s release of the World Silver Survey, which GFMS researches for The Silver Institute, a trade association. “If investment demand falters, you would expect to see prices come off.”

[source]

April 7 (Bloomberg) — European Central Bank President Jean-Claude Trichet said the bank will continue to monitor inflation risks “very closely” after raising interest rates today for the first time in almost three years.

Monetary policy remains “accommodative,” Trichet said at a press conference in Frankfurt today after the ECB raised its benchmark rate by a quarter percentage point to 1.25 percent. “It is essential that recent price developments do not give rise to broad-based inflationary pressures over the medium term.”

[source]

Gold is steady, but well-bid this morning.

BoE held steady on rates, as expected.

ECB hiked the refi rate 25bp to 1.25%, in line with expectations. Marginal lending rate also raised by 25bp to 2.0%. Euro eased initially into the announcement, but then caught a bid as Trichet began press conference with more hawkish language.

Portugal has requested a bailout. This was largely priced in by the market, despite repeated assurances that a bailout would not be necessary. Little market reaction. Focus will now turn to Spain.

US initial jobless claims -10k to 382k in the week ended 02-Apr, below expectations.

by Jim Willie
April 6, 2011 (MarketOracle) — … since the emergency G-7 Meeting held two weeks ago, the central banks have joined forces in a Global QE movement that will propel the Gold & Silver price much higher and render deep further damage to the USDollar. The Deflationists paid no notice, or did not notice, or did not comprehend the importance. They are a laughing stock crew of half blind shamans.

… My main ongoing criticism of the Deflation camp has been their blind eye to the human response to asset deflation. Obvious home prices fell and continue to fall, and related asset backed bonds have fallen progressively into ruin. That is not the point. Their camp has consistently ignored the central bank response with multi-$trillion monetary expansion. In round #1, the excesses were tucked away in the Federal Reserve interest bearing account for the big banks. They were essentially Loan Loss Reserves of those banks, which were removed from the big bank balance sheets only to be relocated on the USFed books. In round #2, the excesses went global with the entire commodity complex exploding upward in price. Purchase of USTreasury Bonds in the hundreds of $billions cannot be contained anymore than herding tiger cats. Most noticeable among commodity price rises was in food & energy. With most food items up 15% to 20% in price in a single year, and gasoline up 25% in several months, the pinch is on with powerful price inflation. But it appears on the cost side, as my analysis has mentioned numerous times. …… They never mention multi-$trillion central bank expansion of the money supply, which debases the value of money, even making a total mockery of money, thereby adding to the cost structure in a massive way, pressuring prices and wages. The rising stock indexes serve as evidence of the monetary inflation, which they do not recognize.

My point made consistently is that wages will not keep pace with rising costs, even made a national priority to halt the secondary inflation effects on wages. In that sense, my analysis has joined the Deflationists, but only with one foot in their shallow pond of constructs, hardly qualifying as a School of Thought.

[source]

Portugal admitted that it will need aid from the European Union to overcome its financial troubles, as the country’s crisis intensified.

Fernando Teixeira dos Santos, the finance minister, said: “In this difficult situation, which could have been avoided, I understand that it is necessary to resort to the financing mechanisms available within the European framework.”

[source]

PG View: The bailout of the eurozone periphery continues, despite months of assurances that Portugal was no Ireland…and Ireland we were told was no Greece. The market’s attention will now turn to Spain, and while there will be assurances that Spain is no Portugal, the charade is getting progressively hard to pull off.

By Claudia Assis and Myra P. Saefong
April 6, 2011 (MarketWatch) — Gold and silver futures made history Wednesday, landing top marks as investors flocked to the safe haven of precious metals, with a weaker dollar speeding up the run. Gold notched a settlement and an intraday record high and set its sights on $1,500 an ounce. Silver stopped just pennies short of the psychologically important $40-an-ounce level, hitting a 31-year high on its way.

Gold for June delivery rose $6, or 0.4%, to settle at $1,458.50 an ounce on the Comex division of the New York Mercantile Exchange.

The contract climbed as high as $1,463.70 an ounce earlier, according to a preliminary tally available at the CME Group’s website. CME owns and operates Comex. The settlement and the intraday nominal records supplanted the previous milestones reached just the previous day.

