Wednesday, 4 May 2011 (CNBC) — Billionaire Carlos Slim has been selling silver futures for “weeks” in an effort to actively hedge the production of his silver mine, a spokesperson confirmed to CNBC Wednesday.

Slim, recently designated the world’s richest man by Forbes magazine, has been selling futures contracts dated out two to three years, a spokesperson also confirmed.

Speculation that Slim was participating in the market has circulated for some time, traders told CNBC.

[source]

By Claudia Assis and Polya Lesova, MarketWatch
May 4, 2011 (MarketWatch) — Silver and gold futures fell Wednesday on a newspaper report that high-profile investors George Soros and John Burbank have sold precious metals, with silver still reeling from an exchange decision to increase trading requirements.

… A spokesman for Soros declined to comment.

… “Well-heeled” investors leaving the trade “put fears in people’s minds,” said Adam Klopfenstein, senior market strategist with Lind-Waldock in Chicago. Unlike gold, bought by large investors, funds and central banks, silver is mostly dominated by individual investors. Silver could trade as low as $36 an ounce in the next few weeks, he added.

Gold for June delivery fell $25.10, or 1.6%, to $1,515.30 an ounce on Comexin the biggest one-day percentage drop since March 15. The metal dropped 1.1% on Tuesday.

Goldman Sachs analysts, though, said in a recent note that gold remains “one of [their] preferred commodities,” with price trends still skewed to the upside.

“Uncertainty in currency markets and medium-term inflationary risk are likely to support investment demand,” according to Goldman. “Recent high-profile investments by prominent institutions … confirm that institutional money is now adding to an investment trend that has hitherto been dominated by retail money.” Geopolitical tensions in North Africa and the Middle East were also supporting gold prices, according to Goldman Sachs.

… Also, gold’s status as a currency alternative to the dollar was boosted by news that Mexico’s central bank had bought nearly 100 metric tons of gold in February and March, according to a Financial Times report citing a Bank of Mexico report and International Monetary Fund data.

[source]

(Reuters) – The Treasury has told lawmakers a roughly $2 trillion rise in the legal limit on federal debt would be needed to ensure the government can keep borrowing through the 2012 presidential election, sources with knowledge of the discussions said.

[source]

PG View: With $491 billion in total US Treasury (Bill, Bond, Note) debt maturing in May alone, a $2 trillion debt ceiling hike might not even get us through next year’s Presidential election.

by Tom Jennemann
May 4, 2011 (Fastmarkets) — Silver on the Comex division of the New York Mercantile Exchange fell sharply for the third consecutive session Wednesday as sentiment has deteriorated dramatically following a series of margin hikes. Silver futures for July delivery closed down $3.197 an ounce, or 7.5 percent, at $39.19 an ounce in New York, which is a one-month low. The grey metal has lost 20 percent of its value since last Friday.

“Silver is a fickle mistress. Every once in a while you see her sitting there looking like an easy target – all nice and alluring – but the moment you hop in bed together, she ruins your life,” said US-based gold trader, who decided not to participate in the recent silver rise and now fall. “Big picture, [silver's] likely just going back to $38 – where this wicked parabolic climb started – to find support. But that’s little solace to mom-and-pop investors who jumped on the momentum bandwagon and now are getting crushed,” he added.

The impetus for silver’s sell-off came Monday when the CME Group, which owns the Comex, said that the initial margin requirements for silver futures would increase to $16,200 per contract, up from $14,513. It raised maintenance margins to $12,000 from $10,750. In total, the initial deposit required to hold a benchmark 5,000-ounce Comex silver contract overnight is up 40 percent over the past eight business days.

By raising the margin requirements, the CME Group aims to reign in speculation by making it more expensive to hold the same amount of silver. “With the higher margins and extreme volatility, we’ve seen a lot of the longs forced to liquidate their position,” the trader said.

… “Gold’s catching a down-draft from silver but it’s a much more liquid and less volatile market so I’m not overly concerned,” the trader said.

[source]

By Lee Quaintance & Paul Brodsky, QB Asset Management
May 3, 2011 (CreditWritedowns) — The following is the second in a series of posts by QB Partners. The first post is available for review here:

- – - – - – - – - – - – - – - -
(first post excerpts) — As it stands and citing all appropriate disclaimers, we now expect a total of three rounds of quantitative easing. In the US as elsewhere, QE is a political construct; its timing depends upon domestic social pressures arising from unemployment and economic stagnation, as well as from the ability of foreign policy makers to placate foreign dollar reserve holders (by delivering an adequate supply of precious metals and resources to them?).

The bigger inflation event (QE3?) would use newly created base money for the immediate benefit of debtors. Sending checks to indebted homeowners made out to their creditors would be an example of quantitative easing that would be popular among the masses and economically stimulative. It would allow a new credit bubble to expand and prices of goods, services and assets to increase. We think this form of QE — broad debt socialization – is inevitable. It would require coordination among central banks and fiscal policy makers, which would demand a general acknowledgement that nothing else would work.

… All the while we expect precious metals, agricultural, basic materials and energy prices to climb consistently through QE2 and QE3. We believe the bull market in precious metals will run faster and higher than consumable commodities and begin to fade only after a third-wave parabolic price shift higher. We think the bull market in consumable commodities will kick-in significantly once consumer confidence and significant (price-generated) nominal output growth returns.

