July 25 (Reuters) — House Speaker John Boehner, a Republican, and Senate Democratic Leader Harry Reid unveiled dueling plans on Monday as Congress struggled to find a way to raise the government’s borrowing limit before an August 2 deadline.

Dueling votes are expected as soon as Wednesday.

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PG View: Each party is saying the other’s plan is full of gimmicks and phantom cuts. The President will speak to the Nation again this evening, but it doesn’t seem like we’re any closer to a deal.

July 25 (Hard Assets Investor) — World Gold Council director talks about precious metal’s duality in seemingly conflicting environments.

The World Gold Council this month released a study it commissioned from Oxford Economics, “The Impact of Inflation and Deflation on the Case for Gold” [PDF - Account setup required]. The independent research found gold performs relatively well compared to other assets in a high-inflation scenario as well as in a deflationary period, among other findings. World Gold Council Managing Director of Investment Marcus Grubb talked from the council’s London offices with Hard Assets Investor Managing Editor Drew Voros about the study and its meaning for investors.

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PG View: The study shows that gold performed well in an inflationary environment and comparatively well in a deflationary environment. Gold weightings in an optimal portfolio would range “from 5-9 percent to up to 17 percent” and potentially higher in certain scenarios. “But those scenarios probably would look pretty ugly.” Most investors have little or no exposure to physical gold, suggesting that growing investor interest will likely be a reliable source of demand for some time to come.

Grubb also points out that the “the findings of this report really concern physical gold, and what this is saying is very much that “it’s a physical gold investment that seems to be positive in a portfolio context in these different scenarios, not a synthetic one.” So physical gold, rather than paper/digital “synthetic” representations of gold, is a critical distinction to achieve the positive impact on ones portfolio.

By Mark Gongloff
July 25 (The Wall Street Journal) — Almost nobody really expects the US to default on its debts as a result of this interminable debt-ceiling brouhaha, which helps explain why markets aren’t exactly beside themselves with terror today.

But barring some sort of miraculous intervention, it seems increasingly likely that politicians will wind up kicking this can down the road, thereby failing to satisfy all the major credit-rating agencies that the US will get its fiscal house in order any time soon (whether that’s really a necessary fight to be having now, with economic growth anemic, is a whole other question that’s not being asked very much).

So it seems likely that the US is at serious risk of somebody taking away its AAA credit rating very soon, which could actually get the market’s attention.

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July 25 (MarketWatch) — Gold futures traded in record territory Monday as U.S. debt-ceiling talks to avert a default continued, with little to indicate progress toward a deal, and as a debt-ratings agency further downgraded Greece.

Gold for August delivery gained $13.20, or 0.8%, to $1,614.90 an ounce on the Comex division of the New York Mercantile Exchange. It traded as high as $1,624.30 an ounce earlier.

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July 25 (Bloomberg) — Gold futures climbed to a record $1,624.30 an ounce as U.S. lawmakers failed to reach an agreement on raising the federal debt limit, boosting demand for the metal as a haven investment.

U.S. House Speaker John Boehner plans to press ahead with a two-step debt-limit extension that President Barack Obama has threatened to veto, fueling concern the nation is lurching toward a default as early as Aug. 2. Greece’s credit rating was cut three notches by Moody’s Investors Service. Europe’s debt woes drove gold to all-time highs in euros and pounds last week.

“Gold is feeding off the uncertainty of the debt negotiations,” Matthew Zeman, a strategist at Kingsview Financial in Chicago, said in a telephone interview. “Gold is in a ‘can’t lose’ situation with the debt negotiations because regardless of the outcome, the dollar is going to suffer.”

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PG View: As a market analyst for decades, I avoid phrases like “can’t lose” and “sure thing,” but as evidenced by my recent commentary on this topic I concur with Mr. Zeman: If the debt negotiations are successful and the debt ceiling is raised, gold will continue its rise as the dollar remains in its long=term downtrend, anticipating that the US will eventually reach any new debt limit. If negotiations break-down, gold will rise on safe-haven demand amid expectations of default and downgrade, as well as heightened systemic risks.

July 25 (Reuters) — The dollar fell to a record low against the Swiss franc and a four-month trough versus the yen on Monday as a deadlock in negotiations to raise the U.S. debt ceiling spooked the market and spurred demand for currencies viewed as safe havens.

Analysts warned of further sharp selling in the dollar if Washington fails to increase the U.S. debt limit and enters a technical default on its debt next month, a scenario for which analysts have priced in a roughly 10 percent chance.

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PG View: Dollar weakness generally translates into strength in gold.

July 25 (Reuters) — Moody’s cut Greece’s credit rating further into junk territory on Monday and said it was almost certain to slap a default tag on its debt as a result of a new EU rescue package.

It was the second rating agency to warn of a default after euro zone leaders and banks agreed last week that the private sector would shoulder part of the burden of a rescue deal that offers Greece more cash and easier loan terms to keep it afloat and avoid further contagion.

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July 25 (USAGOLD) — Gold jumped sharply in Asia, setting a new all-time high at 1622.79. News that weekend debt ceiling talks in Washington broke down seems to suggest that US lawmakers are going to take this right down to the wire. The closer you get to that wire, the more likely it is you cross over that wire, either intentionally or inadvertently. While most seem to still believe that an eleventh-hour deal will be forthcoming, there are a growing number of investors inclined to hedge their bets with safe-haven assets such as gold.

In the absence of a bipartisan agreement to raise the debt ceiling, Democrats and Republicans are retrenching and preparing separate contingency plans to avert a default and likely downgrade.

Officials in Europe continue to talk-up the Greek deal agreed to last week. However, bunds rose and spreads widened in the EU amid general “risk-off” tone and concerns about implementation risks.

• Moody’s cut Greece sovereign debt rating to Ca.
• UK Hometrack housing prices -0.1% in July, -3.9% y/y.
• Australia final PPI +0.8% in Q2 (q/q), vs +1.2% in Q1; y/y pace accelerates to 3.4% in Q2 from 2.9%.
• Singapore CPI +5.2% y/y in Jun, in-line with expectations, vs +4.5% in May.
• Taiwan industrial output +3.6% y/y in Jun, well below market expectations of +6.7%, vs negatively revised 7.6% in May.

By Kevin Plumberg
July 25 (Reuters) — Stocks fell while the Swiss franc rose and gold hit a record high on Monday as hopes for a political deal to avert a U.S. default began to fade, though investors were mostly seeking to protect their portfolios with no signs of panic selling.

Equity markets in Asia were down between 0.8 percent to 2.1 percent, and U.S. stock futures fell 1.1 percent, while the benchmark 10-year U.S. Treasury yield rose four basis points to 3 percent.

Investors have been whipsawed in the past few months by hope and disappointment over policymakers’ ability to halt sovereign debt crises in the euro zone and the United States.

The focus was squarely on Washington now after European leaders scraped together a second bailout for Greece last week.

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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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