Terrible Payrolls Print Caps a Grim Week of US Data, Buoying Gold

Gold jumped and equities tumbled in reaction to nonfarm payrolls, which showed the economy added a mere 54k jobs in May. That was dramatically below even the significantly scaled back forecasts that emerged in the wake of Wednesday’s way-below expectations ADP report. The unemployment rate ticked higher to 9.1%. This came on the heels of troubling news earlier in the week on home prices, business activity, manufacturing, factory orders and consumer confidence. I think only April construction spending and May ISM-NMI beat market expectations this week.

Given the general tenor of data this week, further downgrades to growth forecasts for the US economy can be reasonably expected. That of course has sparked heightened debate about the likelihood of additional quantitative easing by the Fed. Clearly über-easy monetary policy on top of various forms of stimulus have done little to truly reinvigorate the flagging US economy, perhaps giving credence to those that have suggested the government and the central bank simply haven’t done enough. While chairman Bernanke has expressed worries about the detrimental impact of further accommodations relative to benefits, growth and deflation risks unquestionably remain the Fed’s biggest concerns. In an FT op-ed this week, former Labor Secretary Robert Reich said pretty definitively, “The recovery has stalled.”

With our Representatives in Washington embroiled in a contentious partisan battle surrounding the terms of a debt ceiling hike, there is little political appetite for further deficit spending to provide fiscal stimulus, particularly with an election year looming. Consequently, the onus will likely remain on the Fed to provide stimulus from the monetary side. With interest rates stuck at essentially 0%, there isn’t much left in the toolbox other than more QE. The stock market appears poised for a 5th consecutive weekly decline, which hasn’t happened since 2004. Many Americans continue to use the DJIA as their measure of the economy’s health, providing further impetus for more Fed action. Barring some miraculous surge in economic activity, I’m expecting the Fed’s respite from new asset purchases to be a brief one.

The realization that we won’t be seeing a rate hike any time soon, along with rising expectations of further monetary accommodations, has kept downside pressure on the dollar and buoyed gold. Meanwhile, the political game of chicken on the debt ceiling risks further undermining of our nation’s currency and our bond market. Moody’s warned on Thursday that it would put the US government’s Aaa credit rating under review for a downgrade unless there was progress on a deal to raise the debt limit in the next several weeks. S&P has already put US sovereign debt on negative watch for a potential downgrade. The market will become increasingly nervous about a potential US default the closer we get to 02-Aug — the date that Treasury has deemed the point where they can no-longer fund the government — without some sort of deal to raise the debt ceiling.

In Europe, the ECB/IMF/EU troika appears to have issued another stay for Greece, saying that negotiations have concluded “positively.” Reportedly, a new plan that includes more asset sales and structural reforms will be presented to the Greek cabinet and Parliament in the days ahead. This is certainly not a resolution of the Greek debt crisis, merely another kick of the can down the road. Nonetheless, the euro loves it, surging to new 4-week highs above 1.4600 versus the dollar. The new Greek deal is lipstick on a pig, making the single currency look marginally more attractive than the greenback for the time being.

Historically, the early part of the summer is a time when gold prices experience a seasonal lull, generally followed by renewed gains in the last 5-months of the year. Given all the uncertainty in the world, and in particular the likelihood that the US government takes these debt ceiling negotiations right down to the August wire, the negative seasonal influence may be muted — perhaps even negated — this year.

Our latest special report details why June and July offer gold owners some of the best buying opportunities of the year.

Click image to access article.

Gold prices popped on a much weaker than expected US nonfarm payrolls report for May. The US economy added just 54k jobs in May and the unemployment rate rose to 9.1%. Equities came under additional selling pressure on this latest indication that an already tepid economic recovery is faltering. All-in-all, it’s been a pretty grim week data-wise.

Most analysts had tempered expectations for NFP in the wake of Wednesday’s weak ADP report, but today’s actual number was well below even the deepest revisions. April and March payrolls data were revised lower as well. Those 39k in back-month revisions negate all-but 15k of the paltry 54k jobs added in May.

Further flows out of equities may have a short term positive impact on the dollar and Treasuries, but the country’s debt woes and rising expectations of QE3 suggest cash and debt investments might not prove terribly sticky. Gold will likely be increasingly seen as a safe-haven amid rising economic uncertainty.

Nonfarm payroll employment changed little (+54,000) in May, and the unemployment
rate was essentially unchanged at 9.1 percent, the U.S. Bureau of Labor Statistics
reported today. Job gains continued in professional and business services, health
care, and mining. Employment levels in other major private-sector industries were
little changed, and local government employment continued to decline.

…In May, average hourly earnings for all employees on private nonfarm payrolls increased
by 6 cents, or 0.3 percent, to $22.98.

…The change in total nonfarm payroll employment for March was revised from +221,000 to
+194,000, and the change for April was revised from +244,000 to +232,000.

[source]

PG View: Expectations for the May payrolls report had been revised lower in the wake of Wednesday’s weak ADP report, but NFP came in well below even the deepest revisions.

