by Ram Sahgal
May 25, 2011 (EconomicTimes) MUMBAI — A fall in retail demand for silver has brought down physical market premiums sharply over the past few days. Premiums in the spot market have fallen to 500 a kilo as opposed to 2,000-2,500 above the bank rate over the past few days as craze for silver bars among retail investors dies down.

Silver has fallen by 28% over the past month, from a record high of 75,770 on April 25 to 54,196 a kilo on Monday on profit-booking and a stronger dollar. The fall has scared retail investors.

“The premium has normalised to 500 a kilo above the bank rate after retail investors moved out of the market,” said Bhargav Vaidya, director of Bombay Bullion Association, the country’s largest bullion wholesale market. “Retail investors should stay away even at the cur-rent rates because there could still be downward pressure on prices.”… more

[source]

By Claudia Assis and Virginia Harrison
May 24, 2011 (MarketWatch) — Gold futures gained Tuesday, helped by a weaker U.S. dollar and as ongoing worries about euro-zone debt spurred investors to the perceived safety of the metal.

Gold for June delivery added $7.90, or 0.5%, to $1,523.30 an ounce on the Comex division of the New York Mercantile Exchange. That was gold’s best settlement since May 3 and the third time above $1,500 an ounce.

The lingering debt concerns have pushed investors toward “a paperless currency,” said Adam Klopfenstein, a senior market strategist with Lind Waldock in Chicago.

With the recent “whipsaw” between the dollar and the euro, “investors are looking for something more stable and not tied to any one currency,” he added.

Gold is still profiting from uncertainty, analysts at Commerzbank wrote to clients. … But investors appeared to be more “skeptical” of silver, the Commerzbank analysts added…

Bank of America Merrill Lynch said in a research note Tuesday industrial metals have reached a “soft patch.”

[source]

by David Levenstein
Tuesday, 24 May 2011 (Mineweb) — During the last few weeks the price of gold has been consolidating between $1475 an ounce and $1525 an ounce. Yet, with all the current turmoil in the financial markets, it seems totally undervalued.

On Monday May 16, the United States hit its $14.3 trillion borrowing limit. Treasury Secretary Timothy Geithner told Congress that issuing $72 billion in bonds and notes would push the deficit to its legal cap and he would have to suspend deposits into federal pension funds to free up room for more borrowing. The government now has until about Aug. 2 before it begins to default on its loans, which have ballooned as the country spends more than it takes in.

… The crisis regarding Greece remains unresolved and now new phrases such as “reprofiling” or “soft restructuring” of Greece debt are being used to describe a possible solution. But, no matter the new phrases, the meaning is the same; the European Central Bank has threatened to stop lending to banks using Greek government bonds as collateral if Athens changes the terms of the debt, a move which could bring down the country’s banking system.

… S&P cut its outlook on Italian government debt to negative from stable over the weekend. As the concerns about contagion continue, some market participants are watching whether Belgium may become the next to be downgraded. However, as I have often stated, I believe that Spain poses a much bigger threat than people like to suggest.

… Japan’s economy shrank by almost double the margin economists had expected in the first three months of 2011, as the March disaster pushed the country back into recession.

… it does not take a financial genius to see that this current rally [of the dollar] is due to the weak euro. There are problems with the US dollar, Euro and Yen, three of the most heavily traded currencies in the world, and I expect these currencies to continue their race down the slippery slope of burgeoning debt. For this reason it is important to accumulate precious metals in particular gold and silver and I strongly suggest building a core holding of the physical metal in bullion form, and stay away from limited edition medallions which I maintain do not offer any investment value whatsoever.

[source]

By Alex Dumortier
May 24, 2011 (TMF) — When it sets interest rates, the Federal Reserve naturally looks at trends in inflation, among other things. However, instead of focusing on headline CPI, which includes all items in the economy, the central bank looks at core CPI instead — a measurement that excludes food and energy. With gas and food prices galloping ahead of other items’ costs, is the Fed making monetary policy based on the wrong set of data — one that understates the loss in the dollar’s purchasing power due to inflation?

