Gold Consolidates Amid Reluctance on More QE

18-Jul (USAGOLD) — Gold fell again and then rebounded after Fed chairman Bernanke regurgitated yesterday’s Senate testimony before the House Financial Services Committee today. During questioning, Bernanke reiterated that, “It is certainly possible that we will take additional action if we conclude we’re not making progress toward higher levels of employment.” However, hints of additional Fed accommodations remain quite opaque as Bernanke seems rather dedicated to the notion that Congress needs to act to rectify the fiscal train-wreck that is coming, rather than simply relying on the Fed to bailout the Federal government.

Now the Federal Reserve is not supposed to be a political body, but Bernanke seems to be playing a little politics nonetheless. Surely he must know that Congress isn’t going to do anything meaningful on the fiscal side before the November elections. And unless one party or the other takes control of both chambers of Congress and the Presidency, nothing meaningful is likely to be done even after the election. Treasury Secretary Geithner also made note of this political disfunction in the US, warning that the impending fiscal cliff and the drag resulting from the European crisis are likely to have a devastating impact on the US economy.

As for Europe, the IMF further escalated pressure on the ECB to act because the “euro area crisis has reached a new and critical stage.” After negatively revising its growth projections yesterday, the IMF is now expressing heightened concern about deflation in Europe and is encouraging the ECB to both cut rates and embark on the quantitative easing path blazed by the BoJ, Fed and BoE.

While über-accommodative monetary policies have done little to relieve global debt crises, the latest IMF urgings to do more of the same are reflective of just how limited a toolbox the central banks have at this juncture. Yet, given the reluctance of politicians around the world to inflict fiscal pain on their constituents — for fear that said constituents will oust them at the next opportunity — the central banks will likely be forced to act ultimately. When that happens, or perhaps more accurately when the market acknowledges this is the likely outcome, gold will resume its long-term uptrend.

by Richard Duncan

“When we broke the link between money and gold, this removed all constraints on credit creation. This explosion of credit created the world we live in, but it now seems that credit cannot expand any further because the private sector is incapable of repaying the debt it has already, and if credit begins to contract, there’s a very real danger that we will collapse into a new Great Depression. . .If this credit bubble pops, the depression could be so severe that I don’t think our civilization could survive it.”

Link

July 12 (MoneyNews) — Gold will climb to a record by year’s end as the global economy slows from the weight of too much debt, says Eric Sprott, the founder and chairman of Canadian fund manager Sprott Inc.

“I just can’t imagine the demand for gold is going down,” he said in a July 9 interview at Bloomberg’s Toronto office. “I don’t personally see a solution to the problem that we’re in, the financial leveraging issue that we all have where everybody wants to shed debt and there’s no buyers.”

The metal “should go to new highs before yearend, that would be my guess,” said Sprott, 67. “Gold has blown away every financial market in the world since 2000, let’s not forget that.”

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July 12 (ABC News) — “I think if I had to tell you the probability, I’d say the chances are we are going over the fiscal cliff,” Bowles said. “I hate to say it, but I think that’s probably right.”

Bowles, whom Obama appointed, along with Simpson, to create a bipartisan debt-reduction plan, said today that because debt reduction was “politically painful” and “really tough,” it was not likely Congress and the president would make the tough choices to reform entitlements, cut spending and simplify the tax code, as the Bowles-Simpson plan suggests.

“I think that if we don’t get these politicians to come together we face the most predictable economic crisis in history,” Bowles said during this morning’s interview in Sun Valley, Idaho. “I think it’s absolutely clear that the fiscal path we are on is not sustainable, and for me, the best analogy is these deficits are like a cancer, and over time they will destroy the country from within.”

Bowles said that “every nickel” the country brings in each year only paid for interest on the debt and mandatory spending on entitlement programs, such as Medicare, Medicaid and Social Security.

“What that means is every single dollar we spent last year on these two wars, national defense, homeland security education infrastructure, high value-added research, every dollar was borrowed and half of it was borrowed from foreign countries,” he said. “That is crazy. Crazy! It’s a formula for failure in any organization.”

