July 22 (Politico) — Debt talks between President Barack Obama and Speaker John Boehner broke down again Friday with Republicans accusing the White House of upping its demands for new revenues after a rival deficit reduction plan had emerged in the Senate.

The decision left Congress scrambling to find some alternative path around the threat of default Aug. 2. Discussions were already underway with Senate leaders and Boehner has indicated some openness to four to six week extension to get past the immediate crisis.

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The Summer Doldrums that Weren’t

There has been nothing dull about the summer doldrums of 2011. The best the yellow metal could muster was a 7% pullback in early-May (actually too early to truly be considered a summer retreat) from 1574.60 to 1462.25. The biggest driver of that correction was actually a series of margin requirement increases in the silver market that ultimately broke the backs of the longs. When silver plunged, gold went along for the ride, but not for long.

Since posting the Seasonal Gold Price Trends Favor Summer Purchases piece in June, we have been warning of a chance that the summer doldrums would be muted because of the market roiling sovereign debt crisis in Europe, as well as the US fiscal crisis and debt ceiling debate. Those words of caution, particularly for our clients who generally look to buy at lower prices in June and July, have proven to be well founded.

While there seems to be a deal on the Greek crisis, it remains anyone’s guess as to whether the plan can be effectively implemented without causing some other form of market turmoil. And while narrowing spreads at the end of the week suggest the contagion risk has been mitigated, as a Bloomberg article on Friday pointed out: The risk is that the package will follow the pattern of previous agreements and eventually disappoint markets. Questions also remain about the implications of Greece’s now widely expected default and the ECB’s reaction.

Assurances that this deal is only for Greece and will not be made available to other eurozone nations gives additional reason for pause. The market is going to want to test the troika’s resolve. Then there is the likely political fallout in countries like Germany, who are likely going to be footing the tab. A populist political backlash could significantly change the dynamic within the EU, which may in the longer-run be a greater risk to the monetary union than Greece ever was.

Likewise here in the US there are still many unknowns, but the stock market at least seems to believe that a compromise will be reached before the US is put in a position of having to default. Over the years however, the debt ceiling has proven to be more of a target than a limit. If the limit is raised, many worry that the government will continue on its merry spending way until we find ourselves in this very same position once again.

Alternatively, if politicians fail to achieve a bargain and the US faces a default and downgrade, all manner of systemic risks are suddenly highlighted as well. That too would likely have a positive impact on the price of gold.

July 22 (MarketWatch) — Gold futures traded higher Friday, vying to end the week the way they started it: settling at a record.

Gold for August delivery added $17.90, or 1.1% to trade at $1,605 an ounce on the Comex division of the New York Mercantile Exchange.

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July 22 (Politico) — The Democratic-controlled Senate voted Friday to block a Republican measure that would force Congress to pass a stringent balanced budget amendment and cap spending before increasing the debt ceiling.

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PG View: The House plan was tabled by a 51-46 party-line vote. The plan itself will not be voted on.

July 22 (The Wall Street Journal) — Precious metals were trading lower in Asian session Friday with gold prices volatile and trading in a narrow range after European leaders agreed to a rescue package for Greece.

While the safe-haven attraction of the yellow metal could be dented a bit after the rescue package, traders and analysts said doubts about the long-term sustainability of the bailout packages and slow global economic growth are likely to keep the downside risk to the yellow metal limited.

…”Lingering doubts as to whether the latest (package for Greece) is a sustainable long-term solution should (still) help bolster the yellow metal,” said Peter Grant, resident economist of USAGOLD-Centennial Precious Metals Inc.

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PG View: Those “lingering doubts” seem to be carrying the day with gold threatening its record high this morning.

July 22 (Bloomberg) — Euro-area leaders fanned out to persuade investors that last night’s array of crisis-fighting measures can help stop the debt turmoil that’s defied them for more than a year.

German Chancellor Angela Merkel said government chiefs had learned from “systemic effects” in the single-currency area and widened the scope of their bailout fund to allow it to buy the bonds of debt-laden nations, support banks and offer credit lines. The agreement included new aid for Greece that embraced bondholders, prompting Fitch Ratings to say it will put a default rating on Greek debt.

The risk is that the package will follow the pattern of previous agreements and eventually disappoint markets.

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By President Barack Obama
July 22 (USAToday) — For years now, America has been spending more money than we take in. The result is that we have too much debt on our nation’s credit card — debt that will ultimately weaken our economy, lead to higher interest rates for all Americans, and leave us unable to invest in things like education, or protect vital programs like Medicare.