… Debtors would welcome this devaluation and debt covenants would remain intact. Nominal wages and asset prices would rise while debt balances would remain constant. The burden of repaying debt would be greatly diminished, not the principal amount of the debt itself. Bondholders, dollar reserve holders and retirees would suffer losses in purchasing power; however, inflating away the burden of debt would likely act as a massive economic stimulant, which would, in turn, give policy makers room for fiscal maneuvering.
- – - – - – - – - – - – - – - -

In section 1 we tried to lend perspective to the current global monetary system, its weaknesses and predisposition to fail, whom it benefits and harms, and the natural incentives of various participants to push it towards demise. Though obvious to us and many of you, this state of affairs has not been widely addressed by global leaders responsible for steering public economic policies. And though there have been some overtures towards public acknowledgement made by prominent people, such talk has no doubt been seen by active Western policy makers as inconvenient and maybe even irresponsible discourse. Officially, a “strong dollar policy” remains in effect.

Pressure to change the system first came from leaders of small economies without a historical say, irritants like Hugo Chavez and Mahmoud Ahmadinejad, and was then perpetuated by leaders of emerging powerful economies with more economic clout, like Hu Jintao and Vladimir Putin. More recently we have seen occasional moments of acquiescence from representatives of the status quo, like Nicolas Sarkozy and World Bank President Robert Zoellick… There seems to be an undeniable growing acknowledgment that the current global monetary regime does not fit the current global economy.

… As investors, we see a widening gap separating the already well-established march towards a new monetary system and an “official ignorance” among active Western policy makers (and genuine ignorance among most investors) that this change is occurring. Among those that dare to think ahead, there have been three solutions discussed:

1.) Replacing the US dollar with an existing currency that would then be the world’s reserve currency
2.) Using multiple reserve currencies
3.) Converting all existing currencies to a new common global currency managed by an impartial authority.

We think none of these options will come to pass. The global monetary system will remain firmly US dollar- based…up until the time the system crashes and a hard money system is officially adopted.

[source]

RS View: Between these two articles are a few morsels of nutritious food for thought.

by Brett Arends
May 4, 2011 (MarketWatch) — Gold is in a bubble. Anyone will tell you that. They’ve been saying it since gold was about, oh, $500 an ounce. But it’s a funny kind of a bubble. It’s the only one I’ve encountered where so few people seem to own the asset in question.

During the dot-com bubble, you met lots of people with tech stocks. Taxi drivers told you what dot-coms they owned. During the housing bubble you met normal, ordinary people who were trading up to expensive homes using adjustable-rate mortgages, buying new condos off plan to flip, and cashing out their fictional “equity” through a refinance mortgage.

But who actually owns gold? I keep hearing about the gold bubble, but every time I ask people if they own any themselves, they say, “no, no, of course not, it’s a bubble.”

Some bubble.

Now take a look at our chart. It’s an updated version of one I ran nearly a year ago, when gold was $1,176 an ounce.

It compares the bull market in gold with the last two undisputed “bubbles,” namely tech stocks and housing. …… The picture is pretty remarkable. If gold is a “bubble,” it doesn’t look like it’s peaked yet. Indeed it looks like it might be just about to enter its big, blow-off phase.

That’s when you make the real coin…

[source]

by Adrian Ash
Wednesday, 04 May 2011 (Mineweb) — The price of gold held relatively tight as silver prices sank once again in London on Wednesday morning, sitting above last night’s two-session low of $1528 per ounce while silver dropped to new 3-week lows, flirting with the technical definition of “bear market”.

… “A reversal of 20% or more, returning [silver prices] to levels in the mid-$30s, would not surprise us at all,” says UBS metals strategist Edel Tully in London.

“We remain significantly more friendly to gold than to silver.”

From last week’s new 31-year and all-time record highs, silver today bottomed some 18.6% vs. the Dollar and Sterling respectively. Priced in the Euro, silver bullion traded more than 20% below last Monday’s high, meeting the technical definition of a bear market.

Commenting on Mexico buying gold, “There’s an appetite now among emerging economies with large forex reserves to add to their gold reserves,” the FT quotes Mitsubishi precious metals strategist Matthew Turner. “Gold is seen as one way in which to diversify away from the Dollar- or Euro-denominated assets.”

[source]

by Martin Crutsinger
May 4, 2011 (AP) WASHINGTON — Treasury Secretary Timothy Geithner said Tuesday that China needs to make more progress on economic issues vital to America’s interests, including speeding up the rise of its currency against the dollar.

… Geithner said a stronger yuan would help reduce trade imbalances and bolster China’s efforts to restrain inflation.

In remarks to the US-China Business Council, Geithner previewed the administration’s goals ahead of the countries’ annual talks next week on economic and foreign policy issues. The administration has sought to pressure China to boost its currency and open up its market to US goods and services such as financial services to trim America’s massive trade deficit with the nation.

… These discussions were begun in 2006 by then-Treasury Secretary Henry Paulson as a way to bring pressure on China to move more quickly to allow its currency to rise in value against the dollar. Under the Obama administration, the talks have been expanded to include foreign policy issues.

American manufacturers contend that the Chinese yuan is undervalued by as much as 40 percent, making Chinese goods cheaper in the United States and American products more expensive in China. Geithner noted during his address that since last June, Beijing has allowed the yuan to rise in value by about 5 percent against the dollar…

[source]

RS View: With the benefit of articles such as this one, even by the light of the dimmest bulb we can see that the so-called ‘strong dollar policy,’ as verbalized by every Treasury Secretary since Robert Rubin, has simply become nothing more than a ‘hypocritical oath’ these latest years as the policy makers say one thing yet strive for the opposite.

Seeing the officially-intended fate of the dollar for what it truly is, and as the derivative-intensive day traders play havoc lately on gold’s price discovery, take advantage of the discontinuity between illusion and reality by accumulating a tad more of the hard metal with the last gasps of credibility (momentum) available to the officially forsaken dollar.

