The Chinese mining sector is currently producing 340 tonnes of gold a year and rising.   No doubt there is every encouragement from the State for this figure to rise.  We believe that no matter how high it rises, little if any of that supply will reach the world’s ‘open’ market in London.   Even global gold production is not likely to rise significantly from the current level of around 2,500 tonnes.   Therein lies a development that, in itself, will change global gold market dynamics.

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by The Gold Report
May 13, 2011 (SeekingAlpha) — In last week’s EI letter we commented on the parabolic rise in the silver price and made the observation that, although the mining equities don’t always participate in the “up” move in metal prices, they seem to always “enjoy” the down moves. This week proved the rule, as the commodity sector got a good shellacking. … Little more needs to be said about this week’s two by four to the head that the charts below don’t illustrate.

Of more significance is the longer-term underperformance of equities versus metals prices. … With regards to the index itself, it is comprised of a number of “troubled” companies….

Another major and often overlooked problem with the mining (and more specifically exploration) sector relates to the low cost of capital. There are two prime reasons for this availability of easy money. First, “investment” demand for a sexy exploration story far exceeds the number of legitimate and potentially successful exploration properties on Earth. Secondly, my experience is that maybe 80% of the people investing in junior exploration and mining companies have no real idea what the hell the geologist is talking about and therefore, what they are actually buying.

The result is that there are virtually no real barriers to entry in the exploration business. Nearly anyone with a bit of moose pasture, an anomaly, a story and a geologist can raise money. The fictional dream of an easy discovery and instant riches (sold to an overzealous audience) far outweighs the reality that the actual odds of discovery on any exploration property are about 1 in 1,000.

Aiding and abetting this demand for dreams and instant riches are 25 international and 80 Canadian brokerage firms based in Canada alone, all staffed with eager brokers looking to buy that new black Bentley.

… Most of the “intelligent money,” the high net-worth investors who participated in these financings, know the odds of success (FYI – not good). That means that much of that new paper is destined to hit the market as soon as someone can pump the story to a commodity-crazed public.

… Bogus properties will ultimately revert to their intrinsic value — nada. Which do you want to own?

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By Claudia Assis and Virginia Harrison
May 13, 2011 (MarketWatch) — Gold futures settled at their lowest level in a week Friday as Greece debt fears resurfaced, pulling the euro lower and boosting the dollar.

Gold for June delivery lost $13.20, or 0.9%, to $1,493.60 an ounce on the Comex division of the New York Mercantile Exchange, its lowest settlement since May 6. Gold was under water for most of Friday’s floor trading, but clung to a weekly gain of 0.1%.

“We’ve been pushed back and forth by the dollar,” said Frank Lesh, a broker and analyst with FuturesPath Trading in Chicago. With the lack of market-moving headlines and in light of last week’s rout, metals are likely to spend some time in consolidation mode, he added.

Silver for July delivery declined 22 cents, or 0.6%, to $35.01 an ounce. Silver lost 0.8% this week. Last Friday, the metal posted its steepest weekly decline in three decades. Since hitting almost $50 an ounce last month, silver prices have dropped sharply, but the pace of the retreat has eased over the past two days.

… The U.S. dollar’s decline in recent months has drawn investors to precious metals as a hedge against currency weakness, but the greenback has risen in recent days as traders said many investors were unwinding their “long commodities, short dollar” bets.

… Fears about a potential default for Greece’s debt pressured the euro Friday, said George Gero, a vice president at RBC Wealth Management, in emailed comments. In addition, high margin requirements in energy and precious metals are deterring buyers from taking advantage of lower prices, Gero said.

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by Jack Farchy and James Fontanella-Khan
May 13 2011 (FT) — The sharp drop in gold and silver prices has stimulated a surge in buying from India in a sign that consumers in the world’s largest gold-buying country retain faith in the decade-long bull story for precious metals.

Bankers have been surprised by the strength of Indian demand in the past week, when gold dropped below $1,500 a troy ounce and silver tumbled below $35 a troy ounce. UBS and Standard Bank, two large bullion dealers, have enjoyed some of the strongest days of sales to India this year, according to analysts at the banks, while others reported a similar surge.

