By Tom Jennemann
June 27 (Fast Markets) – Gold on the Comex division of the New York Mercantile closed under $1,500 per ounce Monday as investors continue to liquidate commodity positions and lower inflation expectations.

Gold futures for August delivery settled down $4.50, or 0.3 percent, at $1,496.40 an ounce, which marks a five-week low. Trade ranged from $1,490.80 to $1506.10.

The market nervously awaits Wednesday’s vote on a 28 billion-euro ($40 billion) package of Greek tax increases and spending cuts in a parliamentary ballot.

“When gold was up around $1,550 it was clear that the market had priced in at least a technical default of Greece’s debt obligations as well as some degree of contagion, likely to Ireland and Portugal,” a US-based metal trader said.

“While I’m still of the belief that a default is inevitable, this little dog-and-pony show with the austerity vote and aid package has pushed that date down the road a bit. If the measures do pass parliament, gold could move somewhat lower but that’ll be short-lived as Europe’s structural debt problems remain unsolved,” he added.

Additionally, some market participants have lowered their global inflation expectations as several major economies have shown signs of hitting a slow patch. Gold generally benefits from higher inflation rates as the metal is often bought as a currency and inflation hedge.

[source]

June 27 (The Globe and Mail) – Europe’s debt crisis has brought the region to the brink of an “economic collapse,” George Soros warns, and it’s likely the monetary union will at some point agree to a plan by which some of its members can leave.

“We are on the verge of an economic collapse which starts, let’s say, in Greece, but it could easily spread,” the renowned investor said at a panel discussion in Vienna yesterday, according to Bloomberg News. “The financial system remains extremely vulnerable.”

[source]

PG View: When the story broke in May that Soros had sold most of his sizable positions in the gold ETFs in Q1, it was definitely a contributing factor in the yellow metal’s sharp drop from 1574.60 to 1492.25. While Soros was simultaneously buying mining shares, there was speculation at the time that he wasn’t so much exiting gold, as exiting paper representations of gold. His comments in Vienna over the weekend will likely add fuel to that speculation. Why would a savvy investor leave the gold market on such a scale if he truly believes we’re on the “verge of an economic collapse?”

The US dollar will lose its status as the global reserve currency over the next 25 years, according to a survey of central bank reserve managers who collectively control more than $8,000bn.

More than half the managers, who were polled by UBS, predicted that the dollar would be replaced by a portfolio of currencies within the next 25 years.

That marks a departure from previous years, when the central bank reserve managers have said the dollar would retain its status as the sole reserve currency.

…Robert Zoellick, president of the World Bank, last year proposed a new monetary system involving a number of major global currencies, including the dollar, euro, yen, pound and renminbi.

The system should also make use of gold, Mr Zoellick added. The results of the UBS poll also point to a growing role for bullion, with 6 per cent of reserve managers surveyed saying the biggest change in their reserves over the next decade would be the addition of more gold. In contrast to previous years, none of the managers surveyed was intending to make significant sales of gold in the next decade.

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PG View: The writing seems to be increasingly on the wall. As the dollar’s reserve status continues to erode over time, it will have an increasingly negative impact on the greenback. That should in turn continue to have a positive influence on the price of gold relative to those dollars, particularly if gold plays a significant role in any basket of currencies.

By Jennifer Thompson in Paris and Guy Dinmore in Rome
June 27 (FT) – French banks have agreed on a plan to a Greek debt rollover, which would see them reinvest in Greek sovereign bonds with longer maturities, Nicolas Sarkozy, French president, confirmed on Monday.

…The deal agreed with the French banks proposes that banks reinvest 70 per cent of the proceeds from bonds that fall due between 2011 and 2013. Fifty per cent would be rolled over into 30 year bonds. The remaining 20 per cent would be reinvested in triple-A rated investments and put into a special purpose vehicle, to act as a built-in guarantee for the repayment of the 30 year Greek bonds.