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July 11 (AP) — Fed officials warn of looming crisis for economy, discuss steps to boost growth

Most Federal Reserve policymakers agreed last month that they might need to take more action to support growth if the U.S. economy loses momentum.

Minutes of their June meeting released Wednesday show that Fed officials signaled their concern that the struggling U.S. economy could worsen if Congress fails to avert tax hikes and across-the-board spending cuts that kick in at the end of the year. They also expressed worries that Europe’s debt crisis will weigh on U.S. growth.

Members said the economy should continue to grow moderately. But the Fed lowered its growth forecast at the meeting after seeing the U.S. job market weaken and consumer spending slow. It also said it doesn’t expect the unemployment rate to fall much further this year.

Many economists predict the Fed will hold off for one more meeting and give the job market a little longer to show improvement. If it doesn’t, the Fed will likely announce the program at its Sept. 12-13 meeting.

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JK Comment: Looks like more QE is coming, and with a early September proposed announcement, that’s just in time to aid in the typical seasonal strength in the gold price.

July 10 (CNBC) — Gold futures fell to settle at $1,579 an ounce after news of missing client funds from another U.S. futures brokerage prompted commodity investors to lessen positions. The selling erased early gains that occurred amid optimism for a European Union aid package for Spain.

Bullion weakened after PFGBest late on Monday told customers their accounts had been frozen. A U.S. industry body said about $220 million in customer funds were not in the brokerage’s bank accounts.

“With the 100 billion euro being made available to Spanish banks, gold should not be lower,” said George Nickas, commodities broker at INTL FCStone. “If Jefferies is doing an orderly liquidation, you have to believe that there have to be some concerns about ‘Do I let the positions go? You’ve got a higher degree of emotions now in a quiet market,” Nickas said.

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July 10 (International Business Times) — Commenting on the gold price, MKS Finance head of trading Afshin Nabavi stated that “It looks like $1,630 is pretty much a brick wall, while on the downside, $1,550 is equally strong support. So unless something extraordinary happens, we will be stuck in this range…Everyone wants to get involved in gold, but they have been disappointed several times, so I think we need a confirmation that gold is really going somewhere, and that will only happen when it gets above $1,630, only then will we have some investment come back into the market.”

While policymakers in Europe have provided at least some short-term support for the markets, uncertainty surrounding the sovereign debt crisis is likely to remain a considerable headwind, according to analysts at Bank of America Merrill Lynch. In a report to clients, the firm noted that euro worries could also weigh on the gold price in the event of further broad-based liquidation in financial markets.

Nonetheless, the firm reiterated its longer-term bullish forecast for gold prices, based in large part on what it expects from Ben Bernanke and his fellow central bankers at the Federal Reserve. “Loose monetary policies, with a scope for more aggressive balance sheet use in the U.S. and Europe, will keep real rates in most reserve currencies low (or negative) during 2012,” Bank of American Merrill Lynch wrote. “We continue to believe that this will allow investor demand to remain strong and prices to reach our $2,000/oz target by the end of the year.”

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JK Comment: Buys during these consolidation periods (periods defined by range bound trading), have more often than not proven to be excellent entry points into gold through the course of this bull market. While not true of every summer, these consolidation periods have also frequently coincided with what we refer to as ‘the summer doldrums’, a seasonal pattern of tempered price movement and quiet, low-volume trading. What’s really interesting is what seems to happen in the wake of a quiet summer. Check out this graph:

Quick explanation: The average gains coming after the end of July, when compiled over the last 10 years of the gold market, have been 11.3%. The total average annual gains through this period have been 16.6%. Put another way, on average, 2/3 of all gains for the year have come after the summer months. While the past isn’t always a predictor of future performance, the current range bound trading seen this summer is in line with years where the big seasonal moves have occurred. Check out the graphs of 2009 and 2010 below:

Last year this time, gold prices were exploding upwards, on their way to a record high of $1920. In atypical fashion, gold prices actually peaked in the summer in what proved to be an ‘anything but quiet’ summer. It was followed by a significant correction through the fall months. While its unknown whether or not gold will gain significant momentum before the summer is out, if you take the center point of the current trading range ($1600) and increase 15+%, as was seen in both 2009 and 2010, you come out to $1850. To reach $2000, prices would have to increase by 25%, a post-summer performance not seen since 2007.

