By SETH LIPSKY
It’s been 25 years since I found myself sitting in the office of Karl Otto Poehl, the president of the West German Bundesbank. I was then a young editorial writer at The Wall Street Journal intent on asking Europe’s most powerful central banker how he felt about the monetary crisis of the hour.

If people are getting nervous about the dollar, he said, “they shift into . . .” His voice trailed off. I noted that at the moment they were shifting into gold. “Into gold, to a certain extent,” he said. “But, but, but it’s not so relevant, actually.”

I observed that central banks were certainly “holding an awful lot of it.”

“We are the second biggest gold holder in the world, you know,” Mr. Poehl exclaimed.

“You must think it has some relevance,” I replied.

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PG View: Lipsky thinks “America should hang onto its gold while it pursues a return to sound money of a kind envisioned by the Founders.” While Lipsky doesn’t say where he’d put the odds of a return to sound money, author Edwin Vieira “maintains little hope of the government moving to sound money.” Yep, given that I don’t think anyone in Washington even knows what sound money is anymore…I’d make the odds pretty long myself.

By Laura Mandaro
May 20 (MarketWatch) — U.S. stocks closed near their session lows Friday, cementing the third straight week of losses for the S&P 500 and Dow Jones Industrial Average, as worries about European government debt added to concerns about a U.S. slowdown.

For the week, the Dow lost 0.7%, the S&P 500 fell 0.3%, and the Nasdaq Composite dropped 0.9%.

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By Claudia Assis and Sarah Turner
May 20, 2011 (MarketWatch) — Gold futures surpassed the $1,500-an-ounce mark on Friday, as euro-zone debt fears resurfaced and trumped a rising dollar ahead of regional elections in Spain.

Gold for June delivery added $16.50, or 1.1%, to $1,508.90 an ounce on the Comex division of the New York Mercantile Exchange. That marked gold’s first settlement above $1,500 since May 12, and the highest for a most-active gold contract since May 10. Gold finished the week up 1%. … Silver gained 0.3% on the week.

“It’s flight to safety,” said Frank Lesh, a broker and futures analyst with FuturePath Trading in Chicago. “If you are holding euros … you’d like to have something else.”

The single currency lost against the dollar as concerns surfaced that potential new regional governments in Spain could unearth more debt problems and change the political landscape in the key euro-zone periphery country. Spaniards go to the polls this weekend, with the ruling Socialist Party expected to suffer some setbacks.

… Although both gold and silver posted gains this week, the path to higher ground has been by no means smooth. “There is still a tug-of-war taking place between those who believe the commodity trade has peaked in front of the end of [the U.S. Federal Reserve’s] quantitative easing 2, and those who believe it is just a correction,” said metal analysts at MF Global.

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By Jack Farchy and James Mackintosh
May 20 2011 (FT) — The ultimate asset bubble is gold . . .

Gold has shown tendencies to go parabolic and usually bubbles tend to end in that parabolic rise before the collapse.

George Soros – who made the statements above at various points last year – has been one of gold’s most strident critics and also one of its largest investors. But now the billionaire financier has dumped a large portion of his gold investments, according to regulatory filings released this week and people with knowledge of the fund’s activities.

Mr Soros is not alone in cutting his exposure to the yellow metal. Investors sold 2.5m ounces of gold through exchange traded funds in January and February as prices slid 8 per cent, and bankers say several hedge funds were also selling gold on the physical market.

“There was a fairly major exodus at the beginning of the year,” says Philip Klapwijk, executive chairman of GFMS, a precious metals consultancy. “There may have been a bit of an echo of that following the recent peak.”

However, the majority of longer-term investors in gold, such as the macro hedge funds that went long during the financial crisis, are sticking with their positions, bankers and traders say. Most prominent among them is John Paulson, the hedge fund manager who shot to fame with his bets against the subprime housing market, whose position in the SPDR Gold Shares exchange-traded funds alone is $4.4bn, according to the latest regulatory filings.

… Tom Kendall, precious metals analyst at Credit Suisse, says investors such as Soros who have exited gold positions “are still the exception”.

… Troy Asset Management, which manages the family money of the late Lord Weinstock and several public funds ,has close to 20 per cent of some funds in gold and gold shares. “The key thing is where real interest rates are moving,” says Sebastian Lyon, chief executive. “We are quite a long way still from having an honest money policy where real interest rates actually protect the value of money.”

by Ezra Klein
It almost goes without saying, but Brian Beutler of Talking Points Memo got Standard & Poor’s to say it anyway. “A sovereign’s failure to service its debt as payments come due is a default according to S&P’s sovereign rating criteria,” according John Piecuch, spokesman for Standard & Poors. “In that case, the rating would be lowered to ‘SD’ (Selective Default).”

