May 18, 2011
LONDON (Bloomberg) — Pacific Investment Management Co, which runs the world’s largest bond fund, said ‘deteriorating debt dynamics’ will stoke faster inflation and financial repression in the US as well as at least one sovereign-debt restructuring in Europe. In a report aimed at establishing a worldview for investors in the next three to five years, Pimco chief executive Mohamed El-Erian raised the prospect of US policy makers trying to force savers to accept returns below the rate of inflation as the government grapples with a budget deficit the White House reckons will reach US$1.6 trillion this year.

‘It is a world where several governments in advanced economies, and the US in particular, opt for financial repression and mild inflation as the major way to accommodate their deteriorating debt dynamics,’ Newport Beach, California-based Mr El-Erian wrote in a report published Monday on the firm’s website. ‘It is a world that heals slowly and unevenly and remains structurally impaired.’ … Mr El-Erian, whose firm promulgated the term ‘new normal’ to describe an economy characterised by slow growth in developed countries and rapid expansion in emerging markets, made clear that Pimco is sticking with that outlook.

Advanced economies will face growth of about 2 per cent and persistently high unemployment, while emerging markets will enjoy expansion of about 6 per cent, with their income levels converging to those of rich nations, he said. Inflation will settle at ‘levels that are higher than currently anticipated’ as headline rates mesh with so-called core rates which exclude energy and food prices, he said.

… To cope with the growing uncertainties, Pimco will pursue an approach of ‘constructive paranoia’ in managing its more than US$1.3 trillion in assets. … Mr El-Erian added that commodities in short supply or that provide a store of value should also do well.

… almost four years since the start of the financial crisis, ‘the world has seen little meaningful reduction in the size of the excess liabilities accumulated’ beforehand, Mr El-Erian said. ‘Rather than be addressed in a convincing manner, most of the excess liabilities have simply been shifted around the system, and importantly to public balance sheets and taxpayers.’

[source]

by David Levenstein
Tuesday, 17 May 2011 (Mineweb) — … Now that the price of gold has dropped by around $85 an ounce, many market participants are suggesting that gold was in a bubble just as it was in 1980 – and is headed much lower.

… Getting back to my point about the gold price now and in 1980, let me say categorically that as far as I am concerned there are no comparisons and therefore we should not expect the same conclusion.

For most of 1979 the price of gold was trading below $300 an ounce. The price of the yellow metal traded between $240 an ounce and $280 an ounce for the first five months of the year. Then, during the month of June it broke through the key resistance of $280 and by mid-July prices had hit $315 an ounce. Then, after pulling back to $280 an ounce the price had a parabolic move from $280 an ounce all the way up t0 $875 five months later. The price of gold had moved more than three times in less than 6 months. This is a parabolic move. Since 2000 when the current bull market began we have not seen one parabolic move. In fact the rises have been very gradual but consistent. This is one major difference…

… In those years, currency trading was not what it was today and the euro had not been conceived. The way people communicated in those years was completely different. There was no internet, and, in fact, the fax machine had not been invented. All communications were done telephonically and or by telex, something that today’s generation have probably never heard of. And, not many people knew anything about China.

In the current bull market, things are completely different. The price of gold has been driven higher mainly due to the declining values of the major currencies in particular the US dollar. But, the other major currencies such as the euro, the Yen and sterling don’t look all that healthy either. Budget deficits are spiralling out of control and government debit is simply exploding. As governments continue with their loose monetary policies they simply continue to debase their currencies. This is not the first time they have done this, but this time around, the size of debt is just unimaginable. And, gold is simply fulfilling one of its traditional roles as a hedge against the declining values of fiat currencies.

… If you think the gold price is a bubble and headed lower, then you obviously believe that the dollar as well as the other major currencies are going to strengthen and that there are no monetary problems in the world. And, you believe that global government debt as well as burgeoning budget deficits are completely overstated. You also do not see the value of gold in such times and will probably invest in US Treasuries as a safe haven asset. I say good luck to you.

[source]

by Tom Jennemann
17/05/2011 (Fastmarkets) — Gold on the Comex division of the New York Mercantile Exchange wobbled downwards Tuesday as dollar sentiment improved and as market participants reassess the future of quantitative easing in the United States.

