by Steven M. Sears
May 5, 2011 (Barron’s) — Silver is now radioactive. … The implied volatility of SLV’s options is up some 11% Thursday, indicating that even the options market, which is expert in pricing risk, is unsure how to price silver.

Back when silver broke toward $50 in the late 1970s, and then declined, the metal only traded in the futures market. Since then, the Securities and Exchange Commission has allowed financial engineers to create exchange-traded funds that hold commodities like gold and silver. This has made it possible for anyone to invest in commodities in the stock market without opening a separate futures trading accounts.

Commodity investing is now as easy as buying stock. But the decline in silver is proving that is not really true.

Silver’s price is influenced by futures, equity derivatives and stock trading. The action in all the different markets weighs heavily on silver’s price. Selling pressure now stretches across three markets — the futures, stock and options. The selling is exacerbated by an ultrashort exchange-traded fund loaded with derivatives that sharply increase in value if silver prices decline.

[source]

By Claudia Assis and Sarah Turner
May 5, 2011 (MarketWatch) — Gold and silver futures notched steep losses Thursday as the main U.S. metals exchange announced two additional increases in trading requirements for silver.

Silver for July delivery declined $3.15, or 8%, to $36.24 an ounce on the Comex division of the New York Mercantile Exchange.

… CME Group Inc., which owns Comex and Nymex, late Wednesday announced two additional margin-requirement increases, effective at the end of close Thursday and Monday. Higher margin requirements, or the money needed to put up to trade silver, have ignited wholesale selling of the metal that started on Monday and has pulled down other commodities with it. The exchange has announced margin increases four times since April 26. … The exchange had already increased margins three times in recent days, squeezing out those unable or unwilling to put up more money to trade the metal.

… At the close of Thursday, initial margin requirements for silver will cost $18,900 per contract, and maintenance margins will cost $14,500 per contract. They cost $8,700 and $11,745, respectively, before April 26. All told, CME has announced margin requirement increases six times this year, including Wednesday’s double whammy. By the time the latest round of increases becomes effective on Monday, initial and maintenance requirements will have increased 84% to $21,600 and $16,000, respectively.

… “The ending of a tulip-mania style move in silver will put more caution into those who would speculate in commodities markets, limiting the harm commodity price increases will cause the economy,” said emailed comments from Tony Crescenzi, a strategist and portfolio manager at bond giant PIMCO. “ [Therefore...] it will keep the game going for longer because the urgency for central bankers to move quickly has diminished somewhat now that commodity prices have hit a much needed speed bump.”

Gold for June delivery retreated $33.90, or 2.2%, to $1,481.40 an ounce. That was the lowest settlement for a most-active gold contract since April 14, and the biggest one-day percentage loss since mid March. “We may pull back below ($1,500 to $1,450 an ounce) before recovery sets in,” said George Gero, a vice president at RBC Wealth Management, in emailed comments.

[source]

by Jack Farchy
May 5, 2011 (FT) — The reversal of fortunes for silver –- which until this week’s 25 percent drop had been up 56 percent since January –- has led a wider sell-off in commodities markets, which were heading towards one of their worst one-day falls on record.

“The silver market has become even more unhinged as the week nears an end, with no sign yet that the nervous selling momentum is near petering out,” said Edel Tully, precious metals strategist at UBS. “This has paved the way for a wider commodity slump,” she added.

On the spot market in London, silver fell as much as 9 percent on Thursday to a six-week low of $35.82 a troy ounce.

… Sales of silver coins surged to record levels as retail investors, particularly in North America, bought the metal as an expression of dissatisfaction with the perceived profligacy of the Federal Reserve and the US government and the faltering US dollar.

The tumble in silver has led the price of other precious metals lower. However, gold has managed to remain relatively unscathed compared with its poorer cousin. Since hitting an all-time peak on Monday, the yellow metal is down 5.9 percent at $1,483 an ounce.

[source]

by Pater Tenebrarum
May 5, 2011 (SeekingAlpha) — The action in the precious metals space has been so fast-moving this week that updates are usually out of date the moment they are written, but we feel nonetheless compelled to comment yet again. … The CME has decided to increase margins for silver futures traders a fourth time. While it is true that such margin hikes tend to exacerbate the pressure on a collapsing bubble, it is not true that this is done out of some nefarious intent as some commentators are claiming. Commodity exchanges always hike margin requirements when the underlying commodity rises sharply and begins to exhibit extreme volatility – regardless of whether it is silver, corn, hogs or whatever. There is no exception from the rules for silver.