Kick the Can

Further weakness in the stock market sparked a bout of deleveraging in the gold market today, pushing the yellow metal to new lows for the week. The retreat was almost exactly on queue, given today’s release of our annual summer doldums piece. The special report clearly illustrates that over the past 10-years, more than ⅔ of all annual gains came in the last 5-months of the year, usually following a seasonal price slump in June/July.

Gold dipped briefly below 1520.00, but quickly rebounded more than $10 intraday following further indications that a new bailout deal for Greece is at hand. Reuters reported that senior Eurozone officials had agreed “in principle on new 3-year adjustment plan for Greece.” That news pushed the EUR-USD back to new 4-week highs and the corresponding slump in the dollar helped gold find support. The EU commission subsequently denied that a deal had been struck.

If there is a new plan, details probably wont be revealed until tomorrow, but it would seem that the eurozone is destine to kick the Greece problem another 3-years down the road. I would however point out that the initial €110 bln Greek bailout was expected to be a much further kick that 13-months. If the latest maneuvering by the ECB/IMF/EU and Greece succeeds in back-burnering the Greek problem, the market can turn its attention back to the ongoing debt woes elsewhere in the eurozone. The bottom-line here is that the sovereign debt crises remain, only meaningful reduction of said debt will mitigate those crises. More debt, or elongated terms are not a solution, they are merely a delaying action.

Here in the States, the debate over whether there will be a QE3 or not seems to be ramping-up. Recent bleak economic data suggests that the tepid economic recovery is faltering. A bad May payrolls number tomorrow is only going to increase the calls for more QE. The perception of heightened growth risks has resulted in an uptick in expectations that the Fed’s hiatus from new asset purchases once QE2 terminates at the end of the month may be a short one. Noted Fed watcher Jon Hilsenrath suggested today that the Fed is in no immediate hurry to react to the recent data. However, the Fed has made it quite clearly throughout the financial crisis that growth risks, and the risk of resulting deflation, are its biggest fears. If the economy — and in particular if employment — takes a nasty turn for the worse, the Fed would likely react.

By STEVEN RUSSOLILLO
NEW YORK—Stocks plunged Wednesday, suffering their biggest drop in almost a year, as a slew of downbeat reports prompted fears the economic recovery was running out of steam.

The Dow Jones Industrial Average closed down 279.65 points, or 2.2%, to 12290.14, the biggest point drop since June 4, 2010. All 30 of the blue-chip components finished in negative territory.

…Investors kicked off June on a negative note after several economic data points weighed on sentiment. Concerns about unemployment arose after a reading on private-sector job growth came in well below economists’ expectations, fueling anxiety on Wall Street about the government’s monthly jobs report Friday.

…Pessimism continued to mount after the Institute for Supply Management said the manufacturing sector slowed sharply in May. U.S. auto sales also dropped in May from a month earlier, the auto industry’s first significant setback in more than 18 months.

…The selling accelerated in the late afternoon after Moody’s Investors Service again cut the rating of Greek government debt.

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(Reuters) – Moody’s on Wednesday cut Greece’s credit rating by three notches to an extremely speculative level on debt restructuring worries and warned that more downgrades could come.

Citing a growing risk that the government will fail to stabilize its debt position without a debt restructuring, Moody’s cut Greece’s rating to Caa1 from the previous level of B1, bringing it seven notches into junk territory.

The outlook on the new rating is negative, in a sign that another downgrade is likely in the short- to medium-term.

[source]

PG View: Seems like at least one credit rating company is viewing the possibility of a Greek restructuring as a “credit event,” despite what Olli Rehn says.

June 1 (Bloomberg) — The European Central Bank may back a plan encouraging investors to buy new Greek bonds to replace maturing securities, said two officials familiar with the situation, softening the ECB’s opposition to any restructuring to fix the country’s debt crisis.

The ECB is examining that step because it could ease Greece’s funding squeeze without technically constituting a default, the officials said on condition of anonymity. The Frankfurt-based Executive Board is still opposed to any extension of maturities, said one of the officials.

…European Union Economic and Monetary Commissioner Olli Rehn said yesterday that the rollover plan was being examined, as it “would not create a credit event” and ECB Executive Board member Juergen Stark told Il Sole 24 Ore newspaper in an interview published today that such an arrangement would not constitute a default.

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Wall Street is having a hard time figuring out what to do now that the U.S. economy appears to be sputtering and yields are so low, Peter Yastrow, market strategist for Yastrow Origer, told CNBC.

“What we’ve got right now is almost near panic going on with money managers and people who are responsible for money,” he said. “They can not find a yield and you just don’t want to be putting your money into commodities or things that are punts that might work out or they might not depending on what happens with the economy.

…”Interest rates are amazingly low and that, thanks to Ben Bernanke, is driving everything,” Yastrow said. “We’re on the verge of a great, great depression. The [Federal Reserve] knows it.

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Today’s data releases confirm that the US economy has undoubtedly hit another soft patch.

It is not the only one.