Gold futures for June delivery closed down $10.60, or 0.7 percent, at $1,480.00 per ounce in New York. Trade ranged from $1,471.10 to $1,497.50.

“The dollar’s stubborn strength and the general commodity malaise kept gold constrained today,” Sterling Smith, an analyst with Country Hedging, said.

… “Traders — many of whom are highly leveraged — are now in the process of adjusting their risk models. They’re worried about additional margin hikes and are taking steps to protect their assets. The margin clerks are breathing down their necks,” a US-based gold trader said.

Investors are also looking ahead to June 30. That’s the date when the Federal Reserve’s second round of quantitative easing (QE2) ends. In November, the Fed announced that it would buy an additional $600 billion in Treasuries at a pace of $75 million per month. “The folks who made the QE2 trade are now unwinding those positions. That’s another reason we’ve seen this steep fall in speculative longs,” the trader said.

… “The market is pricing in its expectation that QE3 won’t happen,” he concluded.

… The net speculative position for gold now stands at 684.7 tonnes, off 37.8 tonnes since the beginning of the year. This includes a 71.7 tonne decrease in speculative longs and a 3.9 tonnes increase in speculative shorts, according to the US Commodity Futures Trading Commission (CFTC).

[source]

RS View: It is precisely absurd to report these speculative contract positions in terms of tonnage. Instead, reported figures might at least rise to the level of trivial interest if they were provided in terms of total margin posted on those contract wagers one direction or the other.

by David Lawder
May 17, 2011 (Reuters) – The United States on Tuesday blacklisted another Iranian state-owned bank for its role in what Washington sees as an increasingly sophisticated campaign by Tehran to evade international sanctions.

The Treasury said it labeled Iran’s Bank of Industry and Mine as a proliferator of weapons of mass destruction for handling transactions on behalf of two previously sanctioned institutions, Bank Mellat and Europaeisch-Iranische Handelsbank.

… The Treasury’s latest move prohibits U.S. entities from dealing with Bank of Industry and Mine and seeks to freeze any assets that it may have under U.S. jurisdiction.

The bank, with about $5.2 billion in assets and 41 branches, had previously done no business outside Iran, Treasury officials said. As its name suggests, it mostly provided services and loans to domestic manufacturing and mining firms.

[source]

By James Politi
May 17 2011 (FT) — The World Bank expects the US dollar to lose its solitary dominance in the global economy by 2025, as the euro and the renminbi establish themselves on an equal footing in a new “multi-currency” monetary system.

The shift will be driven by the increasing power and strength of emerging market economies, with six countries – Brazil, China, India, Indonesia, Russia and South Korea – accounting for more than half of global growth in 14 years…. emerging economies will grow at a rate of 4.7 per cent between now and 2025, a much faster pace than advanced economies which are expected to grow by 2.3 per cent over the same time-frame.

“The balance of global growth and investment will shift to developing or emerging economies,” said Mansoor Dailami, the lead author of the report.

… In addition, a different international monetary system will gradually evolve, wiping out the US dollar’s position as the world’s main reserve currency.

… On China, the report noted that authorities there had already started “internationalising” the renminbi by developing an offshore market in the currency and encouraging the use of the renminbi in settling and invoicing international trade transactions.

… The scenario presented by the World Bank means that financial institutions will have to “adapt fast to keep up,” said Justin Yifu Lin, the group’s chief economist.

[source]

by CBC News
May 17, 2011 — African Barrick Gold, a division of Toronto-based Barrick Gold, said Tuesday seven intruders were killed and a dozen more were injured Monday at its North Mara mine in Tanzania.

The company said 800 “criminal intruders” were trying to steal ore from the mine when police were called. It says the thieves attacked the police with machetes, rocks and hammers.

African Barrick said the police have increased their presence in the area and are investigating. The company has also started launched its own review.

“Although full details are yet to be confirmed, African Barrick Gold sincerely regrets any loss of life or injury on or near its mine sites,” the company said in a statement. “The company will continue to support the government and the community in their efforts to improve law and order and security in the North Mara region.”

[source]

RS View: When the criminal intruders are numbering up into the 800′s, one has to wonder, how far behind can be the population at large? The population can take far more with the simple ‘vote’ than their vanguard ever can with their assortment of machetes, rocks and hammers.