A few months ago, S&P revised our credit outlook to negative: that meant they thought there was a slightly higher chance we’d lose our credit rating in the future. That was a bit of a shock to the political system, but this would be the real thing. So it’s worth being clear: when you hear Paul Ryan say the market would accept a default “for a day or two or three or four,” or Devin Nunes say that “by defaulting on the debt, in the short and long term, it could benefit us to go through a period of crisis that forces politicians to make decisions,” you’re not hearing about some alternative to default. To S&P, that’d be a default.

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By Pham-Duy Nguyen
May 20, 2011 (Bloomberg) — Gold futures rose the most this month after Fitch Ratings cut Greece’s credit rating, boosting the appeal of the precious metal as a haven asset. The euro tumbled as much as 1.2 percent against the dollar after Fitch said a “soft” restructuring of Greece’s debt by European Union policy makers would be considered a default.

… “Gold is screaming higher,” said Matt Zeman, a strategist at Kingsview Financial in Chicago. “People are buying gold as a hedge against the uncertainty in Europe. There’s a lot of focus again on the euro zone debt crisis.”

Gold futures for June delivery rose $20.60, or 1.4 percent, to $1,513 at 12:26 p.m. on the Comex in New York, heading for the biggest gain since April 29.

“There’s a gravitation toward investments that are paperless,” said Adam Klopfenstein, a senior market strategist at Lind-Waldock in Chicago.

… Bundesbank President Jens Weidmann, a member of the European Central Bank Governing Council, said the central bank may not be able to accept Greek sovereign debt as collateral if the bond maturities are extended.

Gold also gained on signs that demand is increasing in China, where inflation is exceeding government targets. … “When you hear that a large population source like China wants to own gold, that bodes well for the metal,” said Klopfenstein of Lind-Waldock.

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by Bernard Condon
May 20, 2011 (AP) — … As stocks were falling last week, Grant visited The Associated Press in New York to talk about why it’s not just stock investors who should be worried. Below are excerpts, edited for clarity, from a wide-ranging conversation in which he lit into the Federal Reserve for our current troubles, warned of 10 percent inflation and waxed nostalgic for a time when Washington had the courage to let prices fall in crises rather than goose them up and prolong our agony.

Q: What’s your view of the stock market?
A: The Federal Reserve has unilaterally taken it upon itself to levitate asset prices. It is suppressing interest rates. When you’re not getting anything on your savings, you are inclined to go out and buy something, anything, to generate either income or the expectation of capital gains. So the things that we take as prices freely determined are in fact manipulated.

A few months ago, (Fed Chairman) Ben S. Bernanke, Ph.D., the former chairman of the Princeton economics department, stood before the cameras of CNBC and said that the Russell 2000 is making new highs. The Russell! He sounded like another stock jockey. He was taking credit for new highs in the small cap equities index. The Fed, as never before, or rarely before, is now the steward of this bull market. One wonders what it will do if stocks pull back significantly.

Q: What would you have done in the financial crisis if you had been in Bernanke’s position?
A: Resign. I don’t know. I have great faith in the price mechanism, in the mechanics of markets. I think there should have been much less intervention and we should have let some chips fall, many chips fall…

Q: Let’s talk about the dollar. Washington says it wants a strong dollar.
A: It’s disingenuous when (Treasury Secretary) Tim Geithner says he’s for a strong dollar. What he means to say is the economy stinks and we need even greater oomph from our exports and for that we would like a much lower dollar in a measured, managed kind of decline. That’s what he wants, and he wants it by November 2012.

… [But] If the world were to lose confidence in (the dollar) we would suddenly be in a much less advantageous financial position. The U.S. is uniquely privileged in that we alone may pay our bills in the currency that only we may lawfully print. That’s our prerogative as the reserve-currency country.

Q: If investors lose their faith in the dollar, what would replace it?
A: I think there will be a gold standard again in your lifetime, if not mine. It’s the only answer to the question, if not the dollar, then what?

Q: Where should people put their money now?
A: The trouble with the present is that nothing is actually cheap. My big thought is that our crises are becoming ever closer in time. … The cycles are becoming compressed. The temptation to become invested at peaks of these shorter cycles is ever greater.

Q: Any last thoughts?
A: Because the Fed has coaxed or cajoled people into stocks, including many financial non-professionals, I think it has moral ownership of the market in a way that no recent Fed has had. Either the stock market owns the Fed, or vice versa but they are too intertwined now. If stocks pull back by 20 percent, how can Bernanke just sit there and say, `I want a bear market?’ I think he has some moral responsibility for the finances of the non-professionals who bought.

Q: Does this mean the Fed might announce QE 3, a third round of quantitative easing to lower rates and raise stock prices?
A: Yeah, it means QE 3 through QE N.