Other economies are also slowing or contracting—some as a result of budget austerity (such as the UK and the struggling European peripheral economies) and others because they are tapping their monetary policy brakes to counter mounting inflationary pressures (China and other emerging economies).

With such broad-based economic slowing, and with unemployment stuck at very high levels and becoming more structural (and therefore protracted) in nature, market participants are asking whether the US authorities will again try to turbo-charge the economy. And with additional fiscal stimulus off the table due to deficit and debt concerns, the spotlight is fully on the Fed’s reaction function.

…As Chairman Bernanke noted in his August Jackson Hole speech, and reiterated in his first press conference a few weeks ago, policy measures should be judged in terms of the expected balance of benefits, costs and risks.

…I suspect that there is now broad agreement that, in the case of QE, this balance has shifted: lowering the potential gains and increasing the probability of collateral damage and adverse unintended consequences.

[source]

Investors should prepare themselves for a third round of quantitative easing, Simon Maughn, co-head of European equities at MF Global, told CNBC Wednesday.

“The bond market is going in one direction which is up-falling yields which is telling you quite clearly the direction of economic travel is downwards. Downgrades. QE3 (a third round of quantitative easing) is coming,” said Maughn. “The bond markets are all smarter than us, and that’s exactly what the bond markets are telling me.”

“What’s interesting in the bond markets over the last couple of sessions is, you’ve seen human traders trying to step in and call this turn in the market the same way that equities have done … and they have just been mowed down by the quant funds which are all about leverage, all about momentum and are betting on bond prices going up,” added Maughn.

Once again, the United States will step up as the marginal buyer of bonds, said Maughn.

[source]

President Barack Obama invited U.S. House Republicans to the White House today to resume talks on a political compromise to raise the nation’s debt ceiling in exchange for reductions in spending.

The private meeting in the East Room followed the House’s 97-318 vote yesterday defeating a measure that would have raised the $14.3 trillion debt limit by $2.4 trillion without spending reductions.

“I think it was important to clear the air that we cannot have an unconditional increase in the debt without any sort of spending cuts or budget reforms,” Representative David Camp, chairman of the tax-writing Ways and Means Committee, said today on CNBC. “That was important to send that signal.”

[source]

By Robert Reich
The US economy was supposed to be in bloom by late spring, but it is hardly growing at all. Expectations for second-quarter growth are not much better than the measly 1.8 per cent annualised rate of the first quarter. That is not nearly fast enough to reduce America’s ferociously high level of unemployment. The labour department will tell us on Friday whether the jobs situation improved in May, but there has been no sign of a surge in hiring. Nor in wages. Average hourly earnings of production and non-supervisory employees – who make up 80 per cent of non-government workers – dropped to $8.76 in April. Adjusted for inflation, that’s lower than they were in the depths of the recession.

Meanwhile, housing prices continue to fall. They are now 33 per cent below their 2006 peak. That is a bigger drop than recorded in the Great Depression. Homes are the largest single asset of the American middle class, so as housing prices drop many Americans feel poorer. All of this is contributing to a general gloominess. Not surprisingly, consumer confidence is also down.

The recovery has stalled.

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Swiss Franc and Gold Supported by EU and US Debt Woes

Gold pushed to a new 4-week high above 1540.00 as the dollar remains defensive on weak economic data and persistent concerns over the massive US debt. US ADP private payrolls for May came in much weaker than expectations today at just +38k. The market had been looking for a number closer to +180k. Not surprisingly this has prompted a bunch of negative revisions to forecasts for Friday’s release of May nonfarm payrolls. US May ISM missed expectations too, coming in at 53.5. The market was expecting a modest dip to 57.8 from 60.4 in Apr.

On the heels of yesterday’s raft of grim economic data, there will undoubtedly be more defectors from the ‘no QE3′ camp. Those that still maintain there will not be a QE3 are probably at least tempering their Fed tightening expectation. That should add further weight to the dollar, and offer further support to gold.

In an FT op-ed today, former US Secretary of Labor Robert Reich states definitively: “The recovery has stalled.” He goes on to warn that the “possibility of a double dip cannot be dismissed” and that the current anemic economic growth “is not nearly fast enough to reduce America’s ferociously high level of unemployment.”

The euro remains supported by ongoing speculation about a new deal for Greece. The FT Deutschland, reported that the ECB is warming to the notion of a “soft-restructuring” of Greek debt, even though the central bank has been consistently opposed to restructuring, soft or otherwise. The ECB’s Christian Noyer said just last week, “If we restructure Greek debt, that means Greece defaults.” That in turn would make Greek debt unacceptable to the ECB as collateral. Sort of makes one wonder why there would be this sudden change of heart. The obvious answer is; there simply are no other options. Noyer had suggested that more austerity and asset sales were the only available path, but such measures would likely result in resurrection of talk about a Greek exit from the EMU.

While the euro is relatively firm against the dollar, it has fallen to new all-time lows against the Swiss franc. Similarly, the USD-CHF has set new all-time lows, as the swissy continues to benefit from safe-haven interest. Safe-haven flows are expected to continue supporting gold as well.

