July 18 (The Hill) — The White House on Monday warned President Obama will veto GOP legislation to “Cut, Cap and Balance” spending and the budget.

In a statement of administration policy, the White House Office of Management and Budget labeled the GOP bill as an “empty political statement.”

…“Neither setting arbitrary spending levels nor amending the Constitution is necessary to restore fiscal responsibility,” the White House said in its statement. “Increasing the federal debt limit, which is needed to avoid a federal government default on its obligations and a severe blow to the economy, should not be conditioned on taking these actions. Instead of pursuing an empty political statement and unrealistic policy goals, it is necessary to move beyond politics as usual and find bipartisan common ground.”

[source]

PG View: Despite suggestions to the contrary today, it doesn’t appear that the two sides in the debt ceiling debate are making any true headway toward a solution.

Gold trades above $1,600, Silver Back Above $40

July 18 (USAGOLD) — Gold starts the week with a move above the $1,600 level as the situation in Europe continues to unravel. The yellow metal has established new record highs against the euro and sterling as well, finally breaking £1,000. Yields are blowing out in the eurozone periphery once again and Italian rates are along for the ride as Italy’s downward spiral accelerates. Stocks are taking another drubbing as the market seems to be very much in risk aversion mode. Gold is certainly benefiting from safe-haven flows, as is the Swiss franc.

Details from last week’s release of The World Gold Council’s Q2 2011 Gold Investment Digest show that global central banks bought more of the yellow metal in H1 of this year than they did in all of 2010. That’s a pretty stunning acceleration in official gold purchases in light of current events. It would seem that the central banks of the world are going to continue accumulating gold, even though some of the sovereigns that they represent are broke. Let’s take Greece for example, which recently embarked on a privatization jag, selling state owned assets as part of their new austerity package. Meanwhile, Greece holds 111.5 metric tonnes of gold in reserve — a whopping 79.5% of total reserves — that seemingly aren’t even on the table. If I’m Germany, I want those tonnes pledged as collateral before I offer another euro in bailout money.

By that same token, Italy is the 4th largest holder of gold in the world with 2,451.8 metric tonnes. Yet again, there doesn’t seem to be any serious talk about selling any of that gold to mitigate their developing funding squeeze. And why would there be; if you can get the rest of Europe, the Chinese, the IMF and perhaps even the ECB and Fed to finance your deficits with ever-more paper without giving up a real asset like gold?

The WGC also noted that “gold outperformed major bond, equity, and commodity indices in developed and emerging markets alike on a quarterly basis, in US$ terms.” On top of that, it seems to me that gold is increasingly precious in the eyes of many sovereigns, even in these incredibly desperate times. That suggests that the yellow metal is probably still quite undervalued.

July 18 (Bloomberg) — European banks may have to raise as much as 80 billion euros ($113 billion) of additional capital as the stress tests failed to allay investor concern about a Greek default and governments’ ability to bail out their lenders.

[source]

July 18 (Platts) — The all-important $1,600/oz barrier was broken by gold Monday in London but was expected to go higher given US and eurozone debt levels, sources said Monday.

[source]

July 18 (Commodity Online) — A day, the yellow metal created another milestone by breaking the $1600 barrier, WGC said Gold buying by central banks across the world in the first six months of this year already overtake the entire figure of last year.

In its latest report, World Gold Council said emerging market banks continue to be the main driving force, led this quarter byMexico’s 100-tonne increase in its gold reserves. Meanwhile, European central banks have significantly cut gold sales in the wake of the region’s sovereign debt crisis.

[source]

PG View: So where’s the logic? Shouldn’t the central banks of Europe — especially those of the bankrupt periphery nations— be selling gold to raise the capital for their bailouts? Or has gold just become so precious that the prudent man or government doesn’t even consider selling it, even when the chips are down. If the latter is the case, and countries like Greece are quick to sell other national assets before they even think about selling their gold, then I would argue that the yellow metal is likely quite undervalued.

July 16 (Egan-Jones) — Real GDP increased at an annualized rate of 4.0% in Q1 2011, following an increase of 3.5% rise in the prior quarter. Personal consumption expenditures, exports, and nonresidential fixed investment contributed positively to growth during the quarter. Meanwhile, imports rose sharply. In the March 2011 quarter, trade in goods and services resulted in a deficit of $562B, many because of the high price of petroleum. However, the major factor driving credit quality is the relatively high level of debt and the difficulty in significantly cutting spending. We are taking a negative action not based on the delay in raising the debt ceiling but rather our concern about the high level of debt to GDP in excess of 100% compared to Canada’s 35%. Nonetheless, since the US’s debt is denominated in dollars, a hard default is unlikely.