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By Melanie Burton
Fri May 20, 2011 LONDON (Reuters) — Gold rose on Friday, helped by a soft dollar after poor U.S. economic data this week raised prospects the Federal Reserve will keep monetary policy loose for some time to come.

Data on Thursday showed a slowdown in manufacturing growth in the U.S. Mid-Atlantic region and an unexpected fall in existing home sales in April. That strengthened the view that if economic data continues to disappoint, it could delay Fed tightening until well into 2012 or later.

The dollar kept up a softening trend this week against the euro, which was also adding support to gold. “U.S. dollar weakness and uncertainty surrounding Greece’s debt situation continued to be supportive,” said ANZ in a note.

… The European Central Bank wants Greece to drop debt re-profiling ideas and focus on implementing economic reforms to fix its finances, its former vice president Lucas Papademos told Athens, daily Ta Nea reported on Friday.

… On the charts, gold appears to be breaking out to the upside, said fund manager Dennis Gartman of industry newsletter TheGartmanLetter in a note. “Gold’s been given every opportunity to break this week, and it has refused to do so, and now it appears in the process of breaking out to the upside instead. We are much impressed … enough so to add to our gold positions,” he said.

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The consolidative tone in gold persists, with activity centered just below the $1500 level. The yellow metal continues to be underpinned by the sovereign debt crisis in Europe and the fiscal crisis here in America, which continues to defy resolution.

The $14.294 trillion debt ceiling was hit on Monday and the US is now — quite literally — on borrowed time. Treasury has said they can delay default until early-August with a series of accounting gimmicks, but as we get closer to that date without a deal, markets are likely to get increasingly skittish.

Earlier in the week, Tom Coburn pulled out of the Gang of Six Senators tasked with finding a bipartisan solution to the nation’s deficit woes. Coburn said, “We’re at an impasse. There’s no reason to talk about the same things over and over and not getting any movement.”

There’s a high-stakes game of chicken going on in Washington these days, and while I don’t think anyone really believes we’ll default on our obligations, I hope all of our Representatives within the beltway appreciate just how high the stakes are. I suppose if push indeed comes to shove…there’s always the printing press.

The following are the key factors from the WGC’s Gold Demand Trends first quarter 2011:

Prevailing global socio-economic conditions will continue to drive investment demand for gold. These include: continued uncertainty over the US economy and the dollar, ongoing European sovereign debt concerns, global inflationary pressures and continued tensions in the Middle East and North Africa.

Sustained momentum in Chinese and Indian jewellery demand will underpin growth in the jewellery sector throughout 2011. Strong demand in India during the recent Akshaya Tritiya festival and the beginning of the wedding season, alongside extensive purchasing on dips in the gold price, underlines the strength of the Indian market.

Net purchasing by the official sector is expected to continue in 2011 as central banks turn to gold as a means of diversifying their reserves into an asset with no credit or counterparty risk.

Japan all-industry index contracted -6.3% m/m in Mar on earthquake/tsunami disruption.

BoJ held o/n call rate steady at 0.0-0.1%, as was widely expected. Maintaining expanded fund pool for buying assets in wake of earthquake.

German April PPI unexpectedly accelerated to 6.4% y/y, above market expectations, vs 6.2% in Mar.

by Tyler McKee
May 19, 2011 (Forbes) — I recently checked in with Curtis Hesler, editor of Professional Timing Service, for his thoughts on gold:

Gold has finally decided to back off, and there should be a bit more selling before this correction is over. Gold posted three highs at the $1,430 level during November and December last year, which were finally exceeded this spring. Normally, when triple highs are broken, prices will surge short term and then correct briefly before resuming the rally. This is the correction that is unfolding now. Once it is completed, I look for gold to advance to $1,800 later this year and to above $2,000 in 2012.

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By Claudia Assis and Sarah Turner
May 19, 2011 (MarketWatch) — Gold and silver edged lower Thursday, unable to hold on to gains after a rash of disappointing macroeconomic data once again called the recovery into question, hurting prospects for silver’s industrial demand.

Gold for June delivery declined $3.40, or 0.2%, to $1,492.40 an ounce on the Comex division of the New York Mercantile Exchange. Earlier, it had traded as high as $1,499.60 an ounce, but couldn’t top $1,500. On Wednesday, gold for June delivery surged 1.1%, but also remained below the $1,500 level.

Every failed attempt meant investors had a fresh reason to sell, said Carlos Sanchez with CPM Group in New York.

… Among the day’s economic data, April leading economic indicators fell 0.3%, the Conference Board said. Manufacturing conditions in the Philadelphia area disappointed in May, and existing-home sales declined 0.8% in April, surprising economists who had expected a rise.

Separately, gold demand rose in the first quarter by 11% year on year, the World Gold Council trade group said Thursday, with China and India accounting for 63% of total demand.

