By Claudia Assis and Virginia Harrison, MarketWatch
May 11, 2011 (MarketWatch) — Silver futures on Wednesday led yet another commodities selloff , down 8% as traders judged a default for Greece unavoidable, a sentiment that weighed down the euro and sent the dollar higher.

Gold for June delivery declined $15.50, or 1%, to settle at $1,501.40 an ounce on the Comex division of the New York Mercantile Exchange.

July silver retreated $2.97, or 7.7%, to settle at $35.52 an ounce.

Greece’s debt restructuring seems “inevitable,” said Bill O’Neill, a principal at Logic Advisors in New Jersey. “That’s a real threat to the banking system.”

In a restructuring, investors holding Greek debt will likely be offered less than face value for the bonds they hold. The stark possibility was enough to drag down the euro and prop the dollar up against most major currencies.

… For gold, and to a lesser extent for silver, dollar movements add another layer of complexity as dollar weakness and its twin fear of currency devaluation often spark precious metals buying.

Gold held up better than silver because it got some flight-to-quality support, said Adam Klopfenstein, a senior market strategist at Lind Waldock in Chicago. “At the first sign of weakness, people dump” silver, he added.

[source]

By Charles Riley
May 11, 2011 (CNNMoney) — This just in from the Treasury Department: The United States will not be unloading its nearly $400 billion stash of gold to delay hitting the debt ceiling. At least not if Treasury Secretary Tim Geithner gets his way.

As the government approaches the legal borrowing limit currently set at $14.294 trillion, some have suggested the government could sell its gold reserves, as well as other assets such as mortgage-backed securities or student loan portfolio. … That would buy politicians a little extra time to negotiate, chest-thump, and whatever else the debt ceiling debate will bring.

But Treasury is already warning lawmakers that holding a giant yard sale of government assets isn’t a responsible move.

In a letter sent to Congress last month, Geithner said any “fire sale” of assets would be “damaging to financial markets and the economy” and would “undermine confidence in the United States.”

… Uncle Sam is sitting on $396 billion worth of the shiny stuff. According to the World Gold Council, the United States holds more than twice as much gold as runner-up gold hoarder Germany. Treasury, however, plans to keep it in the vault.

“A ‘fire sale’ of the nation’s gold to meet payment obligations would undercut confidence in the United States both here and abroad,” Mary Miller, assistant secretary of the Treasury, wrote in a blog post last week.

… Even if the gold was successfully brought to market, the federal government’s massive borrowing appetite would mean only a brief reprieve. The United States borrows roughly $125 billion a month, a pace that would quickly erase the sale’s proceeds.

[source]

by Geoff Candy
May 11, 2011 (Mineweb) — Gold’s performance last week, in the face of a drop of around 30% in the price of silver was rather impressive and, could be an indicator of things to come. According to UBS precious metals strategist, Edel Tully, the bank prefers gold to silver over the course of the rest of this year even though silver offers perhaps more opportunities for short term gain, albeit with a heightened risk profile.

Speaking on Mineweb.com’s Gold Weekly podcast, Tully said, “Gold, purely from a precious metals and a safe haven angle, is our preferred method…. Obviously silver has come back quite impressively, it is up over $5 from the lows of last week so you could have made some big gains but, I would prefer to see silver try to stabilise somewhat, see it consolidate for a little while. … Gold, on the other hand, is likely to be a less volatile play, to which the movements of last week attest but, it also expected to continue on its upward trajectory.

… Inflation concerns in China, which Tully acknowledges is a very important market for gold, have further boosted demand for the metal. “Whenever I go to China, the actual view on inflation appears to be much higher on the ground than what the official statistics would reveal. So, I think the Chinese population will remain friendly toward gold so long, really as inflation is a problem.”

Remaining in Asia, Tully adds that the current level of demand out of India is surprisingly strong and does not have the same level of seasonality as it has in previous years. “While you are not going to have the wedding-type buying that happens in the beginning of the year, there certainly seems to be an appetite for gold in India that is not going to disappear over the summer,” she says.

… The final major factor that is likely to play an increased role in underpinning gold prices over the course of the year is the continued presence of central bank buyers in the market. … “I think the biggest take-away we can grab from [Mexico] is that another region of the world, another central bank region is buying gold. So, it is not just concentrated in Asia, that it is now in the Americas. So, the potential for another central bank in South America perhaps could be quite high going forward.”

[source]

HSBC has raised its forecast for the 2011 gold price to $1,525/oz from $1,450/oz and for 2012 to $1,500/oz from $1,300/oz. It also introduced a 2013 prediction of $1,450/oz, according to a research note late Tuesday.

