Traders are warning of a dramatic change in dollar selling. They fear central banks from the Middle East may force their Asian rivals to more aggressively drive the dollar down.

In 10 months, the Dollar Index has lost 14% because the world keeps accumulating dollars it doesn’t want and sells them. Asian central banks are key.

Many Asian central banks have been forced into waging wars to keep their currencies from appreciating because of the influx of investors to emerging markets. They sell waves of their own currencies into the market in an attempt to keep exports competitive.

[source]

PG View: Ongoing weakness in the dollar, along with competitive currency devaluations around the world will continue to underpin the gold market.

By Claudia Assis and Nick Godt
April 8, 2011 MarketWatch) — Fears of rampant inflation and U.S. dollar weakness added fuel to gold’s fire on Friday, pushing the metal to a record high, and took silver to a close above $40 an ounce, its first in three decades.

Gold for June delivery advanced $14.80, or 1%, at $1,474.10 an ounce on the Comex division of the New York Mercantile Exchange, a settlement record. Bullion traded as high as $1,476.20 an ounce, an intraday record high.

Gold had reached such milestones the previous four sessions. The metal rose 3.2% on the week, its highest five-day gain since early December and its third weekly gain in a row.

“Two words, the dollar and inflation,” said Frank Lesh, a broker and analyst with FuturePath Trading in Chicago, of gold’s rally. “I’ll tell you when it will correct: when the dollar quits going down. This tit for tat in Congress right now just makes us look bad, and it’s reflected on the dollar.”

Silver for May delivery, gained $1.06, or 2.7%, to $40.61 an ounce, its highest price since early 1980 and a fifth session of gains.

Spot silver set an intraday record of $50.35 in January 1980.

Investors priced out of gold have flocked to silver. The metal gained 7.6% this week. Yearly gains for silver have reached 31%, dwarfing gold’s 3.7%.

The run for gold and other commodities also lifted copper prices, which traded 1.9% higher. May copper added 9 cents to $4.50 an ounce.

[source]

RS View: OMG… they’ve always quoted copper by the pound, and here we’re seeing it quoted by the ounce! Perhaps the upward march of metal prices has forced copper to step up and serve a new role as the poor man’s silver… [Thank the Good Gods of Humor for blessing us with these occasional typos in the media.]

ALSO…

Gold rises to record high
by Frank Tang
April 8, 2011 (Reuters) — Gold rose to a record high for a fourth straight day and silver surged on Friday, as a weaker dollar, the prospect of a US government shutdown and inflation worries lifted precious metals in a broad commodities rally.

Gold was set for its biggest weekly gain in four months, drawing support from renewed euro zone sovereign debt fears amid Portugal’s financial crisis and inflation jitters as crude oil and corn hit new highs this week. Bullion broke above key resistance on technical charts and could target above $1,500 an ounce. The metal has risen more than 10 percent since late January when political unrest began to flare in the Middle East and North Africa. … Gold remained far below its all-time inflation-adjusted high, estimated at almost $2,500 an ounce set in 1980 as a result of heightened geopolitical pressure and hyperinflation.

“With the expected future inflation being higher in this low interest rate environment, investors are more inclined to have some contributions to commodities as an inflation hedge,” said Hakan Kaya, commodities portfolio manager at Neuberger Berman, which manages about $190 billion client assets.

The gold-to-silver ratio — the number of silver ounces needed to buy an ounce of gold — fell to a 28-year low near 36 on Friday.

“One would expect silver to outperform in this environment because it bears a higher risk than gold on a volatility basis,” Kaya said.

[source]

By Ben Rooney
April 8, 2011 (CNNMoney) — Gold prices have hit a series of record highs this week, as a combination of inflation worries, a weaker U.S. dollar and geopolitical turmoil have weighed on investor confidence. On Friday, gold futures for June delivery were up $15.40, or 1%, to $1,474.90 an ounce….

Gold has been on a tear since late January, when the metal traded as low as $1,320 an ounce. But the rally kicked into high gear this week, with gold touching new highs every day except Monday.

… This week’s gains were driven by the confluence of several gold-friendly developments, said George Gero, a senior metals analyst at RBC Wealth Management. “This is the perfect storm,” he said.

Top of the list is inflation, which has been rising sharply in emerging economies and is becoming more of an issue in Europe. … In an effort to “anchor” rising consumer prices, the European Central Bank announced a widely anticipated interest rate hike Thursday. And China has been gradually tightening its monetary policy this year as prices for food and energy surge. While investors are nervous about inflation in the United States, the Federal Reserve is split on whether prices risk getting out of control.

… As if that weren’t enough, a host of geopolitical concerns continue to boost demand for gold as a safe haven.