… Leading blue-chip companies provide plenty more anecdotal evidence regarding the impact of commodity price increases:

Last week, the CFO of the world’s largest retailer, Wal-Mart, said the company was raising prices on a number of grocery items, including meat and dairy. Higher gas prices also reduce the foot traffic in Walmart stores. In April, the CFO of Starbucks said higher milk prices would continue to pressure the company’s margins. Also in April, Procter & Gamble and PepsiCo joined Coca-Cola in announcing that, in the face of rising commodities prices, it would shrink some package sizes, rather than raise prices, in an effort to protect gross margins.

Is core CPI really a better predictor of future inflation?
Daniel L. Thornton — a vice-president and economic advisor to the Federal Reserve Bank of St. Louis — found that the existing research on this question is inadequate, and doesn’t establish the superiority of core CPI.

[source]

May 24, 2011 (Reuters) — The [South African] Reserve Bank announced on Tuesday the inflation outlook had deteriorated markedly and it would not hesitate to act to quell price pressures, although gave no clues as to when it might start raising rates.

… It said there were no discernable signs of pressures from the demand side of the economy at this stage, with the main upward pressures coming from higher food and oil prices.

… Finance Minister Pravin Gordhan has said the strong rand was fortunate given the high oil and food prices and the government was not going to take further steps — over and above accumulating foreign exchange reserves — to weaken it.

[source]

by Christopher Barker
May 24, 2011 (TheMotleyFool) — For every investor in the Western world who sells an ounce of gold, picture a multitude of eager buyers in the East who are thrilled by the long-term investment opportunity. Though not a particularly technical means of understanding the complex dynamics of global supply and demand for gold, that image does illustrate an important aspect of the bullish trend for gold demand that continues to play out on the world’s stage.

Much has been made recently of the decision by George Soros to sell the vast majority of his fund’s stake in the SPDR Gold Trust during the first quarter of 2011, emboldening the predictable chorus of bubble babble that plays incessantly in the background behind gold’s symphony of sustained upward momentum. But while Soros and several other fund managers were busy locking in impressive gains from gold, an incredible surge in gold demand from Asia continues to pave a rising concrete floor beneath long-term gold prices.

… The persistence of massive budget deficits, loose monetary policy, an unrepentant degree of leverage and derivative exposures within Western financial behemoths, and the U.S. dollar’s uncertain future as the world’s primary reserve currency … all of these factors and more combine to ensure that economic developments in the Western world will continue to command the spotlight as fundamental drivers behind gold’s ongoing secular bull market.

But to examine the outlook for gold exclusively in those terms is to ignore the central role that Eastern culture, economic trends, and prevailing demographics are each likely to play in subsequent phases of gold’s multiyear advance…

[source]

May 24, 2011 (Reuters) LONDON — Gold rose to a two-week high on Tuesday as concerns about a spreading EU debt crisis fuelled safe haven buying, while a softer dollar provided support. Spot gold hit $1,521.80 a troy ounce, its highest since May 11.

Portugal and Ireland would be at risk of multi-notch credit downgrades, pushing their ratings into junk territory in the event of a default by Greece, Moody’s EMEA chief credit officer told Reuters.

‘There is so much uncertainty that the downside risk for gold is low in the short term,’ said VTB Capital analyst Andrey Kryuchenkov. ‘People are still frightened about Portugal and about a possible restructuring of the Greek debt so safe haven flows will continue,’ he said.

… Gold prices in British pounds hit a record high of at 944.18 pounds an ounce.
Gold denominated in euros hit a record high of 1,081.43 euros.

‘We like (gold in euros) right now, considering the breadth and depth of risk-sapping variables that currently prevail,’ UBS said in a note.

[source]

by Addison Wiggin
May 24, 2011 (Forbes) — Monday’s traidng was “risk off” as a new week began with markets jittery about the Euro zone again… Gold, however, held its own….

In euro terms, gold reached a record of EUR 1,080 an ounce.

This will be interesting to watch. We could be entering a period much like the first half of 2010 – in which the dollar index ran up 19%… but gold did not fall accordingly. Indeed, it rose 11%… before powering up another 13% by year-end.

… As we noted last week, China is now the No. 1 source of investment demand for gold – surpassing the longtime leader, India. And the Chinese central bank has a long-term aim of growing its gold reserves eightfold.