The buying from India, which accounts for a fifth of global gold demand and a 10th of demand for silver, comes as some investors in the west have cut exposure to precious metals and other commodities, spooked by a series of steep falls and the imminent end of quantitative easing in the US. Investors have cut their holdings of gold and silver through exchange-traded funds by 1.4 per cent and 5.7 per cent respectively in the past two weeks.

But in Mumbai’s bustling Zaveri market, the gold hub of India’s wealthiest city, traders were suffering from no such jitters. Indeed, they were fiercely elbowing one another to grab as many shiny bars as possible last Friday amid expectations that falling prices would cause demand to soar.

“Tonight people will be invading the market to buy gold … I’m here to refill as I’m running out of bars,” said Amit Soni, a vendor standing in the packed store with a bag of cash in one hand and his mobile in the other to monitor the sales back at his shop.

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By Frances Schwartzkopff
May 13, 2011 (Bloomberg) — Austerity measures “don’t work” and prevent countries from creating jobs needed to generate economic growth, said Nobel Prize winning economist Joseph Stiglitz. “Austerity is an experiment that has been tried before with the same results,” Stiglitz said today in a speech in Copenhagen. Cutting budgets in low-growth cycles leads to higher unemployment and hampers recovery, he said.

… Europe’s leaders are gripped by “deficit fetishism,” Stiglitz said. Austerity “doesn’t work, it does not led to more efficient, faster growing economies,” said Stiglitz, a professor at Columbia University in New York who won the Nobel Prize for economics in 2001.

The U.S. economic expansion will exceed European growth this year and the next, the European Commission in Brussels said today.

U.S. gross domestic product will rise 2.6 percent this year and 2.7 percent in 2012, while
the euro area will expand 1.6 percent in 2011 and 1.8 percent next year.

The U.S. federal budget deficit is projected to reach $1.5 trillion, or 9.8 percent of gross domestic product, this year, according to the Congressional Budget Office.
The 17- member euro region’s deficit is forecast to be 4.3 percent of GDP this year, the European Commission forecasts.

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Gold Consolidates Around $1,500 As US Economy Founders

Gold continues to trade above and below $1,500 amid further indications that the anemic economic recovery in the US is faltering. The Philly Fed’s Q2 Survey of Professional Forecasters reflects expectations of slower growth over the next 4-years. The trimming of expectations from the group surveyed by the Philly Fed comes on the heels of Commerce Department data released late last month that showed real Q1 GDP has slowed to 1.8%, down significantly from a 3.1% pace in Q4-10.

The Philly Fed survey participants see growth slowing to 2.7% in 2011, down from 3.2% in the previous survey. They also lowered their estimates of 2012 growth slightly to 3% and in 2013 to 2.8%. These outlooks are consistent with recent downgrades to growth forecasts from Goldman Sachs and Morgan Stanley, among others. Obviously, GDP straddling the 3% level over the next several years does not bode well for job creation, nor for any kind of improvement in the housing market. We may in fact already be entrenched in our own “lost decade,” much like Japan has been for the past couple of decades.

With market participants increasingly resolving themselves to anemic growth, recent expectations that the Fed would at least begin dabbling at tighter monetary policy have begun to erode. While the Fed continues to profess that QE2 will end on schedule in June, quantitative easing in the form of reinvestment of maturing Treasuries will continue into H2, so-called QE-lite, and speculation about a QE3 simply refuses to go away.

Paul Krugman, the Nobel prize winning economist at the NY Times and a unabashed Keynesian recently said, “I would be doing a QE3 that would be both larger and broader-based than QE2.” In other words, Krugman and other economists of his ilk believe the economy is languishing because the government and central bank simply haven’t done enough. More stimulus, more bailout for individuals and corporations and more quantitative easing may indeed increase demand, but at the expense of further discouraging saving, moral hazard, inflation and more asset bubbles that lead to heightened systemic risks. Then of course, the massive debt that is wrung-up in such an environment must eventually be paid back.

With Treasury Secretary Geithner recently saying that he can push back the day of reckoning associated with our current $14.3 trillion debt ceiling until August, any momentum on reconciling our fiscal disaster seems to have evaporated. The mindset in Washington all too often seems to be, ‘why deal with a problem today that can be put off until tomorrow?’ What they seem to consistently ignore is; that’s a sure-fire way to allow manageable problems to grow into catastrophic problems — as our debt arguably has become.