… Another news item that has hit the wires yesterday was that George Soros and John Burbank were getting out of their gold and silver positions – allegedly because they now think that there is a lower probability for deflation. Say what?

According to Marketwatch:
—Traders were also digesting a Wall Street Journal report that said George Soros’s hedge fund, a firm operated by investor John Burbank, and some other investors have sold much of their gold and silver because there’s less chance of deflation.—

The point seems to be that if there is no deflation (in the sense of falling consumer prices), then the Fed will at some point in the future no longer pump as much money into the economy.

The problem with that idea is of course – as we noted yesterday – that the Fed is in a box. The moment it stops pumping, the very deflationary forces that Soros fund manager Keith Anderson now declares as no longer representing a threat will swiftly reassert themselves. The Fed is probably well aware of this, which is why we just got another ultra-dovish speech from Boston Fed president Eric Rosengren, arguing that the rising prices of energy and other commodities have absolutely nothing to do with monetary pumping by the central bank, but instead represent a ‘supply shock’ that should not keep the Fed from further pursuing its extremely loose policy.

So there you have it from the horse’s mouth – easy money is going to be with us for a good while longer.

… it seems highly unlikely that the crash in silver has altered anything with regards to the long term outlook for both gold and silver (gold has of course declined in sympathy with silver, but it has held up much better in relative terms, as always happens in correction phases).

[source]

By Carole Vaporean
Thu May 5, 2011 (Reuters) — Silver prices, down 20 percent from peaks hit last week, have abruptly collapsed into bear market territory, and chartists say further losses are likely before investors are lured back in.

While for now deemed a correction rather than a return to the languishing market that characterized silver in the 1990s, the speed of the collapse after its parabolic rise this year has shocked even long-term traders accustomed to its volatility, and at times has rattled adjacent markets.

For those who study charts for price trends, silver looks unlikely to quickly revisit the all-time high of $49.51 an ounce it touched on April 28, and will probably slide much further before finding its footing.

… Once support breaks at the 50-day moving average near $38.50, said CitiFX chief technical strategist Tom Fitzpatrick, silver lacks additional support before the 200-day moving average between $28 and $31. “There could possibly be a short-term pause, but this really looks like something that could melt down even further.”

… “I would let it fall. The real thing that has been moving silver prices since it went over $25 an ounce, in our judgment, is mostly speculative demand,” said Tom Winmill, portfolio manager of the Midas Fund. Winmill stuck by his projection of $35 an ounce at year end.

… “Where the bottom lies, only time will tell. But, we are in the midst of a correction that presents a buying opportunity for sure,” said Joseph Foster, portfolio manager, at Van Eck International Investors Gold Fund in New York.

[source]

Silver could top the precious pack in 2011 – GFMS
by Amanda Cooper
Thu May 5, 2011 (Reuters) — Platinum is drawing investment as a financial asset and palladium boasts an enviable market balance but silver could top the precious pack this year as its latest fall offers a chance to buy, GFMS’s Philip Klapwijk said.

The managing director of the metals consultancy, which on Thursday released its 2010 Platinum and Palladium market survey, said that once the current price decline from last week’s record above $49 an ounce has petered out, silver has enough favour among investors to return to these levels.

“If we see silver drop, perhaps down close to $30-mark then, (it) would look a pretty decent buy, because through to the end of the year, you’ve got the possibility of 40 to 50-percent price gains,” Klapwijk said in an interview with Reuters.

“I’m not sure that silver would get above $50 but would we see it in the upper $40′s again? Quite possibly. I don’t see that scale of increase probably out there for gold and for platinum and probably not for palladium either,” he said.

The silver price , which is still up about 22 percent so far this year at $38 an ounce, is set for its largest weekly decline in nearly 30 years, led by selling after a series of sharp rises in margin requirements to hold U.S. silver futures, as well as hefty outflows of metal from the world’s largest exchange-traded funds.

[source]

by Rita Nazareth and Nikolaj Gammeltoft
May 5 (Bloomberg) — Commodities plunged the most in two years, stocks worldwide posted the biggest three-day drop since March and the dollar rallied after American jobless claims unexpectedly rose and the European Central Bank signaled it will wait until after June to raise interest rates.

The Standard & Poor’s GSCI index of 24 commodities sank 4.8 percent at 12:10 p.m. in New York and has lost 8.1 percent this week. Silver tumbled 7.4 percent, extending its decline since April 29 to 25 percent, and oil sank 5.9 percent. … The dollar gained 1.6 percent against the euro, making commodities quoted in the greenback more expensive for holders of other currencies.

