June 22 (Commodity Online) – Sales of gold bars and coins are zooming in Chinese market, where people’s investment in the yellow metal has been growing at an exponential rate in the last few years.

China is one of the largest gold consuming and importing countries in the world. China is also the largest producer of gold in the world.

According to the World Gold Council (WGC), China is the fastest growing gold consuming nation in the world, after India. “Gold demand in China is still extremely strong” Marcus Grubb, the World Gold Council’s managing director for investment, said recently.

Grubb feels that the main driver for gold demand in China is inflation fears.

[source]

By Erik Wasson
June 22 (The Hill) – New figures released Wednesday by the Congressional Budget Office (CBO) show debt rising to 190 percent of the gross domestic product by 2035.

The annual long-term budget outlook forecasts a surge in public debt this year that will rise to 70 percent of GDP by the end of fiscal 2011, compared to 62 percent by the end of 2010.

The figures are much worse than those released by the CBO a year ago.

[source]

“We’ve always wondered who will buy Treasurys” after the Federal Reserve purchases the last of its $600 billion to end the second leg of its quantitative easing program later this month, [Pimco's Bill]Gross said. “It’s certainly not Pimco and it’s probably not the bond funds of the world.”

Nor will it be China which has reportedly sold off 97% its short-term Treasuries’ position and is in the process of selling long-term Treasuries as well. In fact, according to recent reports, China has begun to buy other countries’ paper.

Nor will it be Japan which dropped hints of selling some of its Treasuries to shore up it sagging economy following the devastating earthquake and tsunami.

Fully 80% of the debt issued by the Treasury was purchased by the Federal Reserve in 2009, the first year of the quantitative easing program. Over the past twelve months, 70% of federal government debt was financed by the Fed, according to estimates by Pimco (as reported by Puru Saxena at Gold Eagle.). Given the reality reflected in these numbers, how can the Fed, as it announced today, no longer think quantitative easing necessary? The federal government is addicted to debt and the Federal Reserve, if Bernanke is to be believed, is cutting it off.

Returning to Bill Gross, it is interesting to note that long about the time today’s FMOC minutes were released, Reuters ran an article with the following headline:

PIMCO’S Gross says Fed to unveil QE3 at Jackson Hole

In my view, the day the Federal Reserve cuts off the U.S. government is the day the United States falls into line right behind Greece — austerity, rapidly rising interest rates and a crisis in government. It is interesting to note that the U.S. Postal Service announced today that it is no longer making contributions to its employees’ pension plan. . .To those who have followed the situation in Greece closely, that announcement carries a ring of familiarity.

We should keep in mind that what has elevated gold over the past several years is not the threat of inflation per se, but the threat of systemic breakdown. Nothing drives the gold market like a destabilized financial system. One need look no further than Greece now where gold demand among the citizenry is skyrocketing.

Information received since the Federal Open Market Committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected. Also, recent labor market indicators have been weaker than anticipated. The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent with its dual mandate. Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee will monitor the economic outlook and financial developments and will act as needed to best foster maximum employment and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.

June 22 (MarketWatch) — A little-known form of gold investing used by some retail currency traders is disappearing, ahead of tighter regulations scheduled to go into effect next month.

Forex.com, a large retail foreign-exchange operation, on Friday told clients it will discontinue its gold and silver over-the-counter products marketed to retail investors who are U.S. residents. It asked investors to close their positions by July 15. Read a related blog post on Forex’s move and brokerage’s reaction.

“It is our interpretation that we just can’t offer it legally” in response to regulatory provisions in the 2010 Dodd-Frank Act that kick in after July 15, said Alicia Brown, a spokeswoman for Gain Capital, the parent company of Forex.com. Get full coverage of Dodd-Frank.

The allure of gold as an alternative to paper currencies has helped propel the precious metal to record highs, alongside a surge in retail currency trading.

…Trading gold and silver over the counter — bypassing a futures exchange — offered investors a chance to enter a highly speculative, leveraged market that also left many investors at risk of fraud, according to one trade group.

“In order to trade, it needs to be done in a exchange, or it can’t be done at all,” said Dan Driscoll, a vice president with the National Futures Association.

The industry group asked Congress for such changes, due to numerous cases of fraud in such contracts. Doing business with a futures exchange offers retail investors more protections and transparency, he said.

[source]

PG View: Just avoid the hassles and risks: Buy physical gold and silver for delivery from a reputable dealer.

