By Madalene Pearson

June 15 (Bloomberg) Gold prices, rallying for an eleventh year, will extend gains as investors add bullion seeking a haven against currency debasement and inflation, according to India’s Quantum Asset Management Co.

“There will be more people moving towards the safety of gold which will take gold prices much higher,” Chirag Mehta, a commodity fund manager at Quantum, which manages about $1.5 billion in assets, said in an interview in Mumbai. “The gradual increase in gold price will continue.”

“The diversification to gold will continue, gold is still under-owned,” Mehta said yesterday. “Even if a small fraction of financial assets move to gold, I think the price will go much higher than what it is currently.”

“There’s a tidal wave of gold demand coming,” Jason Toussaint, the World Gold Council’s managing director of U.S. and Investment, said yesterday at the Bloomberg Link Money Managers Conference in Boston. “A key is the long-term fundamental change in emerging markets. The biggest markets of growth are China and India.”

“The market will increase, it’s nowhere near the potential,” Mehta said.

[Source]

By JONATHAN CHENG
June 15 (WSJ) – U.S. stocks tumbled as fears of contagion around a Greek default picked up, adding more pessimism to a foreboding mix of U.S. economic data.

The Dow Jones Industrial Average sank 177 points, or 1.5%, to 11900 in early afternoon trading, wiping out the week’s gains. The Standard & Poor’s 500-stock index fell 21 points, or 1.6%, to 1267 and the Nasdaq Composite shed 41 points, or 1.5%, to 2638.

Greek fears intensified after euro-zone officials failed to make progress on discussions about Greek aid and protests against austerity measures turned violent in Athens. Greek bonds were pummeled, sending yields to their highest levels since the inception of the euro.

[source]

By Nicholas Hastings
June 15 (WSJ blogs) – Euro-zone politicians have struggled in the past to come up with a solution to stop Greece from defaulting. But this time the risks are even higher and chances are that even a last-minute reprieve will not be well received.

The current standoff is well known.

Germany is pushing for a bailout that involves the private sector, while the European Central Bank insists that any agreement must be voluntary to avoid a Greek default and a run on the country’s creditor banks.

As the July deadline for new funds gets closer, the battle between the two sides is becoming even more entrenched and the likely bailout figure even higher.

What started out as a need for €80 billion is now being talked about in terms closer to €120 billion.

…Evidence is rising that the strength of the euro zone’s core economies will be sapped in the second half of this year, especially if major export destinations such as China slow down.

[source]

June 15 (USAGOLD) – Gold gave back much of the intraday rebound as the dollar extended to new highs for the month on euro weakness. However, the yellow metal seems to have caught another bid well shy of support 1514.05/1511.03.

June 15 (Reuters) – Greek Prime Minister George Papandreou told the head of the conservative opposition on Wednesday he would be willing to step down and make way for a national unity government, senior government sources said.

Papandreou would only do so if a specific framework and targets for the new government were agreed, the sources said.

[source]

PG View: Apparently Papandreou would need an assurance that any new government would support another EU/IMF bailout for Greece.

June 15 (USAGOLD) – Gold surged back from overseas losses to set new highs for the week after a series of US data misses tanked stocks, which were already on the ropes because of heightened worries about Greek contagion.

The US Empire State index plunged to -7.8 in June, well below market expectations of 13.5, vs 11.9 in May. US industrial production for May rose just 0.1%, also below market expectations. The bigger than expected rise in headline and core CPI, at +0.2% and +0.3% respectively has prompted further talk of stagflation.

It would seem the safe-haven and inflation hedge appeal of gold is trumping any deleveraging pressures.

By MATTHEW SALTMARSH
June 15 (New York Times) – PARIS — French banks were punished Wednesday for their exposure to Greek debt after Moody’s Investors Service placed three of the largest on review for a possible downgrade.

Moody’s cited “concerns” about the exposure of BNP Paribas, Société Générale and Crédit Agricole to the Greek economy, either through holdings of government bonds or loans to the private sector there, directly or through subsidiaries operating in Greece.

It said the reviews would also examine “the potential for inconsistency between the impact of a possible Greek default or restructuring and current rating levels.”

[source]

PG View: Moody’s also warned that it could take “similar actions on other banks with direct exposure to Greece in the coming weeks.”