By Frederic J. Brown
May 17, 2011 (AFP) — China has “no need to fear” allowing its yuan currency exchange rate to float freely, a senior foreign exchange regulator said Tuesday. China should improve its exchange rate regime by making the yuan more flexible and “letting the market play a bigger role”, said Guan Tao, head of the international payment arm of the State Administration of Foreign Exchange.

“Flotation is not equal to one-way appreciation of renminbi,” Guan said, referring to the currency by its official name, in an article posted on the website of China Finance 40 Forum, an independent think tank. “We have no need to fear a floating exchange rate. Flotation will help form a two-way fluctuation and curb one-way speculation,” he said in an analysis piece about Japan’s stagnant economy.

Guan joins a chorus of officials and academics, both in China and abroad, who say speeding up appreciation of the yuan is in the interests of the world’s second largest economy.

[source]

May 17 (Bloomberg) — China’s concern that U.S. government securities may become more risky because of the nation’s deficits and debt burden prompted its call this month for President Barack Obama’s administration to lay “a solid fiscal foundation” for long- term growth. Former Chinese central bank adviser Yu Yongding said last month that China should stop buying Treasuries because of the risk that the U.S. may eventually default.

China may “gradually cut its U.S. Treasuries as it seeks to diversify its foreign-exchange holdings,” said Yao Wei, a Hong Kong-based economist with Societe Generale SA. She said “China is probably routing trades through other places such as London,” meaning U.S. data may not give a full picture.

… discrepancy comes in part from the different methodology used in the monthly statistics and the annual revisions. The monthly figures collect holdings data based on the location of the counterparty at the time of purchase while the revised totals reflect the identity of the owner.

“A lot of central banks have operations in London,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 20 primary dealers that trade directly with the Fed. “A lot of transactions are based in London even though the beneficial owner might be a Middle Eastern central bank or an Asian central bank. That happens quite frequently.”

… “China has kept on lending money to the U.S. to keep its export machine going, and to prevent losses” on its holdings of Treasuries, Yu said last month. “Perhaps it is too late to do anything about the existing stock without causing a serious political and financial backlash. But at least China should stop continuing building up its holdings.”

Officials including central bank adviser Li Daokui have urged diversification of the nation’s foreign exchange reserves away from U.S. debt.

[source]

Gold Underpinned by Eurozone Turmoil

Despite the absence of IMF chief Dominique Strauss-Kahn — who is presently incarcerated at Rikers Island Jail, awaiting trial on sexual-assault charges — eurozone finance ministers agreed yesterday to a €78 bln bailout for Portugal. The third EU bailout comes in spite of the reality that last year’s €110 bln bailout of Greece did little, other than buy a year’s time. Ireland, which received an €85 bln bailout late last year, labeled Portugal’s deal ‘too expensive,’ as it too lobbies for a rate closer to the one Greece got a year ago.

Greece is paying an average rate of around 4.2% on its bailout, while Ireland’s average is about 5.8%. Portugal’s rate is expected to be in the same range as Ireland’s. So Greece had the first mover advantage: Once Greece acknowledged that it needed aid, rates across the eurozone periphery were driven higher on the expectations that other PIIGS would follow suit…as they did. In the end, it wasn’t much of an advantage; as even at the relatively lower rate, there’s no way Greece is going to be able to meet those obligations. It seems almost silly to think that the answer to a sovereign debt crisis is ever more debt.

Just last week, the EU acknowledged that the debt problems of all three were once again greater than previously projected. According to the biannual economic forecast:

Greek debt will reach 157.7% of GDP this year and rise to 166.1% next year. That’s up from forecasts of 150.2% and 156.0% respectively, made just last fall.

Ireland’s debt is expected to hit 112.0% of GDP in 2011 and hit 117.9% in 2012, up from the previous forecasts of 107.0% and 114.3%.

Portugal’s debt is projected to be 101.7% this year and increase to 107.4% next, up from 88.8% and 92.4% previously.

The problems of the EU periphery are not being resolved by the bailouts and in fact, they are getting worse. That’s certainly not the proposition that was sold to core-Europe. They rightfully expect that when €273 bln are thrown at a problem, that problem should at least be mitigated to some degree. A well placed source in Germany told me several weeks ago, that officials were well aware that at best they were simply buying time with these bailouts; but were expecting to get a little more time for the amount of money they were spending. Now that this reality is becoming transparent to taxpayers across the eurozone, it should come as no surprise that a political backlash and potentially broader civil unrest is perculating.

