July 13 (CBS News)

Ratings agency Moody’s announced Wednesday afternoon that it has put the United States’ Aaa bond rating under review “for possible downgrade given the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on US Treasury debt obligations.”

Moody’s, one of the three big ratings agencies, said it was also reviewing the Aaa ratings of Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks because of their connection to the U.S. government as well as securities linked to the government or those financial institutions.

The United States has earned the best possible credit rating because of its history of paying its creditors. Losing that rating would result in increased interest rates and prompt the world’s creditors to seek alternatives to U.S. treasuries.

Moody’s describes the risk of “short-lived default” as “small but rising” due to the continued gridlock in Washington. “An actual default, regardless of duration, would fundamentally alter Moody’s assessment of the timeliness of future payments, and a Aaa rating would likely no longer be appropriate,” the agency said. It added that if even a short-lived default occurred, “A return to a Aaa rating would be unlikely in the near term.”

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July 13 (USA Today) — Moody’s credit-rating service announced it is putting the U.S. government on review for a possible downgrade because of the rising possibility the debt limit will not be raised on a timely basis.

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July 13 (Financial Times) — Gold surged to a new record on Wednesday, propelled by the possibility of a third round of quantitative easing in the US.

The yellow metal, already rallying hard on the back of fiscal concerns in the eurozone, jumped to within reach of $1,600 a troy ounce after Ben Bernanke, Federal Reserve chairman, said the central bank could take further steps to prop up the US economy if needed.

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July 13 (Financial Times) — The International Monetary Fund on Wednesday warned that the Greek sovereign debt burden risked spiralling out of control and that it would be “appropriate” for private bondholders to share in any restructuring.

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PG View: What’s not abundantly clear is why the private sector would voluntarily share the cost of a Greek default when the EU/IMF/ECB troika has consistently stepped in to bailout insolvent sovereigns to the great benefit of the private sector.

July 13 (Forbes) — Chairman Ben Bernanke faced-off with Fed-hating Representative Ron Paul during his monetary policy report to Congress on Wednesday. The head of the Fed was forced to respond to accusations of enriching already rich corporations while failing to help Main Street, while he was pushed on his views on gold. When asked whether gold is money, Bernanke flatly responded “No.”

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PG View: While the Fed chairman may not view gold as money, the ranks of those that do — or at least that see it as a hedge against devaluation of fiat currency — continues to grow every day as Mr. Bernanke’s Fed pursues its expansionary monetary policies.

July 13 (Financial Times) — Bill Gross has reversed course, with the manager of the world’s largest bond fund scaling back bets against the value of US government debt in June as investors sought safety in Treasuries.

Pimco’s $244bn Total Return fund increased its holdings of government debt for the second consecutive month and returned its overall position in what it terms “government-related securities” to zero for the first time since February, according to a report issued by the company on Tuesday.

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PG View: Pimco, which notably liquidated their Treasury position and then went short in advance of the end of QE2, has now covered those shorts. Seems to be pretty apparent where the bond giant thinks rates are going, which can probably only be accomplished with additional quantitative easing.

Gold Surges to New Record Highs

July 13 (USAGOLD) — Gold extended this weeks gains to exceed the early-May high at 1564.70, establishing new record highs (currently 1587.58). Gains in the yellow metal have been driven by safe-haven demand stemming from the worsening of the eurozone sovereign debt crisis and the failure of US policymakers to make any substantive progress toward a debt ceiling compromise. However, it was recent hints about the possibility of another round of quantitative easing that really sent gold flying and the dollar reeling.

The initial hint at QE3 came yesterday, buried in the minutes of the June 21-22 FOMC meeting. Then today, in Humphrey Hawkins testimony, Fed chairman Bernanke said, “recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support.” As we already know, the Fed and Bernanke specifically, view deflation as a far greater evil than inflation, and will therefore take whatever action is necessary to prevent the former. QE3 is just the most obvious and easily implemented option the Fed has, even though it has proven to be largely ineffective in boosting the languishing US economy. One could argue however that it has prevented deflation from occurring, so it would be no surprise if the Fed began new Treasury purchases if they see those deflation risks rearing their ugly heads once again.

Heightened expectations of more debt monetization by the Fed weighed heavily on the dollar over the past two sessions, providing additional impetus to an already strong rally in gold. Clearly the stock market loves the notion of more Fed asset purchases too.

Global stocks were already on pretty firm footing when Bernanke spoke, thanks to some robust economic data out of China. These data mitigated concerns of a hard landing in China, but also simultaneously increased the likelihood that the PBoC would remain focused on inflation fighting. The State Information Center, a leading government think tank, suggested in a research report that, “The central bank should raise the interest rates by one to two percentage points further to ensure residents’ wealth won’t depreciate.”