Obviously there are still considerable political wranglings going on behind the scenes, but both sides seem to be digging in their heels. The Republicans want to wrest big spending concessions from the Democrats. Meanwhile, the Democrats would like to see higher taxes on corporations and wealthy individuals, or at least demonize the wealthy and corporations in he eyes of the rest of the country. In the end, the absence of any semblance of sound fiscal policy will continue to foist the responsibility on the Fed, who will maintain their über-loose monetary policy stance. The dollar will continue to deteriorate and we all suffer.

Historically, the Fed have always viewed risks to growth as being a far greater threat than price risks. Inflation be damned; in an economy that is driven by consumption, quite literally — and frequently against our own personal best interests — we must be cajoled into spending our money, lest the economy whither and die. In that respect, inflation is a useful tool, people are more inclined to buy now if they think the price will be higher tomorrow. In holding interest rates down below the real rate of inflation, there is little incentive to put ones money in a money market account or CD because their real yield is a negative one. Savers are actually losing money.

And so there is an ever-growing cadre of those who choose to save in gold. Steadily and constantly converting excess dollars to gold, positioning themselves to weather any storm that might be brewing beyond the horizon: inflation, deflation, stagflation, systemic collapse, political turmoil to name just the most obvious.

Gold still glows, but even after a selloff, silver looks pricey.

by Kathy Kristof
May 13, 2011 (Kiplinger) — Are precious metals losing their appeal or simply staggering after a stunning climb to the top of the investment heap? The surprise answer: It’s a mixed bag.

Both gold and silver, derided by many experts as “extremist” investments less than a decade ago, had been on a tear. But when the price of silver briefly approached $50 an ounce in late April, worries about rampant speculation prompted U.S. commodities exchanges to require traders to put up more cash, raising the cost of buying the metal. That triggered a vicious selloff in early May that slashed silver’s price by 30% in just one week.

… With countries around the world running huge budget deficits and printing money like mad — actions that tend to whittle away the value of a currency — it’s little wonder that both metals have thrived.

Silver has long been considered the poor man’s gold because an ounce typically sells for 1.8% of the price of the yellow metal, says Koesterich. But at a May 11 price of $35, silver is selling for about 2.3% of the price of gold, suggesting that silver is overvalued by historical standards.

Admittedly, silver has industrial uses that gold does not. But there’s been no rapid surge in industrial demand to account for the mismatch in gold and silver pricing, says Michael Fuljenz, president of Universal Coin & Bullion, in Beaumont, Tex. “I would hesitate to put any money in something that’s risen that much without any fundamental reason to drive the price,” he says. “The rise went too far, too fast.”

Many experts predict that gold, on the other hand, has room to rise. Stephen Freedman, head of investment strategy at UBS Wealth Management, sees gold at $1,650 an ounce within a year, up from $1,502 on May 11.

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by Alix Steel
May 13, 2011 (TheStreet) — Gold prices were sinking while silver managed to stem huge losses as the U.S. dollar gained strength and investors opted for cash. The gold price Wednesday has traded as high as $1,516.40 and as low as $1,482. … Silver prices were down 12 cents to $34.67 an ounce. The U.S. dollar index was losing 0.76% to $75.76 as the euro was getting pummeled.

The euro has slid more than 2.6% this week as worries abounded that Greece would need more bailout money and that extending the amount of time it has to pay back loans might not be enough to get the country back to any kind of fiscal health.

According to the European Union Commission, Greece’s economy is expected to shrink 2.2% in 2011 versus a prior reading of 1% but it is estimated to grow 1.1% in 2012. Greece is reportedly looking at a budget deficit of 9.5% of GDP for 2011 versus the required 7.6%, which means more tightening and perhaps more reluctance by the EU to keep pumping money into the country.

… Gold’s selloff, usually bought as protection against inflation, is reflecting investors’ lack of long term inflation panic. The yield on the 10-year note was also lower at 3.61%, which means there was ample demand for Treasuries.

… David Galland, managing director of Casey Research, believe there will be another quantitative easing program, just not yet. “If they had announced they would keep rolling with QE2 …. then the dollar would have gotten crushed …. For a period of time … the Fed will step aside … [but] I think they are going to have to come back in …. sometime in the first quarter of 2012.”

