by S. Murlidharan
May 26, 2011 (BusinessLine) — The issue of international reserve currency has been agitating the minds of economists and governments alike for several decades now, especially after the 2008 financial crisis that rocked the world and called into question more than ever before the wisdom of setting store by and large by a single currency, the US dollar which ironically held its own even as the US economy went into a tailspin.

How the US hooked the world to its currency in 1944 on the back of the formation of the Breton Wood twins, the World Bank and the IMF, after the Second World War is sufficiently well-known and does not bear a repetition. It dangled the bait of an ounce of gold for every $35 in what was arguably the best but deceptive manifestation of gold exchange standard.

The offer was too good to last and the US predictably reneged on it in 1971 when the first oil shock shook the world and made gold the safest haven even as the IMF members grudgingly marvelled starry-eyed at its gumption. The international financial community hooked to the US dollar has been willy-nilly persisting with it, thanks to its first mover advantage and the TINA (there is no other alternative) factor.

The TINA factor which is a sad admission of helplessness is in evidence in many walks of life, including politics where failed parties continue to win for want of emergence of a credible alternative. Much the same is happening in the more rarefied and less decipherable world of currencies.

… There are quite a few economists and policy wonks that are pining for the return of the gold standard this time round on a fuller and all-encompassing scale to address the problem of a true international reserve currency.

… Accounts, it is said, must speak in a single language and should not be held hostage to and clouded by the practices and laws of different countries. Accounting standards facilitate comparison of accounts. But it is one thing to standardise accounts, but quite another to standardise currencies.

… Standardisation should not introduce newer and greater rigidities, uncertainties and inequities. … The point is each country has it own unique advantage and it would be wrong to straightjacket the currency issue into a gold case. But then this is not to rubbish the case for providing a solid backing for a currency. Let each country be made accountable for its currency through the backing of whatever it can offer by way of exchange – let it be gold, copper, oil or coal.

[source]

RS View: Regarding the author’s final note, looking into that future with good sense would have one soon see that the various chips of copper, of oil, and of coal would inevitably be pulled from the scorekeeping role and recast into employment to function at their highest industrial/economic capacity either domestically or abroad through international trade, ultimately leaving gold, alone, to reign supreme atop this hit parade of tangible would-be reserve assets as the superior alternative to any given national treasury bonds.

By Claudia Assis and Sarah Turner
May 25, 2011 (MarketWatch) — Gold futures traded higher on Wednesday, shaking off early weakness as the dollar came off its highs, and silver futures rallied more than 4%.

Gold for June delivery added $3.40, or 0.2%, to $1,526.70 an ounce on the Comex division of the New York Mercantile Exchange. That was gold’s best settlement since May 3. August gold, the contract with the most open interest but less volume, added $3.50 to settle at $1,527.80 an ounce.

“Gold continues to have a safety bid,” said Frank Lesh, a broker and futures analyst with FuturePath Trading in Chicago.

Silver was more of a speculator market, Lesh said. It was getting a push from smaller investors priced out of gold above $1,500 an ounce, particularly after its recent selloff, he added.

“Silver continues to function as the poor man’s gold,” Lesh said.

Investors on Wednesday grappled with news U.S. durable-good orders were sharply lower in April, rekindling worries of an economic slowdown and providing another leg of support for gold.

Meanwhile, the Bombay Bullion Association said it expects India’s gold imports to reach a record level of 1,000 metric tons this year if the monsoon season is good, analysts at Commerzbank wrote in a note to clients.

“Strong monsoon rainfall increases the income of the rural population, who are major buyers of gold jewelry in the world’s largest gold consumer country,” they said. Gold imports are likely to be 40-50 tons in May, but that’s 30% lower than the previous month, the analysts added.

[source]

By Bloomberg
May 25, 2011 — Gold may advance to a record $1,600 an ounce this year as investors seek to protect their wealth from Europe’s sovereign-debt crisis, boosting demand, according to Scotia Capital. “The investment community found it’s a great investment metal,” Sunil Kashyap, regional head of Asia-Pacific, global capital markets, said in an interview in Bangkok on May 24. Platinum also has “room to grow,” and may outperform other metals when there’s an industrial recovery, said Kashyap.

Immediate-delivery gold, which touched a record $1,577.57 an ounce earlier this month, is set for an 11th year of gains with interest fuelled by Europe’s debt crisis and quickening inflation. Global gold demand rose 11 percent to 981.3 metric tons in the first quarter, the World Gold Council said May 19.

People realized that both gold and silver have dual functions, not only as industrial metals but also as financial assets that preserve their value, said Kashyap.

[source]

By The Associated Press
Wednesday, May 25 MINSK, Belarus — A sharp devaluation of the Belarusian ruble has spread panic across the country, with people rushing on Wednesday to buy dollars, euros, toasters and canned goods — anything that will not lose its value as quickly as the national currency.