THE dollar’s recent decline has taken it to new lows. The chart shows the nominal exchange rate, in trade-weighted terms (ie, against the country’s trading partners). The index is now 30% below its level when the Bretton Woods system was abandoned in the early 1970s and the dollar has halved since 1985, when leading nations adopted the Plaza Accord to drive it lower. There was a rally in 2008 when the dollar attracted “safe haven” flows during the financial crisis, but that now looks like a blip in a 40-year decline. A weak currency should be good news for a country’s exporters, but that hasn’t stopped America from running a persistent trade deficit. And America’s creditors are having to cope with the unappealing combination of holding low-yielding Treasury bonds in a depreciating currency.

Click below to see the grim chart.

[http://www.economist.com/blogs/dailychart/2011/05/exchange_rates?fsrc=scn/tw/te/dc/fortyyearsofhurt]

PG View: Messieurs Geithner and Bernanke can jawbone all they want about “strong dollar policy,” but until there’s some actual policy that can be even remotely construed as dollar positive, it’s nothing but lip-service.

May 4 2011 ( I-Net Bridge) — Spot gold plummeted US$28.67 to US$1,536.93 per ounce between April 29 and close of business yesterday. MarketWatch.com reported that traders were digesting a Wall Street Journal report about the selling of gold and silver by George Soros’s hedge fund after a two-year accumulation of the precious metals. The fund is the seventh-largest holder of the biggest gold exchange-traded fund, SPDR Gold.

But analyst David Levenstein of Lakeshore Trading disagrees with the Wall Street Journal that the large-scale selling was responsible for the drop in the gold price.

“The underlying fundamentals driving the gold price remain unchanged, which leads me to believe that the current drop in prices is nothing more than price correction prompted by profit-taking by mainly traders on Comex,” says Levenstein.

“In all bull markets there are always price corrections, and I feel certain that this one will be relatively short-lived.”

… “The price of gold will rise in proportion to the creation of paper dollars. In an inflationary environment where the demand for protection increases, the price of gold can rise even further. Historically, gold has always been a safe haven against inflation and a safe haven in times of political instability. Today we face both risks,” hedge-fund founder John Paulson said last month in an interview with French newspaper Les Echos.

[source]

4 May 2011 (BBC) — Mexico’s central bank bought more than 90 tonnes of gold between January and March, according to figures from the International Monetary Fund (IMF).

The World Gold Council has said it expects central banks in emerging markets to be the biggest buyers of gold, with its price near record highs. Banks are seeking to diversify their reserves out of US dollars.

Mexico now owns 100.15 tonnes of gold, data on the IMF website showed. At the end of January it held 6.84 tonnes.

[source]

ALSO . . .

Mexico, Russia, Thailand Add $6 Billion of Gold to Reserves, IMF Data Show
by Nicholas Larkin
May 4, 2011 (Bloomberg) — Mexico, Russia and Thailand added gold now valued at about $6 billion to their reserves in February and March as prices advanced to a record, the dollar weakened and Treasuries lost investors money.

Mexico bought 93.3 metric tons since January, adding to holdings of about 6.9 tons, according to International Monetary Fund data. Russia increased its reserves by 18.8 tons to 811.1 tons in March and Thailand expanded assets by 9.3 tons to 108.9 tons in the same month, the data show.

… “Central banks have good reason to buy gold,” said Peter Morici, a professor of business at the University of Maryland in College Park and a former economic adviser to the U.S. government. “The dollar is no longer a safe asset for backing currencies. Treasuries are not a sound investment” and budget and debt issues mean central banks should buy gold, he said.

… Bullion earlier today dropped after the Wall Street Journal reported Soros Fund Management LLC sold precious metal holdings because of a reduced risk of deflation, citing unidentified people close to the matter. The Soros fund held shares in the SPDR Gold Trust and the iShares Gold Trust equal to about 508,800 ounces [approx. 16 tonnes] as of Dec. 31, a U.S. Securities and Exchange Commission filing on Feb. 14 showed.

Soros described gold at the World Economic Forum’s meeting in Davos, Switzerland, in January last year as “the ultimate asset bubble.” In a Nov. 15 speech in Toronto the 80-year-old said conditions for the metal to keep rising were “pretty ideal” and at this year’s Davos forum he said the boom in commodities may last “a couple of years” longer. Michael Vachon, a spokesman for Soros, declined to comment today.

… “Mexico’s gold accumulation confirms the demand of emerging market central banks to diversify their reserves,” said Bayram Dincer, an analyst at LGT Capital Management in Pfaeffikon, Switzerland. “They will be the big buyers for years to come.”

[source]

ALSO . . .

Bank of Mexico buys 100 tons of gold in two months
by Rhiannon Hoyle
May 4, 2011 (MarketWatch) — … The purchase–reported in the International Monetary Fund’s statistics on international reserves–follows a shift in the gold market to net central bank buying, following years of official sector sales, and should be welcomed as a positive boost for the yellow metal, said Jonathan Spall, Director of Commodities Distribution at Barclays Capital.

… “Prior to this, they [Mexico] held very little metal, so it is a decent size change,” Spall said. “People are going to view this as bullish, and will now be closely watching other countries in the region, and elsewhere, for further changes.”

… “Mexico seems to be following the trend established by several other central banks recently and is moving toward restoring a prior balance between gold and currency reserves,” said George Milling-Stanley, Managing Director of Government Affairs at the WGC.

[source]

Gold Softens Despite Renewed Dollar Weakness

The brief respite in the dollar’s recent slide seems to have come to an end, yet gold is maintaining a corrective tone. Renewed weakness is the greenback is reflected in new 17-month highs in the euro and a new all time high in the Swiss franc. Recent talk from US Treasury Secretary Geithner and Fed Chairman Ben Bernanke about a “strong and stable” dollar appears to have been — as expected — merely more lip-service.

