July 19 (MarketWatch) — Gold futures lost more ground in electronic trading on Globex Tuesday, pressured by progress in talks to raise the U.S. debt ceiling. President Barack Obama praised a newly unveiled $3.7 trillion U.S. deficit-reduction plan, which could pave the way for a bipartisan agreement.

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PG View: The new Gang of 6 proposal [PDF] is disturbingly light on the details. The details that are included are already being picked apart by the press and policymakers. Without question this deal is just another kick of the can down the road, but what remains to be seen is if it is a palatable enough kick to make it to the President’s desk.

July 19 (Bloomberg) — Maryland, New Mexico and three other U.S. states had their Aaa debt ratings placed on review for possible downgrade by Moody’s Investors Service, which cited its review of the Aaa U.S. government bond rating.

South Carolina, Tennessee, and Virginia are also being reviewed by Moody’s, which said downgrades would be likely should the U.S. rating be cut to Aa1 or lower. The review covers $24 billion of general obligations and related debt.

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July 19 (zerohedge) — Politico reports that the latest development in the constantly changing and oh so theatric “struggle” to find a compromise on how to raise the debt ceiling by $2.5 trillion, is one which will not only not do anything to fix the deficit situation but will in fact set America back, as a key part of the “savings” will come precisely from the same change in the definition of inflation courtesy of the Chained CPI introduction, which the democrats previously blasted, and for good reason: because it will be an implicit theft from Social Security. Recall that the last time this was proposed the AARP started foaming in the mouth within minutes.

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PG View: Desperate times seemingly call for desperate measures; and while the threat of pushback from seniors may prevent US policymakers from cutting Social Security, a little sneaky adjustment to how CPI is calculated might have the same net effect. If the real rate of inflation is further masked by rejiggering CPI to alleviate or temper future inflation adjustments to Social Security, it essentially amounts to a tacit cut in benefits. It strikes me that that’s actually more insidious than an out-and-out cut.

I’d be willing to bet that any new calculation of CPI comes in below the red line:

Chart courtesy of Shadow Government Statistics (http://www.shadowstats.com/)

News of the possible breakthrough on a debt ceiling deal that would also potentially further mask the real rate of inflation is not surprisingly weighing on gold.

Jul 19 (MarketWatch) — The International Monetary Fund on Wednesday urged euro-zone leaders to increase the size of and make more flexible the region’s rescue mechanism as part of a wide-ranging effort to end deepening sovereign-debt problems.

An intensification of the crisis could have “major global consequences,” the multilateral lender warned.

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July 19 (The Hill) — Democratic and Republican senators are rallying behind a $3.7 trillion deficit-reduction plan announced Tuesday morning by the five remaining members of the Gang of Six.

Sen. Tom Coburn (R-Okla.), who pulled out of the Gang of Six in May, has rejoined the group and praised the plan as something that could win the 60 votes needed to pass the Senate.

“The plan has moved significantly, and it’s where we need to be — and it’s a start,” Coburn said. “This doesn’t solve our problems, but it creates the way forward where we can solve our problems.”

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PG View: While the pan would increase revenue by closing “a variety of special tax breaks and havens,” there is some hope that the proposed elimination of the Alternative Minimum Tax will give House Republicans the necessary cover as the CBO might score the plan as a $1.5 trillion tax cut.

By Jordan Roy-Byrne, CMT
July 19 (CommodityOnline) — An important shift in global markets is taking place and it bears introspection. Gold has broken to a new high while Silver has established a bottom. Precious metals stocks have rebounded significantly from support. At the same time, important global stock markets are in the early stage of a technical breakdown. We don’t foresee a repeat of 2007-2008, yet odds are good that global stock markets are beginning a cyclical bear market and unlike the last cycle this is coming at a time when precious metals are set to accelerate to the upside.

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July 19 (Reuters) — Two weeks before their final deadline, President Barack Obama and top lawmakers will face more pressure on Tuesday for a debt deal amid a growing sense that a last-ditch plan taking shape in Congress may be the only way to avoid a devastating U.S. default.

With talks at an impasse and time growing short for raising the U.S. debt ceiling, attention will shift to a congressional vote on a Republican deficit-cutting measure seen as mostly symbolic but a stark reminder of their ideological divide with Obama’s Democrats.

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July 19 (Bloomberg) — German Chancellor Angela Merkel said Europe’s debt crisis can’t be fixed “in one step,’’ damping expectations that European leaders will be able to draw a line under the turmoil at a July 21 summit.

“Those who want to take political responsibility, and that’s what the government wants and takes seriously, know that responsibly there won’t be one spectacular step” this week, Merkel told reporters in Hanover, Germany today. “It’s entirely about creating a controlled, composed process of gradual steps and measures.”

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PG View: One could easily argue that “gradual steps and measures” in recent years have only compounded the problems in Europe, but I don’t blame Ms. Merkel for trying to temper expectations for Thursday’s summit.

July 19 (Bloomberg) — Gold may rise for an 11th day after touching a record in the longest winning streak since at least 1975 as debt concerns in Europe and the U.S. spur demand for a protection of wealth.

Bullion held in exchange-traded products yesterday climbed 0.9 percent to 2,120.5 metric tons, the most ever, data compiled by Bloomberg show. European government leaders plan to gather in Brussels this week to break a deadlock over a new Greek rescue that has spooked investors. President Barack Obama vowed to veto a Republican proposal to impose mandatory budget cuts as U.S. officials struggle to reach agreement on how to avoid a default.

…“Gold’s safe-haven properties have been in play recently and ever since the global recession in 2008, it has become a vital part of most people’s investment portfolio.”

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July 19 (USAGOLD) — Greek bonds collapsed on hints from the ECB’s Nowotny that the central bank might move from its hard-line on Greece and allow a “temporary default.” Nowotny told CNBC this morning that a full default must be avoided as it “would have very grave consequences, especially with regard to the ECB and the ability of the ECB to accept Greek collateral.” It’s not abundantly clear how the ECB would differentiate a “temporary” versus a full default. Nonetheless, the 2-year GGB yield surged above 39%, but revived hopes that the crisis might be contained to Greece caused Italian and Spanish spreads to narrow. Bund yields also rose on a rebound in risk appetite.

This “risk-on” optimism sparked a rebound in the euro and stocks. Simultaneously, the dollar and Swiss franc weakened, while gold retreated modestly from its new record high at 1609.85.

• US housing starts surged 14.6% to 629k in Jun, well above market expectations, vs 549k in May.
• Canada leading indicator +0.2% in Jun on expectations of +0.8%, vs +0.8% in May.
• Greek bonds collapsed on hints that ECB will now allow a “temporary” Greek default.
• German ZEW investor confidence -15.1 in Jul, below market expectations, vs -9.0 in Jun. Current situation indicator improves to 90.6.
• Eurozone May construction output declined 1.1% m/m, after rising 1.2% m/m.
• Minutes suggested RBA on hold for the foreseeable future.

European Central Bank council member Ewald Nowotny suggested the bank may compromise and allow a temporary Greek default as officials scramble to fix a sovereign debt crisis that’s spreading to Italy and Spain before a leaders’ summit in two days.

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PG View: The yield on 2-year GGBs surged above 39%.

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.”

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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.

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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.

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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.

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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.

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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.

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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.

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(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.

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(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.

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(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.”

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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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