“Given the huge rise of China’s demand, which surged by 32% in a year, the WGC’s earlier forecast that China’s gold demand would double in 10 years could be proven too conservative,” analysts at Commerzbank said. “Consequently, we expect the price of gold to pick up to $1,600 a troy ounce by year-end after a temporary weakness in the summer.”

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by Jack Farchy
May 19, 2011 (FT) — China overtook India to become the largest market for gold bars and coins in the first quarter of this year, as rising inflation inspired a surge in bullion investment.

Chinese investors bought 93.5 tonnes of gold between January and March in the form of coins, bars and medallions, a 55 per cent increase from the previous quarter and more than double the level of a year earlier, according to data released by the World Gold Council on Thursday.

… The surge in Chinese buying has supported prices, even as some investors in the west were cutting exposure…. George Soros’s hedge fund sold almost all its holdings in the largest gold exchange-traded fund, SPDR Gold Shares, in the first quarter, according to a regulatory filing this week.

“You’re seeing eastern demand picking up any of the gold coming out of the hands of western investors,” said Marcus Grubb, managing director for investment at the World Gold Council, a lobby group backed by the gold mining industry.

… The rise in Chinese gold consumption has been stimulated by the deregulation of the country’s gold market, which has led to an increase in the number of banks importing gold and the number of specialist shops that sell it.

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RS View: As a worthwhile reminder, deregulation of the gold market in China has been deliberately unfolding over the whole of the past decade, coincident and harmonious with the pro-gold structure and launch of the euro project.

by Mark Hulbert
CHAPEL HILL, N.C. (MarketWatch) — Evidence is growing that gold has formed at least a short-term bottom around $1,480. Tuesday’s close at that level, for example, now appears to have been the second half of a double bottom, with the first half having been formed by May 5’s close of $1,481.50 an ounce. (Both prices reflect the June gold contract on the COMEX.)

This area therefore represents support, according to technical analysts, since there evidently are buyers on the sidelines ready to buy whenever gold drops to this area.

Sentiment data provide confirmation: The gold timers on balance have remained almost completely out of the market, despite gold’s successful test of the $1,480 bottom. … In other words, while gold is patiently doing the technical work to form a bottom, the average gold timer is building a wall of worry that bullion will be able to climb.

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May 19, 2011 (CBC News) — Hundreds of Spaniards defied a ban on their makeshift protest camp in the heart of Madrid for a fourth straight day Thursday, denouncing the country’s two main political parties as selfish and useless in dealing with the country’s economic crisis.

… Miguel Arrastia, 26, said protesters are angry that spending cuts and other austerity measures imposed to deal with Spain’s deficit and other problems are making people suffer even more. He is an unemployed surveyor.

“This protest is a spontaneous thing, and I think it is happening at the right time because it is right before the elections and we are showing that no party is capable of dealing with this crisis,” he said.

Arrastia said that recent pro-democracy uprisings in North Africa and the Middle East served as an inspiration — a reminder of what people working together can achieve. “They were an influence because they gave us strength. Those people were able to stand up to dictators, so why cannot we” take on a stagnant political system at home, Arrastia said.

… Ramon Cotarelo, a political science professor at Complutense University in Madrid, said the protests, which began over the weekend, are the culmination of a mix of woes and other factors.

He cited the economic crisis, contagion from the Arab countries, rapid-fire communications over the Internet, people being fed up with ineffective and sometimes corrupt politicians, and elections in which some candidates are in fact under formal investigation for corruption.

“Suddenly there is a spark and everything explodes,” Cotarelo said.

… The demonstrations, initially organized by students and unemployed and disaffected youths, are a spillover from countrywide demonstrations Sunday. They have triggered a lively debate throughout the country on how the crisis has been handled by the politicians and financial institutions.

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LONDON (TheEconomicTimes) — Gold, fresh from striking record highs at the start of this month, will enjoy buoyant demand this year, particularly from China and India, the World Gold Council said in a report on Thursday.

“The resilience of gold during recent volatility in the commodities market exemplifies the strength of the global gold market and its unique demand drivers,” said Marcus Grubb, Managing Director of Investment at the WGC.

“High levels of investment demand across the world, strong demand in India and China, the continued strength of the technology sector together with central bank purchasing demonstrates gold’s diverse demand drivers.

“We anticipate continued strong demand during the rest of 2011,” Grubb said.

… “Prevailing global socio-economic conditions will continue to drive investment demand for gold,” the WGC said in its quarterly report.

At the same time, the WGC predicted that more central banks would buy gold as they seek to diversify reserves into assets that are deemed to be less risky.

