By Sue Chang and Myra P. Saefong
May 16, 2011 (MarketWatch) — Gold futures settled below the $1,500-mark Monday as the U.S. currency’s weakness and the U.S. debt limit vied for investors’ attention.

Gold prices had fallen earlier Monday as the dollar initially gained against the euro following news of the arrest of the head of the International Monetary Fund Dominique Strauss-Kahn. The precious metal then recovered to successfully test $1,500 per ounce as analysts said Strauss-Kahn’s arrest was unlikely to table talks on restructuring Greek debt, supporting the euro and driving the U.S. dollar lower. But as the New York floor session ended, gold failed to defend its gains as investors increasingly focused on the impending U.S. debt ceiling issue.

“If Congress reaches an agreement which cuts government spending in order to extend the debt limit, the economy will suffer. Stocks go down on that, and so do precious metals,” Jay Feuerstein, chief executive officer of 2100 Xenon Group, said in an email.

Gold for June delivery lost $3, or 0.2%, to settle at $1,490.60 an ounce on the Comex division of the New York Mercantile Exchange.

Silver prices also slid, with silver for July delivery shedding 88 cents, or 2.5%, to $34.13 an ounce.

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by Lawrence Williams
Monday, 16 May 2011 (Mineweb) — The southern African state of Zimbabwe, where President Robert Mugabe’s dogmatic pursuit of white controlled farms, and now the mining industry, coupled perhaps with a serious degree of ineptitude and corruption, brought the country’s economy to its knees, is now doubting the future value of the U.S. dollar – a currency which it has relied upon to end its disastrous hyperinflationary episode.

According to New Zimbabwe.com – a U.K.-based Zimbabwe news portal – the Reserve Bank of Zimbabwe’s Governor, Gideon Gono, is reported as saying:

“There is a need for us to begin thinking seriously and urgently about introducing a gold-backed Zimbabwe currency that will not only be stable but internationally acceptable,” Gono said in an interview with state media. “We need to rethink our gold-mining strategy, our gold-liberalisation and marketing strategies as a country. The world needs to and will most certainly move to a gold standard and Zimbabwe must lead the way.”

Gono reportedly said the inflationary effects of United States’ deficit financing of its budget were likely to impact other countries, leading to resistance of the greenback as a base currency.

“The events of the 2008 global financial crisis demand a new approach to self-reliance and a stable mineral-backed currency, and to me gold has proven over the years that it is a stable and most desired precious metal,” Gono said. “Zimbabwe is sitting on trillions worth of gold reserves and it is time we start thinking outside the box, for our survival and prosperity.”

When a country like Zimbabwe, which has experienced one of the worst hyperinflationary episodes ever with multi-billion Zimbabwe dollar notes being virtually worthless (the country even printed a 100 trillion dollar note at its inflationary peak), starts casting doubts on U.S. dollar inflation, perhaps we should start to worry a little…

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By Marianne Stigset and Omar R. Valdimarsson
May 16, 2011 (Bloomberg) — Iceland is determined to join the euro as soon as it meets the bloc’s criteria for the currency switch, Foreign Minister Ossur Skarphedinsson said.

The Atlantic island, where krona losses helped generate a trade surplus that carried the economy out of its 2008 banking meltdown, will target the currency switch once it gains European Union membership, Skarphedinsson said in an interview in Greenland’s capital Nuuk. Iceland is underlining its commitment to the euro as European finance ministers meet in Brussels for the latest round of talks to tackle the currency bloc’s debt crisis.

… Iceland started EU accession talks last year and would need to wait about six or seven years before euro adoption could be achieved, Skarphedinsson said. Accession remains attractive even as the region’s debt crisis deepens because the turmoil is “a temporary situation,” he said. “I’m not too worried — by then they will have sorted this out.”

Iceland’s financial collapse more than two years ago sent the krona tumbling 80 percent against the euro offshore after the island’s biggest banks were unable to secure short-term funding. The government took control of the lenders, splitting the foreign and domestic assets, heaping losses on international bondholders while maintaining local deposit and payment facilities.

The central bank then imposed capital restrictions to stem the krona selloff that ensued. The measures were in contrast to those taken in Greece and Ireland, where EU bailout terms dictated bondholders be protected and euro membership prevented the trade benefit of currency depreciation.

… Still, Iceland might have fared better if it had been backed by the EU, Skarphedinsson said. “The hard efforts that the EU is undertaking to shore up the finances of those countries in dire straits show that it is better to have the EU as your backbone than not,” he said.

