July 14 (US News)

The latest fear in Europe is that the sovereign-debt crisis could spread to two of the largest but weakest economies in the EU. Because Italy is the third-largest economy in Europe, it is attracting most of the attention. “Italy is the worst-case scenario,” says Dimitre Genov, manager of the Artio Global Equity Fund (BJGQX). It also has the world’s third-largest bond market, behind the United States and Japan. Italy’s debt, at about 120 percent of GDP, is second to only Greece among members of the EU. However, most of Italy’s debt is held within the country by domestic savers, so there isn’t as much pressure from foreign investors who may otherwise sell in huge numbers.

Meanwhile, the outlook for the smaller, so-called peripheral countries of Greece, Portugal, and Ireland has also worsened. In recent weeks, these countries have received a litany of downgrades from ratings agencies. Greece now carries the world’s worst credit rating, and experts say some type of default or restructuring of the debt is inevitable. Over the past week, Moody’s Investors Service has downgraded both Portuguese and Irish debt to junk status, noting that both countries may need a second bailout. Whether the peripheral countries make noticeable progress in trimming their deficits will be important for the future of the Euro and the EU. “The Europeans need to keep the situation contained within the three smaller countries,” says Geoffrey Pazzanese, comanager of the Federated InterContinental Fund (RIMAX). “It can’t spread to Spain and Italy.”

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July 14 (Reuters)

“I only ask … as Congress looks at the timing and composition of its changes to the budget, that it does take into account that in the very near term the recovery is still rather fragile, and that sharp and excessive cuts in the very short term would be potentially damaging to that recovery,” Bernanke told members of the Senate Banking Committee.

On the second day of delivering the Fed’s semiannual monetary policy report to Congress, Bernanke renewed his warning that a U.S. debt default would be devastating for the U.S. and global economies.

“It would be a calamitous outcome,” Bernanke said. “It would create a very severe financial shock that would have effects not only on the U.S. economy but the global economy.”

Earlier on Thursday China, the United States’ biggest foreign creditor, urged the U.S. government to adopt responsible policies to protect investor interests after the Moody’s warning.

“I believe the stage is set for a resurgence of inflation if the Fed is not careful,” Senator Richard Shelby told Bernanke at the hearing.

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July 14 (FT)

“We struggle to recall a week since last summer when there have been so many reasons why gold should climb,” said Edel Tully, precious metals strategist at UBS, noting that the Moody’s announcement “provided another reason to buy gold, whether as a hedge against the dollar, or as part of a general move away from paper assets.”

Walter de Wet, head of commodities research at Standard Bank, estimated that for every $500bn of additional liquidity provided by the Federal Reserve, gold prices would rise by $80-$100 an ounce.

The yellow metal rallied about $270 an ounce between Mr Bernanke’s first mention of a second round of quantitative easing – or “QE2” – in August last year and the end of the programme in June.

“If you’re a believer in more QE, then it makes sense to be long on gold,” said Mr de Wet.

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Is Gold Money?

As gold charged to new all-time highs this week, Fed chairman Bernanke was asked if he thought gold was money. He paused for a moment and then simply responded “No.” During testimony on Wednesday before the House Financial Services Committee, Mr. Bernanke admitted that he does follow the gold market, but he does not believe that the yellow metal is money, despite 6,000 years of history that suggests otherwise.

This line of questioning came from Rep Ron Paul of Texas, who has been a pretty consistent thorn in the side of the Fed throughout his tenure in Congress. Chairman Bernanke tried unsuccessfully to suppress a smile when it was acknowledged that Mr. Paul would not be seeking reelection to Congress and will instead focus on his run for the Presidency. If the Fed thinks that Paul is an irritant as a Congressman, I wouldn’t imagine Bernanke would be smiling much if Ron Paul were successful in his bid to be President.

Mr. Paul points out that over the last 3-years, the Federal government and the Fed injected more than $5 trillion into the economy with very little to show for it: Real GDP growth is below 1%, unemployment remains stubbornly high and despite official statistics that suggest inflation remains in check, Mr. Paul gives a little shout-out to Shadow Government Statistics which continues to calculate CPI by the old method. The SGS Alternate CPI presents a considerably different picture of inflation, which might prompt one to argue that the Fed is failing to fulfill its price stability mandate.