Based on today’s Humphrey Hawkins testimony, it would seem that the Fed chairman doesn’t have similar concerns about the wealth of American residents. Investors are therefore prudently seeking protection from currency dilution by buying gold.

CNN (July 13) “Clearly, if we went so far as to default on the debt, it would be a major crisis because the Treasury security is viewed as the safest and most liquid security in the world,” Bernanke said, indicating such an event would raise interest rates and send shockwaves rippling through the entire global system.

And contrary to what some Republicans have proposed, just paying interest on the debt to bondholders may not preserve the nation’s pristine credit rating, Bernanke said.

“It’s possible that simply defaulting on our obligations to our citizens might be enough to create a downgrade in credit ratings and higher interest rates for us, which would be counterproductive, of course, since it makes the deficit worse,” he said.

On the one hand, the possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support,” he said in prepared testimony, indicating the Fed stands ready to provide additional stimulus if the recovery falters.

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July 13 (MarketWatch) — Gold futures climbed more than $20 an ounce Wednesday, poised to log a record close as European debt contagion fears and the U.S. Federal Reserve’s hints at further economic stimulus fed investment demand for the precious metal.

“Inflation and deflation have now been slugging it out for over a decade, and physical gold remains an obvious, sensible refuge for private savings caught in the middle,” said Adrian Ash, head of research at BullionVault.com, an online service for gold-bullion trading and ownership.

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July 13 (Bloomberg) — Gold climbed to a record in New York on concern that Europe’s debt crisis will spread. Silver prices surged the most since March 2009.

Ireland joined Portugal and Greece yesterday as the third euro-area nation to have its credit rating cut to below investment grade. The dollar fell against a six-currency basket on signs that the Federal Reserve will continue to use monetary stimulus to revive the U.S. economy. Investors have boosted holdings of exchange-traded products backed by precious metals to more than $125 billion.

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July 13 (USAGOLD) — Gold has pushed to a new record high of 1587.58 on the latest hint of QE3 from Fed chairman Ben Bernanke during this morning’s Humphrey Hawkins testimony.

Bernanke said that, “recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support.”

This was more explicit than the hint of at additional accommodations dropped in the minutes from last month’s FOMC meeting, which came out yesterday.

Bernanke also took a little shot at gold, saying that the yellow metal has risen because it provides a hedge against “tail risk” of a catastrophic event, adding that it is an asset, not a currency. Well that’s certainly one opinion, but more and more individual investors, institutions and sovereigns are viewing gold as an alternative to fiat currency.

Gold has extended into uncharted territory, violating the May peak at 1574.60 and establishing a new all-time high at 1579.99.

Robust economic data out of China encouraged markets, wetting risk appetites once again. As the US economy founders and both the US and Europe struggle with debt crises, China continues to pick up a good portion of the slack in the global economy. However, strong Chinese growth in the wake of the higher than expected Jun CPI print should keep the PBoC focused on inflation fighting.

Irish yields are higher today, after Moody’s downgraded Ireland to junk status late yesterday. While Italian and Spanish yields have moderated somewhat, a resolution to the eurozone crisis remains elusive and contagion worries persist. The euro is being underpinned by sovereign demand, and the commodity currencies liked the China data, which has resulted in a more defensive posture for the dollar.

• US import prices -0.5% in Jun, above market expectations; export prices +0.1%.
• Eurozone industrial production up just 0.1% m/m in May, below market expectations; Annual rate falls to 4.0% y/y from 5.3% y/y in Apr.
• UK claimant count unexpectedly jumped to 24.5k in Jun, well above market expectations; claimant count rate steady at 4.7%.
• China GDP eased to +9.5% y/y, vs 9.7% y/y pace in Q1, but trajectory remains encouraging.
• China retail sales rose to +17.7% y/y in Jun, above market expectations, vs +16.9% in May.
• China industrial production +15.1% y/y in Jun, above market expectations, vs +13.3% y/y pace in May.
• Japan industrial production revised higher to record +6.2% m/m from preliminary print of +5.7% for May.

July 12 (Reuters) – Ireland’s credit rating was cut to junk status by ratings agency Moody’s which said the country will likely need further rounds of official financing before it can return to international capital markets.

Moody’s cut Ireland’s ratings by one notch to Ba1 from Baa3 and kept a negative outlook on the rating.