The euro is firming following the announcement that a deal had been struck on Portugal’s bailout. Despite rather damning evidence — courtesy of Greece — that bailouts at best just buy some time, the EU and IMF are going to provide €78 bln ($116 bln) in aid to Portugal. Even with the bailout deal, yields on 3-month Portuguese T-bills climbed 60bps at today’s auction. In exchange for the bailout, Portugal will face higher sales, property and health service taxes as well as cuts to state pension plans. On top of that, unemployment benefits are to be halved to 18-months from 3-years.

While Portugal’s caretaker PM Jose Socrates claims to have negotiated a better deal than Greece and Ireland got last year, obviously these additional austerity measures will be devastating to the Portuguese economy. According to Eurostat, the unemployment rate in Portugal stood at 11.1% in Mar and is likely quite a bit higher in reality; what happens to all those that will lose their unemployment benefits? Likely they will just fall into the next lower social safety net. The increase in sales tax will further weigh on discretionary spending. Higher property taxes will negatively impact demand in a housing market already reeling from weak demand and a substantial inventory overhang. My guess is that tax revenues actually decreases.

The Swiss franc is benefiting from its increasing status as a safe-haven currency, which is being largely garnered at the expense of the ever-weaker dollar. The recent suggestion by Swiss National Bank Chairman Philipp Hildebrand that CHF strength was helping contain inflation, seems to have been read as a reduction in the risk for SNB intervention. Interest in the CHF has also increased in light of the recent volatility in the precious metals, particularly silver. However, as we noted earlier in the week, the fundamentals that have been underpinning both gold and silver have not changed. A big part of that is their safe-haven aspect.

Swiss Franc Vs Dollar Weekly Chart

Rob McEwen, founder and former head of Goldcorp, says that “China is out to have more gold than America, and Russia is aspiring to the same.” To accomplish that, China would have to increase its reserve holdings of gold by 672%, Russia by 927%. McEwen suggests gold could reach $2,000 an ounce this year, largely driven by central bank demand. Any way you slice it, if that truly is the goal of countries like China and Russia — and there is plenty of evidence to suggest it is indeed — it will be a long term source of demand and you could also reasonably argue that it makes gold cheap at $1,500.

Hedge fund legend John Paulson told investors this week that gold could go as high as $4,000 an ounce over the next 3-5 years. You can bet he’s aware that central banks are no longer selling gold and have turned net buyers in recent years. According to World Gold Council statistics, Portugal has 382.5 metric tonnes of gold; Greece has 111.5 metric tonnes; and Ireland has 6.0 metric tonnes. Despite their dire fiscal situations, there hasn’t been any serious demands that they sell any of their gold, although apparently there was such an appeal today by Norbert Barthle, Germany’s governing coalition budget speaker. I’d be willing to wager the Bundesbank would be willing to take those tonnes off Banco de Portugal’s hands.

Gold remains near the low end of the recent range, but renewed dollar weakness has resulted in a more favorable intraday profile for the yellow metal. The greenback has been weighed by new 17-month highs in the euro above 1.4900, spurred by approval of Portugal’s bailout. Despite the damning evidence provided by Greece — that bailouts don’t work — Portugal will receive a €78 bln ($115 bln) bailout in exchange for austerity measures.

Eurozone retail sales were much weaker than expected in Mar, falling 1.0%. Rising gasoline and food prices on the Continent have cut significantly into discretionary spending. Yet the euro rises on both good news and bad news these days, largely because the greenback looks so weak.

The Swiss franc has also pushed to new record highs against the dollar. As the dollar’s status as a safe-haven has eroded, the swissy has benefited.

US ADP payrolls +179k in Apr, below market expectations of +195k, vs upward revised 207k in Mar. The consensus for Friday’s nonfarm payrolls is running around +185k, but the ADP miss will intensify whispers about a weaker print.

By Claudia Assis and Deborah Levine
May 3, 2011 (MarketWatch) — Silver futures slid Tuesday, dragging down gold and other commodities after the main U.S. metals exchange again announced higher margin requirements to trade silver.

Silver for July delivery fell $3.50, or 7.6%, to settle at $42.59 an ounce on the Comex division of the New York Mercantile Exchange…. The metal has lost 12% since Friday.

“A selloff of this magnitude was inevitable,” said Bill O’Neill, a principal with Logic Advisors in New Jersey. Silver had soared in recent months, hitting a string of 31-year highs, and posted record trading volume last week. “We haven’t recommended it to our clients in more than a year” due to the volatility “and I don’t expect to recommend it anytime soon,” O’Neill said.

Gold for June delivery also ended lower, down $16.70, or 1.1%, to $1,540.40 an ounce. That was gold’s biggest one-day drop since March 15.

… CME raised silver’s initial margin requirements to $16,200 per futures contract from $14,513 per contract…. Maintenance margins were set at $12,000 from $10,750 a contract. … The revised margin requirements will take effect from the close of trading Tuesday, CME said. … The recent increases have forced small investors to liquidate positions, analysts have said.

Besides the increase in margin requirements, however, several analysts saw silver prices due for a correction on fundamentals and rapid gains this year. The metal was also left vulnerable after it failed to top $50 an ounce and take down a January 1980 record in recent sessions. “Silver has been pulled between weak underlying fundamentals and strong retail investment demand, with investor demand residing in the driving seat,” analysts at Barclays Capital said.

…In contrast, analysts see the rise of gold futures, which have hit a string of records this year, as more orderly and sounder. … “Gold is set to remain well supported as the combination of a weak dollar, elevated commodities and higher U.S. inflation expectations support demand for inflation hedges,” analysts at Brown Brothers Harriman said in a research note.