Courtesy of ShadowStats.com

Paul observes that most of that borrowed $5 trillion went to bailing out banks and buying bad assets, so I guess its really not much of a surprise that the impact on the real economy — which is driven by consumption — has been quite muted. Paul suggests we might have been better served giving $17,000 to ever person in the United States, “It couldn’t have worked any worse.” This exchange is even more disturbing within the context of the debt ceiling debate and in light of Mr. Bernanke’s recent hints that another round of quantitative easing might be necessary. According to Albert Einstein, the definition of insanity is “doing the same thing over and over again and expecting different results.”

As the dollar tumbled back into its range yesterday and gold surged — driven by Bernanke’s testimony about a possible QE3, ongoing debt troubles in Europe and heightened concerns about a potential US downgrade — I thought back to the question at hand: Is gold money? It certainly makes more sense in my mind than declaring by fiat that a piece of paper with a picture of a President on it is money. That piece of paper is simultaneously a liability on the balance sheet of the issuing country. Meanwhile, physical gold held in ones possession has no liability; no counterparty risk.

History is rife with examples of fiat currencies printed and devalued away to near-worthlessness. Not true of gold. In fact, gold has an inverse correlation with devaluing currency. Isn’t a reliable store of value what one would want in their money? So whether Chairman Bernanke believes gold is money or not, a growing number of prudent individual savers, institutions and sovereign nations are viewing it as such — or at least as an effective hedge against the dilution of paper money. In America the dilution of the dollar is being driven largely by the loose policies of Mr. Bernanke’s Fed.

If they do opt to try something different the next time around and give each of us $17,000, I think I would run out and buy $17,000 worth of gold immediately. And I bet I wouldn’t be alone.

July 13 (Guardian) — Britain must brace itself for decades of austerity, even after enduring chancellor George Osborne’s spending squeeze, to pay the price for an ageing population, according to the independent Office for Budget Responsibility (OBR).

The OBR, which was set up by the chancellor to produce independent projections of the public finances, says in its report that the rising cost of health care and pensions, and declining tax revenues from the North Sea, will mean future governments have to take action to prevent debt levels rising inexorably.

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PG View: The aging of the US population presents similar challenges.

July 14 (Guardian) — America’s debt crisis reached a critical stage on Thursday as lawmakers remained deadlocked over whether to raise the US debt ceiling, and Moody’s threatened to downgrade the country’s credit rating.

The dollar lost ground against most major currencies after Moody’s and Chinese ratings agency Dagong both put the US on negative watch. Reports, later denied, that President Obama had walked out of debt negotiations with top Republicans added to the drama.

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July 14 (USAGOLD) — Gold remains well bid, having established yet another new record high overseas at 1594.29 as the market continues to digest Fed chairman Bernanke’s testimony yesterday. The market is all abuzz with renewed expectations that there will be a QE3. Adding additional impetus to the rally in gold, was Fitch’s downgrade of Greece to CCC and news that Moody’s had put the US on review for a possible downgrade. Both occurred in late trading yesterday.

Today’s Italian bond auction attracted sufficient buyers, but they demanded higher rates than expected. Analysts fear the higher financing costs will prove unsustainable. Spreads widened back out and the euro faltered after the auction on those concerns. Italy will attempt to pass a new 4-year austerity plan before the weekend.

• US PPI -0.4% in Jun, below expectations of -0.2%. Core +0.3%, above market expectations.
• US retail sales +0.1%, just above market expectations of unch. Ex-auto unch, below expectations.
• US initial jobless claims -22k to 405k in the week ended 09-Jul, below market expectations. Previous week revised up from 418k to 427k.
• Eurozone June HICP inflation confirmed at 2.7%, core accelerated to 1.6% y/y.
• Bank of Korea held steady on rates as expected; repo rate remains at 3.25%, as expected.

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.