[source]

PG View: Understandably the French banks are seeking to protect themselves from a haircut if Greek defaults. However, this plan still smells like a distressed debt swap. If the rating agencies see it as such, it is likely to be deemed a credit event and worthy of further downgrades.

Greek Turmoil Persists

Gold extended more convincingly below $1500 in overseas trading, weighed by a firmer dollar. The dollar was originally being underpinned by a weaker euro, but the single currency has since rebounded on rumors that new Greek bonds could carry a AAA rating if they are guaranteed by the EIB or EFSF. I’m assuming that such guarantees would be the enticement to get private bond holders to “voluntarily” rollover. I’m not sure by what authority the EIB or ESFS can guarantee sovereign debt, but if there is any substance to this rumor, I’ll leave it to the rating agencies to determine if such a swap would be a credit event or not.

Keep this in mind though: A guarantee is only as good as the issuing party. AIG for example guaranteed more than $500 bln in credit default swaps that it ultimately couldn’t pay on. The Fed had to step in and bail-out AIG.

The BIS warned in its annual report that interest rates need to rise globally or the distortions that resulted in the ongoing financial crisis will continue to threaten worldwide financial stability. Therefore it would seem that any measures taken by the EU/IMF/ECB troika that distort Greek yields, to the point that they don’t accurately reflect the risks, are doing a disservice to Greece, global investors and eurozone tax payers that must ultimately foot the bill for loan guarantees.

At any rate, all of this may be moot if the Greek Parliament fails to pass the additional austerity measures being demanded by the troika. There has been talk of defections in recent days from Papandreou’s ruling party, suggesting that the looming vote is anything but a sure-thing. That vote is currently expected on Wednesday.

Meanwhile the Greek’s themselves are taking defensive action. Moody’s says that Greek banks have lost about 8% of their private-sector customer deposits so far this year. Moody’s went on to warn that those banks could face a severe liquidity crisis if such outflows persist. The Greeks are moving those deposits out of the country and they continue to rush into gold.

June 26 (BBC News) – The Bank for International Settlements (BIS) has warned that low interest rates across the globe are a threat to world financial stability.

The BIS warned low cost of borrowing had resulted in a credit and property price boom that was fuelling inflation, especially in emerging economies.

Central banks across the globe have cut interest rates in an attempt to boost growth after the 2008 financial crisis.

However, BIS warned that the policy may prove to be counterproductive.

“The prolonged period of very low interest rates entails the risk of creating serious financial distortions, misallocations of resources and delay in the necessary deleveraging in those advanced countries most affected by the crisis,” the bank said in its annual report.

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PG View: While what the BIS says in its annual report makes sense, some of the individual member central banks seem disinclined to heed their own advice. To wit, Fed chairman Bernanke reiterated the “exceptionally low/extended period” language just last week. How can the Fed view exceptionally low rates as a means to mitigate the financial crisis, while the BIS views them as the source and a threat to world financial stability? Well, if the Fed were operating in a vacuum and we were the only country on the planet with exceptionally low yields and a desire for a devalued currency, the Fed’s über-easy policy might actually be effective. However, we aren’t the only country and so it has truly become a circus of beggar thy neighbor, despite what the BIS says.

By Michael MacKenzie
June 26 (Financial Times) – Investors in the US government bond market could face losses of up to $100bn if the largest economy loses its triple A rating, according to a research arm of McGraw-Hill, the parent of Standard & Poor’s.

A ratings downgrade that results in higher bond yields and lower prices could also mean the US Treasury paying $2.3bn-$3.75bn a year more in interest on financing a $1,000bn annual budget deficit.

[source]

June 27 (Reuters) – The euro fell against the dollar on Monday after Moody’s said Greek banks have lost about 8 percent of their private-sector customer deposits so far this year, warning that those institutions would face severe cash shortage if outflows mount to 35 percent of their deposits.

[source]

June 24 (Dow Jones) – Gold futures settled a breath above $1,500 as fresh concerns about Europe triggered steep declines in equities and commodities and forced some traders to sell the safe-haven asset to meet margin calls.