[source]

by Christopher S. Rugaber
May 3, 2011 (AP) — Manufacturing activity grew for the 21st straight month in April, fueled by a weak dollar that has made U.S. goods cheaper overseas. But the cost of raw materials rose for the fifth consecutive month, a growing concern for many companies.

The Institute for Supply Management, a trade group of purchasing executives, said Monday that its index of manufacturing activity dipped to 60.4 in April. That’s down slightly from March and February, the fastest month for expansion in nearly seven years. A reading above 50 signals growth. … The index has topped 60 for four straight months, evidence that manufacturing remains one of the strongest components of the economy. The index bottomed out during the recession at 33.3 in December 2008, the lowest point since June 1980.

Factories have benefited from growing overseas demand for machinery and other goods. … Export orders rose sharply last month, the ISM survey found. The dollar has fallen 8 percent this year against a basket of six other currencies. A major reason for the weak dollar is the Federal Reserve has kept short-term interest rates at record low levels near zero. Central banks overseas have begun to increase interest rates to ward off inflation, which makes their currencies more attractive to investors seeking higher returns.

[source]

Inflation Worries Keep Gold Underpinned

Gold is consolidating above Monday’s corrective low, underpinned by good buying interest in the physical market. While markets in general are still trying to determine exactly how much the death of Osama bin Laden is likely to affect the overall global risk situation, the underlying driving forces behind gold and silver remain largely unaffected. Boiled down, the primary impetus for recent gold and silver gains has been — and remains — the massive proliferation of paper. Paper in the form of bonds (debt) and paper in the form of fiat currencies.

One of the biggest impending concerns is of course how quickly the US is going to be able to issue even more paper, given the current proximity to the $14.3 trillion debt ceiling. As of Monday, the US debt clock stood at $14,287,630,052,323.12. There was an expectation that the debt limit could be reached as soon as this month, but Treasury Secretary Geithner announced yesterday that by implementing “extraordinary measures” (ie accounting gimmicks) that date could be pushed back to 02-Aug.

Quoting the CBS News article: The Treasury Secretary pledged, too, that, as of May 16, he would declare a “debt issuance suspension period” under the statute governing the Civil Service Retirement and Disability Fund, “permitting us to redeem existing Treasury securities held by that fund as investments, and to suspend issuance of new Treasury securities to that fund as investments.” He also said he would “suspend the daily reinvestment of Treasury securities held as investments by the Government Securities Investment Fund of the Federal Employees’ Retirement System Thrift Savings Plan.”

I don’t think their is any question that the debt ceiling will be raised, it just becomes a question of how much in spending concessions the Republican controlled House can rest from the Obama Administration and the Democrat controlled Senate. There is certainly a risk that a compromise won’t be reached in a timely manner, I’d guess that they take this right down to the wire. A moving wire, that apparently now stands at 02-Aug.

The other big concern that is supporting the precious metals is the trajectory of the dollar, and the inflation that springs from a devaluing currency. When Fed Chairman Bernanke announced a new round of quantitative easing last August (QE2), oil was at $75 bbl and the dollar index was trading above 80. Today, with the end of QE2 approaching, oil stands at $123 bbl and the dollar index recently set new 34-month lows below 73.00. That’s a 64% rise in the price of oil and nearly a 9% decline in the dollar over the past 9-months. In recent months Bernanke dismissed the inflation risk out of hand, citing the low core CPI as reported by the BLS, which strips out volatile food and energy prices. Food and energy may be volatile, but it is something generally consumed by every one. As prices continued to rise and Bernanke’s position became untenable (I can’t eat an iPad!), the Fed’s began saying that inflation was “transitory.” As a recent Forbes article pointed out: The Fed can no longer assert “inflation” is a nonissue. So the line now is that it’s a “temporary” one.

People who fill up shopping carts and gas tanks feel the bite of inflation. As an increasing percentage of income must be diverted to the essentials, it leaves less income available for discretionary spending, the life blood of our consumer driven economy. The contraction in Q1 preliminary GDP to an anemic 1.8% y/y pace, from a less than stellar 3.1% y/y pace in Q4-10 is reflective of this reality. If the recovery stalls and the US slips back into recession, one would reasonably expect the Fed to continue with its über-easy policy stance: zero percent interest rates and potentially more quantitative easing. Add to that the threat of political gridlock on the budget and the debt ceiling and the Fed may have no choice but to flood the market with more dollars, even at the risk of more inflation. And that explains — at least in part — why corrective activity in gold has been limited in recent months.

Recovery?

by Tom Jennemann
May 03 2011 (Fastmarkets) — Gold on the Comex division of the New York Mercantile Exchange has recouped some of the morning’s losses caused by an short-lived dollar rally and a surprise interest rate hike by India.

… Gold was pressured downwards by a stronger dollar, which rebounded briefly to 1.4753 against the euro, and by India’s central bank unexpectedly raising its lending rate by 0.5 percent to 7.25 percent.

“India is trying to head-off inflation and this [rate increase has] worked against precious metals this morning. We know they’re concerned about inflation but it was surprising that they were this aggressive,” Sterling Smith, an analyst with Country Hedging, said. Nevertheless, gold was able to pare some of those losses as the dollar erased earlier gains against the euro to now trade at 1.4867. “We have managed to bounce off a pretty vicious low and we are now finding some degree of support for gold,” Smith added.

… Meanwhile, Comex silver continues to take a beating. The July contract was recently down $2.509, or 2.5 percent, at $43.575 an ounce and earlier fell as low as $42.975.