[source]

by Julian Phillips
May 24, 2011 (Mineweb) — At the London Fix this morning, gold was set at $1,520.75 and in the euro at €1,078.85, up from yesterday and approaching €1,100. The dollar gold price, because of the dollar’s performance is still well below peak prices. Ahead of New York’s opening the gold price in the dollar stood at $1,522.55 up $15 and in the euro at €1,079.40 breaking through resistance and the dollar stood at €1: $1.4109 and looked like weakening further.

All the below happened in one week in the fast decaying, European financial world. [And this is only Europe]:

- – - Greek 10-year yields jumped to a record 17%, while yields on two-year notes climbed to 26.25%.
- – - Fourteen U.K. banks have been put on downgrade review.
- – - Belgium had the outlook on its AA+ investment-grade credit rating lowered to negative at Fitch Ratings yesterday.
- – - Italy has been downgraded.
- – - The Spanish elections went against the government who are implementing austerity measures. This is contagion…

[source]

“It’s not something that stops at the European waters,” Mauldin says. “Just like the subprime crisis didn’t stop in California…I’m worried this one has a lot of contagion and it’ll affect the world.”

Gold Continues to Retrace Recent Corrective Losses

Gold has rebounded to 3-week highs above 1526.43 on safe-haven flows. With nearly 61.8% of the recent correction now retraced, it’s looking increasingly like the debt woes in both Europe and the US have prompted the dominant uptrend in the gold market to re-exert itself.

Moody’s put a bunch of UK banks, primarily ones with big mortgage books, on review for possible downgrade. Meanwhile, China’s Dagong Global Credit Rating Co. downgraded UK sovereign debt to A+ from AA-, with a negative outlook. While the pound remains fairly stable against the dollar, it fell versus the euro. Gold set a new all-time high against sterling at 945.28.

German GDP has returned to pre-crisis levels; Q1 GDP was confirmed at +1.5% q/q and +4.9% y/y (wda). Good news right? Except this is a pretty strong indication that monetary policy is too loose…at least for Germany. This poses a conundrum for the ECB, given that much of rest of Europe is a wreck. Do they hike rates again to slow down the German economy and ease inflationary pressures at the expense of the EU periphery that can’t pay its debts even at present rates? Or do they keep policy loose in the hope that the periphery recovers at the risk of inflation, not just in Germany, but across the EU?

A good article in Der Spiegel today sheds some light on just why the ECB has been so adamantly opposed to a restructuring of Greece’s debt. Basically, the ECB is holding a bunch of bonds and asset backed securities on its books as collateral. Some of that collateral might have to be severely marked down, or perhaps even rendered worthless in the event of a sovereign default (restructure). This story goes a long way toward explaining why Portugal got a bailout even though it was quite apparent that the Greek and Irish bailouts did nothing more than buy a little time.

The ECB’s Christian Noyer (France) reiterated the central banks position today saying that a Greek “restructuring is not a solution, it’s a horror story.” He largely avoided the spin of a “soft restructure” and put it quite simply: “If we restructure Greek debt, that means Greece defaults.” Noyer reminded the audience in Paris that the biggest holders of Greek bonds are Greek banks and they would be “badly damaged” in the event of a default. The Greek people aren’t going to like it, but the ECB’s position is that this is a Greek problem and therefore Greece must stick to its austerity and privatization plan.

While Europe is preoccupied with a possible restructuring of Greece’s debt, huge risks lurk elsewhere — in the balance sheet of the European Central Bank. The guardian of the single currency has taken on billions of euros worth of risky securities as collateral for loans to shore up the banks of struggling nations.

- Since the beginning of the financial crisis, banks in countries like Ireland, Portugal, Spain and Greece have unloaded risks amounting to several hundred billions of euros with central banks. The central banks have distributed large sums to their countries’ financial institutions to prevent them from collapsing. They have accepted securities as collateral, many of which are, to put it mildly, not particularly valuable.

- These risks are now on the ECB’s books, because the central banks of the euro countries are not autonomous but part of the ECB system. When banks in Ireland go bankrupt and their securities aren’t worth enough, the euro countries as a whole must account for the loss. Germany’s central bank, the Bundesbank, provides 27 percent of the ECB’s capital, which means that it would have to pay for more than a quarter of all losses.

