19-Jun (The Wall Street Journal) — The U.S. recovery is hobbled by an economic divide that separates Americans not by income or wealth but by their access to credit.

The housing bust left behind millions of people with credit records damaged by plunging home prices, lost jobs, past overspending or bad luck. Many are now walled off from the low interest rates engineered by the Federal Reserve to spur the economy and remedy the aftereffects of the borrowing boom.

Millions with good credit, meanwhile, are taking advantage of the easy money, a windfall in many cases for people who don’t especially need it.

…”If you don’t need the money, you can get it all day long,” he said. “Thank you, Ben Bernanke.”

…Mr. Hordan, for example, is spending his mortgage savings on such investments as gold, emerging markets, U.S. stocks and European banks.

[source]

PG View: Only a central banker in the midst of a debt crisis would find logic in forcing credit to people with a questionable ability to repay.

Low risk begets lower rates, higher risk begets higher rates. That’s the way a credit market is suppose to work.

Plunge in Median Family Net Worth Suggest Portfolios Could Benefit From Gold Diversification

The Fed’s triennial Survey of Consumer Finances (SCF) came out last week and the results were nothing short of astounding. The data show that the Great Recession wiped out nearly 40% of the typical American family’s net worth.

“Data from the 2007 and 2010 SCF show that median income fell substantially and that
mean income fell somewhat faster, an indication that income losses, at least in terms of levels,
were larger for families in the uppermost part of the distribution. Overall, both median
and mean net worth also fell dramatically over this period—38.8 percent and 14.7 percent,
respectively.”

Median family net worth plunged from $126,400 in 2007 to $77,300 in 2010, close to levels not seen since the 1992 survey. The median, as the Los Angeles Times pointed out is “the point smack in the middle of those richer and poorer.” In other words, the middle class bore — and continues to bear — the brunt of the Great Recession, largely because the vast majority of middle class wealth was wrapped up in the family home and the stock market; either through direct investment in shares or through retirement plans.

According to the Fed, another key contributor to the erosion of wealth over the period, was the marked decline in “business equity”. This may be of particular interest to the business owners and profession practitioners that comprise a very large percentage of our client base.

A Washington Post article summed it up thusly: “Over a span of three years, Americans watched progress that took almost a generation to accumulate evaporate. The promise of retirement built on the inevitable rise of the stock market proved illusory for most. Homeownership, once heralded as a pathway to wealth, became an albatross..”

Certainly some are no-longer among the ranks of homeowners, and some have unquestionably reduced exposure to equities, either as a strategic move or out of necessity. However, perhaps unsurprisingly, investors remain dominantly allocated to the traditional asset classes.

Case in point: A recent article featured on the website of the American Association of Individual Investors (AAII) on the topic of asset allocation suggested “the three most important asset classes for individuals are stocks, bonds and cash.” Talk of diversification focused on sub-asset allocation; “diversifying among growth and value, large cap and small cap, U.S. and international, and so on.”

While the piece concedes that institutional portfolios “have a range of up to 12 asset classes,” all-too often (beyond real-estate in the form of the family home) stocks, bonds and cash are presented as the only options for individual investors.

Despite a myriad of extraordinary measures on the part of Congress and the Fed, a true US economic recovery remains elusive to this day. Yet, the Fed’s über-easy monetary policy has contributed to a rebound in the stock market, commencing with the announcement of QE1 in 2009. Such policies lured investors right back into one of the asset class that had just bitten them badly, by pushing yields on bonds and cash below the rate of inflation.

In fostering a negative real interest rates environment, the Fed has succeeded in discouraging saving, and pushed investors out along the risk curve. Rather than losing money in real terms with cash deposits and bonds, investors seem willing to take their chances with equities once again.

What the Fed survey data said to me was that the portfolios of US families — and particularly those of middle class families — were improperly allocated and could have benefited from diversification into an alternative asset such as gold. From the beginning of 2007 until the end of 2010, the price of gold rose 122%. Over the longer period noted in the chart below (1989 to 2010) gold is up 243%. Even a relatively small allocation to physical gold (we recommend 10% to 30% of net assets) could have significantly mitigated the devastating impact of the Great Recession on the family balance sheet. Yet, physical gold remains a grossly under-owned asset.

Egon von Greyerz, the managing director of Matterhorn Asset Management AG in Zurich says “Less than 1% of investors own gold.” The most recent Erste Group study puts a finer point on it:

“The global equity markets are currently valued at USD 56 trillion according to
Bloomberg, while the fixed income segment amounts to USD 91 trillion according to
BIS. If we assume that only 20% of the gold reserves are investable (i.e. come in the form of
bullions, ETFs, or coins), this would translate into a value of USD 1.4 trillion (at USD
1,500/ounce) and into an allocation of close to 1%. In comparison with bonds, gold holdings
are small: bond holdings worldwide amount to almost USD 14,000 per capita, whereas gold
reserves per capita are less than USD 1,180.”