Yesterday the House resoundingly defeated a bill that would have raised the debt ceiling by $2.4 trillion, an amount that was said to sufficient to cover additional government borrowing through the end of 2012. The so called “clean vote,” with no spending cuts attached, was seen as largely symbolic and was rejected by all the Republicans and nearly half of the Democrats in the house.

Today, House Republicans will troop to the White House in the hope of hashing out a deal with President Obama on spending cuts in exchange for a debt ceiling hike. The Republican position is that if you want a $2.4 trillion hike to the debt ceiling, there needs to be a corresponding $2.4 trillion in spending cuts. The President is likely to push for a mix of spending cuts and tax hikes, but Republicans have stated that tax hikes are a non-starter.

Treasury Secretary Geithner has pegged the drop-dead date for a debt ceiling hike as 02-Aug, just about 2-months away. Markets are likely to become increasingly skittish the closer we get to that date without some kind of deal. The CDS market is already showing signs of unease with the current contentious tone of negotiations.

Nice overview of the current drivers in the gold market. Video

http://finance.yahoo.com/video/cnbc-22844419/gold-a-currency-not-commodity-25396652

By Cecile Vannucci
May 31, 2011 (Bloomberg) — A breach of the U.S. debt ceiling may affect the dollar more than Treasuries because international holders of the debt may view the risk of permanent losses greater than domestic investors, according to Citigroup Inc.

“The foreign exchange reaction to a debt ceiling breach would be sharper and probably more permanent,” Steven Englander, the head of Group of 10 foreign-exchange strategy in New York at Citigroup, wrote in a note today. “It would legitimately tax foreign investor patience and lead to further dollar dumping whenever the opportunity arises.”

… “If it’s a U.S.-based sovereign crisis, the dollar will ultimately lose value,” said Greg Anderson, a senior currency strategist at Citigroup. “If there’s a parallel crisis in Europe, then probably the better alternative currencies are those that are not fiscally challenged: Canada, Australia, New Zealand, Norway, Sweden. They didn’t have the same fiscal problems.”

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RS View: Adieu, my friends and fellow travelers! Over these past dozen years I hope I’ve succeeded in helping you to embrace a new thought or two, not least of them being this most basic premise: Any given national currency can indeed serve well enough for standard banking practices in our fast-paced modern lives (think here in terms of financing/borrowing requirements, checking accounts, and various cash/credit/debit transactions). Don’t sweat the small stuff — it’s here today and gone tomorrow. However, and this is vital, when your needs turn instead toward consolidating those various nondimensional incomes and/or bank accounts into true wealth suitable for mid- to long- term savings, for reliability and soundness nothing beats financially-unencumbered unfractionalized/nonderivatized physical gold. Get you some. — Randal

By Virginia Harrison
May 31, 2011 (MarketWatch) — Gold futures ended a seesawing day in the red as hopes Greece’s sovereign-debt woes may be closer to a solution took away the metal’s shine but a falling dollar provided some support for prices.

Gold for August delivery, the most active contract, declined 50 cents to $1,536.80 an ounce on the Comex division of the New York Mercantile Exchange.

Gold lost 1.2% in the month. Gold and other commodities suffered as renewed concerns about the euro propped up the U.S. dollar and prompted investors to unwind trades that linked a falling U.S. currency to higher commodities.

Silver and other metals more closely tied to industrial uses gained on the day, but sustained heavy monthly losses. Silver for July delivery gained 44 cents, or 1.2%, to settle at $38.31 an ounce.

On the month, however, silver lost 21%.

Silver futures got hit by a series of margin requirement increases earlier in the month that squeezed some investors out of the market, unchaining a steep selloff for silver and other commodities. Margin requirements are the money needed to trade futures contracts.

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by Geoff Candy
31 May 2011 (Mineweb) — … the events within the euro zone have done well to take people’s attention away from the two other big macro economic stories ongoing in the world – the terrifying growth of U.S. debt and the continued growth of China and India.

Speaking to Mineweb’s Metals Weekly podcast, Michael Power, Investec investment strategist, said of the ongoing crisis, “The sentiment effect is that it probably acts as a bit of a dampener especially to traders who are often coming out of the west. They tend to pay a lot of attention – indeed I would argue too much attention – to the macro data that’s coming out of the US and Europe, somewhat underestimating the power of the macro data that continues to come out of Asia.”

For commodities investors, the big question would have to be whether or not demand from Asia is able to continue to support growth as the West continues to flounder in a morass of debt. According to Power, for the time being anyway, Asia seems to be doing just that, despite a very little bit of softness raising its head in China.

But, he adds, that the pattern is a well established one where China does indeed touch the brakes to slow itself down somewhat before accelerating again. And, he says, “If they do have to accelerate, if they’ve over touched the brakes and things carry on getting even soggier, they have an enormous amount of capability to actually start speeding things up again. They could lower interest rates, lower reserve ratios and even, because their budget is in such good shape, increase fiscal spending. So I’m not too worried about the Asian story.”