June 20 (ZeroHedge) – Some very disturbing revelations from CLSA’s Chris Wood who in his latest Greed and Fear note discusses an event that may be all to prevalent within the central banking community: the less than overt lending out of central bank gold to “other entities” in return for picking up nickels in front of a steamroller. In this case, the central bank of governmentless Belgium, which had 41% of its gold out at the end of 2010 on loan. Naturally, the lent out gold is being used by some other key entity, potentially to mask its own inventory deficit, in exchange for the paltry sum of 0.3% on the total loan. Wood’s conclusion: “This is a reminder that the paper gold market is significantly larger than the physical market. Just like a run on a bank in a fractional banking system, GREED & fear suspects it will be very hard to settle all the paper claims to gold physically in a real scramble for the metal. This is why in a parabolic spike physical gold is likely to trade at a significant premium to paper claims.” We couldn’t have said it better ourselves.

[source]

June 22 (Housing Wire) The Federal Open Market Committee once again kept the federal funds rate at next to nothing and said the economic recovery is progressing slower than members expected.

The central bank said investment in nonresidential properties remains weak and persistent depression permeates the housing market.

The FOMC admitted inflation has increased recently due to higher commodities and import prices, as well as supply-chain disruptions.

“However, longer-term inflation expectations have remained stable,” according to the committee.

The Federal Reserve’s quantitative easing program to buy up to $600 billion in Treasury securities ends June 30. The Fed “will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.”

[source]

PG View: The FOMC’s more negative view of the recovery, along with with the open-ended nature of balance sheet “adjustments” going forward, has likely played a role in today’s elevated gold price.

PG View: James Rickards suggests that the next round of liquidity will come from the international level — the G20 and the IMF — in the form of Special Drawing Rights (SDR). Essentially its more money printing that’s even “Less accountable. Less transparent.”

This salient exchange that begins around the 4-minute mark says it all:

Quick: You make up the money, it’s monopoly money that you’re playing with. Who gets burn in the end? Is it taxpayers around the globe that get left holding the bag?

Rickards: It’s a form of inflation, savers, pensioners, people in annuities, average people. … We don’t need hyperinflation. 4% a year for 15 years is enough to cut the value of savings in half. Cut the value of debt in half.

Quick: So the people who have been doing the right things by saving money and making sure they haven’t been ridiculous with throwing their money around and buying stupid things, they will be the ones who suffer the most.

Rickards: Yes. That’s how governments get out of this.

If the governments of the world do in fact attempt to orchestrate 4% inflation a year for the next 15-years, in an effort to inflate away their massive debts, it strikes me as incredibly prudent to have a portion of ones savings safely tucked away in gold.

June 22 (FT) – Greek citizens are emptying savings accounts and buying gold as they brace themselves for the possibility of a sovereign default and a run on the banks.

Pledges by socialist prime minister George Papandreou that his government would “save the country” have been widely discounted by the public. However, parliament gave him a vote of confidence late on Tuesday night. The socialists have a six-seat majority in the 300-member house.

Sales of gold coins have soared as savers seek a safer and fungible source of value.

…“We can’t trust the politicians to get us out of this mess [and] have to protect our families.”

[source]

PG View: When the chips are down, savers continue to turn to gold for protection.

We already know from its fiscal mismanagement that the Greek government has trouble with basic math. So someone needs to explain to Prime Minister George Papandreou that a 12-vote victory is not an overwhelming show of confidence.

Perhaps the markets are doing just that, and that’s why the euro hasn’t moved much and investors are taking last night’s confidence vote in stride.

Mr. Papandreou’s government survived – note how everyone uses the term “survive” – what had been billed as a crucial parliamentary vote that will allow Athens to push forward with a fresh round of cuts tied to the terms of its bailout.

It survived because the 155 politicians in his party voted to support him, against the 143 opponents who wanted him gone. That’s in a parliament of 300 seats, and, really, that vote has changed little.

[source]

Gold remains underpinned by ongoing worries about Greece, even though embattled PM George Papandreou survived a confidence vote yesterday by a narrow 12-vote margin. With Papandreou safe — at least for the time being — now he and Parliament must somehow convince the people of Greece to swallow the bitter-pill of even more austerity in exchange for a second lifeline from the EU. Of course that second lifeline may trigger a credit event anyway, leading to a technical default, at least in the eyes of the rating agencies.

• Norges Bank held rates steady at 2.25%. A pause after the May hike was widely expected.
• Eurozone industrial orders +0.7% m/m in Apr, below market expectations, vs positively revised -1.5% m/m in Mar.
• China’s NDRC said inflation will top May’s 5.5% in June before heading lower.