Neither party is blameless for the decisions that led to this debt, but both parties have a responsibility to come together and solve the problem. That’s what the American people expect of us. Every day, families are figuring out how to stretch their paychecks a little further, sacrifice what they can’t afford, and budget only for what’s truly important. It’s time for Washington to do the same.

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July 22 (USAGOLD) — Everyone loves a good bailout, inclusive of loan extensions, bond buybacks, swaps and rollovers…including the gold market, which has regained the $1600 level once again. Spreads have narrowed throughout the eurozone and immediate pressure on Spain and Italy seems to have eased…for now. However, while it appears that Europe will bite the bullet to pull Greece back from the brink again, there are very real costs — monetary and otherwise — that must be paid. Whether those costs will ultimately prove to be worth it remains to be seen.

The euro has already given back about a quarter of yesterday’s relief rally, yet the bounce in the dollar has been pretty tepid due to ongoing worries about the elusiveness of a deal to raise the US debt ceiling. While there have been reports again today that Republicans and Democrats are making progress, the market remains skeptical. Similar reports on Thursday were quickly refuted by the White House and Speaker Boehner.

• Unnamed Administration official says Bernanke, Geithner and NY Fed’s Dudley, are meeting this morning to discuss the debt limit and implications if a deal is not reached.
• Canada retail sales +0.1% in May, above market expectations; ex-autos +0.5%.
• Canada CPI fell to 3.1% y/y pace in Jun, below market expectations, vs 3.7% y/y in May; core 1.3% y/y, also below expectations.
• Fitch confirmed Greek debt plan likely to trigger selective default rating.
• Eurozone manufacturing orders +3.6% m/m in May, well above market expectations, vs a large negative revision in Apr from +0.7% to -0.1%.
• German Ifo fell to 112.9 in Jul, below market expectations, vs 114.5 in Jun.

July 22 (Financial Times) — Greece faces default after the European Union’s second bail-out for Athens as it includes making bondholders assume part of the cost, Fitch said on Friday.

The ratings agency said it would reduce Greece as an issuer of bonds to “restricted default” should plans to roll over debt or implement debt swaps go ahead.

Fitch cut Greece’s rating to triple C on July 13, one of the lowest levels of junk bond status.

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By NAFTALI BENDAVID, CAROL E. LEE and JANET HOOK
July 22 (The Wall Street Journal) — President Barack Obama and House Speaker John Boehner are moving toward a deficit-reduction deal that could cut as much as $3 trillion in spending and overhaul the tax code by the end of next year to raise up to $1 trillion, according to people familiar with the talks.

Until now, Republicans have shot down every proposal that involved higher taxes. But Democrats could be the major obstacle to this package because they worry that upfront spending cuts would be ironclad while any tax increases would be subject to later agreement.

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PG View: Hope; but not a done deal yet…

by Mohamed A. El-Erian
July 21 (Project Syndicate) — I don’t know about you, but whenever I am in an airplane experiencing turbulence, I draw comfort from the belief that the pilots sitting behind the cockpit’s closed door know what to do. I would feel very differently if, through an open door, I observed pilots who were frustrated at the poor responsiveness of the plane’s controls, arguing about their next step, and getting no help whatsoever from the operator’s manuals.

So it is unsettling that policymakers in many Western economies today resemble the second group of pilots. This perception reflects not only the contradictory pronouncements and behavior of policymakers, but also the extent to which economic outcomes have consistently fallen short of their expectations.

This perception is evident in Europe, the United States, and Japan, where indicators of economic sentiment are deteriorating again, already-weak recoveries are stalling, and over-stretched balance sheets are becoming even more precarious.

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July 21 (Washington Post) — House Speaker John Boehner says House Republicans are willing to compromise on a budget deal to increase the government’s ability to borrow as long as the package does not include tax increases.

Boehner told reporters Thursday that most House Republicans want to find accommodation with Democrats on the budget package passed by the House Tuesday that would raise the debt ceiling only after Congress passes a balanced budget constitutional amendment.

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PG View: That’s funny; because I think that’s exactly the same position held by House Democrats and the White House.

Nonetheless, rumors of a budget deal (subsequently denied by Speaker Boehner and the White House) and the frivolous use of the word “compromise” by Mr. Boehner (even with the massive qualifier) succeeded in knocking gold more than $10. Another short-term gift.