“The geopolitical situation is going from bad to worse,” said Afshin Nabavi, head of trading at MKS Finance in Geneva. “Everybody is talking about gold at $1,500 [an ounce].” … Gold at $1,500 is certainly possible in the short term, although a more orderly, slower rise over the next month or two would be more desirable, he said.

… “Prices are likely to remain buoyant as risk aversion increased on the back of Moody’s downgrade of Portugal’s credit rating,” analysts at ICICI Bank wrote to clients. … The focus on Portugal intensified as the country had to pay hefty yields to sell short-term bonds on Wednesday. Investors are concerned that a rescue for Portugal will also rock Spain, an economy bigger than Portugal, Ireland and Greece combined.

[source]

(Reuters) – The United States should include in its budget the cost of mortgage loan guarantees and other housing supports, the International Monetary Fund said on Wednesday in a rare criticism of its biggest shareholder.

The IMF’s findings may land it squarely in the middle of a hot political debate over what to do about Fannie Mae and Freddie Mac, the mortgage finance giants that back most new housing loans.

The IMF also faulted the Obama administration for failing to address the tax deduction for mortgage interest, which it called “both expensive and regressive.”

[source]

PG View: I find myself wondering why the IMF has chosen to focus on just Fannie and Freddie. There are a whole host of liabilities that aren’t included on the Federal balance sheet. As we’ve discussed in posts this week, our total debt is probably closer to $75 trillion, or nearly 500% of GDP.

by Kelley Holland
Wednesday, 6 Apr 2011 (CNBC) — A federal government shutdown might not dent the dollar too badly, especially if it’s short. But when the debt-ceiling debate rolls around, watch out.

Congress and the President aren’t sharing their sandbox very well. A government shutdown is looking increasingly likely this Friday, with all the attendant uncertainties.

… “Markets have gotten used to stopgap spending measures and have gotten a bit tired of these political games,” said Paresh Upadhyaya, head of Americas G10 FX strategy at Bank of America Merrill Lynch. “If we get a government shutdown and it lasts beyond the last time, I think the markets may start becoming concerned. But for now, I’m not all that bothered by it,” he told me.

… If there is a shutdown, investors could actually watch it for clues to how Washington will handle the looming debate on raising the debt ceiling. Any turmoil around government debt limits could have a marked effect on the dollar, said Steven Englander, head of G10 currency strategy at Citigroup. “You can shut down the government without defaulting. That just leaves you in despair about the process,” he told me. But “If you do anything that looks like a default, that’s really terrible for the dollar.”

Shutdown or no, Englander sees few reasons to be holding the dollar now, short of a global catastrophe that would lead investors to rush to safe havens.

[source]

April 6, 2011 (CNBC) —
“Fixed income securities are not going to do very well over the next five years or so and cash is not going to do very well either, I suspect commodities and common stocks are going to continue to outperform fixed income securities by a long shot,” Puru Saxena, Chief Executive at Puru Saxena Wealth Mangement told CNBC Wednesday.

Recommends 10% of portfolios be in physical bullion.

[source video]

Gold Surges to Record Highs

Gold remains well bid, having pushed to new all-time highs over the past two sessions. Silver continues to lead the charge, rapidly approaching $40, both being driven by rising inflation expectations and the simultaneous erosion of tighter Fed policy expectations. Political uncertainty in the US, a weak dollar, mounting debt worries in Europe, geopolitical tensions in MENA and the ongoing nuclear crisis in Japan are all adding to a broad-based sense of uncertainty and risk aversion that have underpinned the precious metals.

Tuesday’s initial push to new highs in gold was likely triggered by a Reuters story that quoted former Saudi oil minister Sheikh Zaki Yamani saying that oil could hit $200-$300 a barrel if Saudi efforts to squelch anti-government unrest are unsuccessful. This is something we warned about early in the year; If regional geopolitical turmoil spreads to Saudi Arabia, the price of oil could soar, derailing nascent economic recoveries in the US and Europe. Obviously, higher energy prices would not bode well for the hobbled Japanese economy either.

With that in mind, and in the wake of Goldman Sachs’ recent slashing of their Q1 GDP forecast from +3.5% to +2.5%, along with yesterday’s rather disappointing US ISM data, the optimism that developed in the wake of last week’s nonfarm payrolls report for March quickly evaporated. Investors that developed some appetite for risk based on the perception that the job market was improving, decided that they weren’t so hungry after all and began unwinding those risk trades, tempering their expectations that the Fed was not only likely to end QE2 on schedule, but would actually hike rates.