June 21 (Reuters) – Dealers are expected to suspend U.S. retail trading of over-the-counter precious metals due to the U.S. futures regulator’s delay in making new rules based on Dodd-Frank Wall Street reform law.

Online dealer Forex.com, owned by GAIN Capital Holdings Inc, told clients in a letter that it must discontinue metals trading for U.S. residents by July 15, and all open metal positions must be closed by that date.

A spokeswoman of Forex.com cited a specific section of the Dodd-Frank law regarding CFTC’s oversight over off-exchange commodity transactions with retail customers.

That section of the Dodd-Frank law, passed nearly a year ago, only applies to non-eligible contract participants — dealers which offer trading services to retail customers.

[source]

PG View: Just to be clear; our firm deals in physicals, delivered directly to our clients and our business will not be affected. Truth be told, most of our clientele don’t consider digital blips on a trading screen that purport to represent gold to be gold at all. They much prefer the real thing. Interesting though that these online dealers can continue to offer digital representations of currencies — pieces of paper that purport to represent value simply because some government says so — to retail customers.

The following two videos from Max Keiser and James Turk provide valuable perspective from 18th century France, applicable to today’s global economy awash in debt and paper. While familiar with both of these historical instances of fiat inflation, I found the videos extremely interesting and entertaining.

As the adage goes, “Those who cannot remember the past are condemned to repeat it.” (George Santayana)

Part 1: John Law and the Mississippi Bubble

Part 2: Assignats

Andrew Dickson White ends his classic historical essay on hyperinflation, “Fiat Money Inflation in France,” with one of the more famous lines in economic literature: “There is a lesson in all this which it behooves every thinking man to ponder.”

Our own Michael J. Kosares warns that this lesson — that there is a connection between government over-issuance of paper money, inflation and the destruction of middle-class savings — has been so routinely ignored in the modern era that enlightened savers the world over wonder if public officials will ever learn it.

The same folly of 18th century France has been repeated time and time again:

1. The Greenback and Confederate states inflations in the United States during and after the Civil War between the States;

2. A rash of national hyperinflations after World War I including Russia (1921-1924, 213 percent annualized); Poland (1922-1924, 275 percent annualized); Austria (1921-1922, 134 percent annualized); Hungary (1922-24, 98 percent annualized) and the most famous of them all, the Nightmare German Inflation (1920-1923, 3.25 million percent annualized);

3. Another round of episodes during and after World War II including Greece (1943-1944, 8.55 billion percent annualized); Hungary (1945-1946, 4.19 quintillion percent annualized) and China (1949-1950, unmeasured);

4. A rash of post World War II episodes including two in Argentina, and one each in Brazil, Chile, Nicaragua, Bolivia, Peru, Poland, Russia/Ukraine and Yugoslavia/Serbia (1);

5. The Asian contagion (1997-1998) including Indonesia, Thailand, South Korea, the Philippines and Malaysia which managed to display deflationary and inflationary symptoms simultaneously;

6. Zimbabwe (2005-2009).

When will we ever learn? Apparently not anytime soon…

June 20 (Reuters) – Yields on Greek and other lower-rated euro zone bonds rose on Monday, after ministers delayed granting emergency loans to Greece and with market tension increasing before a key parliament vote.

The Greek parliament holds a confidence vote on Prime Minister George Papandreou’s new cabinet, formed to stiffen resolve behind austerity measures to win new loans and avoid bankruptcy.

Political backing for more painful reforms is key to secure vital new aid to plug a funding gap next month and a failure by Papandreou to win the vote will increase concerns about Greece’s immediate financing situation.

[source]

June 20 (Xinhua) — The People’s Bank of China (PBOC), the central bank, announced on Monday that it will issue more gold and silver commemorative coins featuring the giant pandas to meet soaring demands for precious metals in the country.

PBOC said the maximum circulation of the one-ounce gold coins with a face value of 500 yuan (77.3 U.S. dollars) will be raised to 500,000 from 300,000 previously set at the end of last year.

The maximum circulation of four other gold coins with different gold purity and face values ranging from 20 yuan to 200 yuan will increase to 600,000 each set from the previous 200,000.

[source]

Gold has been volatile so far this morning, as the initial disappointment that Europe pushed back a decision on Greece until mid-July gave way to renewed assurances that a bailout would be forthcoming. The euro has risen and fallen as expectations of a second Greek bailout have waxed and waned, leading to volatility in the dollar as well.

