By Myra P. Saefong
July 7 (MarketWatch) — Gold futures edged between small gains and losses Thursday after a two-session win, as upbeat U.S. economic data and comments from the European Central Bank president about Europe’s debt crisis eased investors’ concern, limiting growth for the precious metal.

Gold for August delivery added $1.50 to $1,530.70 an ounce on the Comex division of the New York Mercantile Exchange. The contract tallied a gain of nearly $47 an ounce over the past two trading sessions.

“Gold is consolidative, but generally well bid within its range,“ said Peter Grant, senior metals analyst at USAGold-Centennial Precious Metals Inc.

“The continually unfolding European sovereign-debt crisis, today’s ECB suspension of Portugal’s rating requirement, is likely to limit the upside in the euro and keep a bid under gold as an appealing hedge.”

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July 7 (MarketWatch)
by Matthew Lynn

But it tells us something else as well. The role of money in the global economy is one of the big themes of this decade. Gold is on the up. The euro is falling apart. And, perhaps most importantly of all, the dollar is in long-term decline.

Measured over a decade, the trend is clear enough. Go back to 2001, and the proportion of central bank reserves held in dollars was 71%. It only goes down a bit every year. But over time, that starts to add up. Once the dollar drops below 50% of central bank holdings, we can officially declare that its days as the reserve currency are done. It looks like that will happen some time between 2015 and 2020 — but it could well be sooner.

But if it is a commodity-based currency unit — and that would be this columnist’s bet — then the one big call you need to make for the next decade is to keep buying raw materials even when they do look over-priced. Either way, the euro looks finished, and the dollar is heading for a more minor role in the world economy.

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JK Comment: There has been much talk of late of the “re-monetization” of gold….essentially a discussion of the return of gold’s timeless (though somewhat forgotten) role as money. Lynn paints an interesting picture of the future of the global currency system, and the dollar’s role within it, offering distinct markers to gauge the pace of the greenback’s decline in relevance. As this future unfolds, it becomes easier and easier to understand why so many gold owners treat their ownership less as an investment and more as savings in an alternative currency – one (the only one) that cannot be printed and debased….and one that looks to be definitively ascending in importance (and price), rather than declining. For them, the answer to the question, “Do I hold my savings in dollars, or in gold” is a simple and obvious one.

July 7 (Reuters) — Pimco chief Mohamed El-Erian on Thursday put low odds on a third round of U.S. monetary stimulus unless there is a “major further deterioration” in the U.S. economic outlook.

“We would assign a low probability (at) this stage to QE3 given the general recognition that the forward-looking cost-benefit analysis has shifted away from the potential benefits and towards greater costs and risk,” El-Erian, co-chief investment officer of Pimco, said in a live blogging question and answer session on Reuters.com.

…In the event no agreement [on a US debt ceiling hike] is reached between the White House and the Republican-controlled Congress, El-Erian pointed to the safety of gold.

“The likely consequences for markets would include a simultaneous sell off in equities, bonds and the currency. Gold would most likely benefit from the flight to quality,” he wrote.

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July 7 (The Wall Street Journal) — Precious metals edged higher in Asia as investors turned to investment alternatives such as gold ahead of an interest-rate policy meeting of the European Central Bank later in the trading day, as concerns about euro-zone debt refused to fade.

Spot gold, which opened a touch lower in the Asian session, was underpinned by its safe-haven appeal amid concerns about long-term trends in currency valuations. The yellow metal has gained around 3% since it hit a low of $1,486.50 a troy ounce on July 1.

At 0533 GMT, gold is at $1,533/oz, up $3.60 from its New York close.

“Gold’s buoyancy is largely attributable to the resurgence of contagion risks within the euro zone,” USAGOLD-Centennial Precious Metals Inc.’s resident economist Peter Grant said in a commentary.

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By Myra P. Saefong and Sarah Turner
July 6 (MarketWatch) — Gold futures closed at their highest level in two weeks Wednesday, with global-debt troubles helping it tally a two-session win of nearly $47 an ounce.

Gold for August delivery closed up $16.50, or 1.1%, at $1,529.20 an ounce on the Comex division of the New York Mercantile Exchange. The contract, which earlier touched a high of $1,534.50, marked its highest close since June 22.