Galland thinks the dollar is ultimately doomed, which is good for gold and silver, but that both metals will stay volatile.

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by Tom Jennemann
Fri, May 13 2011 (Fastmarkets) — Gold on the Comex division of the New York Mercantile Exchange slid below $1,500 per ounce Friday afternoon as the investors sold-off riskier currency positions ahead of the weekend. Gold futures for June delivery were recently down $20.50, or 1.3 percent, at $1,486.30 per ounce in New York.

“The euro is taking a hit as investors are nervous about Greece. They’re worried that news about a possible restructuring could break over the weekend,” a US-based gold trader said. “That’s why we are seeing some people paring their euro holdings and buying US Treasurys,” he added.

The European common currency recently fell to an session low of 1.4068 against the dollar, down about 2.7 cents from the day’s high. Greece will be the central topic when officials from the International Monetary Fund (IMF) meet with top European officials in Brussels on Monday.

“This swift downward move by the euro has put some pressure on gold; however, I would expect the impact to be temporary. Every time gold has dipped below $1,500, we’ve seen bargain-hunters jump in. There’s a firm floor so I would be surprised if the market moved much below $1,485,” the trader said.

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by James McKeigue
May 13, 2011 (MoneyWeek) — Famed City chartist Robin Griffiths … thinks gold, which has wobbled of late and currently trades at around $1,500 an ounce, could hit $12,000.

However, investors will have to act quickly. Griffiths thinks the bull market for gold “will all be over by 2015″.

Stints at HSBC and Cazenove have made Griffiths one of the City’s best-known technical analysts. He relies on technical analysis of price movements to predict future values.

… Griffiths thinks both gold and silver will benefit from loose monetary policy and ‘money printing’ in the West. In an interview with King World News, he acknowledged that both markets had been volatile recently but urged investors not to be “wobbled out here because of a few champagne bubbles”.

Elaborating, he said: “You want to be able to stay with and add to your long-term holdings. Bulls [bull markets] are very successful at wobbling people out at the wrong time”.

As an “absolute minimum” Griffiths thinks gold will hit $3,000 per ounce. How much higher it goes above that “depends on how aggressively paper monies get printed from here on in”.

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by Alix Steel
Fri 05/13/11 (TheStreet) — David Morgan, founder of Silver-Investor.com, gives his take on what today’s inflation data means for gold and silver and how he’s trading.

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By Adam Samson
May 13, 2011 (FOXBusiness) — Inflation can be confusing…. So, let’s keep it simple — really simple — and put ourselves in the shoes of everyone’s favorite “Sesame Street” character: the fuzzy blue Cookie Monster, or “CM” for short. He’s a low-maintenance type of monster with a singular necessity, making him the perfect subject to analyze when pondering the impact of inflation.

… One option, especially if he thinks price increases are temporary, is he can simply tighten his belt and buy less stuff. If he does that, there’s a chance it will soften demand for all of the companies from whom he purchases. Ultimately, when millions of people follow this line of reasoning, it’s going to cut those firms’ bottom lines and they’re going to have to make some tough choices to cut back on costs.

… But what if CM thinks the inflation is permanent, and is even going to rise further over the next several years? The Federal Reserve often refers to this process using the technical phrase: “inflation expectations becoming unanchored.”
“We hope this situation never happens,” said Josh Feinman, global chief economist at DB Advisors, Deutsche Bank’s institutional asset management business.

The reason the unanchored inflation expectations are so troubling, according to Feinman, is that it creates a “self-fulfilling” spiral.

If CM truly thinks prices are going to be going up over the next several years, he’s likely to ask his employer to boost his pay. For his employer to afford the pay increase, it will likely have to raise its prices. When this ripples through the rest of the economy, the effects multiply, causing a dangerous, and long-lasting, rise in prices.

… The Fed has learned a lot since CM’s early days and “cherishes” its ability to keep inflation expectations in check, Feinman said, adding that low inflation expectations create a “positive feedback loop” that helps keep them in check.
Still, with so many variables potentially affecting sentiment, it’s impossible for the Fed to have perfect control over inflation expectations, meaning the specter of inflation will continue to loom.