Forex.com announced to its clients late on Friday that the Dodd-Frank act has prompted them to terminate OTC gold and silver trading for US based clients:

Important Account Notice Re: Metals Trading

We wanted to make you aware of some upcoming changes to FOREX.com’s product offering. As a result of the Dodd-Frank Act enacted by US Congress, a new regulation prohibiting US residents from trading over the counter precious metals, including gold and silver, will go into effect on Friday, July 15, 2011.

In conjunction with this new regulation, FOREX.com must discontinue metals trading for US residents on Friday, July 15, 2011 at the close of trading at 5pm ET. As a result, all open metals positions must be closed by July 15, 2011 at 5pm ET.

via zerohedge

One industry contact with extensive experience on that side of the metals business suggested this morning that it was simply, “Comex using its political power to move everything onto the exchange.” It would seem to me though that a narrowing of the paper/digital options when it comes to silver and gold could very well end up benefit the underlying physical markets. This is a developing story.

• Eurozone April current account deficit widened to EUR 5.1 bln sa from EUR 3.0 bln
• German PPI decelerated to 6.1% y/y in May, down from 6.4% in Apr.
• Japan exports rebounded +2.5% m/m in May, retracing at least a portion of the sharp -13.3% plunge in Mar/Apr resulting from the earthquake/tsunami.

By Rich Miller
June 20 (Bloomberg) — As a Princeton University professor, Ben Bernanke castigated the Bank of Japan in 2000 for a “case of self-induced paralysis” that led to a decade of stagnation. Now, the Federal Reserve chairman may be allowing the U.S. central bank to fall into the same trap after its second round of quantitative easing ends this month.

By all but ruling out another cycle of bond purchases, Fed officials have left themselves with little in the way of policy options to respond to slowing growth and rising unemployment. This raises the risk that the U.S. will remain saddled with what Bernanke himself has called a “frustratingly” sluggish recovery that leaves millions of Americans out of work.

“I worry that QE3 will be hostage to QE2,” said Vincent Reinhart, a former director of the Fed’s monetary-affairs division who is now a scholar at the American Enterprise Institute in Washington. “That may lead to that self-induced paralysis” in further easing policy to aid the economy.

[source]

By Clive Crook
The stalling of the US recovery raises big, scary questions. After a recession, this economy usually gets people back to work quickly. Not this time. Progress is so slow, the issue is not so much when America will return to full employment but what “full employment” will mean by the time it does.

The administration thinks the pace of recovery will pick up soon. Last week President Barack Obama called the pause a “bump in the road”. Others think the slowdown will persist and might get worse, fears that cannot be dismissed. One alarming possibility is that the traits the US has relied on to drive growth in the past – labour market flexibility, rapid productivity growth – might have become toxic. If the US is unlucky, traits seen as distinctive strengths are now weaknesses, and a “lost decade” of stagnation, like Japan’s in the 1990s, might lie ahead.

[source]

By James G. Neuger and Stephanie Bodoni
June 20 (Bloomberg) — Europe faltered in its race to save Greece from default as finance chiefs said further aid hinged on embattled Prime Minister George Papandreou delivering budget cuts in the face of domestic opposition.

On the eve of a confidence vote that threatens to topple Papandreou, the euro area’s top economic policy makers pushed Greece to pass laws to cut the deficit and sell state assets. They left open whether the country will get the full 12 billion euros ($17.1 billion) promised for July as part of last year’s 110 billion-euro lifeline.

“The Greeks have to bring to Parliament their austerity measures and their privatization package and they have to implement those measures,” Luxembourg Finance Minister Luc Frieden told Bloomberg Television as a euro crisis meeting in Luxembourg went into a second day. “Only if those conditions are fulfilled, we can pay out the next tranche and at the same time look for a possible second program to support Greece.”

[source]

By Phil Izzo
June 17 (WSJ blogs) – A double-dip recession is back on the minds of Web denizens.

Google searches for “double dip recession” have shot up in the past two weeks. “In the first two weeks of June the number of Google searches for ‘double dip recession’ by Americans has surged back towards the levels seen when such concerns were rife this time last year,” notes Paul Dales of Capital Economics. He suspects, as was the case in 2010 when the trend last appeared, it will prove temporary.

Though there are arguments for and against Google as an indicator, the rise in searches for “double dip recession” is just the latest in a host of datapoints indicating a growing gloom among consumers. Earlier today, a Reuters/University of Michigan survey showed a drop in consumer sentiment, following on the heels of more pessimistic outlooks from homebuilders and both small and large businesses.