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RS View: Taking that notion a step further, insofar as that governmental “backbone” still admits the inescapable element of human frailty, the EU in turn finds reassuring strength (the ultimate backbone) in the form of its own innovative Mark-to-Market structure (firming ever toward rightly valued gold reserves) as was put into place within the pioneering framework of the EMU.

Gold is indeed a steadfast backstop, the ideal reserve asset for CBs to hold — thus avoiding inordinate exposure to the potential weakness of all alternative promissory assets being pitched loosely (or sometimes wildly) by their international peers.

Additional note from the article: — According to central bank Governor Mar Gudmundsson, Iceland still needs a weak krona to buoy its economic recovery. The currency’s real exchange rate is 20 percent below the 30-year average “and hopefully will stay low for quite some time,” Gudmundsson said at a conference in Brussels today. “The recovery is still weak and unemployment is still close to the peak,” he said.—

In the same way that a CB chooses gold reserves as a backstop to the various weaknesses and waywardness of international currencies, an individual should likewise hold gold as a reliable countermeasure to his own currency unit as pitched locally by the domestic monetary officials.

With the United States poised to slam into its debt limit Monday, conservative economists are eyeballing all that gold in Fort Knox. There’s about 147 million ounces of gold parked in the legendary vault. Gold is selling at nearly $1,500 an ounce. That’s many billions of dollars in bullion.

“It’s just sort of sitting there,” said Ron Utt, a senior fellow at the Heritage Foundation. “Given the high price it is now, and the tremendous debt problem we now have, by all means, sell at the peak.”

But that’s cockamamie, declares the Obama administration. Mary J. Miller, Treasury’s assistant secretary for financial markets, said the U.S. should sell assets in an orderly, “well-telegraphed” manner, not in a “fire sale” atmosphere with a debt limit deadline accelerating the process.

Another senior administration official, not authorized to speak for attribution, described the situation more bluntly: “Selling off the gold is just one level of crazy away from selling Mount Rushmore.”

A sudden gold sale would also postpone only briefly — two or three months, perhaps — the deadline for raising the debt limit.

“It’s merely a procrastination technique. It would throw markets into turmoil, and you’d have to accept fire-sale prices,” said the senior administration official.

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JK Comment: We gold owners roll our eyes at Mr. Utt’s comment in the first quote above. Would this “selling at the peak” really be much different than Gordon Brown’s blunder of selling more than half of England’s gold reserves at the bottom of the market in 1999? Only time would tell, but to be sure, as the last quote illustrates, buying the US government a mere 2-3 months of operating expenses by selling the entirety of its gold reserves would do absolutely nothing to curb our runaway debt situation, and would border on lunacy. Other central banks have expressed on overt interest in acquiring gold, as evidenced by Mexico’s recent purchase, as well as China’s ongoing accumulation. They would surely leap at such an opportunity to acquire such a significant gold holding. In time, such a sale would only cause continued erosion to the dollar’s role as the reserve currency of the world. Its value would logically fall, thereby placing upward pressure on gold’s price, especially in terms of dollars. Perhaps such action could even prompt gold prices to never retreat meaningfully below the level at which they were liquidated. So…. even though gold is six times higher than when Brown infamously sold, if our same decision to sell prompted the price to never retreat below the $1500 mark, does it not represent a blunder of similar magnitude?

This story was on the cover of the Denver Post today. Interesting times indeed….JK

By Nicholas Larkin and Pham-Duy Nguyen
May 16 (Bloomberg) — Sales of gold coins are on track for the best month in a year amid the worst commodities rout since 2008, a sign that bullion’s longest bull market in nine decades has further to run, if history is a guide.

The U.S. Mint sold 85,000 ounces of American Eagle coins since May 1 as the Standard & Poor’s GSCI Index of 24 raw materials fell 9.9 percent. The last time sales reached that level, bullion rose 21 percent in the next year. Gold will advance 17 percent to a record $1,750 an ounce by Dec. 31 and keep gaining in 2012, the median estimate in a Bloomberg survey of 31 analysts, traders and investors shows.

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Gold Straddles $1500 as US Poised to Hit Debt Limit

Gold is maintaining a consolidative tone near $1500 as the US Treasury Department acknowledges that we will hit the $14.294 trillion debt ceiling today.  Treasury Secretary Geithner sent a letter to various leaders, notifying them of that reality and outlining some of the additional “extraordinary measures” that will be implemented to prevent a default, including raiding the Civil Service Retirement and Disability Fund.  Geithner has already said he can squeeze out an additional 11-weeks of solvency my employing such “extraordinary measures,” but on our around 02-Aug the bag-of-tricks will be empty.