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by: Lawrence Williams

“The pattern of price movements we are seeing currently, with strong upwards and downwards fluctuations for both metals, but particularly for the more volatile silver, suggest to this observer that, although there may be some more short term shocks in store, the volume of buying for physical metal which has been flowing in at the lower prices suggests both gold and silver are in a consolidation phase and are likely to see another very sharp upwards movement again, if not now perhaps at the end of August when the usual summer price doldrums are past us.”

“But what is apparent here is that there is, at the moment, considerable resistance to gold falling below $1480 and silver below $33 – both levels which only a few short months ago would have seemed to many to be out of reach on the upside! This looks like a strong consolidation phase and once the aftershock tremors die down there could be a very sharp move upwards again which could probably take gold to new highs and silver up to above $50…”

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By Tomoko A. Hosaka
05/19/2011 (Associated Press) — Japan’s economy shrank in the first quarter, veering back into recession as factory production and consumer spending wilted in the aftermath of March 11 earthquake and tsunami.

… The result marks the second straight quarter that the world’s No. 3 economy has lost steam…. While there is no universally accepted definition of a recession, many economists define it as two consecutive quarters of GDP contraction.

… Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo, said there is “no doubt” that recession has returned. More surprising is just how quickly the economy crumpled, he said. The latest GDP report includes just 20 days following the disaster, but “the impact is huge,” said Schulz, who had expected to see most of the economic fallout in the second quarter.

The magnitude-9.0 earthquake and tsunami left more than 24,000 people dead or missing, and wiped out entire towns in the hardest-hit areas. Damage is estimated at $300 billion, making it the most expensive natural disaster in history. It damaged factories in the region, causing severe shortages of parts and components for manufacturers across Japan, especially automakers. A crippled nuclear power plant caused widespread power shortages that added to the headaches faced by businesses and households.

… The recent events have deeply unnerved households, who are likely to remain cautious for the coming months, Schulz said. “The nuclear disaster showed just how much is wrong in Japan actually,” he said. “And many things that seemed so stable and sure like electricity supply … are looking not safe at all.”

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by Amanda Cooper
May 19, 2011 (Reuters) — [Spot] Gold is trading at $1,492.09 in late trade on Thursday as traders eye strong dollar.

… “There is probably some consolidation around where we are, perhaps to test $1 500. I think the dollar will continue to play an important role,” said RBS analyst Daniel Major. “We’ve had some very choppy price action today but we have seen a small turnaround in what has been a strengthening trend in the dollar that we’ve seen throughout May.”

Gold usually moves in the opposite direction to the dollar, as strength in the US currency makes dollar-priced assets pricier for non-US buyers, and this inverse correlation is trading close to its lowest levels since mid-January. The dollar’s 3% rise against a basket of currencies this month has diminished some investor appetite for gold, which is now about $80 off early May’s record high at $1,575.79.

… The World Gold Council said in a report on Thursday that investors turned away from gold-backed exchange-traded funds in the first quarter in favour of coins and bars. Gold coin and bar investment rose in most geographical areas in the first quarter, the WGC data showed, more than doubling in China to 90.9 tons, rising 54% in the United States to 22.5 tons and almost doubling in Europe to 78.1 tons.

“It is very interesting that we continue to see a high level of enthusiasm from European investors,” said the WGC’s Research Manager Eily Ong. “We still see a very slow global economic recovery, and ongoing sovereign debt issue in the euro area.”

[source]

May 19, 2011 (euronews) — The World Gold Council has said there was an increase in the purchase of gold bars and coins in the first three months of this year helping lift overall demand for bullion by 11 percent.

Total coin and bar demand rose by 52 percent. Gold investment increased by 26 percent in tonnage terms.

There was a decline in the sale of gold exchange traded funds – which issue securities backed by physical gold.

… Central banks were also major gold buyers, reversing a previous trend.

… Gold supply was down by four percent in the first quarter.

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by Alix Steel
May 19, 2011 (TheStreet) — Gold and silver prices were falling on a choppy dollar after a stronger than expected reading on jobless claims. … The gold price almost hit $1,500 today and has hit a low of $1,487.40.

Gold prices had been giving up recent gains as investors booked profits and the move accelerated after the Labor Department said 29,000 fewer people filed for unemployment claims for the first time last week. After recent weak economic data has highlighted slowing manufacturing activity and industrial output, the better jobs data is cheering markets and weighing on precious metals.

“Dips continue to draw bargain hunter interest, both physical and investment,” says James Moore, research analyst at FastMarkets, “and could indicate a period of wide range trade until economic optimism improves.”

But it might not be U.S. investors that gold and silver will take their cue from. The World Gold Council released its first quarter 2011 Gold Demand Trend report Thursday. Not surprisingly, China is showing significant demand growth, growing an average rate of 14% per year since 2001. … “We believe that Chinese gold demand could double within the next decade,” the WGC said, “we would not be surprised to see this result achieved in a shorter time frame.”