[source]

The Calm Before the Storm

The gold market has been relatively quiet of late, trading within a narrowing range (see Friday’s Morning Snapshot). This strikes me as somewhat incongruous given all of the financial and geopolitical turmoil that continues to unfold.

Renowned NYU economist Nouriel Roubini suggested early in the week that a “perfect storm” was brewing. Roubini cited an economic slowdown in China, trade disruptions associated with the earthquake/tsunami in Japan, the eurozone debt crisis and the US debt/fiscal crisis. “Everybody’s kicking the can down the road of too much public and private debt. The can is becoming heavier and heavier, and bigger on debt, and all these problems may come to a head by 2013 at the latest,” Roubini said.

Throw on top of that the escalating civil unrest in parts of the EU periphery associated with increasingly draconian austerity measures, ongoing populist uprising in the Middle East and North Africa, as well as several wars and the risks to global markets can not be dismissed. And yet gold, the traditional hedge against such risks, remains well contained.

It’s worth noting that gold is well within striking distance of its all-time high at 1574.60, at a time of year when we generally see seasonal weakness. As our Summer Doldrums piece clearly illustrates: Early-summer pullbacks should be viewed as buying opportunities, as “just better than 2/3 of all annual gains over the past ten years in gold have come in the last five months of the year.” That’s a pretty compelling fact. But what if those early-summer pullbacks fail to materialize?

Some are trusting their instincts and taking advantage of the calm before the storm to add to their gold holdings. Our high net worth clients have been especially active. In fact, while the total number of orders is down from the Spring, large individual orders have contributed to near record sales volume.

Some of this activity has to do with portfolio rebalancing; well-healed clients exiting the stock market on the recent weakness. The traditional move when you came out of equities was to simply hold cash, or perhaps move into bonds. That dated strategy simply doesn’t make sense to the smart-money any more: They see that bond yields are artificially suppressed by quantitative easing and they are very aware of the currency risk associated with holding dollars. Such savvy clients are increasingly turning to physical gold as their shelter from the brewing storm.

Many of our regular clientele — aware of the facts laid out in the summer doldrums analysis — simply buy as a matter of course in June and July, regardless of price. They appreciate the ability to spend time with their brokers; to have long conversations about the economy and global markets, or to discuss their specific strategies in great detail. We brokers benefit greatly from these conversations as well, gleaning valuable insights into what high net worth investors are thinking; what they’re concerned about.

Frequently they recall very recent history, when the market was running scared and getting a hold of their broker might have proved very difficult. When they did reach us, we didn’t have the time for expansive conversations and in some instances certain desirous products were simply no longer available. Some of those clients have vowed never to put themselves in that positions again, having to stampede and compete with the thundering herd. They now prefer to take advantage of the quiet times, when product availability is good and premiums are low. This puts them in a very desirable position of being able to focus on their businesses and family when the next market panic arises.

You may recall that Nouriel Roubini foresaw the housing bubble and correctly predicted “homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt.” So, perhaps the current calm is more accurately the eye of the hurricane, as the coming storm is arguably nothing more than a continuation of what began in 2008. Nonetheless, whether the dark clouds on the horizon are the trailing eyewall or a new storm entirely, now is the time to seek shelter. It is far better to be prepared well in advance than risk being caught out in the storm.

June 17 (HousingWire) – Today’s economy isn’t as depressing as that of the 1930s, but it is as bad as 1983.

The Misery Index, which adds the unemployment rate and level of inflation, rose for the fourth-straight in May to 12.7 and is now at the highest level in 28 years. Economist Arthur Okun launched the index in the ’70s in an attempt to gauge economic hardship.

Unemployment inched up to 9.1% in May, while annual rate of inflation rose to 3.6% as prices climbed across the board, in addition to elevated costs for energy and food. The number of initial jobless claims remained higher than 400,000 for about two months.

[source]

Cabot Money Management’s President & CIO Rob Lutts

View from 3:30 on….

June 17 (Bloomberg) — The International Monetary Fund cut its forecast for U.S. growth in 2011 for the second time in two months, warning that further setbacks to a recovery pose growing threats to the world economy, along with potential contagion from the European debt crisis.

The U.S. economy will grow 2.5 percent this year, down from 2.8 percent projected in April, the IMF said today, citing higher commodity prices and bad weather in the first quarter and a weak housing market. The IMF forecasts 2.7 percent growth in 2012, slower than the previous estimate of 2.9 percent. The Washington-based IMF sees the world economy expanding 4.3 percent this year, down from 4.4 percent two months ago. It left a 4.5 percent forecast for next year unchanged.

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