“Investor demand now is the main driver for gold pricing, while traditionally important physical supply and demand components, such as jewelry demand and mine supply, have recently exerted little influence on day-to-day moves in the gold price,” analyst James Steel said in the note.

Central banks, including Russia, Thailand, Mexico and Vietnam had also played a hand in supporting the market in recent months as buyers.

“After many years as a contributor to supply, central banks have swung to being net buyers. We believe this is an important development that will support prices going forward.”

[source]

By Grant McCool and Basil Katz
Wednesday May 11, 2011 NEW YORK (Reuters) — Galleon Group hedge fund founder Raj Rajaratnam was found guilty of 14 securities fraud and conspiracy charges on Wednesday, in a vindication for the government’s use of aggressive tactics in prosecuting insider trading on Wall Street.

Rajaratnam, a one-time billionaire, will remain free on bail under house arrest with electronic surveillance until his sentencing on July 29, U.S. District Judge Richard Holwell ruled after the jury delivered its verdict.

… His chief lawyer, John Dowd, said inside and outside of the courtroom on Wednesday that he would appeal the prosecution’s use of secretly-recorded phone calls. After a four-day mini-trial called a Franks hearing last October, the judge denied defense efforts to suppress the phone tap evidence.

… “Wiretaps are a game changer on Wall Street,” said Chicago securities lawyer Andrew Stoltmann. “That is the reason Raj Rajaratnam will spend a very long time in prison.”

Rajaratnam is the only one out of 26 people charged in the broad Galleon case to go on trial so far. Twenty-one pleaded guilty and one defendant is at large.

[source]

ALSO . . .

Rajaratnam Conviction an Unwanted Sign of Arrival
by Daniel Gross
Wednesday May 11, 2011 (Yahoo! Finance) — The conviction of hedge fund manager Raj Rajaratnam on 14 counts of insider trading essentially brings to a close one of the largest criminal case of financial misdeeds in recent years….

The Rajaratnam insider-trading ring was a sideshow to the larger financial scandals of recent years. Its impact on the economy pales in comparison to the Lehman Brothers debacle. The sums of money and institutional failures involved were much less dramatic than in the Bernard Madoff affair. Yet the trial inspired interest in large measure because of its cast of characters. This wasn’t a boiler room operation, or a bunch of mob-connected guys in New Jersey manipulating micro-caps. No, this was a conspiracy involving an investor who was able to tap into the nervous system of the financial system and extract valuable, profitable information.

… Rajaratnam’s crimes weren’t those of a marginal outsider motivated by desperation or poverty. When the ring started, he was already a wealthy man many times over. The management fees he would have reaped from running Galleon for a single year would be enough to last most people a lifetime. Rather, his crimes stem from an impulse that has deep roots in America’s financial system: the desire by those on the inside to game the system for further gain.

[source]

Rising Stagflation Threat Underpins Gold

Gold has retreated back below the $1,500 level, as recent gains stalled just shy of the 61.8% Fibonacci retracement at 1531.72. Dollar strength associated with the worsening sovereign debt situation in Europe have weighed on the precious metals. As has today’s drop in oil prices resulting from a larger than expected inventory build. Nonetheless, there remains a whole host of fundamental factors conspiring to limit downside potential in the yellow metal.

While commodities retreated off their highs in recent weeks, inflationary signals — primarily associated with still high energy and food prices — continue to roll in. China reported April CPI of 5.3% y/y today. While that’s down a tick from 5.4% in March, it remains disturbingly high, putting additional pressure on the PBoC to tighten further. Germany revised Apirl HICP higher to 2.7% y/y, well above target, which will increase the pressure on the ECB to raise rates further. In the UK, the Bank of England simultaneously revised its growth forecast lower and revised its inflation outlook higher. This developing trend in the UK and economic data from elsewhere in the world has prompted market whispers of stagflation.

Nomura Securities analyst Joe Mezrich said yesterday that “Inflation expectations in bonds are now priced higher than before the Lehman bankruptcy, while long-term earnings growth is now priced in equities as negligible. The current divergence of higher inflation pricing and lower earnings growth pricing is not a good sign. The market currently seems to be pricing in stagflation.”

In China for example — where inflation has recently been viewed as the biggest threat — a top government economist now expects the PBoC to actually ease rather than tighten further in H2, despite persistent price risks. Wang Jian of the National Development and Reform Commission said, “The central bank will be very cautious about raising interest rates. In fact, I believe it may stop raising interest rates but cut interest rates in the second half of this year.”

At Seeking Alpha, contributor Brian Wills nicely sums up the situation in the US: [W]e have seen our GDP drop from 3.1% in the 4th Quarter of 2010 to 1.8% in the first Quarter of this year. All inflation measures are on the rise —PPI over 5% ,import prices over 9% and the CPI is approaching 3%.