Policymakers in Europe continue to adamantly maintain that a Greek default — they’ll call it a “restructuring” (but a rose by any other name…) — is not acceptable. So let me get this straight: Greece withdrawing from the EMU is not an option and allowing them to restructure their debt is not an option, so what exactly are Greece’s options? Long-term institutionalized austerity is not going to sit well with the Greek people. In denying them restructuring, you essentially force their hand on an exit from the eurozone. On the other hand, a restructuring — and the haircuts that would entail — will put other member states in greater peril and risks destabilizing Europe’s banking system.

There is no easy way out of this crisis for Europe, as there is no easy way out for the United States from its own debt crisis. For those two reasons alone, gold — as a safe haven, an alternative to both the euro and the dollar — is likely to be underpinned for some time to come.

JK Comment: It has been widely reported that George Soros liquidated 99% of his hedge fund’s position in the gold exchange traded fund, GLD. It hasn’t quite been three years since a now famous interview of George Soros circulated in which he outlined his predictions for the future of the international monetary system. Some key snippets are quoted below, and the entire video can be seen here:

“…and the dollar is a very weak currency except for all the others…so there is a general lack of confidence in currencies and a move away from currencies into real assets. The Chinese are continuing to run a big trade surplus and they are still accumulating assets….there is a diversification from assets normally held by central banks into other assets, especially in the area of commodities…so there is a push in gold, there’s strength in oil, and that is in a way, a flight from currencies.”

“…basically, the system is broke and needs to be reconstituted. We cannot afford to have the kind of chronic and mounting imbalances in international finance. You need a new currency system….”

“….there is a cost to using Special Drawing Rights…so somebody has to pay, and I think we (the IMF) have the means to do it, because the IMF has very large gold reserves….it has been decided to use those gold reserves to the benefit of the least developed countries…so the IMF could pick actually up the cost of paying for the SDR’s…”

“…the system we have now has broken down, but we haven’t quite recognized it….”

“…China will be the engine driving it forward and the US will be actually a drag that is being pulled along through a gradual decline in the value of the dollar…So there would be a slow decline in the value of the dollar, a managed decline, and that would be the adjustment that needs to be accomplished, now it could actually get out of hand, and certainly the fear of inflation will precede inflation itself….”

JK Comment Continued: In this interview, Soros describes a monetary changeover that would play out over a significant period of time….during which the decline in the value of the dollar would be orderly and “managed”… and he consistently states gold would maintain a significant and integral role in this new monetary system. Simply put, the evolution of the monetary system Soros described is nowhere near fruition, and if anything, we remain today in the initial stages of this re-balancing, with the “get out of hand” scenario still a possibility…

So now I ask, does this sound like the words of a speculative short-term investor that would completely exit the gold market, simply because it achieved a nominal high? The “slaughter” in the gold market the financial media is attributing to this news doesn’t even amount to a half a percent. In fact, the market has shown admirable resilience given the size of the reported Soros liquidation. Something doesn’t quite add up.

Perhaps, we should consider another possibility: George Soros isn’t exiting the gold market at all, he’s just exiting his paper position…

by Joe Weisenthal
May 17, 2011 (Financial Post) — Monday Business Insider noted how George Soros took the axe to a huge position in his the SPDR Gold Trust, eliminating 99% of his position in Q1, according to his latest 13F.

But that ETF isn’t the only way a fund manager can play through equities (remember, we have no idea what he’s doing with derivatives etc.). There are also miners.

[source]

ALSO . . .

May 17, 2011 (Reuters) — Billionaire financier George Soros, who called gold “the ultimate bubble,” dumped almost his entire US$800 million stake in bullion in the first quarter, well before a commodities slump blamed partly on reports he was liquidating his holdings.

Famed gold bull John Paulson held his ground, but Soros was joined in the retreat by several other big names, including Eric Mindich and Paul Touradji, according to 13-F filings with the U.S. Securities and Exchange Commission that provide the best insight into where hedge funds are placing their bets.

… Gold rose for a tenth consecutive quarter in the three months to March, hitting record highs above US$1,400 an ounce, buoyed by political turmoil in the Middle East and North Africa and lingering worries about indebted European countries.