…“The persistent debt problems in both Europe and the U.S. are a big part of gold’s gains this week,” said Peter Grant, senior metals analyst at USAGold-Centennial Precious Metals Inc.

“It’s quickly becoming a question of credibility,” he said. “As the troika flails about trying to mitigate the Greek crisis without creating a default, they erode market confidence. That waning confidence in the troika has resulted in contagion to Portugal in the wake of yesterday’s downgrade.”

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Gold is consolidating as better than expected jobs data lift US stocks. June ADP data came in much better than expected, offsetting to some degree last month’s much worse than expected print. Modestly lower than expected initial jobless claims for last week further bolstered hopes that there will be a positive surprise tomorrow when June nonfarm payrolls data are released. Market consensus stands at +90k, although today’s ADP print in particular should elicit some higher whispers.

The BoE held steady on rates, while the ECB hiked by another 25bp. Both were widely expected, but ECB chief Trichet seems to be taking a more neutral stance in the presser, which has weighed on the euro; not to mention the continual unfolding of the European sovereign debt crisis. The corresponding firmness in the dollar is providing a bit of a counterbalance to the safe haven bid in gold.

• US initial jobless claims -14k to 418k in the week ended 02-Jul, below market expectations of 420k.
• US ADP private payrolls surged 157k in Jun, well above market expectations, vs negatively revised 36k in May.
• ECB hiked refi rate by 25 bp to 1.50%, as expected.
• BoE left repo rate unchanged at 0.5%, as expected.
• German industrial production +1.2% m/m in May, above market expectations, vs negatively revised -0.8% m/m in Apr.
• UK manufacturing rebounded +1.8% m/m in May, vs negatively revised -1.6% m/m in Apr.
• Swiss Jun CPI -0.2% m/m, 0.6% y/y, just below market expectations. Core rose to 0.3% y/y.
• Japan core machinery orders rebounded +3.0% m/m SA in May; foreign orders extend dip.

Resurgence of Contagion Worries Lift Gold

Gold pushed through important short-term resistance at 1520.28 this morning, putting the yellow metal back above its 20- and 50-day moving averages. This week’s gains come in the wake of last week’s picture-perfect bounce from just in front of the 100-day moving average. While gold remains range bound, it continues to show remarkable resilience at a time of year when the market frequently experiences seasonal softness. If nothing else, the retracement back into the upper half the range reinforces the reaction low from early-May at 1462.25 as formidable support.

Gold’s buoyancy is largely attributable to the resurgence of contagion risks within the eurozone. As the EU/IMF/ECB continues to flail about trying to concoct a resolution to Greece’s second bailout dilemma, the market’s confidence in the troika is eroding. The absence of a cohesive plan for Greece has made it pretty obvious that the troika has no real plan for Portugal either, or any other distressed sovereign for that matter. Spurred by Moody’s downgrade of Portugal to junk status, yields are Portuguese sovereign debt have risen by more than 450 bps in less than 24-hours.

Source: Business Insider

As Joe Weisenthall of Business Insider points out: This is “a really mammoth collapse in confidence for a country that’s already been bailed out!” In fact, Portugal just finalized a €78 bln bailout 2-months ago; which drives home my point about waning confidence not just in the debt-ridden countries themselves, but in the European and international agencies seeking to save them. In fact, The Economist offered further illustration in an article yesterday entitled Spot the Pattern. The chart of 10-year Greek yields presented very clearly shows that the market has been increasingly less assuaged with every step European leaders take to avert disaster.

Interestingly, some of those European leaders have chosen to lash out at the rating agencies, even as Bloomberg reports that Ireland may too get downgraded to junk status despite a substantial bailout. There have been suggestions the Europe suspend sovereign debt ratings until the crisis is resolved, or that they do their own ratings. The ECB has already said that they would cherry-pick the most favorable ratings on distressed periphery debt. While there is plenty to fault about the rating agencies in the wake of the 2008 crisis, this all strikes me as quite desperate: If you don’t like the message…kill the messenger.

July 6 (MarketWatch) — The last financial crisis isn’t over, but we might as well start getting ready for the next one.

Sorry to be gloomy, but there it is.