Between now and 02-Aug the political battle will rage.  The Republican controlled House of Representatives will pressure the Democratic controlled Senate and the Obama Administration for massive spending concessions and entitlement reforms.  President Obama and his allies will attempt to defend various spending initiatives and entitlements, offering tax hikes as an alternative means to stem the flow of red ink.  The Republicans have already been quite adamant that tax increases are a “non-starter.”  Truth be told, there is a distinct absence of political appetite for either austerity or tax hikes in the lead-up to the 2012 Presidential elections, particularly in light of the tenuousness of the economic recovery.

Sadly, that makes half-measures and more can-kicking the order of the day.  Both parties will likely just try and get through the November elections without completely upsetting the apple-cart, while coloring their opposition in the most unfavorable light possible.  In other words, it is unlikely that anything meaningful to address the grim long-term fiscal outlook for America gets done.

Take special notice of the US Unfunded Liabilities in the lower-right of the above snapshot of the US Debt Clock.  That is the number that is inclusive of the unfunded obligations of Social Security, Medicare and the prescription drug benefit.  The Trustees of Social Security and Medicare acknowledged last week that a combination of higher costs and lower-than-expected revenues has resulted in further acceleration in the deterioration in the solvency of these entitlements.  The Medicare trust fund is now expected to be exhausted by 2024, five years earlier than expected, while the Social Security trust fund is expected to be tapped-out in 2036, one year earlier than was projected a year ago.

I wonder if anyone can envision us growing our way out of a hole of this magnitude, when we seem to have condemned ourselves to long-term anemic growth that if we’re lucky might end up averaging 3%.  An increasingly likely scenario will almost assuredly include further devaluation of the dollar — money printing — to allow us to pay down our massive debt with ever-cheaper dollars.  As this inevitability becomes reality, more an more investors will be turning to gold as a haven from the inflation that must result from such policy.

by Amanda Cooper
May 16, 2011 (Reuters) — Gold steadied on Monday, as the twin forces of deepening concern about the euro zone debt crisis and the growing strength of the dollar offset each other, while investors kept silver pinned near last week’s 2-1/2 month lows.

The dollar index, a measure of the greenback’s strength against a basket of currencies, advanced to its highest since early April.

Spot gold was little changed at $1,494.49 an ounce by 0838 GMT, after ending flat in the previous week. Prices had fallen by about 5 percent from the lifetime high of $1,575.79 hit on May 2.

“The dollar is coming into some safe-haven bids, with all the uncertainties and the turmoil and there’s maybe a reassessment that we’ll see the dollar aggressively firm,” said Credit Agricole analyst Robin Bhar.

Gold in euros did not get much of a lift from the renewed concern Greece will have to restructure its debt without further EU support and euro zone finance ministers were not expected to make much progress tackling Athens’ financial crisis.

“It is a bit of a double-edged sword, because in theory any debt, any currency woes should play into gold’s strength. But on the other hand if the euro is pummelled and the dollar strengthens, they offset each other,” Bhar said.

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By Colin Barr
May 16, 2011 (CNN|Money) — China’s holdings of U.S. government debt inched lower for the fifth straight month. But America’s biggest foreign creditor continued to hold $1.14 trillion of Treasury securities through official channels as of March – 26% more than Japan, the second-biggest lender to the United States.

… The latest report on the major foreign holders of U.S. debt comes as economists are starting to question the strength of the economic recovery. Those worries tend to boost demand for government bonds, as investors trade out of riskier assets such as stocks and commodities.

… At the same time the United States is bumping up against its debt ceiling, a fact that Republicans in Congress are using to push the Obama administration to agree to spending cuts. The political impasse could lead to a technical default on U.S. debt, though that is far from certain and there is no sign the markets are nervous about the same.

[source]

Many have been wondering why Bill Gross, with his atavistic aversion to holding US paper, has not yet branched out into precious metals which are the natural hedge to surging rates (not to mention sovereign default). Probably the primary reason for this is that the firm’s flagship credit funds do not have the mandate, nor permission, to invest in such asset classes. As such, the firm’s $200+ billion TRF flagship fund, at least, is limited to fixed income securities. However, the same limitation does not apply to the firm’s other funds, especially the recently launched $1.2 billion equity fund, the Pimco EqS Pathfinder. The fund was launched in 2009 under the stewardship of Anne Gudefin and Charles Lahr, who jointly ran the $16 billion Mutual Global Discover mutual fund. So in an interview recently granted to Fortune by Gudefin, we were not very surprised to hear her response on what her largest investment position is in: “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.” So to all those asking why Gross does not invest in the yellow metal, here is your answer.Should the EqS Pathfinder fund grow in AUM, one can assume that an increasingly bigger pro rata portion will be allocated to precious metals.