Stagflation is essentially the perfect storm for gold as governments and central banks the world over tend to view risks to growth as far more serious than inflation. Those risks to growth will be fought with ongoing easy monetary policies, stimulus, bailouts and various forms of liquidity measures…such as QE3. Wills reminds us that during the last serious bout of stagflation in the 1970s, “gold increased in value by almost 25 fold.” New York Time’s economist Paul Krugman says, “I would be doing a QE3 that would be both larger and broader-based than QE2.” While I don’t agree that additional quantitative easing is a good thing, I do agree that this is eventually the course the Fed follows; and that is very positive for gold.

By Amanda Cooper
Wed May 11, 2011 LONDON (Reuters) — Gold broke a three-day rally to fall on Wednesday, under pressure from a rebound in the dollar and a broad decline in other commodities, although potential demand growth from China was expected to stem any severe slides.

Data from China, a major consumer of silver and the second-largest consumer of gold, showed inflation picked up more than expected in April, while industrial output slowed.

… Earlier, gold benefitted after data showed high inflation and slowing growth in the world’s second-largest economy, which could increase demand for bullion in its capacity as a hedge against rising price pressures. “Inflation remains above the government’s desired target. Although it’s not accelerating, it’s nevertheless above target,” said Standard Chartered analyst Daniel Smith.

… Real interest rates, with the rate of inflation factored into a central bank’s benchmark rate, are at about 1 percent in China, compared with -2.45 percent in the United States, -1.55 percent in the euro zone and an average of -0.4 percent across the G20.

… “Gold is generally benefiting from the return of confidence from investors,” said Darren Heathcote, head of trading at Investec Australia. “They are very happy buying on the dip, as we see the same old problems hanging around.”

… Spot gold fell 0.4 percent to $1,508.54 an ounce by 1338 GMT, leaving the price on course for a 1 percent rise this week, while COMEX gold futures for June delivery were down 0.5 percent at $1,509.60.

…Spot silver reversed course and fell 3.1 percent to $37.26, having risen earlier by as much as 2.7 percent to $39.48, falling after three straight days of gains. COMEX silver fell 3.4 percent to $37.17.

The gold/silver ratio — the number of ounces of silver needed to buy one ounce of gold — has risen for four consecutive days, indicating gold’s outperformance over silver.

[source]

by Alix Steel
May 11, 2011 (The Street) — Gold and silver prices were unable to hang onto their gains Wednesday, as a stronger U.S. dollar and profit taking weighed on the metals. Gold for June delivery was losing $10.10 to $1,506.80 at the Comex division of the New York Mercantile Exchange. The gold price Wednesday has traded as high as $1,526.80 and as low as $1,504.60.

Gold and silver were giving up earlier gains as the U.S. dollar index rose 0.58% to $74.99. Silver has also risen for two trading days and gold for three, so investors might be booking profits.

Some traders were looking to bet against higher prices, especially in silver. Scott Redler, chief strategic officer at T3Live.com, said he initiated some short positions yesterday as did other traders.

[source]

by Sergei Balashov
May 11, 2011 (ProactiveInvestors) — Gold pulled back as traders were taking profits following a surge early in the week after Standard & Poor’s downgraded Greece’s sovereign rating from BB- to B, while indicating that further downward revisions were possible.

The yellow metal got some support from weakness in the US dollar, which dropped after the US government reported that the country’s trade deficit expanded from $45.4 billion in February to $48.2 billion in March, which was attributed to the recent surge in oil prices. The price of oil imported into the US during the month hit the highest level since September 2008 at $93.76/barrel.

… Gold last traded at $1,506/oz. … Mining stocks were in decline today.

[source]

A return to the gold standard by the United States within the next five years now seems likely, since that move would help the nation to solve a variety of economic, fiscal and monetary ills, Steve Forbes predicted during an exclusive interview Monday with Human Events.

Such a move would help to stabilize the value of the dollar, restore confidence among foreign investors in U.S. government bonds and discourage reckless federal spending, the media mogul and former presidential candidate said. The United States used gold as the basis for valuing the U.S. dollar successfully for roughly 180 years before President Richard Nixon embarked upon an experiment to end the practice in the 1970s that has contributed to a number of woes that the United States is suffering now, Forbes added.

[source]

PG View: Forbes is spot on when he says, “You cannot trash your money without repercussions.” However, this article fails to address where gold would have to be valued to cover all the dollars in circulation in the event of a return to the gold standard. Hint: It’s a lot higher than $1,500. It’s probably not quite the simple solution that Forbes seems to be suggesting, as adding another $4,000 or so to the gold price over the next 5-years would likely be quite disruptive to global markets.