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by Christine Hauser
May 13, 2011 (The New York Times) — Consumers continued to feel the pinch at grocery stores and gasoline stations in April as … the Labor Department said in its monthly report that the Consumer Price Index, the most widely used measure of inflation, was up 0.4 percent in April from March, and up 3.2 percent from a year earlier. The 12-month figure represents the biggest jump in the index in any 12-month period since October 2008.

… Consumers are “painfully aware” that if high energy and food costs continue, “the cost of living is going to go up,” said Stuart Hoffman, the chief economist at PNC Financial Services Group.

Inflation as measured by the core C.P.I., which strips out volatile prices for energy and food, edged up 0.2 percent in April, making it the third increase of that size in the last four months, the department’s Bureau of Labor Statistics said. … Core inflation was up 1.3 percent from a year earlier, the department said. The core index, which was also in line with analysts’ forecasts, was helped by rises in the prices of new vehicles, shelter, medical care and airline tickets.

… Many economists expect gasoline prices to ease over the summer. But in some regions of the country, consumers have been paying $4 or more a gallon at the pump since demand in emerging markets and turmoil in the Middle East and North Africa in the first quarter of the year sent prices higher.

… In April, the Fed’s policy-making body voted to continue several stimulus policies, like keeping short-term interest rates near zero. In a statement, the committee said it expected inflation from higher prices in energy and other commodities to be “transitory.”

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Gold continues to consolidate around the $1,500 level as silver remains volatile within a broad range. The underlying bias in the gold market remains positive and dips within the recent range are being viewed as buying opportunities.

US CPI met market expectations of +0.4% in Apr. Core was firm at +0.2%. Nothing here to change the current expectations of static monetary policy from the Fed, which remains generally supportive to gold.

Eurozone Q1 GDP beat expectations at +0.8% m/m, which has swung the policy pendulum back in favor of another ECB rate hike possibly as soon as July. However, the euro is already giving back today’s gains, which is lifting the dollar and pushing gold lower intraday.

You may recall, that the pendulum was pointing toward ‘no further ECB hikes’ as recently as yesterday after a pretty significant miss on Mar eurozone industrial production. The mixed data coming out of Europe, and of course the ongoing saga of the PIIGS, should keep things interesting for some time to come.

By Claudia Assis and Polya Lesova
May 12, 2011 (MarketWatch) — Precious metals pared their losses Thursday, with gold ending higher and silver trimming its slide as the U.S. dollar turned lower against other major currencies.

Silver for July delivery retreated 72 cents to $34.80 an ounce on the Comex division of the New York Mercantile Exchange. The metal had tumbled 7.7% in the previous session.

Gold for June delivery added $5.40, or 0.4%, to end at $1,506.80 an ounce.

… The declines in metals futures came as the U.S. dollar gained against its major rivals, extending Wednesday’s run. But later in the day the dollar index turned lower.

Meanwhile, U.S. stocks and oil also shook off initial weakness. Oil’s June contract added 73 cents to $99.95 a barrel, turning higher about midway through floor trading.

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By Tetsushi Kajimoto and Suvashree Dey Choudhury
Thursday May 12, 2011 TOKYO/MUMBAI (Reuters) – Asia’s reserve-rich nations see no viable option but to keep on purchasing U.S. government debt despite their uneasiness about Washington’s fraught political battle over public spending.

Interviews with policymakers from several Asian countries — including Japan and China, the two largest foreign holders of U.S. debt — showed officials were concerned that U.S. lawmakers would fail to authorize additional government borrowing before a $14.3 trillion debt limit is reached. But they still considered U.S. Treasury debt the safest bet, particularly with so much uncertainty surrounding Europe’s sovereign debt situation.

None of the officials said investment plans would change right away, even if Congress does not raise the debt ceiling this week. The debt limit will probably be reached on Monday, and the Obama administration has warned of “catastrophic” consequences if the government cannot pay its bills.

“Our stance remains unchanged on foreign reserves management,” Japan’s Deputy Finance Minister, Fumihiko Igarashi, told Reuters.

“The U.S. is making the most of having the dollar as key reserve currency and such a situation would not change immediately.

“But nothing will last forever, as with any political and economic conditions,” he added. “We will closely watch developments” in Congress.