Gold is considered a refuge from financial risk, but prices can tumble amid a market-wide sell-off as traders sell profitable holdings like gold to raise cash and cover losses elsewhere.

…However, gold’s declines are unlikely to breach far below $1,500 as it becomes too attractive for bargain hunters to stay on the sidelines.

“It would be a short-lived trade through $1,500, it would present buying opportunities and (investors) will come in,” said Haberkorn.

Moody’s warning about Italy comes as fellow euro-zone member Greece struggles to avoid defaulting on its government debt. In the latest steps to qualify for a second bailout, Greece agreed on a five-year austerity plan with the International Monetary Fund and European Union. The widely-expected accord must still pass a Greek parliament vote, however, and many market watchers question whether the plan will prevent a Greek default.

[source]

PG View: So who thinks “cash” is where they’re going to stay? We’ve seen these deleveraging breaks in gold before and the market always seems to come right back. I’m inclined to echo the sentiments of those that believe losses below $1500 will be short-lived. If you need further incentive to pick-up the phone and talk to your broker, go back and reread our Summer Doldrums piece.

June 24 (China Daily) – Gold’s luster is continuing to attract rising domestic demand and China will continue to “outperform” other countries in private consumption of the precious metal, with sales growth remaining above 20 percent over the next two years, an industry expert said.

The amount individual buyers purchase as an investment is expected to surge two-fold annually, Zhang Bingnan, secretary-general of the China Gold Association, said.

And the government’s gold reserves are “far from enough”, and should be increased to fend off global financial risks, he said.

…”Demand for gold, mostly driven by investment, will grow at least 20 percent this year,” he said.

…”China’s reserves are small. They need to be increased appropriately,” Zhang said.

…China had more than $2.84 trillion in foreign exchange reserves by 2010, but only 1.7 percent were invested in gold.

…”The government needs to expand its share of gold in the foreign exchange reserves to reduce vulnerability to dollar depreciation. The reserve should be at least 5,000 tons,” Zhong said.

[source]

PG View: We fully expect China to remain a reliable and substantial source of gold demand for years to come.

June 24 (Reuters) – European banks and finance officials are discussing a proposal to replace existing Greek debt with a different type of bond to get around ratings agencies’ reservations about a planned rollover, two senior European banking sources said on Friday.

The proposal foresees a voluntary rollover of debt into securities of a different and not comparable credit composition to avoid agencies moving Greece to default status, the sources told Reuters on Friday.

“Only by a completely different composition of the bonds would the rating agencies see the restructuring as voluntary and not declare Greece insolvent,” said one senior banker.

[source]

PG View: The fact that Greece and the troika are going through such contortions to arrive at some “solution” that wont be viewed as a default by the rating agencies should have everyone worried…very worried. Especially when you consider that such a rollover is at best just another kick of the can down the road. You don’t claw your way out of a debt crisis with more debt; be that in the form of GGBs or some new miracle security contrived by the troika to skirt rating agencies interpretations of a credit event.

June 24 (MSNBC) – The breakdown of talks between the White House and congressional Republicans has intensified worries about the financial bomb known as the national debt. Without serious budget reforms, that bomb will almost certainly explode — with widespread collateral damage to the U.S. economy and the global financial system.

But no one can say for certain just when the bomb will go off. The fuse may be longer than many people assume.

Debt-reduction talks came grinding to a halt Thursday when Republicans pulled out, blaming Democrats for demanding tax increases rather than accepting cuts in federal services.

The clock is ticking. The Congressional Budget Office said this week that the national debt is on pace to equal the gross domestic product within a decade, and warned of a European-style crisis unless Congress moves to realign the budget.

[source]

June 23 (Bloomberg) – Oil producers tumbled the most in more than a year after the U.S. government announced plans to pour as much as 1 million barrels of stockpiled crude a day into an already-glutted market.