By HERNAN MUNOZ
June 15 (Associated Press) – BARCELONA, Spain — Politicians in Spain’s northeastern Catalonia region used police helicopters to get to the regional parliament to avoid some 2,000 demonstrators protesters who tried to blockade the building Wednesday to protest planned budget cuts in education and health.

A police spokeswoman said the situation was tense as the deputies arrived at Ciutadella park in central Barcelona. Regional President Artur Mas was among at least 10 politicians who arrived by helicopter.

Scuffles broke out as police pushed protesters back so the deputies who arrived on foot could get in.

The politicians were heckled and at least two were sprayed with paint…

[source]

June 15 (Bloomberg) — Greek police used tear gas to disperse demonstrators encircling the Parliament House as 20,000 people rallied against Prime Minister George Papandreou’s additional wage cuts and tax increases.

Protesters rushed police guarding the parliament in central Athens as union supporters joined up with demonstrators who have been camped out in front of the building for almost three weeks. Ports, banks, hospitals and state-run companies ground to a halt today as the two biggest unions went on strike.

[source]

June 15 (Bloomberg) — Greek economic prospects darkened as European bickering risked delaying the next rescue payment and defections weakened Prime Minister George Papandreou’s majority.

An emergency session of euro finance chiefs in Brussels yesterday failed to break a deadlock on how to enroll investors in a second bailout without triggering a default, casting doubt on funds due from the International Monetary Fund next month.

In Athens, Greek police used tear gas to disperse demonstrators around the Parliament as 20,000 people rallied against additional wage cuts and tax increases as lawmakers debated the budget cuts and asset sales that are conditions of the aid. Ports, banks, hospitals and state-run companies were paralyzed by strikes, while a Papandreou ally said he won’t support the austerity measures and another bolted his Socialist Party.

[source]

June 15 (USAGOLD) – As anti-austerity protesters clashed with police in Athens, S&P downgraded four of the major Greek banks to CCC from B, citing their direct and significant exposure to Greece’s deteriorating creditworthiness. S&P summed it up as follows:

In our view, outflows of domestic deposits could conceivably continue to intensify depending on the public’s view of the impact that Greece’s deteriorating creditworthiness may have on the banking system. The downgrade also reflects the significant risks to the Greek banks’ capital bases that we believe may arise should the government restructure some, or all, of its debt.

Meanwhile, Moody’s placed three large French banks, BNP Paribas, Societe Generale and Credit Agricole, on review for possible downgrade because of their exposure to Greece. The IMF warned France itself today that their AAA credit rating may be in jeopardy.

Even as the contagion risk is escalating, hopes of a deal for Greece seem to be diminishing. Eurogroup chief Jean-Claude Juncker said Tuesday that a deal on a second bailout for Greece may have to be delayed until July. The ECB’s Nowotny acknowledged that it will be difficult to find a solution without triggering a credit event. The euro, bond spreads and global stocks are all reacting accordingly. Deleveraging and dollar gains are weighing on gold.

• US CPI +0.2% in May, above market expectations of +0.1%. Core +0.3% (consensus +0.2%).
• US Empire State index plunged to -7.8 in Jun, well below market expectations of 13.5, vs 11.9 in May.
• Eurozone industrial production +0.2% m/m in Apr, above market expectations, vs upward revised 0.0% in Mar.
• UK initial claims unexpectedly surged to 19.6k in May, more than triple market expectations of +6k. Big upward revision to Apr as well.

Inflation Accelerates in China

June 14 (USAGOLD) – Continued robust economic activity in China gave global stocks a boost today and the improvement in risk appetite eroded the safe-haven appeal for gold somewhat. However, inflation pressures remain persistent, prompting the PBoC to raise bank reserve requirements once again. Accelerating price risks — primarily food price risks — are likely to keep demand for gold in China elevated.

A report released today by Standard Chartered Bank cited rising demand in India and China as a major contributing factor to their bullish outlook for gold. They pointed out that China only has 1.8% of its FX reserves in gold, compared to the global average of 11%. If China were to bring their holdings up to the average — and there is plenty of evidence to suggest that is exactly what they are striving toward — they would have to buy an additional 6,000 tonnes of gold.