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July 12 (The Atlantic) — The Federal Reserve just isn’t sure what’s going on. Although the minutes from its June meeting make some broad assertions about the U.S. economy, the economists appear to be squinting at a future clouded by uncertainty. Rather than dwell on any one thing the Fed concludes, here are ten takeaways from the discussion notes released Tuesday afternoon.

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PG View: I think they should have included the word “yet” at the end of the headline.

July 12 (CNNMoney) — Gold jumped to a record high Tuesday after the minutes from the Federal Reserve’s June policy meeting indicated the central bank might be open to more monetary stimulus.

Gold futures for August delivery climbed $13.10, or 0.9%, to a record high of $1,562.30 an ounce. In after-market electronic trading, gold rose as high as $1,574.30 an ounce.

The late-afternoon surge came after the minutes from the Federal Reserve’s June meeting said “a few members” of the bank’s Federal Open Market Committee said the bank “might have to consider providing additional monetary policy stimulus, especially if economic growth remained too slow to meaningfully reduce the unemployment rate in the medium run.”

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July 12 (MarketWatch) — Gold futures crowned a six-session winning streak with a nominal record Tuesday, overcoming a wobbly start with support from ongoing worries about the euro-zone debt crisis.

Gold for August delivery added $13.10, or 0.9%, to settle at $1,562.30 an ounce on the Comex division of the New York Mercantile Exchange.

That handily supplanted a previous settlement record of $1,557.10 an ounce on May 2.

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Excerpt from June 21-22, 2011 Minutes of the Federal Open Market Committee Meeting

Participants also discussed the medium-term outlook for monetary policy. Some participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated, it would be appropriate to provide additional monetary policy accommodation.

PG View: Stocks like the notion of more debt monetization too.

The information reviewed at the June 21-22 meeting indicated that the pace of the economic recovery slowed in recent months and that conditions in the labor market had softened. Measures of inflation picked up this year, reflecting in part higher prices for some commodities and imported goods. Longer-run inflation expectations, however, remained stable.

The expansion of private nonfarm payroll employment in May was markedly below the average pace of job gains in the previous months of this year. Initial claims for unemployment insurance rose, on net, between the first half of April and the first half of June. The unemployment rate moved up in April and then rose further to 9.1 percent in May, while the labor force participation rate remained unchanged. Both long-duration unemployment and the share of workers employed part time for economic reasons continued to be elevated.

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The Street – Alix Steel – (July 12)

Mihir Dange, co-founder of Arbitrage, says he is flat right now and is sideways bullish on the gold market. “We’re still waiting on a lot of events,” says Dange referring to Washington’s failed attempt over the weekend to resolve the debt ceiling as well as Europe’s inability to help Greece or prevent contagion. These events “could push the market one way or another,” says Dange. “It will probably be choppy between $1,560 and $1,575 and look for a breakout above $1,577″ an ounce, the metals intra-day record.

Dange isn’t concerned that gold prices haven’t hit new records given the spate of negative headlines pounding markets, but says the fact that gold has held up while other assets saw mass liquidation is very bullish.

Silver, on the other hand, typically a go-to metal like gold, has been suffering from the industrial metal blues. As investors worry about a global slowdown, flat or negative demand from Europe and the U.S., and credit tightening in emerging market countries — typically voracious consumers of industrial metals — silver has become less appealing.

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JK Comment: Our clients often ask why gold and silver don’t always move in the same direction…this article has good coverage of this topic.

July 12 (MarketWatch) — Gold futures rose Tuesday, supported by ongoing worries about the euro-zone debt crisis and poised to extend gains into a sixth session.

Gold for August delivery added $4.10, or 0.3%, to $1,553.40 an ounce on the Comex division of the New York Mercantile Exchange. It had earlier wavered between small gains and losses.

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PG View: The yellow metal is now just a dollar off of yesterday’s high at 1556.41, less than $20 off the all-time high.

By COREY BOLES
July 12 (The Wall Street Journal) — A “real solution” to U.S. fiscal problems isn’t possible as long as President Barack Obama remains in office, Senate Minority Leader Mitch McConnell said Tuesday, heightening the rhetoric surrounding the debt-ceiling debate.

Mr. McConnell, the Senate’s top Republican, and House Speaker John Boehner (R., Ohio), both blamed President Obama for the stalemate in the debt-ceiling and deficit-reduction talks, and urged the White House to break the impasse. Negotiations were to resume for a third-straight day Tuesday afternoon.

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PG View: Rhetoric suggests that a wide ideological divide remains in debt ceiling negotiations as deadline looms.

July 12 (Forbes) — As contagion sends ripple effects through the European periphery, with Italy in the eye of the storm amid rumors that the European Central Bank (ECB) has intervened and bought Italian sovereign bonds on the secondary market, analysts are coming to the conclusion that Italy is too big to bail given massive funding requirements and total debt outstanding of €1.6 trillion ($2.2 trillion).