- ECB President Jean-Claude Trichet doesn’t even know exactly what kinds of risks he is taking on. In principle, the conditions for ECB investment grade securities are outlined in a 37-page document, most recently updated in February. To keep the risks for the central banks within reason, some of the haircuts on securities are very high, comprising up to 69.5 percent of the value of a security.

- However, the degree to which individual central banks strictly adhere to these rules varies. This leads to irregularities which should not occur in a bank, let alone a central bank.

[source]

PG View: This article makes it pretty clear why ECB President Jean-Claude Trichet is so adamantly opposed to defaults (restructurings) and why Portugal got a bailout even though it was obvious to all that the bailouts of Greece and Ireland before it were ineffective. In the event of a restructure, the house of cards built by the ECB could come crashing down. That of course begs the question: Who bails out the ECB?

By Claudia Assis and Virginia Harrison
May 23, 2011 (MarketWatch) — Gold futures gained Monday as concerns about the euro zone tempered earlier losses on the back of a stronger dollar.

Gold for June delivery added $6.50, or 0.4%, to $1,515.40 an ounce on the Comex division of the New York Mercantile Exchange. That was gold’s highest settlement since May 10, and the second in a row above $1,500 an ounce.

Silver for July delivery, which had wavered between small gains and losses, finished 18 cents lower, down 0.5%, at $34.90 an ounce.

Fears of a European sovereign-debt debacle “were overriding strength in the dollar,” said James Cordier, a portfolio manager at Optionsellers.com in Florida. “Investors are going to safe havens.”

Traders also fretted about more signs global growth is cooling, pulling down metals more closely related to industrial activities, such as copper.

“The global economy bull run of 2009-10, it really appears to be slowing down,” Cordier said.

… Copper, heavily imported by China and used in construction, led losses for the broader complex on Monday. The July contract fell 13 cents, or 3.2%, to $3.99 a pound. That was the lowest settlement for a most-active copper contract in a week.

Platinum for July delivery dropped $13.50, or 0.8%, to $1,755.90 an ounce.

June palladium declined $3.70, or 0.5%, to $731.80 an ounce.

[source]

by Daniel Indiviglio
May 23, 2011 (TheAtlantic) — Since the financial crisis, two dominant topics in financial news have been the rise in gold prices and the increasing U.S. debt burden. The price of gold is up 94% since November 2008. The amount of U.S. debt outstanding is up 34% over the same period. Today’s chart of the day unites these two popular topics.

… In fact, it now takes much less gold to pay off the U.S. debt than it did a decade ago. At first, this might seem surprising, since the debt has grown so much. But the price of gold has jumped even higher.

One takeaway from this exercise is to show how little impact the U.S.’s gold reserves would make in paying down the debt. The U.S. government has around 21.7 million pounds (12 troy ounces to a troy pound) of gold. That might sound like a lot, but it would take 808.0 million pounds of gold to pay off the debt. Even if the U.S. government put every once of its gold towards paying down the debt, it would pay down less than 3%.

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RS View: Just a paltry 3%… hmmmmm… perhaps the market would do well to consider, as a rule of thumb, that our existing gold reserves must therefore be valued somewhere along the lines of 30 times higher than current levels — especially since Uncle Sam does not have viable recourse offering our in-place infrastructure (buildings, bridges, etc.) as a means of international settlement.

by Karl Smith
May 23, 2011 (SeekingAlpha) — … There will be a couple of strands of thought here. As usual, you are getting undigested (but, thankfully, not unedited) musings and analysis.

[Read All -- source]

HEADLINE: Belarus devalues rouble by a third
23 May 2011 (BBC) — Belarus has cut the official value of its currency against the dollar by 36%.

The rouble is not freely convertible, with currency transactions controlled by the country’s central bank. The dollar now buys 4,930 roubles at the official rate, up from 3,155 – but still well below the freely-traded interbank rate of about 7,000 roubles.

The country faces a severe financial crisis, thanks to a large trade deficit and rapidly falling hard currency reserves.

Many shops have been emptied of goods, as importers lack hard currency to purchase foreign goods.

… The trade deficit stood at $9.3bn (£5.6bn) last year, according to an estimate of the International Monetary Fund, or 17% of economic output – one of the highest levels in the world.

Loss of competitiveness is only one reason for the deficit, which has risen steadily over the past five years.