Gold has turned mildly corrective after the dollar shrugged off the larger than expected US trade deficit. The trade deficit widened 6.0% to $48.2 bln in March, worse than expected, versus -$45.8 bln in February. Oddly, the US says its trade deficit with China was $18.1 bln in March, while China reported a $13 bln trade surplus with the US in March. That’s a pretty big discrepancy.

China’s April CPI slipped to 5.3% y/y, vs 5.4% in Mar. With inflation still a concern and with still robust April output and retail sales, more PBoC tightening may well be in the offing.

German April HICP revised up to 2.7% y/y, boosted by late Easter and rising energy prices. This will add to rate hike pressures, despite the meltdown in the eurozone periphery.

BoE forecasts slower growth and higher inflation for UK over the 2-year horizon.

By Paul Eckert and Doug Palmer
Tuesday May 10, 2011 (Reuters) – China on Tuesday pledged easier access for U.S. companies to key sectors of its economy by removing barriers to its huge market in government contracts and offering a foothold to U.S. mutual funds.

The pledges were made in two days of talks between the world’s two biggest economies which ended with both sides hailing progress in their often tense relationship.

… A U.S. official said there had been detailed talks on China’s yuan currency and a recognition by China that a stronger yuan was needed to tamp down surging inflation.

However, Geithner made clear the United States was not yet satisfied with the speed at which Beijing was letting its currency appreciate and the U.S. Treasury said the yuan “remains substantially undervalued.”

… Vice Finance Minister Zhu Guangyao said that while the two sides agree the yuan needs to strengthen, Beijing will move at its own speed.

[source]

By Claudia Assis and Virginia Harrison
May 10, 2011 (MarketWatch) — Gold and silver futures on Tuesday settled higher for a second day, extending a relief rally on concerns about Greece’s debt woes and the wrangling over the U.S.’s debt ceiling.

Gold for June delivery added $13.70, or 0.9%, to $1,516.90 an ounce on the Comex division of the New York Mercantile Exchange. Silver also extended its rebound, with the July contract gaining $1.37…

“With Greece back in the gun sights people are becoming once again worried about euro-zone issues … A Greek restructuring of some type is inevitable at this point,” said Matt Zeman, head trader and strategist at Kingsview Financial in Chicago…

Meanwhile, Republicans in the U.S. Congress set their terms for raising the U.S. government borrowing limit, demanding cuts and rejecting increases in taxes.

Gold and to a lesser extent other precious metals often get a boost from debt worries and concerns about currency debasement, as they are seen as the ultimate storers of wealth.

[source]

Talk of a new rescue package for debt-laden Greece is “premature”, according to European Union economic affairs commissioner Olli Rehn.

“It is precisely the task of our EU mission now in Athens to specify… the needs for next year,” he said, with a decision following in the coming weeks.

Speculation has risen that Greece will need new rescue loans even before the current ones expire in 2012-13.

[source]

PG View: “Playing for time” seems to be the modus operandi of governments around the world these days. It would seem that Greece’s initial €110 bln bailout in May of 2010 was nothing more than a “play” for another year of time. Apparently its time for another kick of the can. One of these times, some government is going to find that can is now filled with lead…or gold.

“With the national debt growing to about $1.6 trillion a year, the U.S. government would be flooding the world’s capital market with too many bonds but for the Federal Reserve’s recent policy of quantitative easing — purchasing Treasurys to keep down long-term interest rates. With that program scheduled to end in June, rates on long-term Treasurys will likely rise and the value of existing long-term Treasury securities would fall.”

“A permanent decline in the value of existing long-term Treasurys would be nothing less than a partial default on U.S. debt. No surprise, investors are hedging positions by adding gold.”

“A significant devaluation of the dollar against the yuan seems inevitable and it will cause a wholesale downward adjustment for the dollar against other Asian currencies, too. With so much of what the world consumes coming from China and other Asian economies, the dollar will be worth a lot less to gold miners in South Africa or Russia and Asian currencies would be worth more. The yuan or rupee price of gold might not rise, and could even fall, but the dollar price of gold would increase, a lot.”

[source]

May 10, 2011 (IBTimes) — Mexico’s Central Bank has been Buying Gold as a means of reducing its exposure to currency depreciation risks, say analysts.

The Banco de Mexico bought 93.3 tonnes of Gold Bullion in February and March, according to data released by the International Monetary Fund. It had previously held 6.9 tonnes.

The central banks of Russia and Thailand also made significant gold purchases over the same period, of 18.8 tonnes and 9.3 tonnes respectively.