SCB notes that is the equivalent of 2-years of global gold production. Obviously, with other competition on the demand side and anemic mining output projected, there is little hope that China will reach its goal any time soon. That however bodes well for the long-term uptrend in gold, with China likely to provide a consistent source of demand for years to come.

Debt troubles in Europe and the US continue to provide a safe-haven underpinning to the gold market in the near term. Events in Europe revolving around the second rescue of Greece seem to be coming to a head. While the euro seems to like the traction being gained by the Vienna-style “voluntary” rollover of Greek debt, the market seems to remain troubled by the implications of the rating agencies viewing this as a credit event. The discomfort was evident today in eurozone bond markets as Greek, Portuguese and Irish 10-year yields all hit new euro-era highs.

As the clock continues to tick on the US debt ceiling, President Obama warned that if Congress fails to reach a deal, the result a new global financial crisis could ensue. Even as negotiations led by Vice President Joe Biden resume today, market odds that a compromise on offsetting spending cuts will be reached seem to have eroded substantially in recent days. “[S]ome on Wall Street predict that there is just a 33 percent chance a deal will be cut in time to avoid default,” according to a US News and World Report article, but others have suggested its a 50-50 bet at best.

June 14 (CNBC) – President Barack Obama warned Tuesday there could be another global financial crisis if the U.S. Congress fails to raise the national debt ceiling.

…”The full faith and credit of the United States is the underpinning not only of our way of life, it’s also the underpinning of a global financial system. We could actually have a reprise of a financial crisis, if we play this too close to the line. So we’re going be working hard over the next month,” he said.

[source]

Editor’s Note: We often find ourselves in agreement with the studied assessments of James Rickards, who has ruffled the feathers of the financial media on numerous occasions by his determined defense of gold ownership. In this wide-ranging interview conducted by Lars Schall, he dissects the key issues of the day as they relate to gold and explains why the major central banks now want the price to continue rising. [Link]

The USAGOLD Gilded Opinion Library is home to numerous articles and essays of enduring value to our current and prospective clientele. It is one of our most popular pages, so if you’ve not yet done so, we welcome your visit today.

Enjoy!!

June 14 (WSJ MarketBeat) Remember that retail sales report that got the market all excited this morning by being not all that bad? Yeah, it was actually kind of bad.

It was bad enough, anyway, to push Macroeconomic Advisers to cut its forecast for second-quarter GDP to 2.1% from 2.5%, citing weaker retail sales through May than expected — past months were revised downward — and less retail inventory building than expected in April.

2.1% GDP is not great, folks. That’s below potential growth, below the long-term average and well below what you’d want to see following a weak first quarter. It leaves the economy vulnerable to shocks.

[source]

June 13 (Bloomberg) — There are reasons for bankers like me to view these as good times. Bank profits are up and failures have ebbed. Nonetheless, I remain troubled about the state of the financial-services industry.

Here’s why: community banks have given way to big banks and excessive industry concentration; profits are increasingly driven by risky trading; leverage is taking precedence over prudent lending; compensation is out of control. This toxic combination leads to continued taxpayer risk and threatens long- term U.S. prosperity.

To understand the change, first consider history. Banking once was a community-based enterprise, relying on local knowledge to guide the process of gathering customer deposits and extending credit. Done well, this arrangement ensures that deposits are deployed into a diversified pool of investments, while providing depositors with liquidity and a return on their savings.

Over the past generation, however, the financial services industry changed dramatically. In 1990, the six largest financial institutions accounted for 9 percent of all U.S. domestic deposits. As of Dec. 31, 2010, the six biggest banks accounted for 36 percent of deposits.

…Those financial institutions that engage in trading should live and die by the pursuit of their fortunes, rather than impose a burden on the whole economy.

…It’s time to disentangle the trading of big financial institutions from their more traditional commercial banking operations and put an end to this unsafe business model.

[source]

PG View: Nearly 3-years after the collapse of Lehman Brothers and the mayhem that ensued, little has been done to mitigate the systemic risks that nearly took down the global financial system. Despite 2,300+ pages of sweeping regulatory reform in the Dodd-Frank act, the “too big to fail” issue has morphed into “too bigger to fail” and as the author points out, the real business of banking at the regional and local level has been severely impeded in the process. It would seem the reactionary forces in Washington are not doing the economy — and therefore average citizens — any favors. The TBTF banks on the other hand have plenty to be thankful for.