“Silver is again deflating and is trying to work its way back into a better alignment with gold,” said Smith, who noted that the closely-watched gold/silver ratio last week fell to a 28-year low of about 31:1.

[source]

RBCCM delves into the vexed issue of why listed gold stocks seem to be underperforming the extended bull market for gold bullion and comes up with some cost-heavy answers

by Barry Sergeant
Tuesday, 03 May 2011 (Mineweb) — In a truly useful piece of research, “Capital Punishment – Part III ‘Inflation Returns’ “, focused mainly on North American Tier I gold miners, RBC Capital Markets analysts have gone a considerable way to providing insights to why the prices of listed gold stocks seem nervous and hesitant, even as dollar gold bullion continues to extend a decade-old bull market.

The stock price of Barrick, the world’s biggest gold miner, breached $50 a share early in 2008, when gold bullion breached $1,000 an ounce. Today, with gold above $1,500 an ounce, Barrick is trading at just under $50 a share. What gives? And why did Barrick recently bid for Equinox, a copper miner?

One take-away from this latest RBCCM report is that since November 2009, gold miner capital and operating costs have risen by 21% and 17% respectively; RBCCM forecasts a 15% increase for both capital and operating costs in 2011 over 2010, “with additional upside pressure if oil prices remain elevated”. The good news is that at current gold prices, “the gold industry remains healthy; however, cost inflation has clearly returned pressuring operating margins and capital allocation decisions”.

[source]

By Murray Coleman
May 3, 2011 (Barron’s) — Silver prices are continuing to fall this morning after the CME Group (CME) said that initial margin requirements for silver contracts are going up for a third time in a just over a week.

… The CME’s initial margin requirements will increase to $16,200 per futures contract, up from $14,513. Maintenance margins were increased to $12,000 from $10,750. The changes are effective after the close of business today.

[source]

ALSO…

Morning Note: Silver Trade Over?
by Catherine Holahan
Tuesday, 3 May 2011 (CNBC) — Is the silver trade over? That was a question for Fast Money Traders Tuesday morning as silver futures continued to weaken, falling below $44 per ounce intra day less than one week after hitting a 31-year high of $49.84 per ounce. Silver futures have fallen nearly 10% in the past couple days.

“The selling in silver has been relentless since Sunday evening,” wrote Fast Money Contributor Dennis Gartman in this morning’s Gartman Letter.

New margin requirements by the CME Group appeared to be fueling the selloff. … [T]he third increase in one week … go into effect after the market close today.

Fast Money’s Guy Adami of Drakon Capital was betting that the long silver trade was done for the time being. “Volatility will now take over and you are just going to get chopped up,” said Adami. “A couple months from now, silver could be forgotten like it had been ten years prior.”

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ALSO…

Silver Demand Theory Debunked
by Nigam Arora
May 3, 2011 (SeekingAlpha) — … The same models that got us in to silver heavily at $17.73 are now flashing sell signals with silver near the all-time high.

The silver bulls are predicting that the present trajectory of silver’s run will continue. … I am hard nosed about being driven by cold hard data and in the process forsaking all prejudices, opinions, preconceived notions. Estimates of silver demand over the years have varied widely, depending on the source. … Unfortunately, for the silver bulls, the data does not support any of their six arguments.

… In this article, I will answer the more urgent question of what is driving silver prices up now, not a month or two ago. The answer is American speculators – it is not industrial demand or India and China or inflation.

… Those who study historical patterns will find that even in extreme circumstances, investors drive prices linearly. A good example of a steep linear movement is the resent price of gold. Please see the chart to compare the price movement of of gold and silver. From the tulip mania to the internet bubble, when prices rise parabolically, it has always been the speculators and not the investors.

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Tuesday, 3 May 2011
(Reuters) — The Federal Reserve’s easy money policies risk causing inflation unless the Fed scales them back soon, Kansas City Fed Bank President Thomas Hoenig said Tuesday. “If you pump dollars into the system at a rapid pace … eventually you will see prices rise,” Hoenig said in a speech to a community group.

… Hoenig has persistently opposed the Fed’s ultra-loose monetary stance, dissenting 8 times against it when he was a voter on the Fed’s policy-setting panel in 2011.

The central bank last week affirmed it is not hurrying to reverse interest rates near zero and bond buying programs that have pumped $2.6 trillion into the financial system to date.

… Hoenig also said legislation introduced by Representative Barney Frank that would curtail the role of the 12 regional Federal Reserve banks in setting monetary policy would be a mistake because it would diminish the influence of voices outside Washington and New York in monetary policy.

“We have institutions across the country … who have local boards of directors, including bankers and businesses, consumers, labor, who have grass roots input into the process,” he said.

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by Amanda Cooper
May 3, 2011 (BusinessDay) — Gold fell on Tuesday from record highs above $1570 an ounce the previous day, as the dollar rose and as safe-haven buying of the metal lost some momentum following the death of al Qaeda leader Osama bin Laden. Spot silver also came under selling pressure after hitting a near two-week low of $42.58 an ounce on Monday, when the precious industrial metal saw its biggest one-day drop in 29 months.

… The dollar held above three-year lows as a build-up of bets to sell it based on loose US monetary policy ran out of steam, though gains against the euro were capped by good demand on dips for the shared currency.

… “The US dollar is significant in the price development of the precious metals,” said Quantitative Commodity Research analyst Peter Fertig. “With the divergence of monetary policy in the US and the euro zone in particular, I expect the dollar is going to weaken further in the medium term,” he said, referring to market expectations for US rates to remain unchanged and euro zone rates to steadily rise.