“Gold is seen as one way in which to diversify away from the Dollar- or Euro-denominated assets,” said Matthew Turner, precious metals strategist at Mitsubishi, the Japanese trading house.

Bayram Dincer, Pfaeffikon, Switzerland-based analyst at LGT Capital Management, which has $100 billion under administration, agrees. “Mexico’s gold accumulation confirms the demand of emerging market central banks to diversify their reserves,” he said. “They will be the big buyers for years to come.”

Mexico’s reserves of foreign currency have grown rapidly over the last two years. In August 2009 its international reserve was valued at $72.6 billion. That had risen to $125.8 billion by the end of last week.

[source]

RS View: The Mexican central bank shows the rest of its peers how easy it is to walk the path of the new international monetary reserve paradigm, boldly doing so even on the very doorstep of the tired and irritable old grouch, King Dollar.

By Rodrigo Orihuela
May 10, 2011 (Bloomberg) — Gold, which reached a record on May 2, may surge a further 30 percent by January as investors seek to protect themselves from “economic uncertainty,” according to Deutsche Bank AG.

“I’m bullish on gold despite its current levels,” Hal Lehr, Deutsche Bank’s managing director for cross-commodity trading, said in an interview in Buenos Aires. “It could reach $2,000 an ounce in the next eight months.”

… Gold fell 1.6 percent on May 4 after the Wall Street Journal reported that Soros Fund Management LLC sold precious- metal assets. Soros’ fund held shares in the SPDR Gold Trust, the biggest exchange-traded product backed by gold, and the iShares Gold Trust at the end of 2010, U.S. Securities and Exchange Commission filings show.

… Lehr’s so-called cross-commodity team was created by Deutsche last year to handle large investments in commodities without distorting prices with sudden inflows of cash, he said. The team focuses on investment opportunities in a portfolio of commodities, as opposed to looking at individual commodities.

Lehr declined to offer a breakdown of all the commodities that form his portfolio, though he said he’s also bullish on corn, which has risen 92 percent in the past 12 months.

[source]

By Jeff Kleintop
05/10/11 (TheStreet) –

… 4. Not just a defensive asset: Normally a beneficiary of a pullback in riskier investments, investors have often embraced gold as a perceived insurance policy against a return to recession. However, rather than act purely as a defensive investment, gold rose last year along side stocks and bonds.

… 5. Supply has been constrained: The supply-demand equation continues to provide a favorable tailwind for gold prices. After averaging growth of 4% annually since 1980, world production growth of gold has slowed considerably since 2001, averaging -1% annually over the past 10 years. To meet the gradual rise in demand, a steady increase in scrap supply has been needed. But scrap is falling short. It is getting more expensive to mine gold as the most accessible areas have been mined out and new mines are in increasingly remote or hard-to-mine locations. To meet the demand the major producers are pursuing digs formerly thought to not be economically viable at costs over $1,000 per ounce.

Finally, with gold supported by multiple fundamental forces, one of our pre-conditions for a bubble is the asset has to be “over-owned.” All the gold produced around the world over the past 110 years (which accounts for more than 80% of all gold ever mined) at today’s prices is equivalent to only about 3.9% of the combined total value of stocks, bonds and cash around the world. While up from the 1.3% in 2000 when gold prices were depressed, it is similar to the 3.5% in 1990 and well below the whopping 12.1% in 1980 when gold traded near its last peak. While gold’s popularity is returning, it does not seem “over-owned.”

[source]

by Josh Lipton
May. 10 2011 (Forbes) — from 2000 to 2010, it took an average of 60 ounces of silver to buy one ounce of gold. But, when silver made its recent high just over a week ago, the ratio of gold to silver shrunk from close to 70 a year ago all the way down to 32!

Now, even after the recent shellacking that silver has suffered, Bespoke [Investment Group] says it still only takes about 40 ounces of silver to buy one ounce of the barbarous relic, which remains extremely low by historical standards.

“All this seems to imply that unless some new demand for silver materializes from a previously non-existent source, either silver is still overvalued or gold is undervalued,” the analysts at Bespoke argue.

[source]

by Michael Kahn
Tuesday, May 10, 2011 (Barron’s) — Despite their drop in the wake of silver’s debacle, the uptrend in crude oil and gasoline prices is intact.

Whether you run a hedge fund or have to fill up a thirsty SUV, last week’s 14.7% decline in the price of crude oil grabbed your attention. For the latter, there seems no relief in sight from the pain at the pump. To the relief of speculators on the long side of these markets, their uptrend remains intact despite last week’s downdraft.