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Today, the United States has reached the statutory debt limit. Secretary Geithner sent the following letter to Congress this morning alerting them to actions that have be taken to create additional headroom under the debt limit so that Treasury can continue funding obligations made by Congresses past and present. The Secretary declared a “debt issuance suspension period” for the Civil Service Retirement and Disability Fund, permitting Treasury to redeem a portion of existing Treasury securities held by that fund as investments and suspend issuance of new Treasury securities to that fund as investments. He also suspended the daily reinvestment of Treasury securities held as investments by the Government Securities Investment Fund of the Federal Employees’ Retirement System Thrift Savings Plan. For more information on these measures, please read this FAQ.

Last Friday, Secretary Geithner also responded to an inquiry from Senator Bennet regarding the fiscal and economic consequences of failing to increase the debt limit. That letter can be found here.

Secretary Geithner continues to urge Congress to raise the debt limit in a timely manner in order to uphold the full faith and credit of the United States.

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

Dear Mr. Leader:

I am writing to notify you, as required under 5 U.S.C. § 8348(l)(2), of my determination that, by reason of the statutory debt limit, I will be unable to invest fully the portion of the Civil Service Retirement and Disability Fund (“CSRDF”) not immediately required to pay beneficiaries. For purposes of this statute, I have determined that a “debt issuance suspension period” will begin today, May 16, 2011, and last until August 2, 2011, when the Department of the Treasury projects that the borrowing authority of the United States will be exhausted. During this “debt issuance suspension period,” the Treasury Department will suspend additional investments of amounts credited to, and redeem a portion of the investments held by, the CSRDF, as authorized by law.

In addition, I am notifying you, as required under 5 U.S.C. § 8438(h)(2), of my determination that, by reason of the statutory debt limit, I will be unable to invest fully the Government Securities Investment Fund (“G Fund”) of the Federal Employees’ Retirement System in interest-bearing securities of the United States, beginning today, May 16, 2011. The statute governing G Fund investments expressly authorizes the Secretary of the Treasury to suspend investment of the G Fund to avoid breaching the statutory debt limit.

Each of these actions has been taken in the past by my predecessors during previous debt limit impasses. By law, the CSRDF and G Funds will be made whole once the debt limit is increased. Federal retirees and employees will be unaffected by these actions.

I have written to Congress on previous occasions regarding the importance of timely action to increase the debt limit in order to protect the full faith and credit of the United States and avoid catastrophic economic consequences for citizens. I again urge Congress to act to increase the statutory debt limit as soon as possible.

Sincerely,

Timothy F. Geithner

Identical letter sent to:

The Honorable John A. Boehner, Speaker of the House
The Honorable Nancy Pelosi, House Democratic Leader
The Honorable Mitch McConnell, Senate Republican Leader

cc:       The Honorable Dave Camp, Chairman, House Committee on Ways and Means

The Honorable Sander M. Levin, Ranking Member, House Committee on Ways and Means
The Honorable Max Baucus, Chairman, Senate Committee on Finance
The Honorable Orrin Hatch, Ranking Member, Senate Committee on Finance
All other Members of the 112th Congress

Gold is higher this morning, but remains generally consolidative in the vicinity of $1500.  Silver is lower with the gold/silver ratio maintaining a positive bias.  The dollar is likely to remain underpinned on worries over the euro.

The US is expected to hit its $14.294 trillion debt ceiling today, amid persistent warnings of ‘catastrophic consequences’ if the ceiling isn’t raised by 02-Aug when Treasury’s bag-of-tricks for forestalling default is expected to come-up empty.  In the meantime, Treasury will start dipping into the retirement funds for federal workers.

EMU finance ministers are still slated to meet to discuss Greece and Portugal today, despite the absence of IMF chief Dominique Strauss-Kahn who was arrested in NY over the weekend on charges of sexual assault. Eurozone officials continue to deny that a restructuring of Greek debt is being considered, but obviously everyone knows it must be.

Eurozone Apr HICP confirmed at 2.8% y/y. Core higher than expected at 1.6% y/y on expectations of 1.4%, vs 1.3% previously.

NY Empire State index plunged to 11.88 in May, well below market expectations of 20.00, vs 21.7 in Apr.

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.

[source]

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.

[source]

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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