Why? Here are 10 reasons.

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PG View: I think the most troubling of the 10 reasons is #6; which notes that Wall Street’s derivatives exposure has actually increased over the past 3-years by a whopping 35% from $183 trillion just before the Lehman collapse to $248 trillion today.

July 6 (Bloomberg) — Ireland’s credit rating may be cut to junk by Moody’s Investors Service after Portugal yesterday lost its investment grade rating, according to analysts.

Moody, which slashed Portugal to Ba2 from Baa1, in April lowered Ireland’s credit rating to the lowest investment grade Baa3 and left country’s outlook on negative.

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PG View: Contagion risks re-exert themselves as faith in EU/IMF/ECB troika’s ability to find a solution to Europe’s sovereign debt crisis wanes.

By Martin Wolf
July 5 (Financial Times) — The biggest question in any debt crisis is whether a credible path back to solvency can be found. For Greece, this now seems very unlikely. The same is true, to a lesser extent, for Ireland and Portugal. This raises three further questions. First, how big is any required restructuring? Second, who should bear the cost? Finally, is restructuring enough? If the answer to the last question is No, then one has to ask whether the currency union will last in its current form.

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Gold is firmer this morning amid heightened contagion concerns in Europe. With Greece’s second bailout still to be resolved, Portuguese yield spreads surged to record wides in the wake of yesterday’s downgrade. The yellow metal has now retraced more than half of the recent corrective retreat within the range and is trading back above its 20 and 50-day moving averages.

China acknowledged its local government debt problems following the warning from Moody’s that the magnitude of such debt is $540 bln larger than Beijing estimated just last week. Despite this new debt threat, the PBoC raised interest rates by 25bp today as efforts to curtail inflation continue. PBoC adviser Xia Bin said today’s rate move was “not enough,” suggesting that the tightening cycle that began late last year will continue.

President Obama has called party leaders to the White House on Thursday in the hopes of restarting stalled debt ceiling talks. The President rejected a proposed short-term deal that would have pushed the more substantive debt debate deeper into the campaign cycle, calling for a resolution within the next two-weeks.

The likelihood that China will continue to try and slow its economy, along with persistent debt woes in America and Europe have weighed on equities, increasing the appeal of gold as an alternative investment.

• Canada building permits surged 20.9% in May, well above market expectations of +4.5%, largely offsetting Apr surprise plunge of 21.5%.
• China hikes lending rate 25bp to 6.56%. Fifth hike of the cycle, which began in Oct-10.
• President Obama has rejected a short-term debt deal; calls leaders to White House on Thursday in hope of restarting stalled talks.
• Major Greek bond holders are meeting in Paris today to discuss debt rollover plans
• German May orders +1.8% m/m, well above market expectations, vs positively revised +2.9% in Apr.
• UK shop price inflation rose to a 2.9% y/y pace, a 22-month high, driven largely by a sharp 5.7% jump in food prices.
• Japan leading index rebounded to +3.6 m/m in May; further evidence of post quake/tsunami “V” recovery.

July 5 (The Economist) — Here is a chart [see article] showing the yields on 10-year Greek debt over the past three months. See the pattern?

There’s a spike, followed by a decline, followed by a higher spike, followed by a decline to a higher trough, and so on. European leaders keep taking steps to avert disaster, and each time markets are less assuaged.

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July 4 (Time) — The first thing any insolvent private person is forced to do is relinquish the family silver. But other rules seem to apply to governments. Whether they’ve been living above their means for a few years or for decades, certain countries hold on tight to their assets, declare themselves unable to pay back their debts and turn to other countries for help.

The European Union has seen many an example of this. Right now, Greece is negotiating with the troika of the E.U., the European Central Bank (ECB) and the International Monetary Fund (IMF) for a new rescue package while Athens sits on an impressive 114-ton stash of gold, about what four large, fully loaded trucks could carry.

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The credit ratings agency Moody’s Investors Service has downgraded Portugal’s debt to junk status.

The agency said there was a growing risk the country would need a second bail-out before it was ready to borrow money from financial markets again.

Moody’s was concerned that if there was a second bail-out, private lenders might have to contribute.

