July 20 (MarketWatch) — Italy is wobbling. Spain is facing a fresh crisis. Even France doesn’t look like it is a secure member of the euro zone anymore. The storms swirling around Europe’s beleaguered single currency are growing by the day as the crisis moves in from the periphery into what can only be regarded as core Europe. The markets remain poised on a knife edge, fearful of the consequences of a full scale collapse.

And yet, the one thing that can’t be underestimated is the political will of Europe’s leaders to keep the euro alive. Three generations of politicians have staked their careers on closer European integration. They won’t give up without a fight.

They will make one last-ditch effort to save the project. How? Europe will soon start printing money on a massive scale — far larger than even the U.S. Federal Reserve’s exercises in quantitative easing.

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July 20 (BloombergTV) — “We’re going into a recession, a really big one, bigger than 2008 — I’ll hang my hat on it,” says John Taylor of FX Concepts.

The recession will be deeper because there’s no other “gimmick” U.S. policy makers are able to use to stave off the slowdown, he said, referring to monetary and financial stimulus measures. Europe is likewise headed for a downturn, he said.

PG View: While Taylor sees a pretty grim economic future for both the US and Europe, he doesn’t believe we have to worry about America’s top-tier credit rating because we “print the money that makes the world go around.” It’s only when there’s an alternative currency to the dollar that we should worry. Hey, what about gold? Might that already emerging realization by global markets impact his expectations of a significant correction in gold once $1,900 is achieved?

July 20 (Fortune) — He may not be President Obama’s top economic adviser anymore, but Larry Summers still has plenty of strong opinions on the economy—and some strong words for the President’s Republican rivals in Congress.

Speaking at Fortune’s Brainstorm Tech conference in Aspen, Colo., the former Treasury Secretary and head of the National Economic Council repeated his recent warnings that failing to raise the debt ceiling would be tantamount to “financial Armageddon” and called brinksmanship on the part of Republicans “outrageous” and “profoundly irresponsible.”

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PG View: Some might argue that what is truly “outrageous” and “profoundly irresponsible” are the decades of policy decisions by both parties that allowed our Nation to accumulate such a massive and dangerous amount of debt.

Gold Continues to Show Its Metal

Gold set a new low for the week in early NY trading on Wednesday at 1581.40, then promptly rebounded back to the 1600.00 level in an impressive display of resiliency. The intraday high presently stands at 1599.72. The yellow metal was knocked from its new all-time high of 1609.85 on Tuesday after initially positive reviews of a Gang of Six proposal to address the long-term US structural deficit. That plan was viewed as a possible bipartisan bridge to an agreement on the debt ceiling, but such hopes may already be waning.

The Gang of Six proposal is woefully light on details and former Obama Administration chief economic advisor Larry Summers described it as a “more a plan to have a plan rather than a plan.” That’s not exactly the reassurance against a potential US default the market was looking for. Yet, whether the debt ceiling is ultimately raised in time to avoid default or not, it’s all likely to prove positive for gold:

As analyst Julia Yoo, of Korea Investment pointed out in a Bloomberg article yesterday, “Increasing the debt limit means you print more dollars, which will weaken the dollar and consequently lift the gold price.” On the other hand, failure to raise the debt ceiling will likely lead to a selective default and a downgrade of the US sovereign debt rating. That in turn will result in higher yields that will exacerbate the US fiscal crisis by increasing refunding costs and further erode confidence in the dollar. If the dollar resumes its long-term downtrend for either reason, gold will continue its long-term uptrend.

Meanwhile, at least the near-term fate of the eurozone rests largely on the results of Thursday’s meeting of EU leaders in Brussels, where they will once again attempt to hash out a second bailout for Greece. Hope seems to spring eternal as eurozone spreads narrowed considerably today. However, German chancellor Angela Merkel has attempted to temper expectations, saying that nothing “spectacular” is likely to come from Thursday’s meeting.

If Merkel is right, gold is likely to be right back on the march higher into uncharted territory. Even if a deal is reached on Greece, there are likely to be all manner of risks associated with any such bargain. More money for Greece would simply be another kick of the can and the market will once again start positioning for follow-on bailouts for Portugal and Ireland as well as initial bailouts for Spain and Italy. That too would ultimately be favorable for gold.

As we’ve suggested over the past several months, because of the twin debt crises on either side of the pond, corrections in gold over the summer were likely to be shallow and short-lived. While there is still another week+ in the traditional “summer doldrums” period and a deeper more protracted correction cant be ruled out, we are on the cusp of a time of year that is generally associated with seasonal strength. It therefore might be prudent to buy the dips while you can. Let us not forget how gold took off in late-July of 2009 and 2010:

July 20 (Reuters) — EU leaders must find a convincing solution to Greece’s debt crisis at a summit on Thursday or the global economy will pay the price, the head of the European Commission said in an unusually somber warning.