The U.S. and 27 other nations pledged today to tap government-controlled oil inventories after civil war in Libya disrupted crude shipments and Saudi Arabia failed to persuade fellow members of the Organization of Petroleum Exporting Countries to plug the gap with increased output. Crude futures plunged more than $5 a barrel in New York trading.

The U.S. plans to make 30 million barrels available from the Strategic Petroleum Reserve over the next 30 days as part of a coordinated effort by International Energy Agency member states, according to the Energy Department in Washington. The other 27 IEA countries will collectively release an equal amount of crude during the same period.

The supply addition comes at a time when refiners in the world’s biggest economy have more crude on hand and are importing less as demand for fuels such as gasoline and diesel is slipping, according to Energy Department figures.

…“This is kind of a head-scratcher because we’re just not in a situation in the U.S. where we physically need more barrels to meet demand,” Blake Fernandez, an energy analyst at Howard Weil in New Orleans, said in a telephone interview. “This looks more like a perception move by the U.S. government and the Europeans to alleviate high crude prices.”

[source]

June 24 (BBC) – EU leaders have urged all Greek politicians to support new spending cuts and tax hikes, saying there is no alternative if debt-laden Athens is to qualify for a second massive bail-out.

The second rescue is being negotiated in Brussels. It is expected to be about 120bn euros (£107bn; $171bn).

“There will be a new programme for Greece, on which the Greek parliament will have to vote next week,” said Germany’s Chancellor Angela Merkel.

The UK says it will not contribute.

[source]

PG View: The UK has plenty of their own problems to contend with…but then again, so does much of Europe.

By Deborah Levine
June 24 (MarketWatch) — Gold futures went back to losses Friday as metals traders eyed the dollar and stock markets for hints about how much investors are worried about the outlook for global economic growth.

Gold for August delivery /quotes/zigman/700181 GC1Q -0.80% declined $14.60, or 1%, to trade at $1,505.80 an ounce on the Comex division of the New York Mercantile Exchange, around its session lows.

Gold prices dropped more than 2% on Thursday as commodities sold off after news that the U.S. and other International Energy Agency members will make oil available from strategic reserves to counter loss of Libya’s oil.

[source]

Gold has slipped to a new 5-week low, after having set new 7-week highs on Wednesday. Global uncertainty on a number of fronts is contributing to volatility, but pressure yesterday and today has resulted from deleveraging and mitigated inflation worries stemming from global growth concerns and the IEA’s decision to dump oil reserves on the market.

As the EU/ECB/IMF troika continues to wrangle with the details of a second Greek bailout that wont trigger a credit event in the eyes of the rating agencies, it’s worth noting that it all becomes moot if the Greek parliament is unable to pass the additional austerity measures on Tuesday. Fresh doubts arose today on that front with ruling party lawmaker Thomas Rombopoulos saying he hasn’t decided if he will support the fiscal plan. This sparked rumors that Rombopoulos would join the opposition and vote against the latest round of austerity measures. Such a move would bring the expected votes down to just 153 out of 300, raising the risk of an early election.

Late on Thursday, Moody’s put 16 Italian banks and two government institutions on review for possible downgrades. This has pushed the spread between Italian and German 10-year yields to a new euro-era record wide 212 bps.

In the US; Republicans walked out of budget talks yesterday being led by Vice President Joe Biden over the sticking point of tax hikes. Republicans have called on President Obama to intervene and abandon calls for tax increases, something that is unlikely to happen, at least not until the 11th hour. With just over a month to go until a potential default, markets are likely to get increasingly jittery as the 02-Aug deadline approaches without some sort of deal.

• US final Q1 GDP revised up to 1.9% from 1.8% preliminary figure, but below market expectations of 2.0%.
• US durable goods orders +1.9% in May, about what the market was expecting, vs -2.7% in Apr.
• German Ifo rose to 123.3 in Jun, above market expectations, vs 121.5 in May.
• Chinese Premier Wen says efforts to control inflation are working.
• RBA’s Lowe said interest rates will probably have to be higher in the future.

