Ambrose Evans-Pritchard – The Telegraph (July 11)

“We’ve painted ourselves into a corner. At this point, either someone – Germany, the European Central Bank – has to fundamentally shift position, or everything blows up,” an EU official told Reuters.

Gary Jenkins at Evolution Securities said the EU cannot keep stalling. Italy’s borrowing costs are ratcheting towards the fatal line of 7pc. “It is worth remembering how quickly bond yields can get out of control by looking at what happened to Greek, Irish and Portuguese 10-year yields. What would keep me awake at night if I was a European finance minister is that we are only about 2pc from potential disaster,” he said.

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July 8 (Reuters) — “The U.S. government has its work cut out for it,” said Douglas Borthwick, managing director at Faros Trading in Stamford, Connecticut. “U.S. fiscal problems have been put off for so long that the government has to cut spending at a time when the economy is unable to absorb it.”

As a share of output, the $1.4 trillion budget gap expected for the fiscal year ending in September is one of the largest since World War Two.

“We really are in a bind here,” Cliggott said, “We have to start addressing the deficit, and if it means a rough stretch for corporate profits and the equity market, then they go through a rough stretch. Putting it off is not the answer.”

David Semmens, U.S. economist at Standard Chartered, said the 2012 election may clip even the biggest deficit hawks’ wings, as lawmakers won’t want to lose votes. A rising jobless rate is an impediment for Obama’s reelection chances.

“I think any spending cuts will be aimed at 2013,” he said.

“It shows the tightrope that has to be walked,” said Greg McBride, senior financial analyst at Bankrate.com. “We’ve got to rein in the government red ink so we don’t in coming years face a day of reckoning. But it’s a balancing act, because if you rein it in too much, it will plunge us into recession.”

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JK Comment: Good explanation of the current state of a “rock and hard place” for the US economy…I was especially drawn to what I think is an important consideration for our clientele…will anything meaningful really happen in terms of deficit reduction over the next year and a half as we move toward another presidential election? We’ve often talked about the political will to do what’s “necessary” in our Video RoundTable Series. With the motivation to be re-elected amongst all politicians, democrat and republican alike (and the ability to do so being largely dependent on positive economic performance), it is unlikely there will be any meaningful change to the policies that have been implemented over the past two and a half years. In short, more debt is more palatable for the voting public as it has a more broadly socialized impact, making it the “safer” choice for our elected officials. Economic retraction through spending cuts and higher taxes won’t be well received as it has a more localized and personal impact, even though it is arguably much better for all of us in the long run. In the end, all signs point to more of the same (at least for another year and a half, though perhaps much longer)….an environment that has seen gold increase 78% since January 2009.

Gold Jumps as EU Contagion Worries Mount

July 11 (USAGOLD) — Eurozone contagion worries have intensified as yields in the periphery moved higher once again and spreads in both Italy and Spain advanced to new euro-era highs as well. “We believe the European sovereign crisis might be entering a new phase with contagion reaching the larger economies,” said Jacques Cailloux, chief Europe economist at RBS in a Telegraph article.

If the core of Europe is infected by the sovereign debt crises that have been for the most part successfully contained to the periphery, there is little hope that the EU/IMF/ECB troika has the means to orchestrate a bailout of that magnitude. The combined public and private debt of Italy and Spain alone is reported to be about €6.3 trillion. It therefore becomes very obvious why the troika has expended such political and monetary capital in bailing out Greece, Ireland and Portugal. They simply can’t afford contagion to the core.

What’s the troika’s solution? Well, for the time being they seemed to be focused on attacking the credibility of the ratings agencies; as if without the agencies the fundamental problems wouldn’t exist. Even if there were no ratings agencies at all, analysts at the big investment banks and other sovereigns would be digging into the data to discern the counter-party risks and acting accordingly. The net results in the bond markets of the world would be the same — if perhaps a little delayed — but delay does seem to be the name of the game these days. The focus of these seemingly unending ‘emergency meetings’ appears to be delaying the inevitable. They never seem to make any true progress on the underlying fundamentals that resulted in the crisis in the first place.

Again, the ratings agencies do indeed have credibility problems in the wake of their misread of the initial financial crisis, but seeking to silence them may actually be doing more harm than good. Suspending ratings on sovereign debt may actually incent investors to dump that debt. That pretty clearly has been the case with Portugal recently.

Even as the situation in Europe continues to deteriorate, markets continue to reel from Friday’s terrible US nonfarm payrolls report for June. In the face of a slowing economy the jobs picture is worsening, which in turn has a negative impact on the economy and the already moribund housing market. All of these factors negatively impact tax revenues, even as the President himself now seems to be focusing much more intently on the spending side of the balance sheet. Nonetheless, hopes of a ‘grand bargain’ to raise the debt ceiling that blossomed ahead of this past weekend seem to have been dashed with just about 3-weeks to go before Treasury Secretary Geithner says we’ll have to start selectively defaulting.