Additionally, there has been no movement on a US budget deal, despite intervention on the part of the President. There is apparently another CR on the table, but it comes with steep cuts attached. Both parties have dug in their heels, suggesting that a government shutdown this weekend is looking increasingly likely.

by Fiona Bond
April 6, 2011 (MoneyObserver) — Gold soared to a fresh record high today, as geopolitical unrest, a weaker dollar and rising inflation sent investors flocking.

Turbulence in the Middle East has showed no signs of abating as civil war in Libya persists, and skirmishes in Syria, Yemen and Bahrain have been reported.

Furthermore, the sharp spike in oil prices to a two and a half year high of $122.5 per barrel have sparked concerns that global inflation could continue to rise.

‘Very high inflation rates are particularly good for gold for short periods, as investors seek out hard assets, as concerns about the outlook intensify and safe-haven buying picks up,’ Standard Chartered analysts said in a research note.

[source]

April 6, 2011 (Morningstar) — Paul Justice, director of North American ETF research at Morningstar, talks to Tony Rochte, Senior Managing Director at State Street, and Abraham Bailin, a Morningstar commodities ETF analyst….

Justice:
So, we’re looking at $14 billion in assets, so roughly we are looking at a new source of storage or a new source of demand for silver that really didn’t exist five years ago. Could you give us an idea of how much silver was actually stored five years ago versus where it is today?

Bailin:
Well, it really depends on what context you are looking at–certainly there were a host of jewellery applications and silverware applications, but as far as vaulting went, really there wasn’t too much to speak of it at all, and there has been a bit of a paradigm shift in that respect now with the proliferation of funds like SLV that actually do vault silver in order to back their shares. Reason for that is that they are actually drawing down supplies that would have gone to physical uses beforehand.

Justice:
So, you’ve got industrial consumers who are competing against these people who want to hoard the metal and put it in the vault. They can’t really shut off production of their end used goods very quickly, so that marginal cost can really shoot up on that.

Bailin:
Sure. You get a bit of feedback, right? Because not only is there the entrance of a new demand with investment demand driven by these exchange-traded funds and the close-ended funds, but at the same time you are drawing down those supplies.

[source]

By Pham-Duy Nguyen
April 6 (Bloomberg) — Gold rose to a record for a second day in New York on demand for the precious metal as a hedge against inflation. Silver advanced to a 31-year high.

Gold rose as high as $1,463.70 an ounce on speculation that the U.S. will struggle to contain inflation. Federal Reserve Chairman Ben S. Bernanke this week said inflation must be watched “extremely closely.” Minutes from the Fed’s March 15 meeting, released yesterday, show dissent on maintaining programs intended to stimulate growth. The U.S. has kept its benchmark interest rate at a record low since December 2008.

“People are very concerned about inflation, especially with our central bank holding rates so low for so long,” said Matt Zeman, a market strategist at Kingsview Financial in Chicago. “In the eyes of the investing public, Bernanke’s reputation as an inflation fighter is questionable, and you’re seeing people continue to buy precious metals.”

“People don’t have much faith in the dollar,” Zeman said.

[source]

Gold has extended to establish more new record highs (currently 1460.78) as silver continues its march to $40. The latest surge in the metals and oil came on the heels of yesterday’s weak US ISM data. The hint of a faltering recovery reinvigorated the camp that believes the Fed will not be removing extraordinary accommodations any time soon. It simultaneously rattled the camp that had viewed the recent improvements in US payrolls data as a harbinger of tighter monetary policy.

About the same time that the ISM data were released, a Reuters story came out in which former Saudi oil minister Sheikh Zaki Yamani suggested that oil could hit $200-$300 if Saudi Arabia fails to prevent contagion of the regional geopolitical unrest.

China Securities Journal warns inflation may top 6% in the coming months, preventing any relaxation of monetary tightening.

Swiss CPI unexpectedly jumped 0.6% in Mar, accelerating the annual rate to 1.0% from 0.5%. Well above market expectations.

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.

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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.

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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.

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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 think 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, offering further support to 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.

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