By Wolfgang Münchau
July 21 (Financial Times) — It looks like there will be deal on a eurozone package for Greece. The full details are still missing, but it appears that the eurozone is forcing Greece into a selective default. As part of such a package, short-term Greek debt will be more or less forcibly converted into long-term debt. The wretched bank tax is mercifully off the table. And the European financial stability facility will most likely be allowed to purchase Greek debt at a discount. Let us not mince words here. This would be a default, the first by a western industrialised country in a generation. I am not quite sure how it is possible for the European Central Bank to agree to this, or to all of this. But I will surely be intrigued to hear how Jean-Claude Trichet will manage to be consistent with what he said a few days ago. There are also reports that the eurozone leaders may accept a more flexible EFSF beyond those bond purchases.

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July 21 (USAGOLD) — Stocks jumped and gold slipped after WSJ Breaking News ran the following headline:

Breaking: President Obama and House Speaker Boehner are close to a $3 trillion budget deal; stocks are rallying.

Less than 15 minutes later they ran the following:

Update: both parties say they are *not* close to a budget deal. Citing Tweets by @SpeakerBoehner and @pfeiffer44.

House speaker Boehner responded: False. Senate should pass #CutCapBalance.

Meanwhile Dan Pfeiffer, via his official White House Twitter account said: Wrong. POTUS pushing for biggest deal possible, but nothing new.

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By JOHN B. TAYLOR
July 21 (The Wall Street Journal) — This month marks the two-year anniversary of the official start of the recovery from the 2007-09 recession. But it’s a recovery in name only: Real gross domestic product growth has averaged only 2.8% per year compared with 7.1% after the most recent deep recession in 1981-82. The growth slowdown this year—to about 1.5% in the second quarter—is not only disappointing, it’s a reminder that the recovery has been stalled from the start. As shown in the nearby chart, the percentage of the working-age population that is actually working has declined since the start of the recovery in sharp contrast to 1983-84. With unemployment still over 9%, there is an urgent need to change course.

…Since 2009, Washington has doubled down on its interventionist policy. The Fed has engaged in a super-loose monetary policy—including two rounds of quantitative easing, QE1 in 2009 and QE2 in 2010-11. These large-scale purchases of mortgages and Treasury debt did not bring recovery but instead created uncertainty about their impact on inflation, the dollar and the economy. On the fiscal side, we’ve also seen extraordinary interventions—from the large poorly-designed 2009 stimulus package to a slew of targeted programs including “cash for clunkers” and tax credits for first-time home buyers. Again, these interventions did not lead to recovery but instead created uncertainty about the impact of high deficits and an exploding national debt.

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PG View: An excellent op-ed by Stanford economist John Taylor. I agree that we really need to hit the brakes and change course before we drive off a cliff, yet the government and the Fed continues to step on the monetary and fiscal gas peddles…consequences be damned. That’s true here in America, and today’s events show that its abundantly true in Europe as well.

July 21 (CNBC) — “Gold will go much higher,” said Irakli Menabde, founding partner of fund manager M2 Capital Partners.

“It’s one of the most attractive investment opportunities out there.”

“Gold is a reflection of what’s going on in fiscal and monetary policies of the developed world and what’s going on in terms of the great inflation scare in emerging markets,” he said.

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July 21 (MarketWatch) — Gold futures swerved between small gains and losses Thursday as the U.S. dollar traded lower, but some of the metal’s safe-haven appeal diminished after European leaders agreed on a plan to try contain the region’s sovereign-debt crisis.

Gold for August delivery added $1.10, or 0.1%, to $1,598.10 an ounce on the Comex division of the New York Mercantile Exchange.

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By RHIANNON HOYLE
July 20 (The Wall Street Journal) — Fiscal troubles in both Europe and the U.S. may have spurred gold to record highs this week, but the warm embrace of the precious metal appears to be the result of more than one set of incentives.

Swiss bank UBS said that gold, which cracked the $1,600 a troy ounce mark on Monday, will be the only precious metal with a supply deficit this year, as demand outstrips inventory for the first time since 2008.

…Demand for gold, meanwhile, is getting stronger, and not just from investors keen to hedge present economic uncertainties. China’s growing middle class and central banks around the globe are clamoring for more. In fact, central-bank purchases are expected to be key in driving the deficit this year, according to analysts.

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July 21 (Reuters) — Gold fever is gripping Asian investors and could spread to central banks as global growth uncertainties tarnish the appeal of other assets, putting bullion on course for more gains but also provoking fears about supply.

Spot gold surged more than $100 in 11 straight days to Tuesday, its longest winning streak in four decades, hitting a record $1,609.51 an ounce, as debt default fears in the United States and Europe drove investors to seek safety.

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PG View: Availability on most gold products is good right now, but we’ve seen that change dramatically and quickly in past crises in 2008 and 2009. Supply issues can lead to significant rises in premiums. It is therefore frequently prudent to take advantage of the relative calm before the storm.