… Last week’s lows landed on the rising trendline from August, meaning that the 8.5% sell-off in this market was actually rather ordinary in the context of the bull market that preceded it. After all, it was up over 80% from August 2010 through April 2011.

Given that crude oil continues to respect its long-term bull-market trendline and remains above its breakout level, the bulls remain in control of this market. And with gasoline in quite good technical shape heading into the seasonally strong summer driving season, there is no reason to expect that energy prices have topped yet.

[source]

May 10, 2011 (Reuters) LONDON — Gold was set for a third daily rise on Tuesday, after a retreat in the dollar helped reverse earlier losses, while concern about Greece’s debt crisis was expected to insulate the price from any severe declines.

A sharp rise in margins on US oil futures dented the broader commodities complex but with so much investor focus on Greece and other indebted euro zone member states, gold was able to rally for a third day.

The oil margin hike came on the heels of consecutive margin increases on the Comex silver futures in the past two weeks, which knocked silver prices down more than 25 per cent last week and triggered a broad sell-off in commodities. … Gold fell by more than 4.5 per cent last week in its largest weekly slide in two years, caught up in a storm of selling that battered the entire commodity complex.

… But the fragility of Greece’s finances as well as the impact of more potential bailouts for other indebted euro zone members was expected to support gold, in spite of a continued decline in global holdings of the metal in exchange-traded funds.

Spot gold recovered from a session low of $1,505.69 an ounce to be quoted 0.1 per cent higher at $1,514.60 by 1110 GMT

… Euro-denominated gold rose by nearly 40 per cent last year, when investors fled euro-priced assets as the region’s debt crisis unfolded.

[source]

Gold Underpinned Has Housing Double-Dips

The real-estate information company Zillow reported this week that housing prices are now falling faster than anytime since the collapse of Lehman Brothers in 2008. There has been plenty of evidence in recent weeks and months indicating that the housing market is indeed double-dipping, but the grim data from Zillow arguably removes any doubt. Average home prices are down 8% from a year ago, 3% over the quarter, and are falling at about 1% every month. Housing prices declined in the vast majority of markets over the past 12 months, with nearly 75% of all homes in the United States losing value from Q1-10 to Q1-11.

Declining prices pushed the number of properties with negative equity to a new high of 28.4% in Q1, up from 27.0% in Q4-10. A record 37.7% of all homes sold in March were sold for a loss. In a guest post at the ZeroHedge blog today, Charles Hugh Smith points out that American homeowners have lost $6.5 trillion in equity in the past 57 months. Homeowners’ equity stood at $12.8 trillion in 2006 and now stands at $6.3 trillion, a decline of more than 50%. Smith points out that prices have retreated to 2003 levels nationally, “but that masks the reality that in many locales, prices have returned to 1998 or even lower.”

Calling these losses “catastrophic” may actually be an understatement. Fed chairman Ben Bernanke can attempt to create a “wealth effect” by driving up the stock market, but at best he’s offsetting the negative wealth effect of declining real estate values for those that have a stock portfolio along with a home. As I’ve said in past reports, the housing market remains the biggest argument for ongoing easy monetary policy and could very well be the impetus for QE3. In allowing rates to rise, it will put upward pressure on mortgage rates as well, effectively killing what little demand for housing there is.

It has become abundantly clear that the tax breaks offered to home buyers in 2009 and 2010 only temporarily overrode market forces, stealing demand from the future. Many of those buyers are probably now part of the 28.4% of home owners that have underwater mortgages. Yet, I’d be worried that tepid demand for homes this Spring will only lead the government to try tax credits again; although why they would expect different results is beyond me. Trying to override the law of supply and demand is a fools game and throwing good money after bad makes things even worse.

If the Fed is indeed hamstrung by the housing market they are likely to leave interest rates near 0% — and perhaps offers additional accommodations after the expiration of QE2 at the end June — even at the risk of inflation. At that point, the long-term downtrend in the dollar would re-exert itself, driving the price of gold higher yet.

by J.D. Roth
Tuesday, 10th May 2011 (GRS) –

The Permanent Portfolio . . .

One investment strategy that I find appealing uses a lot of gold. This is the permanent portfolio, as developed by Harry Browne. The permanent portfolio calls for a fixed asset allocation:

– 25% in U.S. stocks, to provide a strong return during times of prosperity
– 25% in long-term U.S. Treasury bonds, which do well during prosperity and deflation
– 25% in cash (a money-market fund) to hedge against recession
– 25% in gold to provide protection during periods of inflation

If I were to choose any other investment plan than the one I have, it’d be this one. I find the arguments compelling, and wouldn’t be surprised if five years from now, I’d adopted this strategy.