… According to Power, the biggest question in the global economy at the moment, albeit not the most immediate one is what is likely to happen to U.S. debt. … “At the moment most members of Congress generally speaking, don’t see it as a particular problem – they’re in denial. They think: ‘we’re the United States so we can afford to get away with big numbers’. And when we see now that China is no longer the main owner of US treasury bills, a far more frightening person is – and that is the Federal Reserve itself – you start to realise that this dog isn’t just chasing its tail – it’s starting to eat its tail. Eventually this is going to end up in tears. We’ve seen with austerity in Greece over the weekend what the electorate thinks of that. Well we ain’t seen nothing yet, because the Americans I suspect are going to be even more vocal than their Greek friends.”

But, if one looks at what has been happening to precious metals prices during this latest crisis, one can only imagine what will happen if the US takes to the streets.

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by David Levenstein
Tuesday, 31 May 2011 (Mineweb) — Luckily for US financial officials, the Greek debt crisis and Eurozone has taken center stage. It was not long ago when the United States hit their $14.3 trillion borrowing limit. The government now has until about August 2, before it begins to default on its loans, which have ballooned as the country spends more than it takes in. Now back to the crisis in Greece…

If Greece does default, something that I personally can’t see, several large financial institutions that purchased the high yield debt will lose billions. Frankly, while I have no sympathy towards these greedy financial institutions that were enticed by the high yields without any consideration of potential risk, I am concerned about the average individual who has little idea about the impact political mismanagement can have on the value of these fiat currencies. Suddenly, they will wake up and find that the money they have worked so hard all their lives for will become worthless.

While Greece’s financial situation remains perilous, there is very little mention about Belarus where a sharp devaluation of the Belarusian rubble has spread panic across the country, with people rushing to buy dollars, euros, toasters and canned goods – anything that will not lose its value as quickly as the national currency.

… If I did not know better, this could have been Zimbabwe where a similar scenario played out a few years ago where the government printed so much money, it eventually was not even worth the paper it was printed on. … People holding Zimbabwe dollars lost their entire savings overnight. And, pensioners who had saved their entire lives suddenly found that the money they had in the bank was not worth a dime.

Argentina’s devaluation in 2002 sent its peso from 1:1 vs the dollar to roughly 4 pesos to the dollar. Banks closed, taking depositors’ savings with them. Those with any cash savings were paying four times as much for goods, practically overnight. Unemployment soared. Even now, over ten years later, the economy has yet to fully recover.

… These scenarios are very real, yet most individuals believe that this could never happen to them and that their respective government leaders have things under control. This is their first big mistake.

… it is absolutely essential to take precautionary measures to preserve your wealth. In times like these it is important to own tangible assets such property, gold and silver. In the event of a global monetary melt-down, your paper assets will become worthless while your gold…. is a long-term store of value, and a highly liquid, internationally recognized asset of last resort.

… I suggest that you simply accumulate the physical metal as if it was a savings account.

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By Daniel Dicker
Tuesday May 31, 2011 (TheStreet) — Memorial Day has come and gone, signaling the start of the summer — and the summer driving season. After the wild gyrations of the crude oil market this spring, what should we expect for gas prices? The outlook actually looks pretty good for the next several months.

Summer brings thoughts of vacations with the family in the car, and that means that gas prices are a big part of those plans. There’s been a big run-up in gas prices over the past year, from an average price of $2.76 last Memorial day to $3.81 yesterday.

… after Brent crude traded in London surged to close to $125 a barrel last month, bringing national average gas prices close to $4 a gallon, prices have moderated somewhat.

…It takes several weeks normally for prices in the futures markets to find their way out to the streets for consumers, but crude’s recent $15 fall should translate into an almost 40-cent retreat in the price of gas at the pumps.

… That would be a great relief for summer vacationers, but the question is, will it?

… Goldman Sachs and Morgan Stanley, the two strongest and most influential oil traders in the world, have put positive, bullish research notes out on crude oil in the past two weeks. They both call for higher prices in the next 12 months, with the proviso that, near term, there could still be more moderating that could take place.

So if they’re right, this really is a summer to savor — even with pump prices that will likely hover more than 70 cents higher than last year. Compared to what’s to come in the summers ahead, according to the trading “experts,” this summer’s gas prices are going to look relatively cheap.

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by Andrew Taylor
Tuesday May 31, 2011 (AP) — The GOP-led House is poised to reject a bill Tuesday to increase the nation’s debt limit without the big spending cuts that Republicans are demanding. The move is intended as an embarrassing reminder to Democrats that increasing the government’s ability to borrow is tied to such reductions.

Tuesday’s vote would also allow tea party-backed Republicans to go on record against an increase in the debt ceiling, especially since it won’t be accompanied by big spending cuts that GOP leaders are demanding.

… On Tuesday, the No. 2 Democrat in the House, Rep. Steny Hoyer of Maryland, said that GOP leaders were holding the vote to give GOP lawmakers “cover” in advance of the real vote this summer — a chance to record a “no” vote before facing the must-pass measure.

“This will not be an adult moment on the floor of the House,” Hoyer said.