The Belarus government directed banks to lend heavily to boost the economy in recent years.

… With hard currency rapidly draining from the country’s reserves, the president, Alexander Lukashenko, secured a $3bn bail-out loan from Russia last week.

[source]

ALSO . . .

HEADLINE: Swaziland currency may be devalued, World Bank warns
May 32, 2011 (Business Report) — Swaziland might be forced to devalue its currency unless the crisis-hit kingdom urgently cut government spending, a World Bank economist said yesterday.

“It is getting to the point of reckoning – when Swaziland will no longer be able to sustain its deficit,” World Bank economist Jean van Houtte warned ahead of a meeting today organised by the bank. “We have said if you need a little time to get your house in order you can re-peg at a different level.” Swaziland’s currency, the lilangeni, is pegged at parity with the rand.

But pressure to devalue is growing as the country faces a financial crisis brought on by a 60 percent drop last year in revenues from the Southern African Customs Union, the government’s main source of income.

Finance Minister Majozi Sithole warned on state radio last week that it would be “difficult” for the government to pay May salaries, adding: “I do not even want to mention June” – a bombshell he later retracted, promising the government would find a way.

… The World Bank has agreed to lend Swaziland $20 million (R138.3m), but the money will only be available in September. Even coupled with a potential $150m loan from the African Development Bank, Van Houtte warned, “they are not even close to closing their financial gap”.

[source]

May 23, 2011 (IBTimes) — South Africa’s National Union of Mineworkers (NUM) said on Monday it would seek a 14 percent rise in salaries from gold and coal miners in upcoming wage talks.

“We are asking for a 14 percent (increase) across the board for companies in gold mining and coal mining,” said spokesman Lesiba Seshoka, adding that the demand is for one year. “For the next year we will cross that bridge when we come to it,” Seshoka said.

The gold miners usually reach two-year wage agreements with the union and the current contract expires June 30. There is no date yet for the talks but the current deal expires at the end of June.

… South Africa’s chamber of mines, an industry body, said it was concerned by the demands for an above-inflation rise in salaries.

… Elize Strydom, the negotiator for the chamber… added that the union’s demands will only serve to further erode the companies’ already tight margins and alienate investors.

[source]

by Tom Jennemann
May 23, 2011 (Fastmarkets) — Gold on the Comex division of the New York Mercantile Exchange outperformed most other commodity classes Monday as investors looked for safe haven given the escalation the sovereign-debt crisis in Europe and the prospects of slower growth rates in China.

… “Gold is behaving more like an alternative currency than a commodity, which is why it can move higher while the other more industrial metals, like copper and even silver, struggle,” a US-based gold trader said. “Paper currencies are engaged in a race to the bottom. There’s a lack of confidence in governments and their ability to control their debts levels,” the trader added.

Over the weekend, Standard & Poor’s ratings agency revised Italy’s sovereign debt outlook from “stable” to “negative.” Meanwhile, the Spain’s ruling Socialist party got trounced in local elections by the centre-right Popular Party (PP). Voters expressed anger over the country’s soaring debt and 21.3 percent unemployment rate.

[source]

by Jack Farchy
May 23, 2011 (FT) — The price of gold jumped to a record in euros as renewed fear about the eurozone debt crisis drove investors to move money out of the single currency and into the precious metal.

On the spot market, gold bullion rose to a peak of €1,080.04 a troy ounce, surpassing the previous euro-denominated record set in December last year.

The rise was aided by a sharp drop in the value of the euro, which slid as much as 1.3 per cent against the dollar to a low of $1.3968.

… The jump in euro-denominated gold prices was spurred by a combination of negative economic and political news that put peripheral eurozone bond markets under renewed pressure.

… “While we believe gold would move higher in dollar terms, we expect gold denominated in euros to outperform,” said Walter de Wet, head of commodities research at Standard Bank.

[source]

by Carl Richards
May 23, 2011 (The New York Times) — Gold is not an investment. It’s a speculation.

Investments are made by evaluating underlying value. Speculative bets are made by looking at the price of something and simply hoping the price goes up. Investing is about value; gambling is about price.

Gold has no real underlying value. I know there is a market for it. I know it is real, just like real estate was real in 2007.

But what is the value of a bar of gold?