…While funding requirements for 2012 the three PIIGs that have already been bailed out totals €91 billion ($127 billion), Italy’s funding requirements reach a massive €250 billion ($350 billion).

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This looks like a good time to buy physical.

The speculators are confused and that confusion is reflected in a restrained paper market price. Lately, I’ve entertained the notion that high-frequency traders in the gold market have their algorithms set so their buys/sells respond to the euro. This results from the old notion that gold goes contrary to the dollar. Thus, when the euro drops, it acts as a trigger for a flood of auto-sells despite the fact the dollar isn’t a significantly better safe haven than the euro. Similarly, when the euro rises, a flood of trades comes in on the buy side. This creates a false impression and a false trade that might come back to haunt the hft’s at some point in the future.

The hft’s (and other traders using the euro as a stalking horse), if my analysis proves accurate, have effectively kept the the market in relative calm when it should be soaring, simply because they are following the wrong pied piper (the euro). Once they wake up to the reality that real gold demand is essentially a safe haven strategy being adhered to on both sides of the Atlantic (and against both currencies), they will reset their algorithms which could translate to turbocharging for the gold market.

The safest way to take advantage of this situation is not to play the futures or options where you could be run out of the market before the adjustment arrives. It is to buy the physical metal itself where you won’t be buffeted by the trading winds. Ultimately, as I have said many times over the years, gold is not really an investment at all, but an insurance policy taken out against a failing economic system. Over the past few days, gold has begun to act like a safe haven play rather than a speculation, as it separates from the other metals and commodities in general. That reality will likely register in the right places as time goes on.

This, of course, is all speculation. I have no way of knowing for certain how the hft’s set their algorithms. The thought occurred to me as I tried to understand just why gold might be hampered by a weaker euro in light of what’s going on in the EU, and thought I would pass it along.

July 12 (Reuters) — The euro zone’s debt crisis has taken a dangerous turn. Contagion is singeing the currency bloc’s third biggest economy Italy, which would be too big to save with existing EU financial fire-fighting tools.

The cheapest way for Europe to build a firewall to shield Italy would be to take decisive action this month on a second bailout for Greece, market participants and EU officials say.

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PG View: Or perhaps they allow a selective default on some Greek debt to serve as a pressure valve.

July 12 (MSNBC) — President Barack Obama has painted a bleak picture of what could happen to the economy if lawmakers do not agree on a pact to cut the deficit in time to avoid a U.S. default. He warned the economy could slip back into recession and lose millions more jobs.

The reality is that economists don’t know exactly what would happen. What they do know is that we would stray into territory marked “Here Be Dragons” on the economy’s map.

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July 12 (Commodity Online) — Imports of Gold and Silver by India are soaring thanks to an unabated demand for the bullion commodities. While India’s import of gold has risen were up by 76% and 160% in April and May respectively, silver import was up by 22% in the same period compared to last year.

According to UBS, India continues to be a robust centre of attraction for gold bullion sales. UBS said that gold and silver imports are set to soar in India in 2011 thanks to an unprecedented consumer demand for these commodities.

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Gold has rebounded from overseas corrective downticks amid FX market volatility as Europe continues to unravel. The EUR-USD broke out of its recent range to the downside, falling to a 4-month low of 1.3838 as contagion worries centered on Italy and Spain mounted. Talk of ECB intervention in Italian and Spanish debt markets has provided a reprieve, as has the first acknowledgement from EU leaders that Greece may have to default in order to stem the contagion to the larger European economies. This has apparently sparked rumors of a potential downgrade to France; likely because of their exposure to Greek debt.

Meanwhile, here in America, there is no substantive progress on the debt ceiling negotiations; so the countdown to a US downgrade continues.

• US trade deficit widened to $50.2 bln in May, above market expectations, vs $43.6 bln Apr.
• Canada trade deficit dipped to -C$800 mln in May, above market expectations of -C$1.0 bln; exports +1.2%
• UK trade deficit unexpectedly widened to £8.5 bln in May; Jun CPI unexpectedly declined to 4.2%.
• French HICP inflation accelerated to 2.3% y/y in June, vs 2.2% y/y in May.
• German June CPI confirmed at 2.3% y/y. HICP steady at 2.4% y/y, in line with market expectations.
• BoJ held o/n call rate steady as was widely expected. Positive revision to economic assessment.
• China FX Reserves rose to $3.198 trillion in Jun, +$153 bln q/q in Q2; reflective of continued intervention to suppress CNY.