June 14 (Reuters) – Private investor involvement in a second Greek rescue must be voluntary but a deal akin to the 2009 “Vienna Initiative” may be just that, European Central Bank Governing Council member Mario Draghi said on Tuesday.

“There are basically two initiatives that are under discussion. One is the Vienna Initiative, which to me looks entirely voluntary,” Draghi told a European Parliament hearing on his proposed appointment as ECB president later this year.

“The ECB is not in favour of restructuring or haircuts, we should exclude all concepts that are not purely voluntary or that have any element of compulsion,” he said.

[source]

PG View: “Entirely volutary.” Uh huh. Banks and investors don’t generally do things out of the goodness of their hearts. Given the additional deterioration of Greece’s fiscal picture, one has to wonder what is really motivating the largess of private bondholders. I know the rating agencies are wondering the same thing.

June 14 (Standard Chartered Equity Research) – We are bullish on gold. Most market commentary on gold has centred on the direction of US dollar movements or inflation/deflation issues. We go beyond this to examine future mine supply, which we think is just as important a driver. Our comprehensive study of 375 gold projects supply suggests a very limited production growth profile for the next five years. A ten-year bull market in gold has done little to drive gold production. The gold miners are running to stand still. A lack of funding from equity markets and a shortage of large gold mines makes it difficult for the industry to compensate for the depletion caused by aging mines and falling grades. In our base case, our 375-mine supply model shows net production growth of 3.6% pa. over the next five years.

…The limited supply comes at a time when central banks have completely changed their tune on selling down their gold stocks and now appear likely to accelerate their net buying programmes. China is way behind the curve. Currently, only 1.8% of China’s foreign exchange reserves is in gold; if the country were to bring this proportion in line with the global average of11%, it would have to buy 6,000 more tonnes of gold, equivalent to more than 2 years of gold production.

…We believe that these factors – limited gold production, buying by central banks and increasing demand from India and China – can potentially drive the gold price to US$5,000/oz…

[source]

14 June 2011 (BBCNews) – Inflation in China hit its highest level in 34 months despite the government’s efforts to rein in rising prices.

Consumer prices in China rose by 5.5% in May, compared with the same month last year, according to the National Bureau of Statistics.

Food prices continued to be the biggest factor as they surged by 11.7%.

The rising cost of food and commodities have pushed up the cost of living and become a hot political issue in China.

[source]

June 14 (USAGOLD) – Gold remains slightly defensive within the recent range as robust economic data out of China improved risk appetite, lifting global stocks. However, China’s strong economy comes at the expensive of higher inflation. China CPI hit a new 34-month high of 5.5% y/y in May.

Gold remains comfortably above the $1500 level with broad-based debt uncertainty in both Europe and the US continuing to underpin the market. The EU is attempting to advance a Vienna-style debt rollover for Greece as yields in the periphery continue to soar. The EU seems inclined to move forward and wage a PR war for the hearts and minds of global investors if the ratings agencies deem the plan a technical default for Greece.

S&P cut Greece 3-notches to CCC from B yesterday. The backs of Greece and the troika are up against the wall and the rollover is probably the most defensible position they’ve come up with. However, I don’t think anyone really believes there wont be some arm-twisting — and perhaps some form of quid pro quo — to get the private bond holders to play along. Nonetheless, the euro has firmed, putting modest pressure on the dollar.

• US retail sales -0.2% in May, modestly better than the -0.3% expected. Ex-auto +0.3%. Negative back-month revisions.
• US PPI +0.2% in May on expectations of +0.1%, +7.3% y/y. Core +2.1% y/y.
• UK CPI unchanged in May at 4.5% y/y, in line with expectations.
• UK RICS house price index slumped to -28 in May, lower than market expectations, vs -21 in Apr.
• China CPI rose to a new 34-month high of +5.5% y/y in May, vs +5.3% in Apr. PBoC hiked reserve requirements again.
• Robust China data: May production 13.3% y/y, retail sales 16.9%, investment 25.8%.
• Japan MoF Survey: Large-firm diffusion index plunged to -22 in Jun, vs -1.1 in May on earthquake/tsunami.
• Bank of Japan held o/n rate at 0.0-0.1%, expanded loan scheme for growth industries