The report highlights rising incomes in China, the country’s proclivity to buy gold as gifts and high inflation as three reasons why gold demand will stay strong. As China also seeks to tame its real estate bubble investors need another place to invest and gold looks to be the winner.

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Gold Consolidates as Inflation Percolates

When the FOMC met back in April, inflation was a hot topic because…well…inflation in the real world is ‘hot.’ The Fed noted that “Headline consumer price inflation was boosted by large increases in food and energy prices, but measures of underlying inflation were still subdued and longer-run inflation expectations remained stable.” The minutes of that meeting suggest the Fed is prepared to pull back on accommodations if the economy continues to grow, in order to prevent consumer prices from getting out of control; or perhaps more accurately to prevent inflation expectations from becoming un-anchored.

The minutes go on to say:

Maintaining well-anchored inflation expectations would depend on the credibility of the Committee’s commitment to deliver on the price stability part of its mandate. A few participants suggested that clearer communication about the Committee’s inflation outlook, such as explaining the measures it uses to gauge medium-term trends in general price inflation and announcing an explicit numerical inflation objective, would be helpful in this regard.

I am going to guess that the St. Louis Fed’s James Bullard was involved in that discussion. In fact he gave a speech at NYU yesterday entitled, “Measuring Inflation: Why the Core is Rotten” [PDF]. Bullard systematically dismantles the old arguments that have favored a focus on core inflation, suggesting they “have become rotten over the years.” He believes, “It is time to drop the emphasis on core inflation as a “meaningful way to interpret the inflation process in the U.S.”

The most prevalent argument for avoiding the headline number is that food and energy prices are too volatile. While this is true, rather than ignoring the prices of of products that pretty much everyone in the country consume on a daily basis, there are methods to smooth those data. Bullard sums up by saying, “To the extent that the volatility of headline inflation is a problem, there are better methods of addressing that than to simply dismiss troublesome prices.”

Jerome Idaszak, Associate Editor of The Kiplinger Letter pointed out the reality of those “troublesome prices” in an article earlier in the week:

Some prices are, in fact, surging: In the past 12 months, airfares, for example, have climbed by nearly 12%. The average cost of used cars is up 15%. Hospital bills have climbed by 5.4%. And shoppers are paying an average of 9% more to put beef on the family dinner table and a whopping 16% more for pork.

The cost of many raw materials — including chemicals, rubber, iron ore, grains and more — is also soaring.

In addition, our own Mike Kosares, in the June/July issue of USAGOLD News, Commentary and Analysis clearly illustrates that the reality of actual prices “contradicts the nearly constant prattle in the mainstream press that inflation is under control.”

Kiplinger’s Idaszak goes on to suggest that the “cost of money” — interest rates — must soon rise as well. However, knowing that the Fed views risks to growth as far more serious than price risks, I find myself not necessarily convinced. Signs of a weakening economy abound: With recent downgrades to US growth expectations, frustratingly high unemployment and the increasingly obvious double-dip in the housing market; not to mention today’s troubling plunge in the May Philly Fed index and below expectations Apr leading indicators. All these factors conspire to give the Fed pause when they consider tightening, even knowing that 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. Perhaps not surprisingly, it seems threading the policy needle when you have a dual-mandate of full employment and stable prices is no small task.

The Bernanke Fed has also made it quite clear that they will do whatever is necessary to combat deflation, viewing it as a far greater threat than the alternative; going so far as to arguably manufacture inflation in recent years to stimulate the economy in the hope of creating jobs. Amid signs that the already tepid economic recovery may be faltering, it is far more likely in my opinion that the Fed will once again cede inflation in its quest for growth. This has many increasingly worried about hyperinflation and stagflation. In a recent interview, John Williams of Shadow Government Statistics differentiated between healthy inflation, driven by economic growth and unhealthy inflation spurred by fiat currency devaluation.

There is absolute lack of direction from Washington on fiscal matters right now, leaving the Fed to do all the heavy lifting. Due to the limited tools at its disposal, the Fed is more likely than not to resort to the “unhealthy” brand of inflation. As the Fed’s James Bullard noted yesterday, “when [the US debt crisis] does blow up, it will be too late…when the markets lose confidence in the U.S., rates will skyrocket.” And therein lies a critical risk: That the Fed’s hand will be forced by the market, supplanting any well thought out and executed exit strategy. That’s when things could really get away from us.

By Jeffry Bartash
WASHINGTON (MarketWatch) – Business activity at manufacturing firms in the Philadelphia region grew in May but at a much slower pace compared to a few months ago, according to the survey issued Thursday by the Federal Reserve Bank of Philadelphia. The Philly Fed index sank to 3.9 in May from 18.5 in April, well below expectations of an increase to 20.1. Any reading over zero in the diffusion index indicates growth. Higher readings mean that more firms are reporting better conditions instead of worse conditions.