Turmoil in the Middle East has roiled the markets this year and the bloody stalemate in Libya threatens to draw Western powers into a quagmire. Japan, reeling from last month’s natural disasters and ensuing nuclear crisis, was hit by another major earthquake Thursday. At home, investors are worried about a looming government shutdown if Washington is unable to resolve a budget impasse Friday.

[source]

by Andrew Wilkinson
April 8, 2011 (Forbes) — A growing wariness has crept up behind bond traders to cause rising yield curves to steepen along the way. The dollar has broken to its weakest since December 2009, broadening the appeal of inflation hedges found in commodities and elevating demand when supply is already short.

… Dollar weakness is exacerbating the debate at the Federal Reserve over whether policy stimulus remains justified while bloating the prospects for inflation down the road. Investors are starting to sense this is not a good menu for fixed income.

[source]

April 08, 2011 (FoxNews.com) — A fight over a fiscal 2011 budget, when the government has been operating without a budget for six months. Medicare and Social Security reform that is so far on the back burner, it’s not even on the stove. That is what you’ve awakened to this morning, D.C. dysfunction now in high definition.

And a Federal Reserve that has journeyed on its magical bus tour so far to the outer limits of monetary policy, that it’s left a growing number of its own board members behind in disagreement.

The back-and-forth over the budget bodes ill for what many believe is the far more important fight: raising the U.S. debt ceiling.

… The 111th Congress added more to the U.S. national debt than the first 100 U.S. Congresses combined.

… If the U.S. debt ceiling is not raised, the Congressional Research Service [CRS] says: “Under current estimates, the federal government will have to issue an additional $738 billion in debt above the current statutory limit to finance obligations for the remainder of FY2011.”

… However, during debt limit fights in 1985, 1995-1996, 2002, and 2003, Treasury raised cash by redeeming securities held in government pension plans, and delayed funding these plans by shoving off into the future bond auctions, so as to meet the federal government’s other obligations…. In the first fight, in 1985, the Treasury cashed out of government pension funds to make its payments. It redeemed “earlier than usual fund securities” in Social Security, the Civil Service Retirement and Disability trust fund, and several smaller trust funds, CRS says. It also essentially stopped funding these government retirement plans, too, in order to raise cash.

… The Treasury made similar moves during the debt ceiling impasses in 2002 and 2003, and during the government shutdown under the Clinton Administration in 1995 and 1996, CRS says, with some restrictions on the use of the Social Security fund.

Treasury’s trust funds moves got Congress mad. In 1996, says CRS, Congress passed a bill to increase the debt limit noting its anger, but it didn’t do anything to stop Treasury’s raids. … And so Treasury once again raided the trust funds from April to June of 2002 and from February to May 2003…

[source]

RS View: Take heed, all would-be retirees — a pension is merely a promise, and bankrupt institutions are lousy at keeping promises. For more reliable savings, choose physical gold. It delivers.

April 8, 2011 (Reuters) — Gold hit record highs on Friday and silver its strongest since early 1980 as the dollar slid on the prospect of a US government shutdown, with euro zone debt concerns and unrest in North Africa further supporting buying.

Spot gold rose as high as $1,472.96 an ounce and was bid at $1,469.40 an ounce at 1335 GMT…

Friday’s slide in the dollar added fuel to a rally that has already taken gold to a series of record highs this year.

“The US budget at an impasse and the ECB rate hike have meant the dollar dropping to the lowest level since Dec. 2009 on the index,” said Saxo Bank senior manager Ole Hansen. “This is undoubtedly a very important ingredient for the rally we have seen.”

… “Inflationary concerns and sovereign debt worries in Europe (are) heightening demand for value store and safe haven investments,” Fairfax analyst John Meyer said in a note.

[source]

By Simon Hobbs
Friday, 8 Apr 2011 (CNBC) — Traders are warning of a dramatic change in dollar selling. … In 10 months, the Dollar Index has lost 14% because the world keeps accumulating dollars it doesn’t want and sells them. … When they sell dollars they often buy euros.

“China and Taiwan have tried looking further afield in their diversification, to the Australian and South Korean bond markets” says Mellyor. “But there are only two places that are deep enough to absorb reserves of this magnitude: the Euro Zone and the US. When ever you see emerging markets perform well you will see the euro perform well.”

… Euro/Dollar is now up 19% in 10 months. In fact there’s a growing realization that the ascent of the euro more to do with Asian bank diversification than anything happening within the Euro Zone.

“Euro/Dollar is trading without reference to the underlying debt markets” says Mellor. “In fact it’s our contention at BNY Mellon that the entire move in the Euro since 2001 have been driven by the Asian central banks need to diversify.”