… “Both equities and commodities had a big run,” said Mike Ryan, the New York-based chief investment strategist for Wealth Management Americas at UBS Financial Services Inc., which oversees $741 billion. Following the U.S. jobs report, “anyone wanting to take some profits now has an excuse to do it.”

The S&P measure of commodities prices had surged 20 percent in 2011 through April 29. The MSCI stock gauge closed at the highest level since June 2008 on May 2 after rallying 8.2 percent since Dec. 31

… “The economic outlook is looking more challenging,” said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees about $84 billion in assets. “People have been crowding into stocks and commodities, but with the additional slowdown in the U.S. and the more difficult employment situation, there’s suddenly more uncertainty.”

[source]

By Andrew Mickey
May 5, 2011 (WallStreetPit) — Gold and silver have been setting new high after new high. Gold is up $100 and silver’s up more than $10 since President Obama ruled out significant spending cuts in his mid-April budget speech and the Fed chairman noted inflation will be “transitory.” The strong uptrend, however, showed its first signs of weakness in months this week. Gold has fallen for three straight days and silver is down nearly 20% from its highs.

If the downswing continues, it could be enough to send the hot money crowd running for the exits and set off a long-awaited (and healthy) correction.

… The current “story” driving gold is a simple and very widely spread one. Government spending is out of control. The federal deficit is well over $1 trillion and both sides are nowhere close to agreement on how to close it (and won’t be until after the next election or until the next debt crisis suddenly hits). China has stopped by U.S. government bonds. Bill Gross, a.k.a. the Bond King, has sold out of U.S. Treasuries. There’s nowhere to go but down for the dollar over the long run.

And any hopes of a return fiscal sanity have been quickly dashed. The last round of $38 billion in phantom spending cuts have done nothing to reduce the trajectory of federal spending growth.

… Gold prices have risen due to many factors. One catalyst, however, has outweighed them all. … there have been three periods of sustained negative interest rates in the past 80 years. Each period of negative interest real rates coincided with rising gold prices and/or extremely high inflation.

… And this period of negative real rates is not going to end anytime soon. …… at this point, we’ve got at least another year and a half left (probably even longer) to go for gold prices as real interest rates are going to be held below zero. And if history is a reasonable guide, gold prices will continue their uptrend and any correction will be short-lived.

[source]

by Richard Cowan and Thomas Ferraro
May 5 (Reuters) – U.S. House Speaker John Boehner said on Thursday that Republicans will not vote to raise the U.S. debt limit without budget reforms and spending cuts totaling trillions of dollars.

Boehner said he was optimistic that bipartisan talks led by Vice President Joe Biden would “lead somewhere” in an effort to allow the government to continue its borrowing activity…

[source]

by Steve Schaefer
May 5, 2011 (Forbes) — Don’t look now, but it appears the U.S. employment picture isn’t just improving slowly it’s actually showing signs of fresh weakness. The weekly unemployment snapshot from the Labor Department showed initial jobless claims jumped to 474,000 last week, from an upwardly revised 431,000 the week prior. That’s not good news ahead of Friday morning’s April jobs report and led traders to flee from risk assets almost across the board.

The four-week moving average, meant to smooth out volatility, is back up to 431,250, while continuing claims rose back over 3.7 million. Much like Wednesday’s weak reading on the services sector from the Institute for Supply Management’s non-manufacturing index, Thursday’s employment figures rattled investors and produced a flight to safety.

Major U.S. equity indexes slumped. … Much has been made of late about the debt and deficit burdens facing the U.S., but Uncle Sam is still a port in a storm for investors and the yield on 10-year Treasuries dropped to 3.19% Thursday morning.

… Across the pond, European Central Bank President Jean-Claude Trichet said he remains mindful of upside inflation risks after the bank held steady on its benchmark interest rate after hiking last month. Trichet did not seem to indicate another increase in June, but left the door open for a further hike in July from the current 1.25% level.

That’s compared with a 0-0.25% range for the Federal Reserve’s target rate for federal funds, a number that likely will remain untouched for some time.

[source]

Gold and Silver Extend Corrective Losses

Gold has fallen back below the 1500.00 level, weighed by the ongoing rout in silver. Silver has tumbled about 27% since peaking on 25-Apr at 49.77. By comparison, the correction in gold has been much more modest at just about 6%. Recent activity in silver has been a wild ride to be sure, but it’s just a reality of the market. Silver is a much smaller, more thinly traded market than the gold market. Consequently the volatility in silver is much higher than it is in gold. We began suggesting a “measure of caution” was warranted with regard to silver in early-April when the market exceeded 50% above its 200-day moving average. At its peak, silver was more than 80% above the 200-day MA.