… Some Democrats, like Treasury Secretary Timothy Geithner and Rep. Peter Welch of Vermont, have called for a so-called clean increase in the debt limit.

“Republicans are playing with fire by voting against an extension of the debt limit today. I hope that the markets understand a political stunt when they see one,” said Rep. Anthony Weiner, D-N.Y. “Because, to much of the world, putting the full faith and credit of our nation at risk understandably seems like playing Russian roulette.”

The real, serious effort to increase the borrowing cap will come this summer and will be paired with spending cuts of $1 trillion or more, according to Vice President Joe Biden, who’s leading negotiations with top lawmakers in an effort to come up with the cuts.

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By Debbie Carlson
May 31, 2011 (Forbes) — Speculative buyers returned to the U.S. gold futures and options market, buoyed by a rise in prices. According to data released Friday by the Commodity Futures Trading Commission, the net-long position held by speculators increased in both the legacy and the disaggregated weekly commitment of traders’ reports. The data included futures and options combined and are current as of May 24. The reports for other markets were mixed regarding speculative action.

Managed-money accounts returned as buyers in gold, as shown in the disaggregated report. They added 17,191 gross long contracts and 4,062 gross shorts, pushing up their net-long position to 198,515 contracts. Producers and swap dealers both increased their net-short position with producers adding both gross longs and shorts and swap dealers cutting gross longs and adding gross shorts.

In the legacy report, non-commercials added 20,597 gross longs and 2,062 gross shorts, increasing their net-long to 213,515 contracts. Non-commercial also added both gross longs and shorts, lifting their net-short position.

Barclays Capital noted the rise in speculative gold positions and said they, too, favor the yellow metal. “We remain positive on gold over the forthcoming months as inflation expectations remain high and European sovereign debt worries have heightened significantly drawing investor interest,” the bank said.

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Gold Supported by Continued Uncertainty About Greece and the US Economy

The euro is rebounding in renewed optimism about another bailout for Greece. EU officials are scheduled to meet in Vienna on Wednesday with the hope of hashing out another deal to prevent a Greek default. Eurogroup chief Jean-Claude Juncker has promised a plan by the end of June, while maintaining his position that a restructuring of Greek debt is not an option. He is however in favor of “reprofiling” Greece’s debt: but how that wouldn’t be a restructuring remains beyond me. My guess is that the EU will provide just enough of a plan to give the IMF the necessary political cover to release their next tranche of bailout funds to Greece, providing another kick of the can. Euro gains are weighing on the dollar, which is already reeling from last week’s warning by the UN economic division of a crisis of confidence and a potential “collapse”. That in turn is underpinning gold.

US investors returning from the long holiday weekend were met with a pretty dismal round of economic data; negative misses all around this morning:

US S&P/Case-Shiller home price index [PDF] for 20-cities fell 0.8% (nsa) in March, below market expectations. This was the eighth consecutive monthly decline. The index is off 5.1% from a year ago. Prices fell in 18 of the 20 cities in the index in March, with only Washington DC and Seattle seeing appreciation. The m/m rise in Seattle was a mere 0.1%.

“This month’s report is marked by the confirmation of a double-dip in home prices across much of the nation. The National Index, the 20-City Composite and 12 MSAs all hit new lows with data reported through March 2011. The National Index fell 4.2% over the first quarter alone, and is down 5.1% compared to its year-ago level. Home prices continue on their downward spiral with no relief in sight.” says David M. Blitzer, Chairman of the Index Committee at S&P Indices.

US Chicago ISM plunges to 56.6 in May, well below market expectations, versus 67.6 in April. That’s the biggest monthly drop since the collapse of Lehman. US consumer confidence also came in below expectations, falling to 60.8 in May, versus 66.0 in April. On top of all that, even things in comparatively robust Texas may be faltering: The Dallas Fed’s general business activity index tumbled to -7.4 in May, well below market expectations, versus 10.5 in April.

All of this lends further credence to rising expectations that the Fed won’t be tightening any time soon. While QE2 may officially conclude at the end of June, reinvestment of maturing debt on the Fed’s balance sheet will continue. However, if the bad data continue rolling in, the quantitative easing hiatus for new bond purchases may indeed be short-lived. As speculation about QE3 heats up, the dollar will suffer and gold is therefore likely to maintain its bid.

by Tom Jennemann
Tuesday May 13, 2011 (Fastmarkets) — Gold on the Comex division of the New York Mercantile Exchange ticked slightly higher on Tuesday when a weaker dollar and disappointing macroeconomic news were offset by some modest profit-taking.

Gold futures for August delivery were recently up 70 cents at $1,538.00 per ounce. Trade has ranged from $1,533.10 to $1,541.80, which is a four-week peak.

The euro hit a three-week high at 1.4423 against the dollar after speculation that European policymakers could soon extend the bailout package offered to Greece. “This is a somewhat mixed bag for gold,” a US-based gold trader said. “Sure, a softer dollar is going to support commodity prices but there’s now a feeling that [eurozone] leaders are closer to agreeing to a strategy on how to deal with Greece’s debt problems.”