… “They have been working bids below the market, relying on the market to come to them, as Europe’s sovereign debt fears and interest rate differentials trigger bouts of temporary dollar strength,” says Douglas Borthwick at Faros Trading. But Borthwick says the Asians may be forced to abandon that because of fresh, aggressive dollar selling from the Middle East.

… “The Middle Eastern players seem to be willing to chasing the market higher,” says Borthwick. “When the EUR/USD rallies 30 pips on air you can be assured this is a Middle Eastern reserve manager diversifying out of Dollars they have received from the higher price of oil.”

If the Arabs keeps “front running” their orders the Asians may be forced to abandon their passive approach…

[source]

RS View: Passivity will only serve you up to a point in the context of a “currency war”, beyond which it behooves you to firm up your position with golden reinforcements — even if it must be done in the full light of day.

by Scott Berman
April 8, 2011 (Examiner) — Following up on my article on Wednesday on inflation, faster increases in living costs can clearly create challenges. Here are some steps you can take now to prepare for the potential impact of higher inflation:

Consider making “big ticket” purchases sooner — buying a home or car or completing a major home project may be less expensive today than it will be in several years if inflation picks up.

Lock in low rates for borrowing — if you have borrowed money using an adjustable interest rate (many homeowners do this with their mortgage), you might want to consider locking in a low fixed rate for an extended term.

Don’t lock into low rates on a long-term savings vehicle — there is little advantage to putting a large amount of money into a bond or certificate of deposit for an extended period of time if it pays a very low interest rate.

Invest in assets that can appreciate in value — stocks of companies positioned to grow during inflationary periods, commodities such as precious metals, agricultural or energy investments and real estate historically tend to perform reasonably well if living costs rise more dramatically. Be certain that any investment decisions you make are consistent with your long-term objectives and your risk tolerance.

[source]

New Record Highs in Gold as Dollar Tumbles

Gold has pushed to another new record high of 1472.77 and silver surged above $40 as the threat of a US government shutdown pushed the dollar to new 16-month lows, a mere 4.5% above the all-time low in the dollar index at 71.74 from March of 2008. On top of the political uncertainty stemming from the potential government shutdown, the collapse of the greenback heightened already prevalent inflation concerns as oil and other commodities jumped in relation to the dollar. This added further impetus to the bid in the metals as gold and silver are seen as the classic hedge against a devaluing currency and the inflation that results.

Japan was rocked by another major earthquake on Thursday, and while far less severe than the March quake, it was yet another blow to the already fragile Japanese economy. There were some early concerns about damage to other nuclear plants, but TEPCO seems to have dispelled those worries.

Amid concerns that the civil war in Libya has become a stalemate, Army General Carter Ham suggested the US may consider sending troops into Libya with a possible international ground force. While General Ham didn’t seem to think this was necessarily a good idea, the prospect that wider US military intervention in Libya is on the table is yet underpinning force under the gold market. Additionally, tensions between anti-Gaddafi rebels and NATO rose yesterday after NATO aircraft mistakenly struck rebel forces on two occasions.

In the wake of yesterday’s ECB rate hike, speculation about a follow-on move by the Fed escalated. The ECB tightened policy with the specific goal of reigning-in surging inflation expectations, but a 25bp hike in the face of 2.8% (or higher in real terms) eurozone inflation is pretty meaningless. However, Fed Chairman Bernanke’s recently dismissed price risks here in the US as “transitory”. Those sentiments were reiterated today by the Atlanta Fed’s Dennis Lockhart, although he did concede that household budgets would experience “sticker shock” due to rising gasoline prices. This tone seems to suggest that Fed tightening is unlikely, at least for this year. See: Seven reasons why the Fed won’t follow the ECB

Charles Biderman of TrimTabs Investment Research pondered in a recent report, “Are central bankers loading up on gold as they crank up the printing presses and keep interest rates ridiculously low?” Biderman went on to say, “we think investors could do a lot worse than allocate some of their capital to precious metals as fiscal and monetary excess continues around the globe.” Dr. Marc Faber suggested on CNBC that gold may be “cheaper today than in 1999 when it was $252″ after railing against central bank liquidity measures (money printing).

Gold and silver surged to new all-time and 31-year highs respectively as the budget impasse persisted throughout the night, threatening to shut down the US government today. The dollar collapsed overnight to new 16-month lows, elevating the metals on the rise in inflation risks. Oil prices surged as well.

While there are rumors circulating that a budget compromise has been reached, and the metals have backed off their highs, there has been no official announcement.

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.”

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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.”

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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.

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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.”

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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.

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(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.”

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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.

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