It has no value except the one assigned by a herd of speculators…

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RS View: … and so on ad nauseam. Why does The New York Times allot space so that vacuous contributors may air their simpletonian view of the universe? Are we to conclude from this that it is not politically correct to consolidate any significant portion of one’s wealth of income, and rather than taking chips off the table it must all be continuously put back into play in an ethereal realm with a hope that stocks, bonds and derivatives will keep pace with the devaluation of the non-dimensional currency while suffering no setbacks of their own? Gimme a break.

Gold Sets Record High Against Euro

Gold pushed to a new all-time high against the euro at €1080.76 as the debt situation on the Continent continues to devolve. The EUR-USD fell to new 10-week lows and the comparative strength in the dollar has resulted in a consolidative tone in the yellow metal above $1500. The euro set new record lows against the Swiss franc.

Yield spreads widened dramatically across Europe today — led by Greece — as talk of a sovereign default, couched as a “soft restructure” continues to swirl. S&P downgraded its outlook on Italy’s debt to negative from stable and Spain’s ruling party suffered defeats in local voting. All of this has translated into less optimism about EU growth prospects, which has weighed on stocks, and that weakness has carried over to US markets.

The Greek government met today to put together its fifth austerity plan, focusing on further spending cuts and state-asset sales. Clearly the €110 bln bailout that was approved just over a year ago has done little to resolve Greece’s debt crisis and yet the foisting of further austerity measures on the Greek people is probably not going to go over so well either. The country has already be roiled by a string of protests. Amid ongoing chatter from EU officials that restructuring is not an option for Greece — even as they simultaneously talk about a “soft restructure” — the prospect of a Greek exit from the EMU may well gather further traction.

Uncertainty about the situation in Europe, along with our own dire long-term fiscal outlook here in the US, is likely to keep gold underpinned both in terms of euros and in terms of dollars. While the relative stability of the Swiss franc and the yen may continue to garner safe-haven flows, the inherent weaknesses of fiat currencies, even the ones that are looking pretty decent right now, are becoming more readily apparent. That will continue to drive interest in gold.

by Robert McTeer
May 23, 2011 (Forbes) — Someone recently asked me whether I thought the taxpayers would be willing to pay to clean up our fiscal mess.

From a political perspective, I doubt that they will be willing to pay enough to convert the fiscal deficits into surpluses, which is necessary to reduce the level of debt. Since public awareness is probably at an all time high, they probably will tolerate a reduction in the deficit, perhaps enough to avert a financial panic if we have enough time for that. Hopefully, it would be sufficient to reduce the ratio of the deficit and the debt to the economy.

… One political problem is that we’ve had warnings about the dangers of deficits and debt for decades without the sky falling and we will be hard to convince that it will fall this time. We must realize that the magnitude of the problem now is sufficiently larger than in the past to constitute a difference in kind rather than merely a difference in degree. Another political problem is that our politicians are addicted to making promises today that someone else will have to keep tomorrow.

… The post WWII status of the dollar as a reserve currency had its advantages, especially in the 1950s and the 1960s but also since then to a lesser degree. … That means that we have covered our excess of imports over exports in value terms by increasing our foreign debt, broadly defined to include equity ownership as well as traditional debt in the form of bonds, bank balances, and the like. In short, we’ve been living on debt and were able to do so more than most countries because of the special status of the dollar.

… When the time comes to reverse that process, your favorable credit rating in the past looks more like a curse than an advantage. More discipline all along would have made the day of reckoning less traumatic. We should have recognized that there was something perverse about the richest, most productive country in the world borrowing year after year from poorer countries.

[source]

RS Note: The author, Robert McTeer, is no mere doom and gloomer pandering from a home made soapbox to an appreciative audience of surly tea partiers. Bob served well over a decade as president at the Federal Reserve Bank of Dallas.

by Matt Day
MAy 23, 2011 (DowJones) — Gold futures edged higher Monday as worries about economic growth in Europe and China sent traders seeking a safe place to park cash, but with buying limited by strength in the dollar.

The most actively traded contract, for June delivery was recently up $2.30, or 0.2%, at $1,511.20 a troy ounce on the Comex division of the New York Mercantile Exchange.