Belarusians swept store shelves and queued for entire days at currency exchange offices in a desperate attempt to protect their savings from the country’s sinking fortunes.

… President Alexander Lukashenko promised that the national currency will remain stable following the devaluation ordered a day earlier, but experts warned it will continue its nosedive if Russia doesn’t provide a quick bailout.

Confidence in the ruble, whose value is fixed in Belarus, has dropped for weeks amid fears over the country’s finances and the country’s lack of support from its neighbors, both the EU and Russia.

… To make matters worse, there is a physical shortage in the country of dollars and euros, which companies and households desperately want to own to protect themselves from a worse devaluation in the future.

The government’s own reserves are badly depleted and exchange offices have run out of foreign currency because they are allowed only to sell what they buy from clients.

Andrei Krylevich, 42, has spent a week in lines outside an exchange booth in downtown Minsk without a chance to buy a single dollar. The computer company he works at has sent its employees on an unpaid leave, and he urgently needs to pay back a $9,000 loan to a bank.

“In just one month, I have virtually turned bankrupt, the entire country has gone bankrupt,” Krylevich said. “Even during the Soviet collapse we didn’t go through such nightmare.”

… “I fought my bank to close my account and get 5 million rubles ($1,000) in cash, and I want to buy at least something before my money turns into dust,” said Dmitry Malishevsky, a 48-year old tractor factory worker who showed up at Minsk’s main department store only to see empty shelves. “I feel scared when I think of the future,” he said. “We are struggling to survive instead of living a normal life, and Lukashenko is to blame.”

[source]

By Associated Press
May 25, 2011 — U.S. food-price inflation may top the government’s forecast as higher crop, meat, dairy and energy costs lead companies including Nestle SA, McDonald’s Corp. and Whole Foods Market Inc. to boost prices.

Retail-food prices will jump more than the U.S. Department of Agriculture’s estimate of 3 percent to 4 percent this year, said Chad E. Hart, an economist at Iowa State University in Ames. Companies will pass along more of their higher costs through year-end, said Bill Lapp, a former ConAgra Foods Inc. chief economist. The USDA will update its forecast today.

Groceries and restaurant meals rose 2.4 percent in the four months through April, the most to start a year since 1990, government data show. During the period, rice, wheat and milk futures touched the highest levels since 2008, and retail beef reached a record. Yesterday, J.M. Smucker Co. announced an 11 percent price increase for Folgers coffee, the best-selling U.S. brand, after the cost of beans almost doubled in a year.

“It’s going to be a tough year” for U.S. shoppers, said Lapp, who is president of Advanced Economic Solutions, an agriculture consultant in Omaha, Nebraska. “You’re looking at an economy where a lot of consumers are under some serious pressure from food and fuel costs.”

… The United Nations Food and Agriculture Organization said May 23 that price swings will persist in coming years because of mismatches between supply and demand. The FAO said May 5 that global food costs rose in April for the ninth time in 10 months

[source]

by Michael Babad
May 25, 2011 (Globe and Mail) — Gold may be “overbought,” but it’s nothing like a bubble, Dennis Gartman says. Indeed, the publisher of The Gartman Letter said today, gold has become more than a “mere commodity” and is now a “reservable currency” during Europe’s debt crisis. Bullion, he said, has become the “preferred coin of the realm” as the continent’s debt troubles mount by the day.

“That is as it should be, for in the present environment what investor/saver would not wish to have some of his/her savings in gold rather than in [euros] whose value is wasting each day,” Mr. Gartman said.

“Dollars are a reasonable alternative, and increasingly the Swiss franc is one also. But the ‘trump card’ currency of choice is gold and in all likelihood it shall become even more readily embraced, not less so in the days and weeks ahead as Europe’s problems worsen rather than turn for the better.”

Gold is “certainly” overbought, but it’s far from a bubble “and this may become rather astoundingly more overbought in the days and weeks ahead.”

[source]

by Pratima Desai
May 25, 2011 (Reuters) — Gold hit a three-week high on Wednesday, boosted by fears about the debt crisis in euro zone countries such as Greece while the resulting stronger dollar against the euro undermined sentiment.

Spot gold hit $1,528.40 a troy ounce, its highest since May 4.

Euro-priced gold hit a record 1,087.84 euros an ounce, according to Reuters data. Gold priced in sterling was at 942.60 pounds per ounce, near a lifetime high of 944.87 struck on Tuesday.

… Spot silver saw $37.36 an ounce, its highest since May 11. It was last at $37.13 an ounce from $36.53 late on Tuesday. The industrial precious metal is down 35 percent since touching a record peak of $49.51 an ounce on April 28.

“We think silver’s prospects are less positive given the fundamental overvaluation and the market’s heavy dependence on investor appetite,” Credit Suisse said. “Physical (platinum and palladium) markets have remained tight.”

[source]

by Alix Steel
May 25, 2011 (TheStreet) — Gold and silver prices were clawing higher Wednesday on modest safe haven buying. Gold for June delivery was adding $3.20 to $1,526.50 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,529.50 and as low as $1,521.30.