… The death of bin Laden accelerated spot gold’s drop to a session low of $1534,15 from a record high of $1575,79 on Monday, although Fertig said the impact of the al Qaeda leader’s death would be limited. “I don’t expect this to be a lasting factor, terrorism remains a threat to Western society and for that reason, there is no convincing argument to abandon gold as a safe-haven if one has bought it as a safe-haven against terrorism,” he said.

Gold might have lost some safe-haven appeal after bin Laden’s death, but the bullish trend is intact as fundamentals of the market remain supportive, said traders and analysts. Concern over rising global inflation and ongoing unrest in the Middle East and North Africa may also continue to attract investors to bullion.

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May 3, 2011 (IBTimes) — The Central Banks of developing countries will Buy Gold at an increasing rate in coming years, with China being a leading player, according to a major industry figure.

Rob McEwen, founder and former head of Goldcorp, now the world’s fifth largest Gold Mining company, believes central bank purchases could help push the price of gold to $2000 an ounce by the end of the year.

“China is out to have more gold than America, and Russia is aspiring to the same,”said McEwen, who is now chairman and CEO of junior miner US Gold. “When you have debt, you don’t have a lot of flexibility. China wants to show its currency has more backing than the US.”

… A survey by Central Banking Publications revealed this month that over 70% of reserve managers expect central banks will remain net gold buyers.

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By Ethan Smith
(The Wall Street Journal) — Eike Batista, chairman of Brazilian conglomerate EBX Group, predicted Monday that the price of gold will hit $2,500 an ounce.

Mr. Batista’s remarks came during a lunch-time discussion at the annual Milken Institute Global Conference. The panel was moderated by The Wall Street Journal’s Paul Gigot.

Mr. Batista didn’t give a timeframe for his prediction.

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“I can’t eat an iPad.” This could go down in history as the line that launched the great inflation of the 2010s.

Back in March, the president of the New York Federal Reserve, William Dudley, was trying to explain to the citizens of Queens, N.Y., why they had no cause to worry about inflation. Dudley, a former chief economist at Goldman Sachs, put it this way: “Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful. You have to look at the prices of all things.” Quick as a flash came a voice from the audience: “I can’t eat an iPad.”

Dudley’s boss, Ben Bernanke, was more tactful in his first-ever press conference on Wednesday of last week. But he didn’t succeed in narrowing the gap between the Fed’s view of inflation and the public’s.

I respect Bernanke. As an expert on the financial history of the 1930s, he was one of the very few people in power back in 2008 who grasped how close we were to another Great Depression. But if we’ve avoided rerunning the 1930s only to end up with a repeat of the 1970s, the public will judge him to have failed.

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PG View: Clearly inflation feels anything buy “transitory” out here in the real world.

Gold and silver are consolidating and the dollar is slightly better as the market continues to digest the killing of Osama bin Laden. However, ongoing concerns about the greenback, inflation, budgets, deficits and the debt ceiling are underpinning the metals.

The Reserve Bank of India hiked its rep rate by 50bps to 7.5% amid ongoing inflation worries. The hike was twice what the market was anticipating.

Treasury Secretary Geithner said the necessary hike in the debt ceiling can be forestalled until 02-Aug if his department takes “extraordinary measures” such as the suspension of SLGS (State & Local Government) issuance. That is expected to take effect on 06-May, and while it kicks the Federal debt ceiling can down the road, it may put some state and local governments in very dire straights.

KC Fed’s Hoenig says you can’t have extreme accommodation without inflationary pressure. He remains worried that easy monetary policy could create more asset bubbles. Yet he’s also worried that the rapid withdrawal of accommodation could shock the financial system.

By Claudia Assis and Kate Gibson
May 2, 2011 (MarketWatch) — Silver prices fell more than 5% Monday after the main U.S. metals futures exchange increased for the second time in a week the amount of cash needed to hold speculative positions in the metal.

Gold, which started floor trading in the red after hitting a record intraday high in electronic trading, turned positive as the dollar weakened and settled modestly higher.

Silver for July delivery fell $2.52, or 5.2%, to $46.08 an ounce on the Comex division of the New York Mercantile Exchange. That was silver’s largest one-day percentage drop since early January.

Gold for June delivery advanced 70 cents to $1,557.10 an ounce. The metal traded as high as $1,577.40 an ounce earlier, an intraday record. It got support from a weaker dollar, and some modest safe-haven bidding on fears of attacks in retaliation to Osama bin Laden’s death.

Silver gathered most of the attention on Monday trading , however, as it plunged as much as 13% to $42.20 an ounce earlier. Monday was the first full session after the increase in margin requirements. Initial margin requirements for silver increased to $14,513 per silver futures contract, from $12,852. Maintenance margins increased to $10,750 from $9,500.

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by Michael Pettis
May 2, 2011 (WallStreetPit) — The week before last on Thursday the Financial Times published an OpEd piece I wrote arguing that Washington should take the lead in getting the world to abandon the dollar as the dominant reserve currency.

… Reserve currency status is a global public good that comes with a cost, and people often forget that cost.

Just as importantly as a public good it requires a number of characteristics. At a minimum these include ample liquidity, central bank credibility, flexible domestic financial markets, minimal government or political intervention, and very deep and open domestic bond markets. …… And no other country, not even Europe, will be willing to pay the cost. If there is any chance that the dollar’s status declines in the future, it will require that Washington itself take the lead in forcing the world gradually to disengage from the dollar.

Ironically, this is exactly what Washington should be doing….. the global use of the dollar has become bad for the US economy, and because of the global imbalances it permits, bad for the world.