[source]

Gold has now retraced slightly more than 50% of the recent correction, returning additional credence to the underlying uptrend. Silver remains below the 38.2% retracement level, with investors unnerved by the recent volatility.

The euro has caught a bit of a bid on rising expectations that another bailout deal is in the offing for Greece. The Wall Street Journal reported this morning that “Greece expects a new package of nearly €60 billion ($86.11 billion) in financial aid to cover its financial needs stretching into 2013 as early as next month.”

The dollar retreated back into the recent range on the euro’s uptick, but the greenback’s move was muted somewhat by weakness in the Swiss franc. The swissy fell after benign Apr CPI of 0.1% m/m and 0.3% y/y diminished expectations of an impending rate hike.

Meanwhile, US import prices surged 2.2% in Apr, above market expectations of +1.8% and export prices rose 1.1%. Price risks remain a very real concern, just a week after commodity prices tumbled on rising concerns about economic growth.

Oil prices remain surprisingly buoyant, despite yesterday’s CME margin hike on crude futures.

China’s trade surplus jumps to $11.4 billion in Apr, well above market expectations. This is likely to intensify US calls for a stronger yuan, which in turn means a weaker dollar relative to the yuan. That will make the yellow metal more affordable to a population that already has a strong desire for gold.

By Myra P. Saefong and V. Phani Kumar
May 9, 2011 (MarketWatch) — Silver futures closed more than 5% higher Monday, leading a recovery in the precious-metals sector, and gold topped $1,500 an ounce, rebounding from last week’s decline as some weakness in the U.S. dollar and concerns over European debt woes lured investors back to metals.

Silver futures for July delivery rose $1.83, or 5.2%, to settle at $37.12 an ounce on the Comex division of the New York Mercantile Exchange after tapping a high of $37.98 overnight.

June gold futures, meanwhile, rose $11.60, or 0.8%, to settle at $1,503.20 an ounce, extending Friday’s $10.20, or 0.7%, increase. Prices are still more than 3% lower in May.

“The gold success today is a nice reflection — a mirror image almost — of the dollar index failure today along the 75 fault line,” said Richard Hastings, a macro strategist at Global Hunter Securities.

… Paul Mladjenovic, author of “Precious Metals Investing for Dummies,” said gold looks “very strong” and any pullback will be minor, as the market expects some dollar strength and some euro weakness.

… The precious-metals complex may have seen some support Monday from political unrest over the weekend in Syria, Egypt and Bahrain, according to Ben Potter, markets strategist at IG Markets in Melbourne.

Several protesters were reportedly killed in Syria over the weekend in clashes with government forces, while the Los Angeles Times reported 12 deaths in Egypt in the wake of violent riots between Muslims and Christians.

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By Michael Lombardi
May 9, 2011 (WallStreetPit) — There’s quite a story going on between China and United States in respect to what each country believes the other should be doing with its interest rates, debt, and currency. U.S. Treasury Secretary Timothy Geithner will be meeting this week with Chinese Vice Premier Wang Qishan.

… Yes, by keeping interest rates so low, running huge deficits and keeping the printing press running overtime, the U.S. has been able to emerge from the worst recession since the Great Depression.

However, the Chinese are right in that the existing U.S. monetary policy is causing inflationary pressures to rise worldwide. According to the Food and Agriculture Organization, a United Nations entity based in Rome, Italy, world food prices rose to a near record in April on soaring grain costs.

The U.S. is the winner today in the fight against the Chinese over currency valuation, but, as I say above, it will be the loser in the long term, as those short-term interest rates that are artificially low, huge deficits, and overtime money printing come back to haunt us in the form of a devalued currency and the rapid inflation that the Chinese are complaining about.

China sat on $1.15 trillion in U.S. Treasuries at end of February. A devaluing greenback and inflation are already paying havoc with the real return of U.S. Treasuries.

Speaking of the “real return” of an investment, it has been months now that U.S. Treasuries have been delivering negative real rate returns. A typical investor looking to park cash buys a U.S. Treasury yielding 1.86%. If we take an inflation rate of 2.7%, the investor is losing 84 basis points over a one-year period in inflation adjusted terms. If he or she held that T-bill for the full five-year maturity, the investor would lose 4.2% in the purchasing power of his or her money. But we all know the inflation rate is much higher than the “official” rate we are given by the Commerce Department….

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May 9 (Bloomberg) — John Burbank, founder and chief investment officer of hedge fund Passport Capital LLC, talks about the outlook for the gold market and his investment strategy. Burbank, speaking on Bloomberg Television’s “InBusiness with Margaret Brennan,” said commodities including gold are seeing a “temporary correction” as markets anticipate the end of large-scale asset purchases by the U.S. Federal Reserve.