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PG View: With Greece’s second bailout yet to be fully resolved — and Portugal’s first €78 bln bailout less than two months in the past — rumblings of a possible need for a second Portuguese bailout suggests that contagion risks persist.

June 5 (MarketWatch) — Gold futures rallied Tuesday as concerns about global debt problems fed investment demand for the precious metal, lifting prices by more than $30 an ounce.

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June 4 (MarketWatch) — Greece is at risk of missing a key budget target in June, European Union experts said in a report, a sign of the uphill struggle the country faces as it tries to get its deficit reduction plans back on track.

…Government revenue faces “significant” shortfalls that have only partially been offset by lower spending and delayed payments, the report says. “As a result, the quarterly performance criterion on the primary balance could be missed already in June.”

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PG View: Even as Greece moved to pass further austerity last month, tax revenues continued to crater due to previous austerity measures, general strikes and diminished tourism.

Gold Rises on Indication that China May Face its Own Debt Woes

June 5 (USAGOLD) — In recent years, China has become a major creditor to the rest of the world, as massive trade imbalances with the West — and in particular the United States — caused their foreign exchange reserves to swell. As of April, China held $1.1525 trillion in US debt. Only the Fed holds more, thanks to the past several years of quantitative easing. More recently, China has stepped up to be a white-knight for Europe, actively buying the debt of distressed periphery nations.

Now suddenly, analysts are increasingly concerned about the mounting debt burden of China itself. Not only are many of the foreign assets on China’s balance sheet of dubious quality, but Moody’s has warned that China’s local government debt may actually be $540 bln larger than the National Audit Office (NAO) estimated. Moody’s believes that 8% to 12% of the loans on the books of Chinese banks could eventually prove to be non-performing, and in the worst-case scenario the ratio could be as high as 10% to 18%. This has prompted speculation that a Chinese bank bailout may be in the offing.

If China withdraws from global credit markets to focus on internal problems, there are likely to be substantial worldwide repercussions. As we have already noted, China has already pulled back significantly from the US market. Such a move could also severely undermine Europe’s efforts to mitigate their sovereign debt crisis.

With Chinese inflation expected to top 6% in June (CPI will be released on 15-Jul), the deterioration of the Chinese balance sheet could hamstring the PBoC’s reaction to price risks. The PBoC has been moving to tighten monetary policy to reign in inflation, but higher yields might exacerbate the internal debt issues, raising servicing costs and threatening downgrades for Chinese banks. This could ultimately lead to a central government bailout of the banking system.

Does this sound at all familiar? Because, this is pretty much the same conundrum faced by Europe and the US. If it is proven that the primary creditor nation in the world right now faces its own debt crisis, we’re all in a heap of trouble.

July 4 (Erste Group) — Erste Group analysts, in their annual Gold report, find that investor demand for gold has increased tenfold in 10 years indicating that the commodity is entering a new phase of the gold bull market as China and India drive demand. The price of gold has also been affected by global monetary stimulus programmes and the exchange rate between gold and paper is expected to rise even further, with Erste analysts predicting that the next 12 month target for gold will be USD 2,000.

“Since the first Gold Report five years ago, the gold price increased by +140 %. The long-term target of USD 2,300 which experts forecasted three years ago, could even be considered too conservative now”, commented Ronald Stöferle, Erste Group’s gold analyst.

Gold benefits from unsolved debt crisis
Given that the majority of debt has neither been written off nor paid off, the problem of excessive debt is still waiting to be resolved. This is why the low real interest rates will stay low which provides the perfect environment for gold. There are only a few ways out of the debt trap: growing out of one’s debt much like the USA did after WWII, or alternatively drastic spending cuts and rigid budget consolidation like Scandinavia in the 1990s.

Massive tax hikes, the creation of inflation, the depreciation of the currency or ultimately, national bankruptcy are amongst the most painful options. We expect gold to benefit in practically all of these scenarios.

It is also often forgotten that China and India remained the most important factors on the demand side. The higher gold affinity in combination with the increase in disposable income will definitely have a positive effect on gold demand. By 2020 emerging markets will generate 50% of global GDP, up from 19% in 2000.