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BEIJING (MNI) – The new IMF leadership needs to reflect changes in the world economic order and be more representative of emerging market economies, Chinese central bank governor Zhou Xiaochuan said Thursday in his first public comments since the arrest of Dominique Strauss-Kahn.

“The senior management team of the IMF should better reflect changes in world economic patterns and should be more representative of emerging market economies,” he said.

Zhou also said he regretted Strauss-Kahn’s decision to resign as the Managing Director of IMF.

“The current world economy is recovering slowly from the financial crisis and the European sovereign debt crisis is at a key stage. A powerful IMF support is needed to overcome current difficulties facing Europe and ensure world economic developments are on a robust, sustainable and balanced track,” Zhou added.

German Chancellor Angela Merkel reiterated earlier today that the next head of the International Monetary Fund should be a European again.

[source]

Gold pressured the $1500 level overseas, but a softer intraday tone has emerged in the wake of a better than expected US initial jobless claims. Claims fell 29k to 409k in the week ended 14-May, while expectations were running around 420k. The dollar caught a little bid as expectations of when the Fed might tighten may have moved ever so slightly closer on the time-line.

Japan 1st preliminary Q1 GDP contracted -0.9% q/q SA (-3.7% SAAR) on earthquake/tsunami disruptions, below market expectations.

Taiwan Q1 GDP revised higher to +6.55% y/y from 6.19%. Singapore Q1 GDP revised lower to +8.3% y/y from advance number of +8.5%.

Dominique Strauss-Kahn has resigned as head of the IMF so that he can focus on fighting the criminal charges against him. As replacements are discussed, most of the serious contenders are from Europe, but emerging Asia is looking for a greater say in IMF matters. PBoC governor Zhou said, “The senior management team of the IMF should better reflect changes in world economic patterns and should be more representative of emerging market economies.”

by Christine Hauser
Wednesday, 18 May 2011 (The New York Times) — The swollen Mississippi River, already spilling over into wide areas of the Mississippi Delta, has dealt the South a heavy economic blow that is seeping into every possible corner of the region’s commercial and agricultural life.

… Like the very nature of water, the trickle-down effects of the historic flooding are leaving no corner untouched. Retail gasoline prices, already at two-year highs, and food prices could rise in the region because of supply disruptions. Tens of thousands of people are unemployed, shut out of jobs at establishments that are literally under water. State and local government coffers, strained because of the economic downturn, may lose many millions of dollars in revenue from tourism and taxes.

In about a dozen interviews, economists, farmers and industry officials said they expected hundreds of millions of dollars in damages including crop and infrastructure destruction in communities along the 740 miles of river that meanders from Memphis to New Orleans. But while the final bill has yet to be determined, the costs are already being felt.

… Economists are only just beginning to assess the potential headwinds of the Mississippi River flooding. … Michael J. Hicks, the director of the Center for Business and Economic Research at Ball State University, said there were losses to the region’s consumer base and trade disruptions in a region that connects the manufacturing heartland of the Midwest with routes traveling between the East and the West. “I am going to estimate in the $6 billion to $9 billion range for total damages from Memphis southward to the gulf,” Mr. Hicks said.

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by Bill Bonner
18 May 2011 (TheDailyReckoning) — Here’s the world’s most successful investor talking about our favourite metal. Warren Buffett had this to say about gold: “You can fondle it, you can polish it, you can stare at it. But it isn’t going to do anything.”

… “Gold really doesn’t have utility,” the 80-year old told shareholders at Berkshire Hathaway’s annual general meeting. “I’d bet on a good producing business to outperform something that doesn’t do anything.”

Yes, so would we. And we’d usually rather have a jacket from Ralph Lauren… or Brooks Brothers… than a Life Jacket. And we’d usually like to see a pick-up truck or a delivery truck in our driveway, rather than a fire truck. And we’d much rather spend the night with Julia Roberts stark naked than with a heart surgeon in full medical regalia.

But hey… guess what? There’s a time and a place for everything.

… while most of the time it is useless, occasionally it is indispensable. Most of the time, gold is as dumb and lifeless as a joint session of Congress. Buffett is right; most of the time, it’s as useless as a seat belt. But there are times when a common lifeboat has greater utility than a luxury sailboat. Could this be one of them?

Well, something is going on that is turning this do-nothing metal into an investment champ. The price of gold is up 10% already this year. It’s gone up every year for the last decade. You don’t have to look too far to see what it is.

How about $4.5 trillion in deficits over the last 3 years? How about tripling the Fed’s balance sheet holdings since the end of ‘08? How about TARP, TALF, QE1, QE2… and zero interest rates?