… “If we settle above this $1,525 level I think we can challenge $1,550 over the next couple of days,” says Anthony Neglia, president of Tower Trading. Today is options expirations for gold and silver, which will cloud the real direction of the metals, but Neglia thinks it will only take a day or two for metals to regain their footing.

… George Gero, senior vice president at RBC Capital Markets, says that gold is benefiting as a safe haven and is “a currency in a class by itself.”

Sam Stovall, chief investment strategist at Standard & Poor’s Equity Research, says “I don’t think [gold's rally] is just a dead cat bounce. People are very much concerned about a deflationary environment.” Stovall also says that despite the end of the Federal Reserve’s $600 billion bond buying program at the end of June, the world is continually worried about paper currencies and the possibility of more bailouts for European nations, which creates a positive environment for gold.

[source]

by Amy Williams
May 25, 2011 (CityWire) — Frustrated by being consistently overlooked for the IMF top job, representatives from Brazil, Russia, India, China and South Africa have joined forces and called on the institution to abandon the ‘obsolete unwritten convention’ that requires its head to be from Europe.

… The FT’s Martin Wolf wrote on Wednesday: ‘The time has come for the incumbent powers to recognise that they cannot continue to dominate the global scene. If they persist in running these institutions, the rising powers will, inevitably, turn away from them altogether, to create replacements they can control. This would Balkanise management of the global economy, to no one’s true long-term advantage.’

The BRICS alliance argues the IMF is in need of a person that is ‘committed to continuing the process of change and reform of the institution so as to adapt it to the new realities of the world economy.’

[source]

By Lori Montgomery and Peyton M. Craighill
The debate over whether to raise the legal limit on government borrowing has riveted Americans, with a large majority worried about the potential consequences regardless of whether Congress votes to allow the national debt to keep increasing.

But when pressed to name their biggest concern, nearly half of respondents say they are alarmed by the prospect that the debt could grow beyond its current limit of $14.3 trillion, according to a new Washington Post-Pew Research Center poll. Only 35 percent say they are more worried about the risk of default and economic destabilization if Congress does not raise the debt limit.

The poll vividly illustrates the dilemma facing lawmakers as they approach an Aug. 2 deadline on the debt ceiling. While congressional leaders in both parties have acknowledged that the Treasury needs to keep borrowing to pay the government’s bills, lawmakers are likely to face voters’ wrath if they can’t prove that they are also working to rein in the spiraling debt.

[source]

PG View: I would hardly say that the country has been “riveted” by the debt ceiling debate, but clearly those that are paying attention know that there has never been a debt ceiling that the government couldn’t eventually blow through.

By Chen Yixin and Kazunori Takada
SHANGHAI, May 25 (Reuters) – The yuan rose against the dollar on Wednesday after the People’s Bank of China set the mid-point only a pip away from a record high, reflecting its intention to start a new round of appreciation, traders said.

The Chinese central bank set the daily yuan mid-point at 6.4949, just off the fixing’s record high of 6.4948 set on May 11 and higher than Tuesday’s 6.5038, although the dollar index hovered around a near-eight-week high.

[source]

PG View: Ahhhh, a higher yuan. Just what the doctor ordered. It is however, quite unlikely that a rising yuan (weakening dollar) will prove to be the panacea it has been billed to be.

Gold remains generally well bid against the dollar, having once again set new record highs versus the euro and sterling. Ongoing turmoil surrounding debt issues both in Europe and the US are likely to continue underpinning the yellow metal for some time to come.

Reuters ran the following two headlines this morning that were picked up by the zerohedge blog:

* EU Commissioner Damanaki says Greece’s Eurozone membership is at risk
* EU Commissioner Damanaki says Greece must agree on tough measures or return to Drachma, according to state news agency

But while a Greek exit from the EMU may solve some problems, it creates others, and one glaring issue remains; all those GGBs on the books of the ECB and other banks around the world. To think that Greece would exit the EMU under duress, return to a severely devalued drachma and then honor the existing obligations from the previous regime is just silly.

The PBoC set the mid-point for the yuan just a pip off the record high versus the dollar, suggesting that a new round of yuan appreciation is commencing.

UK Q1 GDP (second estimate) confirmed at +0.5% q/q and +1.8% y/y, near expectations. Despite this anemic growth, the OECD thinks the BoE should tighten due to above target inflation and the risk that inflation expectations become embedded. Quite the conundrum.

US durable goods fell 3.6% in Apr, well below market expectations, vs +4.4% in Mar. Ex-trans came in at -1.5%, also well below expectations. This is a terrible number that will likely lead to further negative revisions to US GDP forecasts. Yet, the OECD is also calling on the Fed to hike rates, noting that there are “some signs that long-term inflation expectations have edged up.” In reality, today’s data more likely increase the odds of a QE3.

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%.

[source]

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]