Price level still attractive – no bubble in sight
In 2000 investor demand accounted for only 4.8% of total demand, while by 2010 that share had increased to almost 40%. According to Erste Group analysts, this indicates a clearly strong upward trend reversal and heralds a new phase of the bull market. It can be expected that institutional investors will dominate the next stage of the gold bull market. Especially insurance companies and pension funds should step up their gold allocation, seeing as the correlation to equities and especially to bonds is low or even negative. Gold is well known as a safe haven as it has never lost its value. The clear downwards trend of most currencies compared to gold is clearly illustrated by the graph. This trend might not mitigate very soon. We expect the gold price upswing to continue“, said Stöferle.

Gold, as antagonist of uncovered paper currencies, remains an excellent hedge against worst-case scenarios. Moreover, there is a clear correlation between the gold price and trust. A falling gold price would therefore relate to rising or at least stabilising trust. We believe that the trust lost in the past years will not be regained anytime soon, and that therefore gold still commands an excellent risk/return profile.

Gold pillar of a clever investment strategy
Gold should be part of every portfolio because of diversification and insurance aspects. Numerous studies prove that gold as portfolio module reduces overall risk and improves the performance. About 5 to 10% of the portfolio should be allocated to gold. In contrast to shares or bonds, there are no liabilities attached to gold. As such gold is highly recommendable for reasons of diversification. “We still expect the gold price to rise at least to the inflation-adjusted all-time-high of USD 2,300/ounce (dating from 1980) at the end of the bull market”, forecasted Stöferle. Some historical comparisons suggest even higher spheres. Stöferle explains, why gold does not pay any interest, “Gold is pure ownership without any liabilities towards any person or institution. It does not contain any counterpart risk.” In particular the previous month have shown a clear trend which is in favour of gold as an asset class. Gold has been more and more regarded as money of the purest water and increasingly less as commodity.

Returning to the gold standard?
The thought of a currency not pegged to gold would have probably been absurd 100 years ago. Today even the thought that back in 1971 every 35 US dollars were backed by one ounce of gold is absurd. „A return to the gold standard is not realistic at the moment. At least the discussion about it restarts“, said Stöferle. „Before implementing concrete measures, the strain must still increase“. Various studies on currencies show an interesting phenomenon: the stronger the gold pegging, the lower inflation.

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Full report (PDF): In Gold We Trust

PG View: Yet another piece of excellent and comprehensive analysis on gold by the Erste Group.

The European Central Bank will continue to accept Greek debt as collateral for loans unless all the major credit rating agencies it uses declare it to be in default, said a senior finance official.

The ECB would rely on the principle of using the best rating available from the agencies – Standard & Poor’s, Moody’s and Fitch – the official said. The comments came after S&P on Monday became the first agency to warn that a plan, pushed by France and endorsed by Germany, for banks to roll over their holdings of Greek debt into new bonds would constitute a “selective default”.

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PG View: So the ECB will cherry-pick the rating they like on Greek bonds, I suppose the next step is that the ECB will just do their own ratings…

July 5 (MarketWatch) — Given all the possible permutations of the continuing debt dilemmas in both the United States and Europe, finding a way to profit from the potential effect they’ll have on the markets is a complex challenge. Indeed, the current global landscape is fraught with so many cross-currents that calculating potential causalities is becoming less of a science and much more of an art.

…Given our view that the U.S. and Europe will continue to inflate their way out of these debt crises, printing money and debasing their currencies, we tend to favor precious metals — but we wouldn’t look to buy just yet.

…The bottom line is that investors should recognize the inherent long-term weakness of the major fiat currencies, and begin diversifying at least some percentage of their funds into hard assets, closely watching where major support levels develop for gold in order to identify the prime entry points.

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PG View: The “just not yet” in this article stems from the authors’ see “potential for a continued sell-off in stocks through the summer” and perceive there to be risk of a corresponding deleveraging sell-off in gold. I would argue that the deleveraging break of 2008 actually make a repeat less likely, as investors may be increasingly quick to move into the safety of gold.

July 5 (The Economic Times) — China’s local government debt may be 3.5 trillion yuan ($540 billion) larger than auditors estimated, potentially putting banks on the hook for deeper losses that could threaten their credit ratings, Moody’s said on Tuesday.

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