The correlation between flare-ups in Europe’s sovereign debt crisis and rising gold prices has been quite strong over the past two years, the trader noted. “If they’re able to put together a package [for Greece] that allows the country to avoid a default then we could see some short-term [downward] pressure on gold, even if there is a weaker dollar environment,” he added.

Gold also found some support on Tuesday after a slew of new data pointed to a possible soft patch in the US economy.

[source]

via Pravda
A day is coming when the rest of the world will decide that it no longer has faith in U.S. dollars or in U.S. debt. When that day arrives, the game will be over. Traditionally, two of the biggest things that the U.S. economy has had going for it were the U.S. dollar and U.S. Treasuries. The U.S. dollar has been the default reserve currency of the world for decades. All over the globe it was seen as a strong, stable currency that was desirable for international trade. U.S. government debt has long been considered the “safest debt” in the entire world. Whenever there was a major crisis, investors would flock to U.S. Treasuries because they were considered a rock. Sadly, all of this is now changing.

Today the rest of the world is losing faith in the U.S. financial system. In fact, even the United Nations is now warning of the collapse of the dollar. But if the U.S. dollar and U.S. Treasuries collapse, that will be an absolute nightmare for the U.S. economy. If the rest of the world does not want our dollars someday, then what are we going to give them in exchange for all of the oil and all of the cheap imported goods they send us? If the rest of the world does not want our debt someday, then how in the world are we going to be able to continue to consume far, far more wealth than we produce?

[source]

PG View: Last week’s warning by the UN economics division that the dollar faced “collapse,” was just the latest in a series warning of the potential demise of the dollar as the world’s reserve currency. The UN is concerned about the implications for the global economic system, as a disorderly collapse of the world’s reserve currency may indeed result in ‘game over.’

By Bloomberg News
May 30 (Bloomberg) — China National Gold Group Corp., the state-owned company that controls the nation’s largest gold deposits, wants to invest in projects in Africa as it expects bullion to trade near record levels for the next three years.

“We aim at large-scale mines with good potential in countries that have close ties with China and domestic stability,” President Sun Zhaoxue, 48, said in an interview in Shanghai. “Gold prices will foreseeably fluctuate at historically high levels for another three years.”

…China National, owner of the Yangshan deposit in Gansu province, may also invest in Southeast Asia and Central Asia, Sun said.

[source]

By Greg Robb
WASHINGTON (MarketWatch) — The prices of single-family homes in 20 major cities fell for the eighth straight month and confirmed that there is a double-dip in the housing market, according to the S&P/Case-Shiller home price index released Tuesday by Standard & Poor’s. Home prices fell a non-seasonally adjusted 0.8% in March. Prices have moved down 3.6% in the past year. Home prices declined in 18 of the 20 metropolitan areas tracked by Case-Shiller in March compared with February. Washington D.C. and Seattle were the only markets where home prices increased in March.

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Gold remains well bid, less than $40 off the all-time high, as the dollar weakens once again. Last week’s UN report that warned of a potential “collapse” of the dollar, and the peril to the global economic system that would result, is weighing on the greenback. While uncertainty about Greece and the broader implications for Europe prevail, talk of a new deal has bolstered the euro.

Japan industrial production rebounded 1.0% in Apr. Unemployment ticked higher to 4.7%. Moody’s warns of possible downgrade of Japan’s debt.

British Chamber of Commerce lowers UK growth forecast and raises inflation expectations. Growth estimates were lowered to 1.3% this year and 2.2% in 2012. Inflation forecast were raised to 4.5% in 2011 and 2.7% in 2012, from 4.2% and 2.3% respectively.

German retail sales +0.6% m/m in Apr, below expectations, versus downward revised -2.7% m/m in Mar. German unemployment eases to 7.0%.

Eurozone HICP eased to 2.7% y/y in May, meeting expectations, versus 2.8% y/y in Apr.

BoC holds steady on rates, says policy stimulus will eventually be withdrawn.

US S&P/Case-Shiller home price index for 20-cities -0.8% (nsa) in Mar, below market expectations. Prices -3.6% y/y. This was the eighth consecutive monthly decline. Prices fell in 18 of the 20 cities in the index, with only Washington DC and Seattle seeing appreciation.

US Chicago ISM plunges to 56.6 in May, well below market expetations, vs 67.6 in Apr.

The market is looking for an uptick in May US consumer confidence at 10:00ET.

By Robin Harding
May 27 2011 (FT) — China is not a currency manipulator but its real exchange rate “remains substantially undervalued”, the US Treasury said on Friday in its semi-annual currency report to Congress.

… The measured tone of the report and its low key release just before a holiday weekend show how the heat has gone out of the US dispute over China’s currency policy.

… it argued that letting the renminbi rise is now in China’s self-interest. “By trying to limit the pace of appreciation, China is not allowing the exchange rate to serve as a tool to counter inflation in its own economy,” the Treasury said.