… Igarashi said Japan should aim to diversify its reserves to reduce Treasuries exposure, perhaps by increasing gold holdings or raising the percentage invested in euro assets. But he acknowledged that a portfolio shift would be “quite difficult… because selling Treasuries would hurt our own assets.”

… Reuters spoke with about a dozen senior policymakers across Asia, many of whom insisted on anonymity in order to speak more candidly about sensitive fiscal policies.

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By Pedro Nicolaci da Costa
Thursday May 12, 2011 (Reuters) – When the Federal Reserve finally decides to begin draining cash from a flush U.S. banking system, policymakers may find themselves armed with more tools than they know what to do with.

In an effort to ensure its unprecedented monetary stimulus during the financial crisis would not create the risk of future inflation, the Fed has developed a broad range of measures to ensure an orderly retreat. The Fed’s exit toolkit is jam-packed with awkwardly-dubbed concoctions like reverse repurchase agreements and term deposits, along with more straightforward companions like asset sales and conventional interest rate hikes.

Even rate increases are more complex than before, since the Fed now has authority to pay interest on bank reserves parked at the central bank. That rate looks to supplant the overnight federal funds rate for a time as the one to watch.

… “We haven’t really settled on a roadmap,” Richmond Federal Reserve Bank President Jeffrey Lacker told Reuters in an interview. “The permutations are many. It’s probably less important the exact sequencing we pursue than to make a smooth and clear transition.”

For investors, the multitude of possible tightening combinations could make for a disorienting ride when the Fed does decide it is time to tighten monetary policy. Market volatility, particularly in stock, bond and currency markets, could spike significantly, potentially crimping economic activity in a way that intensifies the effects of a monetary contraction.

Not that higher official rates appear imminent.

… With each move further into unconventional easing territory, the central bank added new potential layers to its exit strategy. … “They definitely don’t have a roadmap or even a strategy,” said Keith Springer, president of Springer Financial Advisors in Sacramento, California. “This is all experimental and it contains more hope and prayer than experience that it works.”

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by Jennifer Liberto
Thursday May 12, 2011 (CNN|Money) — Federal Reserve chief Ben Bernanke reinforced his call on Thursday for Congress to raise the cap on U.S. borrowing, saying a failure to do so could lead down the same risky path that the failure of Lehman Brothers did.

During a Senate Banking Committeee hearing, Bernanke reiterated catastrophic consequences should Congress either fail to raise the limit on borrowing or edge too close to that limit.

“The worst outcome would be one in which the financial system would be again destabilized, which we saw in Lehman, which would have extremely dire consequences for the rest of the economy,” Bernanke said, referring to the period following the failure of the Wall Street bank Lehman Brothers at the height of the financial crisis in 2008.

Bernanke also said that “using the debt limit as a bargaining chip is quite risky,” reiterating a worry he expressed in a February press conference.

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By David Patten, Henry J. Reske, and Ashley Martella

“I think America is going to go the way of other great nations historically,” says author and syndicated columnist Walter E. Williams after carefully observing the political games being played over the deficit. “And that is down the tubes. That’s my prediction.”

Pataki, in an exclusive Newsmax.TV interview, says America is facing “an enormous crisis that looms above everything else.”

GOP budget guru Rep. Paul Ryan has warned that America is “on a path of economic ruin.”

And in an interview that Human Events published Wednesday, magazine publisher Forbes called for a return to the gold standard to shore up the dollar and stave off financial ruin.

“People know that something is wrong with the dollar,” said Forbes, who believes the gold standard would rein in federal spending. “You cannot trash your money without repercussions.”

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By Jason Lange – Reuters

Mexico bought over $4 billion of bullion in the first three months of the year as emerging economies move away from the ailing U.S. dollar.

Bank of Mexico chief Agustin Carstens, asked in a radio interview if the price of gold would rise by year-end, said: “It’s likely.”

At the same time, Carstens said Mexico’s recent gold purchases were made as a longer term investment.