July 11 (USAGOLD) — EUR-USD extends losses below 1.4000. The corresponding rise in the dollar leaves resistance marked by the June high in gold at 1558.09 intact for now. EUR-CHF intraday low now stands at 1.1672.

July 11 (MarketWatch) — Gold futures gained Monday on continuing concerns about Europe’s sovereign-debt crisis and as investors eschewed investments considered riskier, such as U.S. stocks.

Gold for August delivery added $13.20, or 0.9%, to $1,554.80 an ounce on the Comex division of the New York Mercantile Exchange, gaining momentum as U.S. equities opened lower.

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July 10 (Reuters) — European Council President Herman Van Rompuy has called an emergency meeting of top officials dealing with the euro zone debt crisis for Monday morning, reflecting concern that the crisis could spread to Italy, the region’s third largest economy.

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PG View: Europe moves from one emergency meeting to the next and yet the sovereign debt crisis seems to be getting away from them once again. Perhaps it’s because these meetings are always about delaying the day of reckoning, while never making inroads with the core fundamental issues that inevitably led to crisis. In the respect, Europe is very much like America.

July 10 (The Telegraph) — Once again Europe’s debt crisis has metastasized, and once again the financial authorities face systemic contagion unless they take immediate and dramatic action.

If the ECB’s Jean-Claude Trichet is right in claiming that Europe was on the brink of a 1930s financial cataclysm a year ago – and I think he is – it is hard see how the threat is any less serious right now.

Fall-out from Greece flattened Portugal and Ireland last week. It is engulfing Spain and Italy, countries with €6.3 trillion of public and private debt between them.

[source]

July 11 (USAGOLD) — Gold has set new record highs against the euro above €1105.00, amid heightened contagion fears in Europe. Italian and Spanish spreads have widened to euro-era records, and the threat to ‘core-Europe’ has pushed the single currency within striking distance of its 2-month range low. Meanwhile, the euro plunged to new record lows against the Swiss franc below 1.1700. While the worsening situation in the eurozone has also lifted the dollar, the yellow metal doesn’t seem to care, with gold pressuring the June high at $1558.09, the final tier of significant resistance ahead of the 1574.60 all-time high.

• Japan Consumer Confidence continues to rebound, firming to 35.3 in Jun, vs 34.2 in May.
• China CPI +0.3% m/m in Jun to +6.4% y/y pace (a 3-year high), above market expectations, vs 5.5% in May.
• China export +17.9% y/y in Jun, below expectations, vs +19.4% y/y in May; imports fell to +19.3% y/y, vs 28.4% y/y in May.

July 8 (BusinessInsider) — After that miserable jobs report, the pace of the recovery looks as horrible as ever.

This chart measures the percentage of jobs lost during various recessions, and the pace of recovery. As you can see, this recession saw WAY more aggressive job cutting than in the past, and the recovery has been anemic.

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July 7 (Financial Times) — Central banks have pulled 635 tonnes of gold from the Bank for International Settlements in the past year, the largest withdrawal in more than a decade.

The move, disclosed in the BIS’s annual report, marks a sharp reversal from the previous year when central banks added to deposits of gold at the so-called “bank for central banks” rather than lending it directly to the private sector amid growing concerns over counterparty risk.

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July 8 (PIMCO) — As the August 2nd debt ceiling deadline looms ever closer, President Barack Obama has asked congressional leaders to work through the weekend. The hope is for agreement on a “grand bargain” that avoids disorderly disruptions to government payment obligations and creates, quoting the president’s remarks of yesterday, “an environment in which we can grow the economy and make sure that more and more people are being put back to work”. The likelihood is that the disruptions will indeed be avoided but, unfortunately, only through a “mini deal”.

…Let us therefore hope that, if it indeed materialises, the mini-deal is only a means to a grand bargain down the road. It would be a tragedy if, instead, it were an end in itself.

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PG View: Sadly, ad-hoc mini-deals seem to be the best that our Representatives can muster, as political gamesmanship ahead of the 2012 elections takes precedence over truly solving our countries debt addition. It is therefore likely that we will be stuck in this economic morass for some time to come.

July 8 (HousingWire) — Housing prices are likely to keep falling the rest of this year, and probably won’t show much improvement next year either, according to a survey of economists.

A CNN Money exclusive survey of 27 economists showed the battered housing market is facing myriad problems and won’t turn around anytime soon.

[source]

by Jacob Goldstein
July 8 (NPR) — The U.S. economy added only 18,000 jobs last month, according to this morning’s jobs report. This is not nearly enough to keep up with population growth, much lower than economists were expecting and way down from the pace of job growth earlier this year.

The unemployment rate rose to 9.2 percent. A more inclusive measure, known as broader unemployment, rose to 16.2 percent. That’s more than 25 million people.