Oh, and lest you think it is all just an emergency response to the crisis of ‘07-‘09, soon to be history…

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by Dorothy Kosich
Wednesday, 18 May 2011 (Mineweb) — Both the Federal Trade Commission (FTC) and the Commodity Futures Trading Commission (CFTC) Tuesday filed charges against Florida-based American Precious Metals and its principals, accused of bilking more than $37 million from customers for physical bullion sales, including $23 million through its leveraged precious metals program.

A federal judge has shut down American Precious Metals at the FTC’s request. Many of its customers, including many senior citizens, came from around the United States.

… The CFTC has charged Harry Tanner, the managing member of APM, and Samuel Goldman, who managed the day-to-day operations and directed financial transactions, with fraud in connection “with offering, purchasing, selling or delivering gold, silver, platinum and palladium to U.S. retail customers on a leveraged basis.”

APM’s websites describe the leverage program as allowing customers to buy precious metals with as little as $5,000 down and finance up to 80% of their purchases.

In a filing with the U.S. District Court for the Southern District of Florida, the CFTC said APM did not purchase or sell physical precious metals on behalf of its leverage program customers, nor were any physical precious metals stored in any independent depository.

… Instead, after charging a 40% commission of customers’ fund, APM sent the customers’ money to a second company named Global Asset Management (GAM), which allegedly pooled the money received from APM “with funds received from similar boiler room telemarketing firms, takes a portion of the funds as its own profit, and deposits the rest in margin accounts held in GAM’s name with various United Kingdom-based funds were GAM trades over-the-counter (OTC) precious metals derivatives.”

“The scope of APM’s fraud is significant,” the CFTC said, adding that as of Jan. 7, 2010, APM’s 396 leverage program customers “purportedly owned gold, silver, platinum, and palladium with a total value of $23,834,108.”

“In fact neither APM, GAM nor any secure deposit held any precious metals for those customers,” the agency claimed.

… This is the third case in the past seven weeks filed by the CFTC against companies and company owners who purport to offer retail investors the opportunity to purchase physical precious metals on a leveraged basis.

… The FTC alleged that telemarketers working for the defendants “led consumers to believe that they were offering low-risk investments that would double or triple in value in a short time.” However, the defendants did not use consumers’ money to buy precious metals.

“Instead, after taking fees and commissions that were not clearly disclosed to consumers, they deposited the consumers’ money in the account of a clearinghouse that recorded but did not buy or handle metals.”

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RS View: This is a hot mess. In the realm of gold it is 1) business integrity, 2) payment in full, and 3) as specified delivery that are the three items that matter most, and to be sure, they count for everything.

by Derek Gatopoulous
May 18, 2011 (AP) — The European Central Bank’s chief economist said a Greek debt restructuring would be a “recipe for catastrophe” as he blamed “vested interests” in Britain and the United States for fueling market pressure on the country.

Juergen Stark told a financial conference in Greece Wednesday that the struggling eurozone country’s “debt sustainability is insured” if it fully complies with its internationally monitored austerity program.

Asked about the markets’ hostility to Greek efforts, Stark said: “This is not the view of all market participants, to be very clear. This is a discussion triggered from London and New York. I don’t know what is behind it — vested interests, people topping their books and so on. So it’s more complicated than just (saying) what markets expect.”

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By Claudia Assis and Simon Kennedy
May 18, 2011 (MarketWatch) — Gold and silver futures rallied on Wednesday, with investors back into precious metals after a recent selloff and as higher prices for other commodities highlighted lingering fears of inflation.

Gold for June delivery rose $15.80, or 1.1%, to $1,495.80 an ounce on the Comex division of the New York Mercantile Exchange. Silver for July delivery advanced $1.61, or 4.8%, to $35.10 an ounce. In the previous session, silver dropped to its lowest close since Feb. 25.

A rally for oil futures, back at more than $100 a barrel, and corn and wheat futures brought back fears of inflation… Oil for June delivery topped $100 a barrel after a government supplies report showed unchanged inventories, contrary to analyst expectations of a rise.

Corn for July delivery rallied 3.8% to $7.48 a bushel on the Chicago Board of Trade as weather concerns have dominated the trade. Wheat soared 7.2%.

The dollar also declined against major currencies, providing an extra boost to commodities, which gained across the board.

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The latest USAGOLD News, Commentary and Analysis by Michael J. Kosares is now available.

“The table displayed immediately below is likely to surprise even our most-jaded readers. It shows the astronomical increase in cash prices for well-known food commodities over the past 12 months. With inarguable exactness, it contradicts the nearly constant prattle in the mainstream press that inflation is under control, or that it is peaking and likely to come under control sometime soon.”

We welcome your interest.