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Silver Losses Weigh Briefly on Gold

Silver fell to a new 11-week low at 32.30 in overseas trading on Thursday, undermined by another hike to Chinese bank reserve requirements and another margin hike on silver. China’s largest banks must now hold a record high 21% of capital in reserve. It was the eight increase in the reserve requirement since October. The Shanghai Gold Exchange raised margin requirements to 19% of a contract’s value and was the third increase in less than a month. These are on top of the dramatic rise in margin requirements on COMEX silver futures in recent weeks.

While the losses in the white metal have weighed on gold, last week’s corrective low at 1462.25 remains well protected thus far. The gold/silver ratio has rebounded back to 45 from the recent low of 31. UBS precious metals strategist Edel Tully has taken notice of gold’s resilience in the face of dramatic losses in silver, saying that she favors gold for the remainder of the year. Tully added that “a gold price above $1,600 this year is very, very possible.”

A much weaker than expected eurozone industrial production print for Mar, further eroded ECB rate hike expectations and pushed the euro to a new 6-week lows, bolstering the dollar in the process. Further dollar strength added additional weight to the metals, although eroding expectations of a Fed rate hike as well can hardly be construed as positive for the greenback. At the beginning of the US session, higher than expected initial jobless claims, weaker than expected retail sales and an upside miss on PPI all conspired to take some of the wind out of the dollar’s sails and gold dutifully regained $1,500.

Eurogroup chief Jean-Claude Juncker said today that “with certainty” Greece won’t be able to tap credit markets in 2012. The implications of course are that the EU — with perhaps additional assistance from the IMF — will indeed have to provide further aid. Juncker acknowledged that EU finance ministers will meet next week to discuss Greece, while justifying his lie from last week about Friday’s meeting of select EU officials in Luxembourg. You may recall that Juncker denied that any such meeting was taking place. Juncker’s defense was that in lying he “helped avoid many speculations,” and specifically speculation about Greece exiting the EMU.

First of all, that’s just silly; speculation on Greece was, and continues to run rampant. Second, and more importantly, under no circumstances should a government official — whether elected or appointed — lie, regardless of the perceived justification. A “no comment” may be entirely appropriate, but lying should be an actionable offense.

In thinking back to Treasury Secretary Tim Geithner’s assurances in 2008 that Lehman Brothers and Bear Stearns were well capitalized — when clearly they weren’t — and other such offenses, it becomes apparent that lying and misrepresentation by government officials has been pretty much institutionalized. While Geithner’s lies may have forestalled the inevitable ever so briefly, it makes the people (whom these officials work for) increasingly skeptical of the government. The speculators may be kept somewhat off balance, but undoubtedly there are little old pensioners out there too that rode Lehman stock all the way to zero based on assurances from their government that all was well.

by Tom Jennemann
Thu, May 12 2011 (Fastmarkets) — Gold and silver on the Comex division of the New York Mercantile Exchange have bounced off the morning’s low but the risk going forward remains firmly to the downside as the dollar touched a five-week high against the euro and as crude oil remains deep in negative territory.

Silver futures for July delivery were down $1.66, or 4.8 percent, at $33.855 an ounce and earlier hit $32.30 – a 10-week low. The grey metal has lost about 33 percent from its April highs. Gold has pulled back also but not nearly as dramatically. The yellow metal was recently down $4.80, or 0.3 percent, at $1,496.60 an ounce, on a June basis, but previously fell to an intraday low of $1,477.60.

The brunt of the downward pressure is coming from the stronger dollar, which has rallied to 1.4119 against the euro earlier before curbing gains to 1.4186. The forex market finds itself “massively, violently, enormously, egregiously and frighteningly short of the dollar and now is scrambling to find its way out of a archly spring trap,” explained Dennis Gartman, author of the Gartman Letter.

… “Even the most ardent metal’s bull has to stand back, take a deep breath and worry about margin liquidation,” Gartman said.

Commerzbank AG said in a note that investors are taking profits with gold to compensate for losses with other assets. “However, the firmer dollar is allowing gold prices in euros to remain above 1,050 euro an ounce. Gold should be well supported overall in the current market climate and sharp price losses should be prevented by a greater interest in physical buying at the lower price levels,” the bank analysts said.