In the May issue of our newsletter, USAGOLD president Michael J. Kosares wrote an excellent article in which he suggested, “just as we inoculate our bodies against disease, we should inoculate our portfolios.” The devastating plunge in the net worth of American families in recent years clearly indicates that families would be well served to heed that advice. With gold trading near the midpoint of the 6-month range, arguably the medicine for beleaguered portfolios is pretty reasonably priced right now.

18-Jun (Financial Times) — Greece’s centre-right New Democracy (ND) party has begun talks to build a coalition government after pushing the leftwing Syriza coalition into second place in the country’s second general election in six weeks.

Antonis Samaras, its leader, received a mandate to form a government from president Karolos Papoulias on Monday. His challenge is to try to rebuild credibility with Greece’s European partners and revive the country’s flagging bailout programme after an election seen as a referendum on Greece’s membership of the eurozone.

His proposal for an inclusive government of “national salvation” was rejected out of hand by Alexis Tsipras, the Syriza leader, saying his party would play the role of “an honourable opposition”. The two men were due to meet on Monday.

[source]

17-Jun (Financial Times) — The head of Denmark’s central bank has warned that the Danish krone is coming under intense pressure from investors seeking a haven in Europe and betting that the currency’s peg to the euro could be cracked by the crisis.

Nils Bernstein, the governor of the Danish central bank, said that the upward pressure on the krone was the most severe he had seen in his seven years as governor, and warned that negative interest rates could be on the cards if the problem continues.

[source]

PG View: Even Denmark if getting dragged into the currency wars.

In 2009, Noriel Roubini, the well known NYU economist, boldly commented “all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense.” Gold, trading at the time in the $1100 range, promptly went straight up — to well over $1900 per ounce by 2011.

It was Mr. Roubini, not the so-called gold bugs, who was talking nonsense.

In a new article titled “A Global Perfect Storm,” he starts off with this: “Dark, lowering financial and economic clouds are, it seems, rolling in from every direction: the eurozone, the United States, China, and elsewhere. Indeed, the global economy in 2013 could be a very difficult environment in which to find shelter.” (My emphasis)

“[W]hile the cloud over the eurozone may be the largest to burst,” he goes on, “it is not the only one threatening the global economy. Batten down the hatches.”

Roubini goes on to outline an essentially disinflationary outcome to the current global turmoil. In the post-Lehman Brothers confusion, gold defied expectations by adding disinflation to the list of economic ills against which it provides a hedge. Its rise occurred precisely because it was a “very difficult environment in which to find shelter,” as Roubini puts it. Investors did “battten down the hatches” by buying gold coins and bullion in record amounts (and, by the way, continue to do so now). Though long on advice for the European Union in his visit to the dark side of the world economy, he comes up short on anything useful for the ordinary investor. He never once utters the word “gold.” Perhaps he should reconsider.

After all, what does one do when confronted with A Global Perfect Storm??

In “The Accidental Empire” Soros alludes to the fact that Britain “which retained control of its currency, enjoys the lowest yields in its history, while the risk premium on Spanish bonds is at a new high.” Consider too, that Iceland, which also issues its own currency, is slowly crawling out of the hole created by its crisis in 2008.

In the article linked below, former Moody’s vice chairman, Christopher Mahoney says the United States finds itself similarly situated. He sees Europe’s banking crisis causing “massive wealth destruction” and “global financial chaos” with the “globalist” banks taking a direct hit — “Citigroup, Bank of America, JP Morgan Chase, Goldman Sachs and Morgan Stanley.” He goes on to say that the United States “can withstand any shock” because “it can print the money that it needs. . .” Of course, there’s a downside to quantitative easing on steroids (which is what would be required to bailout banks the collective size of those just mentioned): “The stock market will react negatively to the level of uncertainty caused by the collapse of the European financial system (as it did in 1931), and the dollar, yen, and gold should benefit.”

Living Europe’s Nightmare

The Accidental Empire by George Soros:

“It is now clear that the main cause of the euro crisis is the member states’ surrender of their right to print money to the European Central Bank. They did not understand just what that surrender entailed – and neither did the European authorities. . .

In my judgment, the authorities have a three-month window during which they could still correct their mistakes and reverse current trends. . . [W]e are at an inflection point. The Greek crisis is liable to come to a climax in the fall, even if the election produces a government that is willing to abide by Greece’s current agreement with its creditors. By that time, the German economy will also be weakening, so that Chancellor Angela Merkel will find it even more difficult than today to persuade the German public to accept additional European responsibilities.”

MK comment: It appears at the moment that Greece has voted to keep the euro. It will not be printing its way out of the problem. Germany, in essence, has won this round, but as Soros predicts in The Accidental Empire, “the EU will become something very different from the open society that once fired people’s imagination. The division between debtor and creditor countries will become permanent, with Germany dominating and the periphery becoming a depressed hinterland.” Soros Fund Management quadrupled its holdings in gold ETF shares in the first quarter. Remember Soros’ comments about gold being in the “ultimate bubble?” Double trouble trumps bubble.