…”Nobody should be under any illusion: the situation is very serious. It requires a response, otherwise the negative consequences will be felt in all corners of Europe and beyond,” Barroso told a news conference.

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July 20 (HousingWire) — Existing home sales slid 0.8% in June, as contract cancellations spiked unexpectedly and prices rose slightly, according to a leading trade group.

The National Association of Realtors said seasonally adjusted sales decreased to an annual rate of 4.77 million last month from 4.81 million for May. Existing sales in June were 8.8% lower than 5.23 million a year earlier, which was when the homebuyer tax credit expired.

…Yun said 16% of members reported a sales contract was canceled in June, up from 4% in May, “which stands out in contrast with the pattern over the past year.”

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July 20 (Reuters) — China pressed the United States to take “responsible” measures to boost market confidence in the dollar and U.S. government debt on Wednesday, underscoring investor worries that Washington could default on its debt.

The urging from China’s currency regulator came as U.S. leaders tried to hammer out an 11th-hour deal to raise a $14.3 trillion debt ceiling for the United States before it runs out of money to cover all its bills on Aug. 2.

…”If we use much of our foreign exchange reserves to invest in [oil, gold and silver], we could push up market prices, which may affect our people’s consumption and economic development.”

[source]

PG View: Nearly 70% of China’s $3.2 trillion in foreign exchange reserves are invested in dollar assets. So if China where looking to diversify their reserves into assets like gold, silver and oil — and clearly they are — it would be pretty shrewd to reinforce confidence in the dollar assets while simultaneously downplaying the other markets as being “too volatile and small” as you go on a long-term buying spree of alternative assets.

By Howard Schneider
July 19 (Washington Post) — The International Monetary Fund said Tuesday that the euro, a currency born a decade ago out of the post-World War II urge to knit Western European nations more closely together, was under “a shadow” and hinted it might not survive the current battle over government debt.

With European leaders struggling to agree how to divide the costs of another Greek rescue program, the IMF said there was “no consistent road map ahead, leaving both orderly and disorderly outcomes on the table. . . . The reaction by national authorities and economic agents has been one of retrenchment, threatening to turn back the clock on economic and financial integration, the very foundation” of the Economic and Monetary Union (EMU).

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July 19 (Bloomberg) — Gold may rally further from this month’s record if President Barack Obama wins lawmakers’ agreement to raise the U.S.’s debt ceiling, weakening the dollar and boosting demand for the precious metal as a store of value, according to Korea Investment & Securities Co.

The CHART OF THE DAY shows the spot gold price in dollars has climbed along with increases in the U.S.’s statutory debt limit over the past 16 years.

…“Gold’s rally is quite explosive,” said Julia Yoo, a Seoul-based analyst at Korea Investment. “Increasing the debt limit means you print more dollars, which will weaken the dollar and consequently lift the gold price,” adding to gains this year that were driven by demand from countries including China, she said.

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PG View: The referenced Chart of the Day is reproduced in today’s Morning Snapshot, clearly illustrating the real implications of another hike to the US debt ceiling. That would suggest that the pullback in gold — inspired by hopes that a deal to raise the debt ceiling is at hand — is a mid-summer gift.

July 20 (USAGOLD) — Gold remains defensive after revived hopes of a US debt-ceiling deal on Tuesday knocked the yellow metal off its new record high of 1609.85. However, one need look no further than the chart below to discern the true impact on gold if the debt ceiling is indeed raised:

Bloomberg Chart of the Day from Korea Investment (via GoldCore)

Nonetheless, hope that a debt ceiling compromise may be at hand has heightened risk appetite and yesterday’s stellar earnings data from Apple certainly helped the cause. Optimism that tomorrow’s EU summit will yield a pathway to solvency for heavily indebted periphery countries has prompted a sharp narrowing of eurozone spreads, even though leaders have been attempting to temper those expectations.

For the time being it’s “risk on;” at least until investors once again realize that there are no easy and pain-free solutions to either the European sovereign debt crisis or the US fiscal crisis.

• US existing home sales expected to rise 4.9 mln in Jun.
• Canada wholesale trade +1.9% in May, well above market expectations, vs -0.1% in Apr.
• German PPI decelerated to 5.6% y/y in Jun, just above market expectations, vs 5.9% y/y in May on lower energy prices.
• PBoC daily yuan fix at 6.4592 (+0.14%) per dollar, a 17-year high.
• Japan May leading indicators revised to +3.4 m/m in May from +3.6 preliminary reading. Coincident revised to +2.7 from +2.4.

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.”

[source]

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.

[source]

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.”

[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.

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