July 21 (Bloomberg) — Gold may climb toward a record in New York on demand for a protection of wealth after European officials signaled Greece may default on government bonds as part of a second bailout.

Luxembourg Prime Minister Jean-Claude Juncker said he couldn’t rule out the “possibility” of a so-called selective default on Greek debt.

…“Investment demand is still very strong as there are still many uncertainties in the global economy,” Dick Poon, precious metals trading manager at Heraeus Ltd., said by phone from Hong Kong.

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July 21 (Reuters) — Europe is willing to let Greece default under a crisis response that would involve a bond buyback, a debt swap but no new tax on banks, EU sources said as euro zone leaders began a crucial emergency summit on Thursday.

A draft summit statement obtained by Reuters showed leaders were also considering a sweeping expansion of the role of their EFSF rescue fund to help states sooner, recapitalise banks and intervene in the bond market in a drive to halt contagion.

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PG View: Bond market intervention sounds sounds like QE to me…

July 21 (USAGOLD) — Gold is consolidating around $1600, underpinned by a weaker dollar. The greenback took a drubbing on reports that today’s EU summit netted a new deal for Greece. While the plan may include a selective default for Greece, the euro loved the news. As the single currency surged, the greenback came under pressure, buoying gold in the process. Lingering doubts as to whether the latest kick of the Greek can is a sustainable long-term solution should also help bolster the yellow metal.

Apparently the bond swap plan that was scrapped several weeks ago — because the ECB wasn’t willing to play ball — was successfully revived in Brussels. Reuters is also reporting that “a sweeping expansion of the role of their EFSF rescue fund to help states sooner, recapitalise banks and intervene in the bond market in a drive to halt contagion” is being considered. “Intervention in the bond market” seems to suggest that the eurozone is contemplating quantitative easing of their own.

So where do the funds come from to expand the EFSF and buy bonds? German taxpayers should be very worried right now…

• US initial jobless claims +10k to 418k in the week ended 16-Jul, above market expectations. Previous week revised higher to 408k.
• S&P Says 50-50 Chance Of Downgrading US To ‘AA’ over next 3-months.
• Germany’s Die Welt reports that Germany, France ECB and private banks have agreed to a “path” for Greece. Bond swap plan revived.
• Eurozone manufacturing PMI retreats to 50.4, below expectations. Services falls to 51.4. Fears of slowing growth may give ECB pause on further rate hikes.
• UK retail sales +0.7% y/y in Jun, but consumer confidence tumbled to 51, vs 55 in May.
• Swiss trade surplus shrank to CHF1.745 bln in Jun from revised CHF3.254 bln in May; Strong franc taking its toll on trade.
• IMF urged China to let “undervalued” yuan rise.
• China HSBC “flash” PMI fell to 48.9 in Jul, below neutral and a 28-month low.

July 21 (MNI) — Excerpts from a report published by Standard & Poor’s:

In our view, the need for an agreement to raise the debt ceiling before it is breached — which the government has said would occur on or around Aug. 2 — remains a major risk to the U.S. economy, in our view. Because we see a real risk that efforts to reduce future deficits may meaningfully miss the targets that Congressional leaders and the White House have discussed, we put the likelihood that we would lower the long-term rating on the U.S. within the next three months and potentially as soon as early August — by one or more notches, into the ‘AA’ category — at about 50-50.

There is some concern that investors, especially those overseas, are speculating that the U.S. government would resort to higher inflation to reduce the real value of its debts. Given the risks of a government shutdown, some feel the Fed would need to keep policy “too easy, too long” in order to accommodate whatever happens on the fiscal side.

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July 21 (New York Times) — European leaders began a crucial meeting Thursday after talks between Germany and France produced agreement on a rescue plan for Greece that may push the country to default on some of its debt for a short period.

Details of the agreement, reached early Thursday in Berlin after seven hours of talks, were not disclosed.

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PG View: Even if the ECB has softened its position and will accept Greek debt even after a default, this is at best just another kick of the can down the road.

July 21 (AP) — China faces risks from inflation and a possible boom and bust in real estate prices and should allow its tightly controlled currency to rise to promote economic stability, the International Monetary Fund said Thursday.

In an annual review, the IMF recommended changes it said would raise China’s living standards and promote a transition to more sustainable growth with less reliance on exports and investment. It said Beijing should allow interest rates to be set by the market and ease controls on investment flows into China.

China’s main domestic risks are higher inflation, a bubble in real estate prices or a decline in credit quality due to the upsurge in lending as part of Beijing’s response to the global crisis, the report said.

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