[source] PDF

Gold has probed above the $1600 level, establishing a new record high at 1603.15 amid ongoing risk aversion.

Results of the eurozone stress tests did little to assuage investor concerns because they failed to take into consideration sovereign defaults. Goldman Sachs warned that up to 27 banks would fail stress test if haircuts from sovereign defaults would have been considered.

ECB President Trichet suggested that a resolution of the eurozone debt crisis was “not a question of technique,” but one of “will and determination.” He went on to reiterate that the ECB won’t accept bonds from nations that have defaulted, suggesting that a wide gulf remains between the central bank and EU policymakers.

The continued uncertainty drove periphery and Italian yields higher and weighed on the euro. Meanwhile, the Swiss franc and of course gold continue to benefit from safe-haven flows.

• US TIC inflows +$23.0 bln in May, down from $30.6 bln net inflow in Apr; Treasuries +$37.9 bln.
• Rightmove: UK house prices down 1.6% m/m in Jul. Housing market expected to remain under deleveraging pressure.
• NZ Q2 CPI +1.0%, +5.3% y/y. Big y/y rise largely attributable to big Q4 hike in GST.

July 15 (AP)

Eight of 90 European banks have flunked stress tests that project how they would fare in another recession, and 16 more barely passed, Europe’s banking regulator said Friday.

The test, run by national banking regulators, simulated what would happen to bank finances during a recession where growth falls more than 4 percentage points below EU forecasts. For the 17-country eurozone, that would be a drop of 0.5% this year and 0.2% next year.

Some said the tests were not tough enough because they did not include a scenario in which Greece defaults on its government bonds. That is considered a key risk for Europe’s economy.

[Source]

July 15 (UK Guardian)

Even assuming that these ideas are greeted as workable, Europe may not be ready for such radical suggestions. A collective solution will be costly: some estimates put the price tag at €2tn. Policymakers may balk at the cost. They may prefer to stick to the current mantra of austerity, austerity and still more austerity. But they are dicing with disaster if they do so. Privately, some senior bankers are saying that Europe has a matter of days to get its act together before an implosion of the single currency triggers a second phase to the global financial crisis.

Be clear: were that to happen it would make the recession of 2008-09 seem mild by comparison.

[Source]

(July 15) Reuters

Italian Prime Minister Silvio Berlusconi’s austerity plan won final approval by Parliament, opening the way for measures intended to balance the budget by 2014 and keep the region’s debt crisis at bay.

Berlusconi pushed for quick passage of the bill after investors began dumping Italian securities on concern that Italy, with the region’s second-highest debt, would become the next victim of Europe’s sovereign crisis. The selloff pushed the 10-year bond yield to a 14-year high 6.02 percent on July 12 and sent the benchmark stock index to the lowest since July 2009.

Finance Minister Giulio Tremonti said yesterday that Italy, and even the region’s strongest economies, would remain vulnerable until European policy makers come up with a solution for the debt crisis that led Greece, Portugal and Ireland to seek bailouts. “Like with the Titanic, even the first-class passengers can’t be saved,” Tremonti told the Senate.

[Source]

(July 15) Dow Jones Newswire

Gold prices flirted with positive territory on weaker-than-expected U.S. consumer confidence data and escalating concerns about a political stalemate on national debt in Washington.

The most actively traded contract, for August delivery, was recently up 80 cents, or 0.1%, at $1,590.10 a troy ounce on the Comex division of the New York Mercantile Exchange.

American consumers grew skittish in their outlook on the economy in mid July, with the preliminary reading of the Reuters/University of Michigan index of consumer sentiment falling to 63.8 from 71.5 last month.

The negative sentiment gave gold futures a boost, helping the contract shake off earlier losses. Investors tend to sell other assets and purchase gold when their outlook on the economy falters because gold tends to keep its value better during times of higher uncertainty.

[Source]

(July 15) Ambrose Evans Pritchard – UK Telegraph

As the twin pillars of international monetary system threaten to come tumbling down in unison, gold has reclaimed its ancient status as the anchor of stability. The spot price surged to an all-time high of $1,594 an ounce in London, lifting silver to $39 in its train.

“It is very scary: the flight to gold is accelerating at a faster and faster speed,” said Peter Hambro, chairman of Britain’s biggest pure gold listing Petropavlovsk.

“One of the big US banks texted me today to say that if QE3 actually happens, we could see gold at $5,000 and silver at $1,000. I feel terribly sorry for anybody on fixed incomes tied to a fiat currency because they are not going to be able to buy things with that paper money.”

[Source]

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.”

[Source]

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.

[Source]

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.

[Source]

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.

[source]

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.

[source]

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.”

[Source]

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.

[source]

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.

[source]

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.

[source]

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.”

[source]

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.