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by Josh Lipton
May 9 2011 (Forbes) — It was silver that dominated the headlines last week with an unnerving 27.4% free-fall, but gold also suffered a setback as the yellow metal dropped 4%. For analysis on the barbarous relic, and where gurus see the price of the metal headed from here, we checked in with a couple of market pros who basically argued the following: the decline represented a setback, but not the beginning of some bear reversal.

Curt Hesler, the longtime editor of the Professional Timing Service newsletter … says that a correction might not prove as long or deep as some might suspect. The broader story remains the same: there is a lot of interest among both retail investors as well as central bankers in gold as a hedge against falling fiat currencies.

“Weak currency holders – as well as typical dollar-phobic gold buyers like the Chinese and Russians – are all in the market to hedge their paper assets,” says Hesler, adding that investors are best advised to buy on weakness and not when the metal makes new highs or when gold hits $1800, which he thinks is likely by year-end.

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Gold Recovers Some of Last Week’s Losses

Gold has regained the $1500 level, with more than 38.2%, but less than 50% of the corrective retreat from 1574.66 already retraced. Silver’s hook reversal on Friday is seen as technically constructive, although recent volatility is likely to leave buyers timid in the near term. Not surprisingly, the gold/silver ratio has moved back above 40 and may remain elevated above the recent lows.

Greece remains a member of the EU, despite rumors late last week that they were contemplating an exit from the EMU. That story may have simply been floated to wrest more favorable terms for the next bailout, amid the recent claims from Portugal that they had negotiated a better deal than both Greece and Ireland before them. Greece has indeed requested additional aid to cover €22 bln in debt repayments that are due next year and not covered by the original bailout deal. That prompted S&P to a downgrade Greek sovereign debt once again from BB- to B with a negative outlook. S&P went further, warning that the “burden sharing” being considered for Greece would constitute a “distressed exchange,” resulting in a rating of SD (Selective Default). Moody’s has put Greece’s ratings on review for a possible downgrade as well. Greek CDS premiums responded by surging to new record highs and the euro extended its recent losses.

While the dollar remains underpinned by the latest bout of euro weakness, there have been no fundamental changes that can be remotely construed as positive for the greenback. The dollar is just slightly less ugly at the moment, when compared to the single currency. In fact, Morgan Stanley has followed Goldman Sachs’ lead and downgraded their US economic forecast for 2011. Morgan Stanley lowered their GDP outlook for the third time this year to an anemic 3.3% for 2011, down from 3.6% last month. Goldman Sachs cut their forecasted range for US 2011 GDP by a full 50bps to 3-3.5% from 3.5-4%. The dimming outlook on growth has Goldman believing the Fed is unlikely to tighten until sometime in 2013. This is all dollar negative.

Meanwhile the prospect of another ECB rate hike seems increasingly unlikely any time soon in the current environment. It makes little sense to be providing periphery countries bordering on insolvency below market rates, while raising rates on everyone else. Not to say they wouldn’t try to justify such measures, particularly if inflation expectations come roaring back, but it really does make little sense. The mixed messages currently coming out of the eurozone in the midst of the recent chaos risks undermining confidence in not just the ECB, but the EU as a whole. This all translates to rising systemic risks. A German government adviser suggested today that without a comprehensive solution to the eurozone sovereign debt crisis, the union may not remain intact over next 12 months.

by Jan Harvey
May 9, 2011 (Reuters) — Gold climbed back above $1500 an ounce on Monday and silver rallied more than 6% as a retreating dollar and rising concerns of euro zone debt helped the metals recover some ground after last week’s hefty losses. Worries over the health of some smaller euro zone economies was brought back into the spotlight after ratings agency Standard & Poor’s downgraded Greece’s credit rating.

… Gold was supported by a rebound in the euro after some investors viewed its sell-off last week as overdone, given the fact interest rate differentials between the euro zone and the United States remain favourable.

Prices briefly eased below $1500 an ounce as the euro pared gains after the S&P cut, which dragged Greece’s rating further into junk territory. However, they quickly recovered as traders digested the news.

“The big confusion in the whole picture is what people are going to do with the US dollar,” said Macquarie analyst Hayden Atkins. “You have competing concerns, with a change in policy rhetoric in the US and mounting concerns over the euro.”

“It is too hard to have a lot of conviction. That will probably weigh on pricing (for commodities), though maybe gold will outperform in that sort of environment.”

… From a technical perspective, silver is also looking more vulnerable than gold after last week’s rout, analysts said. “Gold did not break any significant levels on the downside, so long-term investors were not forced out like in silver, where it was pure carnage,” said Saxo Bank senior manager Ole Hansen.

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