Fresh concerns about the ability of Europe to manage its sovereign debt load sent investors seeking gold as a refuge, traders said. Gold, which isn’t as closely tied to industrial activity as some other commodities, is sometimes viewed by traders as an attractive investment amid turmoil in other markets.

Standard & Poor’s over the weekend cut its outlook on Italy’s credit rating to negative from stable, and Spain’s ruling Socialist party faced setbacks in regional elections. Both developments pressured global equities markets lower Monday.

Also weighing on investor sentiment was a survey showing Chinese manufacturing activity this month expanding at its slowest pace in 10 months. The report added to worries that efforts to curb inflation in the world’s second-largest economy were stifling growth.

[source]

By CHRISTINA D. ROMER
AT a recent news conference, Ben S. Bernanke, the Federal Reserve chairman, was asked about the falling dollar. He parried the question, saying that the Treasury secretary was the government’s spokesman on the exchange rate — and, of course, that the United States favors a strong dollar.

Listening to that statement, I flashed back to one of my first experiences as an adviser to Barack Obama. In November 2008, I was sharing a cab in Chicago with Larry Summers, the former Treasury secretary and a fellow economic adviser to the president-elect. To help prepare me for the interviews and the hearings to come, Larry graciously asked me questions and critiqued my answers.

When he asked about the exchange rate for the dollar, I began: “The exchange rate is a price much like any other price, and is determined by market forces.”

“Wrong!” Larry boomed. “The exchange rate is the purview of the Treasury. The United States is in favor of a strong dollar.”

[source]

PG View: Basically, the former chairwoman of President Obama’s Council of Economic Advisers is confirming that the consistent prattle from US policymakers about “strong dollar policy” is simply nonsense. Romer is also correct when she says the exchange rates have fluctuated over the years and are for the most part determined by market forces. Primarily FX flows chase yield.

However, what is conveniently glossed over is that the periods of dollar strength that she cites — relative to other fiat currencies — were generally short-lived respites within a rather disturbing long-term downtrend that dates all the way back to the late-1800s. When put in the context of “real” things, be it corn flakes or gold, the dominant trend in the dollar is even more readily apparent.

Romer says, “on net we are almost surely better off with a weaker dollar for a while.” The Treasury Department with the help of the Fed have indeed been orchestrating just such a decline. However, the United States isn’t the only country on the face of the planet desirous of a weaker currency. That leads to a nasty cycle of beggar-thy-neighbor policy moves, which drives a race to the bottom.

The euro and stock markets across Europe have fallen, with the eurozone debt crisis showing no sign of abating.

Borrowing costs for heavily indebted governments also rose further, with Italy and Spain suffering.

Market worries focus on a possible debt restructuring by Greece that could hit Europe’s banks and other governments.

Latest bad news included weak eurozone economic data, a local election defeat for Spain’s government and a negative credit rating outlook for Italy.

[source]

PG View: If Greece is forced to default, it would threaten to drag the larger economies of Spain and Italy — already reeling from higher borrowing costs — into the vortex. This is exactly what the EU sought to avoid, by providing bailouts to Greece, Ireland and Portugal.

The European debt crisis continues to deepen, prompting a sell-off in global stocks and yield spreads to widen sharply. The euro has tumble to 10-week lows, pushing gold to a new all-time high against the single currency above €1080. Euro weakness has provided a boost to the dollar, which has weighed modestly on gold in terms of the greenback.

Focus remains on Greece as EU officials continue to dismiss the possibility of debt restructuring, while simultaneously talking about a “soft-restructuring.” Of course “restructuring” is just a polite way of saying “default,” making “soft-restructuring” just a polite and spun way of saying “default.” Most importantly, the ratings agency would likely view a restructuring of Greek debt — soft or not — as a default. It would also be predicated on Greece agreeing to even more harsh austerity measures.

Adding insult to injury: S&P cut its rating outlook for Italy over the weekend to negative from stable saying, “in our view Italy’s current growth prospects are weak, and the political commitment for productivity-enhancing reforms appears to be faltering.”

Eurozone PMIs miss expectations in May: Manufacturing fell to 54.8 vs 58.0 in April. Services slid to 55.4 from 56.7. This resulted in a weaker composite reading of 55.4 vs 57.8 in April.

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.

[source]

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.”