… In practice, dollar liquidity, limited Washington intervention, and the size and flexibility of US financial markets ensure that these [other] countries always stockpiled dollars. There is no real alternative to the dollar, and most other governments would anyway actively discourage massive purchases of their own currencies because of the adverse trade impacts. If foreigners accumulate euros or yen at anywhere near the rate they accumulate dollars, they would force Europe and Japan into massive current account deficits, and neither Europe nor Japan has any interest in seeing this happen.

… The massive imbalances that this system has permitted are destabilizing for the world because they permit large and unstable debt buildups both in countries that over-produce, like China and Japan, and those that over-consume, like the US. If the world were forced to give up the dollar, there is no doubt that there would be a cost – it would reduce global trade somewhat and it would probably spell the end of the Asian growth model – but it would also lower long-term economic costs for the US and reduce dangerous global imbalances. … The cost of maintaining sole reserve currency status has simply become too high in the past three decades and is leading inexorably to rising American debt and worrying global imbalances.

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RS View: While this commentary on the whole is usefully sound, I would hasten to take exception with the remark, “There is no real alternative to the dollar…”

In the context of this commentary and all surrounding discussion, it isn’t the CURRENCY (invoicing&payment) aspect of the dollar’s international function that is under scrutiny (because that is merely incidental,) but rather it is the RESERVE aspect that is on the chopping block. And to be sure, there is — quite literally — a very REAL alternative to the dollar in the international monetary capacity as a reserve asset. Gold. As such, gold uniquely would endure an inexorable rise, floating independently higher against all national currencies such that countries need no longer play ‘hot potato’ with the burden of any given national currency bearing the special forces of international reserve usage. Physical (underivatized) gold alone can take the elevating heat and pressure and with it shine all the more as a reliable public and private good in providing that specialized monetary utility. This path becomes ever more discernible with the march of progress. For the sake of your future wealth and well-being, get yourself intellectually and financially firmly on that road.

For the year 2011 so far, 39 banks have gone into FDIC receivership — 13 in the month just ended.

NEWLY FAILED
April 29
Community Central Bank – - – - Mount Clemens, MI
The Park Avenue Bank – - – - Valdosta, GA
First Choice Community Bank – - – - Dallas, GA
Cortez Community Bank – - – - Brooksville, FL
First National Bank of Central Florida – - – - Winter Park, FL

April 15
Heritage Banking Group – - – - Carthage, MS
Rosemount National Bank – - – - Rosemount, MN
Superior Bank – - – - Birmingham, AL
Nexity Bank – - – - Birmingham, AL
New Horizons Bank – - – - East Ellijay, GA
Bartow County Bank – - – - Cartersville, GA

April 8
Nevada Commerce Bank – - – - Las Vegas, NV
Western Springs National Bank and Trust – - – - Western Springs, IL

by Josh Funk
Monday May 2, 2011 OMAHA, Neb. (AP) — Warren Buffett and Jack Welch, two respected business leaders, said Monday the death of Osama bin Laden won’t end the threat of terrorism and might not boost markets.

The pair appeared together Monday on CNBC. Buffett’s interview had been scheduled to discuss the economy and last weekend’s Berkshire Hathaway shareholders meeting, but international relations became a prominent topic because of the bin Laden news.

… Buffett said he felt good when he heard of bin Laden’s death, but he still worries about terrorist attacks. “The desire to do us harm exists in too many people around the world,” Buffett said.

But Buffett doesn’t expect the bin Laden news to affect business much. “I don’t think this is a big market factor,” Buffett said on the Fox Business Network. “The American people feel wonderful today — all of us — but in terms of earning power of American business, I don’t think that factor should change dramatically because of this.”

… Buffett and the Berkshire officials were also asked again about the actions of a one-time Berkshire executive who resigned last month after details emerged about a questionable investment he made. … Buffett called Sokol’s behavior inexcusable, but said he doesn’t think many changes are needed at Berkshire. His friend, [Bill] Gates, supported that view.

“Berkshire has very good compliance rules,” Gates said. “The fact is that no compliance rules are going to stop somebody from making a mistake.”

Buffett and Berkshire Vice Chairman Charlie Munger both said the Sokol situation is a sad one for him and for Berkshire because Sokol did so many good things for the company over the years. “I saw it instantly as tragedy,” Munger said.

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by Jean Folger
May. 2 2011 (Forbes) — Gold has been considered a currency, commodity and investment for thousands of years. Sought after for both its beauty and worth, gold continues its rally to reach new daily highs. There is speculation among anxious investors about just how high gold could go. While no one knows for certain, there is a strong argument in favor of gold climbing even higher.

… Central banks keep paper currency and gold in reserve. For the first time in decades, central banks have begun buying more gold than they are selling, according to the World Gold Council. As these banks move away from paper currencies and towards gold, they in effect remove a significant of supply from the international gold market, driving the price of gold higher.

… Gold and the U.S. dollar have an inverse relationship…. when the dollar is weak and during times of economic uncertainty, more investors look to gold as a safe haven for their investment activity.

… On April 18, 2011, Standard & Poor’s downgraded its credit outlook for the United States…. In addition to worldwide instability, this particular downgrade, coupled with the threat of further ratings cuts, will likely increase gold’s attractiveness to already skittish investors.

… Investors worldwide seek gold as a means to protect wealth and hedge against uncertainty. [Also...] As economies develop and salaries increase in emerging markets, the demand for gold is expected to increase. …… Gold is still far from its January 1980 inflation-adjusted high of $2,300 per ounce, indicating that it can undoubtedly go higher. Also, the fact that gold has been a solid performer over the past decade does not automatically guarantee its near-term failure: gold is not necessarily in a bubble that is about to pop; rather, it could very well continue for some time to reach new highs. How long is not known, but today’s economic and political environment, coupled with increased demand in emerging markets, points to gold’s continued rise.

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