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July 8 (Guardian) — Italian banks on Friday bore the brunt of concerns about the financial health of Europe’s banking sector before official results of stress tests due on 15 July.

The UK’s major banks – including bailed-out Royal Bank of Scotland and Lloyds Banking Group – are among 91 in Europe to have been subjected to the crisis scenarios drawn up by the European Banking Authority.

While the UK’s banks are expected to pass the health check, Italian bank shares slumped amid concern they might need new capital and that the country may be dragged into the eurozone crisis.

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Grim Employment Data Raises Expectations of QE3…and Gold

Gold extended gains to new two-week highs in the wake of today’s terrible nonfarm payrolls report for June. There were just 18,000 jobs added to the economy last month on expectations of 90,000. The unemployment rate edged higher to 9.2%, while the broader U6 measure of un/under-employment jumped to 16.2%. Negative back-month revisions to both May and April added insult to injury, prompting a sell-off in stocks and a sharp drop in US yields.

The rise in Treasuries and gold is in part associated with continued safe-haven demand, as anemic economic growth translates into higher unemployment — with the overhanging threat of default if a resolution to the debt ceiling crisis fails to materialize over the next several weeks. However — and perhaps more significantly — today’s grim jobs data have increased speculation that the Fed will eventually cave to the economic realities and launch QE3 sooner rather than later. At least a serious hint about the prospects for a QE3 could come as soon as the 09-Aug FOMC policy statement, or perhaps Chairman Bernanke will wait until the economic policy symposium in Jackson Hole the last weekend of August. At any rate, based on today’s news, I put the odds of QE3 between now and year-end at 3/5.

Truth be told, we always figured that something would have to be done to fill the demand void for US paper left by the Fed when QE2 concluded at the end of June. I think the Fed was overly-optimistic in assuming that approximately $300 bln in QE-lite reinvestments over the next year would be sufficient to keep rates low and encourage business investment and job creation. Here’s the problem though, in announcing the end of QE2, Bernanke acknowledged the risks of ongoing balance sheet expansion. Now the Fed doesn’t really need to explain anything to anyone, but if Bernanke back-tracks and says further asset purchases are suddenly necessary once again — that the economic risks outweigh the risks associated with more QE — the Fed’s credibility is likely to be further eroded.

As we’ve seen in Europe recently, when central banks and other governing bodies flail about trying to resolve crises, credibility is called into question and bad things happen to markets. Invariable more paper — in the form of debt and fiat currency — gets issued to paper-over the crisis de jour. In such circumstances, hard assets such as gold tend to fair very well as they are the classic hedge against the seemingly unending blizzard of paper. If the Fed reverts to more aggressive quantitative easing in yet another effort to reinvigorate the flagging US economy, we could be facing the blizzard of the century.

July 8 (GoldCore) — While all the focus will be on the US jobs market today, the more important long term factor of robust global and massive Asian demand should continue to support gold around the $1,500/oz level and silver around the $36/oz level.

Bloomberg reports this morning that gold and silver imports into India, the world’s largest importers of bullion, rose 200% to $17.7 billion in the 2nd Quarter of 2011 (April-June).

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Flight to quality has pushed gold to new 2-week highs in the wake of terrible employment data. The US economy added just 18k jobs in June, well below market expectations, which were running around +90k. Adding insult to injury; May’s weak print of +54k was more than halved to just +25k. April was revised lower as well from +232k to +217k.

The unemployment rate rose to 9.2%, while the broader U6 number jumped to 16.2%. The labor force participation rate fell to a new 25-year low of 64.1%. Average hourly earnings decreased by 1¢ to $22.99.

US stocks tumbled following the jobs report, as did yields on US Treasuries amid a resurgence in QE3 expectations. And the latter is good for gold.

• US nonfarm payrolls +18k in Jun, well below market expectations. Jobless rate edges higher to 9.2%.
• Canadian employment +28.4k in Jun, above market expectations; unemployment rate 7.4%.
• US Monster.com employment index +3 points to 146 in Jun, +4.0% y/y and at the highest level since Oct-08
• UK June PPI: Input prices +17.0% y/y (nsa), above expectations; output prices +5.7% y/y (nsa), near expectations.
• German trade surplus €14.8 bln in May, up from €9.9 bln in May-10. Exports rebounded 4.3% m/m, vs -5.6% m/m in Apr. Imports +3.7% m/m.
• Japan May current account +Y594 bln surplus, but still -51% y/y on disruptions from earthquake/tsunami.

July 8 (BLS) — Nonfarm payroll employment was essentially unchanged in June (+18,000), and the unemployment rate was little changed at 9.2 percent, the U.S. Bureau of Labor Statistics reported today. Employment in most major private-sector industries changed little over the month. Government employment continued to trend down.

[source]

June NFP at 8:30ET.

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.

[source]

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.