The rise in the renminbi against the dollar – and a belief that China will allow that rise to continue for domestic economic reasons – underlie the fall in tensions over what had become the leading bilateral issue between the world’s two largest economies.

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ALSO . . .

China Must Let Yuan Rise Faster, Treasury Tells Congress
By Ian Katz
May 27 (Bloomberg) — The U.S. said China has made “insufficient” progress on letting the yuan rise and urged quicker appreciation, without branding the world’s fastest- growing major economy a currency manipulator.

The U.S. “believes that progress thus far is insufficient and that more rapid progress is needed,” the Treasury Department said today in a report to Congress on foreign- exchange markets. The yuan’s real exchange rate remains “substantially undervalued” and the department “will continue to closely monitor the pace” of appreciation.

… “We have differences on the degree of appreciation,” Deputy Finance Minister Zhu Guangyao said May 10 in Washington. China’s economy will expand 9.6 percent in 2011 and 9.5 percent next year, according to International Monetary Fund projections released last month.

The Treasury Department backed away from the “nuclear option” of calling China a currency manipulator, said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. The Group of 20 nations “is going to have something to say on the global imbalances later this year, so it is better to decide these matters in a world forum rather than for the U.S. to take unilateral action.”

… Rupkey said in e-mailed comments the “late afternoon release before Memorial Day weekend appears well timed in order to miss congressional criticism. Nice timing, as a war of words helps no one.” The report was released at 4 p.m.

Today’s report said “no major trading partner” of the U.S. met the legal standard of improperly manipulating its currency.

… If China fails to let its currency rise, it faces the risk of higher inflation, an “excessively rapid expansion of domestic credit, and upward pressure on property and equity prices, all of which could threaten future economic growth,” according to the report.

[source]

Currency Collapse

Early in the week, Belarus devalued their currency. Headlines in the financial press stated the devaluation was 36%, but the zerohedge blog, citing The National Bank of Belarus‘ own website showed the Belarus ruble (BYR) had been devalued in dollar terms from 3155 to 4930. That’s a startling 56.3% devaluation! Devaluations similar in scope were reported against the euro and the Russian ruble.

Imagine for a moment, waking up one morning to find that more than half (or even a third) of your savings had been wiped out in one fell-swoop. Amid worries that the Belarus ruble would devalue further, citizens rushed out to buy things, anything, before more purchasing power was eroded. There were reports of store shelves being swept bare and many citizens stood in line for days at currency exchanges hoping to swap their rubles for some other currency — any other currency; dollars, euros, Russian rubles — anything to protect what little they had left. Of course, governments that devalue generally have the foresight to implement capital controls to impeded flight from the currency being devalued. Not surprisingly, other currencies were in short supply across the country, further fueling the desire to trade currency for goods.

Of course the world has seen devaluations before: Germany, Russia, Venezuela, Argentina, Mexico, Great Britain…um the United States, among many others. Devaluation is generally used as a means of inflating away debt. While savers in Belarus rubles may have seen their savings evaporate dramatically, those that had debt valued in BYR saw more than half of that debt disappear. It is in every way a transfer of wealth from savers to debtors. It is punishment for saving and a moral hazard, as such measures reward indebtedness. That reality should give everyone with a dime in the bank pause.

The time honored tradition of alleviating sovereign debt burdens via currency devaluation is the primary reason there is an element in Greece that would love nothing more that to exit the EMU and revert back to the drachma. As the sovereign debt crisis in Greece continues to deteriorate, savers are keen to get their money out of Greece. There has been significant erosion of the household savings rate in Greece over recent weeks. The wealthy have the means and the knowledge to protect themselves, so it is the working class savers that invariably end up baring the brunt of the burden. Greek officials continue to assure the people that their savings are secure, just as I’m sure Belarus officials did…

Certainly our very own government and the Fed have been actively discouraging saving right here in America. By driving interest rates to near 0% and offering tax incentives for home, automobile and other durable goods, the message is clear: In an economy that is primarily driven by consumption, ‘we want you to spend your money, not save it.’ In sending that message though, consumers must be reasonably sure that the government will take care of them if they dutifully spend all of their income. That is why any proposed changes to entitlement programs like Social Security and Medicare are so contentious.

Recently, Zimbabwe’s central bank chief, Dr. Gideon Gono talked about backing their currency with gold, adding that “the inflationary effects of United States’ deficit financing of its budget was likely to impact other countries, leading to a resistance of the greenback as a base currency.” That’s Zimbabwe –a country that experienced the worst hyper-inflationary period in recent history — busting on us for our fiscal and monetary policy. Okay, he’s spot-on correct, but he’s the head of the Reserve Bank of Zimbabwe for cryin’ out loud!

While the US and Europe are arguably a far cry from Belarus or Zimbabwe, as our own debt loads grow increasingly oppressive, so grows the temptation to devalue. The take away here is that you save exclusively in fiat currency at your own peril. And while there are some currencies that are arguably safer than others, there is one that has stood the test of time, for thousands of years in fact. There is an ever-growing number of people across the globe that are increasingly looking to physical gold as an alternative means of saving.