The gains accelerated in April, but peaked at the start of this month, reaching a record US$1,575 an ounce on May 2. Prices have since fallen more than 5% amid the biggest commodities slump since late 2008, a move partly triggered by a Wall Street Journal report that Soros’ US$28 billion fund was selling precious metals — and fuelling fears other big funds were also seeing a peak.

… “It’s not the most bullish news I’ve ever heard in gold, but it’s not the end of the world either,” said Citigroup analyst David Thurtell. “With the eurozone sovereign debt problems still going on, inflation worries and the dollar weakness, gold’s got good underpinnings at the moment. I think it will be well supported in the US$1,450-US$1,475 range. I don’t see a widespread sell-off.”

[source]

The issue is the dollar. Or, more specifically, how we talk about it. When its value goes up, we call it a “strong dollar.” And a “strong dollar” sounds great! It sounds like a strong America, like Old Glory waving in the breeze, like our soldiers planting the flag at Iwo Jima. As for the “weak dollar,” well, yech. That’s American decline, compact cars, the Vietnam War. We might as well say “awesome dollar” and “America-hater dollar.”

But it’s unwise to apply emotionally loaded words to economically neutral concepts. Now every major economic policymaker in America pledges his or her fealty to a strong dollar with the same glassy-eyed obedience you see in coerced confessions. “I believe deeply that it’s very important to the United States, to the economic health of the United States, that we maintain a strong dollar,” Treasury Secretary Tim Geithner said upon beginning his term. “The Federal Reserve believes that a strong and stable dollar is both in American interests and in the interests of the global economy,” Fed Chairman Ben S. Bernanke promised at his first news conference.

[source]

PG View: The perfunctory spewing of “strong dollar” platitudes by US officials is the biggest running joke in the markets. Everyone knows that you can’t have a “strong dollar policy” in the absence of any actual policy that can be even remotely construed as dollar positive. Zero interest rates, quantitative easing and monetary expansion is unquestionably weak dollar policy, but the Treasury Secretary and the Fed chairman must periodically trot out the pat line about a “strong dollar” lest the orchestrated decline in the greenback become disorderly.

Klein’s article illustrates an inherent weakness of the fiat currency system; because you see, we aren’t the only ones in the world desirous of a weaker currency and the bump in exports and tourism that might result. And so a nasty cycle of beggar-thy-neighbor policy moves drives a race to the bottom. However, a prudent policy maker wouldn’t really want to win that race…would they? For inflation is the price that must be paid for even participating in such a race.

Klein’s logic, however, goes astray in paragraph 7 where he says, “A weak dollar, meanwhile, makes American-made goods cheaper on the world market and foreign-produced goods — including commodities, like oil — more expensive.” He adds, “That’s a boon for American manufacturers.” Actually higher input costs, and particularly energy costs, are anything but a “boon” for manufacturing. In fact, 10 out of 11 post-World War II recessions [PDF] in the United States were preceded by a sharp increase in the price of oil.

Gold is retreating into the range housing starts unexpectedly tumbled in April. US housing starts plunged 10.6% to 523k in April, well below market expectations. While March was revised higher, that’s a bad number and US stocks reversed course intraday. That prompted a bid in both the dollar and Treasuries, pushing the precious metals lower on the day.

Nonetheless, the downside is thought to be limited by ongoing worries over the sovereign debt crisis in Europe and our own severe fiscal woes here in the US. Eurozone finance ministers agreed to a €78 bln bailout for Portugal yesterday, even as Greece teeters on the edge of default after receiving a €110 bln bailout a year ago. The US hit its $14.294 trillion debt ceiling yesterday and is now living on borrowed time — courtesy of some accounting gimmickry — until Congress can reach a compromise that would allow America to go even deeper in debt.

China foreign direct investment for Apr +15.2% y/y, a robust +26% y/y cumulative for first 4-mo of the year, vs +17.4% y/y in 2010.

German ZEW fell to 3.1 in May, well below market expectations, vs 7.6 in Apr.

UK CPI surged to 4.5% y/y in Apr, well above market expectations, vs 4.0% in Mar.

US industrial production unchanged in Apr, below market expectations. Cap use 76.9%.

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.

[source]

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…

[source]

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.

[source]

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.

[source]

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.

[source]

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.

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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.

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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.