If Bank of American Merrill Lynch’s forecast comes to fruition, the range we currently find ourselves in will most certainly have proven another one of these seasonal opportunities, in fact, one of the best to date.

We currently have some nice discount offers on 1 ounce bullion Maple Leafs, and pre-1933 British Sovereigns and Dutch Queens. Please call to inquire.

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July 10 (MarketWatch) — Gold futures turned higher Tuesday after the Bank of Japan said it will up its asset purchases to help beat deflation, and as the euro rose against the dollar.

The metal rose after Bank of Japan Governor Masaaki Shirakawa said the bank was implementing “strong monetary easing steps, such as its near-zero interest rate policy and asset purchases in order to overcome deflation,” in comments while attending a government meeting.

Shirakawa said the central bank has accumulated up to ¥54 trillion ($681 billion) of asset purchases so far, but is aiming for ¥70 trillion. And through the accumulation of another ¥16 trillion in assets, “we believe the impact of monetary easing will be further enhanced,” he was quoted as saying.

“Banks are now starting to pick up gold, given the amount of monetary stimulus pumped in across various economies across world,” said Michael Hewson, senior market analyst at CMC Markets. “They’re trying to mitigate currency exposure and currency depreciation.

“If you take the view the Fed is going to print more money, it would make sense for central banks to hold more gold,” said Hewson. “It’s the only thing you can’t manipulate print or devalue.”

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July 9 (IBT Times) — The gold price held steady near $1,585 per ounce on Monday as the yellow metal consolidated following last week’s 0.9% decline. The price of gold stabilized alongside the U.S. Dollar Index this morning, which inched lower by 0.1% to 83.292. In recent weeks, gold prices have fallen back toward the midpoint of the $1,540-$1,620 trading range that they have occupied since early May.

Last Friday the gold price fell over $20 despite the worse than expected U.S. employment report. While the non-farm payrolls data came in below economists’ estimates, the general consensus among investors was that the jobs report was not disappointing enough to meaningfully increase the odds of a third round of quantitative easing (QE3) by the Federal Reserve.

While the United States’ central bank may not be implementing further easing measures in the near future, several others around the world announced additional monetary stimulus programs last week. This past Thursday, the Peoples’ Bank of China (PBOC) unexpectedly cut interest rates, the Bank of England expanded its quantitative easing program by 50 billion pounds, and the European Central Bank (ECB) reduced its benchmark interest rate to a new record-low of 0.75%.

Looking to the week ahead, the U.S. economic calendar is relatively light, but does include a few key items. The Fed minutes – a recap of the latest Federal Open Market Committee (FOMC) meeting – will be released on Wednesday afternoon, followed by weekly jobless claims on Thursday. The week then concludes on Friday with reports on the Producer Price Index (PPI) and University of Michigan Consumer Sentiment Index.

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July 9 (Reuters) — Spanish and Italian bond yields rose on Monday and financial market investors saw little chance of respite in the euro zone’s debt crisis from a meeting of finance ministers due to start later in the day.

Spanish 10-year yields rose 9 basis points to top the critical 7 percent level seen as unsustainable in the longer-term, re flecting doubts over how measures agreed last month to stem the crisis will be implemented.

“This is a product of the fact that implementation risk has come to haunt the EU summit’s plans more rapidly than might have been expected.”

Euro zone officials agreed last month that the euro zone’s bailout funds could be used to buy bonds in the secondary market – which could help Spain and Italy – and could also be used to directly recapitalise Spain’s ailing banks.