As speculators continued to rush into silver in recent weeks, the COMEX inventory of deliverable silver was shrinking to a record low of just 33 million ounces. The exchange faced a dilemma, shake out the specs or face a potential force majeure and the loss of confidence in the exchange that would likely result. With the recent market volatility providing the necessary cover, the CME Group began a succession of margin hikes directed at erasing the massive overhang of paper silver obligations that simply could not have been delivered at recent lofty prices.

As the cost of maintaining open long positions went up, some traders were forced to liquidate all or part of their positions to cover those additional expenses. Margin requirements on silver rose 84% in the last 8-days alone. Once the ball is rolling downhill and stops start getting triggered, it can become a self-sustaining retreat. However, in raising margins again last night, with Singapore following suit, and amid rumors that another COMEX hike is in the cards, clearly the CME Group is not yet content to kick-back and watch the carnage unfold.

And there in lies a fundamental difference in physical silver and gold, versus those ‘paper obligations’: If the exchange that clears that paper doesn’t like an impending outcome, they can change the rules of the game. It’s like the home football team being able to successively increase a fee the visiting team must pay as they drive deeper into the red zone. How bad do you want to score? Well, pony up…

Word that billionaires George Soros and Carlos Slim have been selling gold and silver have added further impetus to the recent declines. While Slim is reportedly selling to hedge the production of his mining operations, Soros’ intent is not as clear. Was he simply reacting to the severely overbought condition in silver and taking profits? Or was he actively shorting gold and silver? Or like other hedge funders before him, is he exiting paper representations of metal with the intent of buying physical with the proceeds? There has been some whispers to that affect in the market, but if Soros does have an intention to buy physical, he would be well served to play his cards very close to the vest.

Today’s reported plunge in German factor orders seems to have prompted a more dovish tone from ECB President Trichet. If the last economic engine firing on all cylinders in Europe is starting to sputter under the strain, expectations of further ECB rate hikes will deteriorate. That does indeed appear to be happening as the euro plunged dramatically during Trichet’s press conference, off nearly 8% from yesterday’s 17-month high.

The euro’s swoon, along with a weaker Swiss franc and the ongoing commodity deleveraging has provided the first decent bid in the dollar. However, today’s unexpected surge in US initial jobless claims in conjunction with yesterday’s horrible ISM print, also reinforces the Fed’s über-easy policy stance. That certainly doesn’t translate to dollar strength, yet the dollar could correct further based on further euro weakness and darkening prospects for economic recovery.

Basically, the underling fundamentals remain broadly constructive for gold. Rising growth risks may mitigate some of the recent price risks, largely associated with soaring food and energy costs, but it increases the likelihood that central banks will once again goose the economies with yet another dose of liquidity. This is a particular risk in the US, where Republicans and Democrats are waging a pitched battle on budgets, deficits and and the debt ceiling.

Gold and silver extend corrective losses. Silver has been hit particularly hard by a succession of margin hikes as COMEX in particular looks to erase the massive overhang of paper silver obligations that simply could not have been delivered at recent lofty prices. The COMEX inventory of deliverable silver was recently reported at a new record low of 33 million ounces. Margin requirements on silver are up 84% in just the last 8-days. As a capper, Singapore raised silver margins by 18% last night.

The BoE and the ECB have held steady on rates. While this was widely expected, ECB President Trichet seems to have a decidedly more dovish tone at the press conference. Perhaps this is in light of the 4% plunge in German factory orders in March and a downward revision to the February data. As the prospects of an ECB rate hike appear to be evaporating, the euro is tumbling from its recent 17-month highs.

US initial jobless claims unexpectedly surged 43k to 474k in the week ended 30-Apr, well above market expectations. The previous week was revised higher as well.

by Robert Campbell
May 4 (Reuters) – Mexico’s central bank said on Wednesday its recent purchases of gold were part of its normal policy for managing the country’s international reserves.

The bank bought over $4 billion in gold in the first quarter…

[source]

RS View: This tiny comment should set the stage for a very comfortable peace of mind. In the wake of a financial climate that has seen innumerable central banks engage in a very wide variety of new behaviors that were subsequently articulated as being “extraordinary measures” (i.e., the implication being that such activities were undesirable yet unavoidably excusable,) it is distinctly auspicious that this particular example of newish activity is hereby being described as part of “normal policy”.

Think long and hard about that.

got gold? Get you some.

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.

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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.

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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.”

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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.

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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.

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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.

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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.

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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”.

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