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By Mina Kimes
May 12, 2011 (CNN|Money) — Money-management powerhouse Pimco has long been renowned for its expertise in bonds. Equities, not so much. So when the firm announced in late 2009 that it was moving into stock picking, it scoured the globe for talent. Its first draft choices were Anne Gudefin, a veteran value investor, and Charles Lahr, partners who jointly ran the $16 billion Mutual Global Discovery mutual fund. During the five years Gudefin was at the helm, the fund averaged a 7% return, beating the MSCI world stock index by more than four percentage points annually and topping 98% of its peers during the 2008 meltdown. …… She discussed the holdings in her new $1.2 billion fund, Pimco EqS Pathfinder.

Q. How do you decide a stock is cheap?

A. I’m really attracted to good business models. We’ve seen over the years that quality pays, and I’m always looking for companies with high barriers to entry and strong free cash flow generation. I also want to see things that aren’t operating perfectly at the moment, so there’s a margin for improvement. I look for there to be a number of catalysts for value to be unlocked…

Q. A large chunk of your portfolio is in consumer staples. Why?

… they benefit from growth in emerging markets. We like Pernod Ricard, which is the No. 2 spirits company in the world. The Chinese consumer is crazy about cognac and, to a lesser extent, Scotch. Some bottles — not even the most expensive ones — go for a few thousand euros, so you can imagine the margins. It’s insane! But good for the investor. A growing portion of the luxury goods produced in the world are sold in China these days…

Q. Pimco’s leadership has backed away from U.S. Treasuries, citing factors such as inflation. Has that affected your investing strategy?

It’s always something we keep in mind, especially when we’re investing in consumer staples, because there will be higher raw material prices.

… Q. Other than value stocks, what do you like?

The largest position in the fund is gold, which we think is a very good form of protection against what can go wrong. We were encouraged by the fact that a lot of the central banks, especially in Asia, are big buyers. We think that’s an underlying trend that’s very favorable for gold.

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by Jan Harvey
May 12, 2011 (Retuers) — Gold and silver prices slid on Thursday, with silver tumbling more than 7%, as renewed strength in the dollar and concerns over the outlook for economic growth sparked broad-based selling of commodities.

Silver also came under heavy selling pressure after the Shanghai Gold Exchange lifted its margin requirements for silver again, traders said.

Spot gold was bid at $1,482.10 an ounce at 1100 GMT against $1,499.75 late in New York on Wednesday, having earlier hit a low of $1,478.05. Silver fell as low as $32.52…. Gold dropped more than 1% on Wednesday and silver nearly 9% as hefty gains in the dollar prompted selling across commodities.

… “External factors are playing the most important role here — the firmer dollar, and secondly somewhat weaker equity markets which reflect higher risk aversion among market players at the moment,” said Commerzbank analyst Daniel Briesemann. “Given that commodities still show quite good price performance over the last 12 months and are still in positive territory, some market players are taking profits to cover losses elsewhere,” he added.

… Gold prices have dropped more than 5% and silver by around a third from the record highs they hit in recent weeks.

… Increases in the amount of money exchanges require to trade silver have rattled futures markets. Speculators have liquidated long positions in silver in both New York and on the Shanghai Gold Exchange in recent weeks, pressuring the metal. “While the long silver trade is a lot less crowded than it was earlier this month, news that the SGE will raise initial margins on the metal to 19%, from 18%, and widen the allowed daily range to 13% — both effective tomorrow – may spook those investors who are still long that further margin hikes will follow,” said UBS in a note. “The only thing we can be certain of in silver right now is that the roller coaster journey is going to continue for some time.”

The gold:silver ratio — the number of ounces of silver needed to buy an ounce of gold — rose towards 44 on Thursday, having slipped to 31.7 in late April.

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Yet another hike to China’s bank reserve requirements and a margin increase for silver on the Shanghai exchange conspired to keep the precious metals, and commodities in general on the ropes. China hiked reserve requirements another 50 bps to a record high 21% for its largest banks. This is designed to fight inflation by slowing the economy and reducing demand for commodities.

Additionally, eurozone industrial production came in much weaker than expected, further curtailing ECB rate hike expectations. The euro fell to a 6-week low, lifting the dollar in the process and adding further weight to gold.

However, a flight of bad US data this morning, particularly a larger than expected rise in Apr PPI, seems to have resulted in at least a slightly more constructive intraday bias.

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.

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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.

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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.”

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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.”

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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.

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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.

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