15-Jun (Financial Times) — The European Central Bank is on standby to keep banks flush with liquidity if Greece creates fresh financial market turmoil, its president has indicated, joining a global chorus of central bankers pledging support ahead of Sunday’s elections.

Mario Draghi’s comments on Friday followed the announcement by the UK’s central bank of plans to pump £100bn into the ailing British economy, hinting at a co-ordinated strategy by the world’s top central bankers.

“The ECB has the crucial role of providing liquidity to sound bank counterparties in return for adequate collateral. This is what we have done throughout the crisis … and this is what we will continue to do,” Mr Draghi said.

[source]

PG View: Draghi echos talk that a coordinated central bank plan is in place to counteract any market turmoil resulting from the weekend elections in Greece and France.

14-Jun (USAGOLD) — Gold jumped in early NY trading to a new high for the week at 1627.90, as higher than expected initial jobless claims and a 0.3% drop in CPI nudged QE3 expectations higher. Initial jobless claims rose by 6000 last week to 386,000 on expectations of 375,000, versus an upward revised 380,000 in the previous week. Meanwhile, May CPI saw the biggest month on month drop in more than 3-years, led by a 6.8% drop in retail gasoline prices. This was perceived as adding to the impetus for the Fed to react, while simultaneously acknowledging they had the room to do so without increasing price risks.

Continued uncertainty surrounding this weekend’s Greek elections continue to underpin gold as well. Additionally, Spain was downgraded late yesterday by both Egan-Jones and Moodys, to CCC+ and Baa3 respectively. Not surprisingly, this accelerated the recent rise in Spanish borrowing costs to new euro-era highs, near the critical 7% level on 10-year money, which has prompted other periphery countries to seek bailouts. It’s actually quite amazing how rapidly the situation in Spain has deteriorated, having reached a deal to bail out its banks to the tune of €100 bln just last weekend.

• US initial jobless claims +6k to 386k for the week ended 09-Jun, above expectations of 375k, vs upward revised 380k in previous week.
• US CPI -0.3% in May, below expectations of -0.2%, vs UNCH in Apr; 1.7% y/y, down from 2.3% in Apr. Core +0.2% in May, +2.3% y/y.
• Eurozone CPI -0.1% m/m in May, +2.4% y/y; Core +1.6% y/y.
• Greece unemployment rate 22.6% in Mar, vs 20.7% in Feb.
• Japan industrial production (sa) – Revised -0.2% in Apr, vs +0.2% previously.
• BoJ began 2-day meeting.

14-Jun (The Telegraph) — A leading bullion dealer said that demand for gold has risen 50pc since last year and that it now holds more than 30 tonnes of gold worth more than £1bn on behalf of private investors. It is the first time it has broken the £1bn barrier it said.

Adrian Ash, head of research at BullionVault, said: “While gold may slip out of view for some when prices ease back, as they have done since last summer’s record highs, private investors are using this lull to build their gold holdings.

[source]

PG View: Like we always say, the time to build your gold holdings is during the times when it has seemingly fallen out of favor.

13-Jun (Financial Times) — The easy money drug has been administered several times now and the markets are yet again hoping for more.

[video]

"Gold-investment demand in China may gain more than 10 percent this year as buyers seek a haven from Europe’s debt crisis and the prospect of weakening currencies, according to the country’s largest bullion bank."

MK Comment: When it comes to the gold market, China remains the dragon in the room.

Link

13-Jun (Der Spiegel) — The EU is signalling that it may be willing to renegotiate the austerity measures it imposed in return for aid to Greece, a German daily reported on Wednesday. The move is aimed at keeping Greece in the euro by boosting support for pro-austerity parties in the June 17 election.

The European Union is planning to discuss softening the terms of its international bailout for Greece, regardless of the outcome of the June 17 election, German business daily Financial Times Deutschland reported on Wednesday.

The paper cited unnamed EU sources saying that there was no way around a renegotiation if Greece was to remain in the euro zone. It is unclear how many concessions the EU is prepared to make. “We will do our utmost to keep Greece in the euro zone while it is respecting its commitments,” European Council President Herman Van Rompuy said on Tuesday.

[source]

PG View: I rest my case. So which came first, the alleged plan to renegotiate Greek austerity, or Alexis Tsipras’ FT op-ed vowing to keep Greece in the eurozone?

By Alexis Tsipras
13-Jun (Financial Times) — Lest there be any doubt, my movement – Syriza – is committed to keeping Greece in the eurozone.

President Barack Obama was right when he said last Friday: “Let’s do everything we can to grow now, even as we lock in a long-term plan to stabilise our debt and our deficits, and start bringing them down in a steady, sensible way.” That applies to my country, too. The need for giving Greece a chance for real growth and a new future is now more widely accepted than ever.

I strongly believe we will get a clear democratic mandate from the people of the Hellenic Republic on Sunday.

[source]

PG View: These words boosted the euro back to the 1.2600 area and the softer dollar is helping to keep gold underpinned. But make no mistake, Tsipras will continue to demand concessions from the troika on Greek austerity as a price for keeping Greece in the eurozone.