Gold Tumbles on Sharp Dive in Oil, Amid Mounting Growth Fears

Gold came under intense selling pressure this morning as the IEA announced its members would release 60 million barrels of stockpiled oil over a 30-day period that is slated to begin around the end of next week. Fully half of that total dump will come from the US strategic petroleum reserve. The stated rationale for the drastic move is to offset MENA supply disruptions. I assume they’re talking about Libya’s approximate average of 1.8 mln bbl/day in recent years.

Put another way; 2 mln bbl/day is about 2.2% of the IEA’s estimated global consumption rate of 89.3 mln bbl/day for this year. The supply dump essentially offsets the daily consumption of Mexico. Or perhaps more relevant; for a US family driving 1,000 miles for a family vacation this summer — if the IEA action optimistically drops prices at the pump by 50¢ — they’ll save about $25.00. That won’t even cover half the price of a daily ticket to SeaWorld. If as Christopher Helman of Forbes suggests, this is the Administration’s feeble attempt at QE3, it’s a pretty weak effort.

As for the real QE3; Fed Chairman Bernanke left the door open yesterday, saying that the Fed would be “prepared to take additional action, obviously, if conditions warranted,” including the purchase of more Treasury securities. While Fed purchases of new Treasuries through QE2 will apparently indeed terminate at the end of the month, the NY Fed announced yesterday that it will conduct 7 POMOs beginning 01-Jul as part of ongoing reinvestment operations (QE-lite).

The FOMC and Bernanke expressed heightened concerns about the pace of the recovery. The Fed scaled back their GDP forecast for 2011, while raising their expectations for both inflation and unemployment. Stocks fell on this news and have extended sharply lower today, turning up the pressure on the Fed to provide further accommodations. Perhaps tapping IEA and US strategic petroleum reserves is simply a feeble attempt to bridge the accommodation gap between the end of QE2 and the needed justification for QE3.

Evidence of faltering economic growth from both China and the eurozone played in to the double-dip scenario today, adding further weight to gold on moderating inflation worries. A very weak June UK CBI distributive sales survey added insult to injury. The July expected sales component was particularly troubling, suggesting UK consumers are tightening their belts. The BoE has already been discussing the potential need for additional QE.

Gold has tumbled after weaker economic data out of China, the eurozone and the UK. IEA plan to release 60 million barrels of oil reserves, along with rising global growth fears hit oil prices particularly hard These losses arguably reduce short term inflationary pressures, and thus, the need for gold as a hedge. Another weak US initial jobless claims number hasn’t helped the cause.

IEA announced that member countries would release of 60 million barrels of stockpiled oil. Half of that will come from US strategic petroleum reserve. The oil will reportedly be released around the end of next week at the rate of 2 million b/d for 30 days.

Still no deal on Greece and the euro has tumbles back below 1.4200. Losses gained impetus on market chatter about a €3.5 bln hole in Greece’s €28.6 bln medium term austerity plan and weak eurozone PMIs. Euro weakness has bolstered the dollar within its recent range, but the main beneficiary has been the Swiss franc. The EUR-CHF cross plunged to a new record low below 1.1900.

• US May New home sales out at 10:00ET. Expectations are for a drop to around a 310k pace.
• US Chicago Fed national activity index rose to -0.37 in May, below market expectations, vs revised -0.56 in Apr.
• US initial jobless claims +9k to 429k in the week ended 18-Jun, above market expectations. Previous week revised up to 420k from 414k.
• Terrible results from June UK CBI distributive sales survey. July expected sales component was particularly troubling. UK consumers hunkering down.
• Preliminary eurozone PMIs showed a sharp drop-off in manufacturing. Services PMI were also weaker than market expectations.
• China flash PMI (HSBC) fell to an 11-month low of just 50.1 in Jun, that’s barely-expansionary, vs 51.6 in May.

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.