But the lack of detail on how the plans will be implemented, as well as opposition from Finland, have dampened initial market euphoria over the deal. Questions over the rescue funds’ capacity to undertake such steps, and no signal the European Central Bank would take any further unconventional measures to support indebted countries, have also not helped sentiment.

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We’ve just posted a new interview of Steve Forbes by Hera Research’s Ron Hera at USAGOLD’s Gilded Opinion page. In it he talks about sound money and the gold standard being the surest road to curbing the federal government’s animal spirits and bringing back America. Enjoy.

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July 6 (Reuters) — Gold initially rallied in response to the report, touching a session high of $1,609.39 an ounce on the view that the poor number would pile pressure on the Federal Reserve to ease monetary policy further.

The metal then turned sharply negative, touching a day low of $1,583.99 an ounce as the dollar rose to fresh five-week highs against the euro, reducing gold’s appeal as an alternative asset to the U.S. currency.

“The precious metals bounced strongly when the (payroll) numbers turned out to be below expectations. But after all the data is a bit mixed: it is not bad enough to suggest the Fed will go ahead with a new round of quantitative easing but at the same time it is not good enough to exclude it,” said T-commodity consultant Gianclaudio Torlizzi.

Quantitative easing by central banks devalues paper currencies and should in theory boost investor appetite for hard assets such as gold, traditionally seen as a hedge against inflation.

“While the ECB cut was near-term bearish for gold as it weakened the euro, it may be more bullish longer term. Added global liquidity with policy easing measures from the euro zone, China, and the Bank of England may stimulate demand for hard assets, including gold,” said HSBC in a note.

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July 6 (MarketWatch) — The U.S. created just 80,000 jobs in June — about one-third of them temporary — as evidence hardened that the economy has hit another rough patch.

The unemployment rate was unchanged at 8.2%, the Labor Department said Friday.

The decline in job growth has raised the odds of further Federal Reserve intervention in the economy. The central bank will hold its next major meeting in late June and the Fed could launch a new program to buy bonds to try to drive down interest rates.

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Here’s a very good interview of the Wall Street Journal’s Simon Constable on the significance of central bank gold purchases, i.e., what it means to the ordinary gold owner.

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July 5 (Reuters) — Gold prices rose towards two-week highs on Thursday, with investors reluctant to make big bets after pricing in an expected European Central Bank (ECB) rate cut, with investors moving on to focus fully on key U.S. jobs data on Friday.

Spot gold was up 0.2 percent at $1,618 an ounce by 1004 GMT, treading water along with equities and the euro, also little changed ahead of the ECB meeting, where policy makers are likely to cut rates to a record low to contain the debt crisis.

Bullion is up more than 1 percent on the week, potentially heading towards its first back-to-back weekly gains since late February.

“I think the ECB is priced in — it’s been a case of buy the rumour all week and now probably some profit taking on the announcement,” Societe Generale analyst Robin Bhar said.

“The market would really need something big like a Fed move – not the ECB or Bank of England which is a bit more of a minor consideration.”

Friday’s June U.S. employment data is likely to reflect the impact of the euro zone crisis and weak economic data and this could encourage the Federal Reserve to take more measures to stimulate economic growth.

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July 5 (MarketWatch) — China’s central bank on Thursday unveiled a surprise interest rate cut, lowering borrowing and deposit rates while also enabling banks greater leeway in setting their own lending rates at a discount to the benchmark.

The People’s Bank of China lowered its one-year yuan deposit rate 25 basis points, or a quarter percentage point, to 3% and its one-year lending rate by 31 basis points to 6%, according to a statement posted on its website.

The central bank also announced more relaxed rules on lending for commercial bans, allowing lending rates to be set as low as 70% of the benchmark rate, down from 80% currently.

The move, the second rate cut in a month, was seen as part of efforts to prop up lending after data showed credit growth in an apparent stall in June. It also comes on a day when the European Central Bank cut interest rates by a quarter-point and the Bank of England extended an asset purchase program by 50 billion pounds.

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JK Comment: Here we go again…that’s two out of three of the world’s largest economies that are easing/providing stimulus.