July 26 (Bloomberg) — The inability of Congress and President Barack Obama to reach a deal on raising the national debt ceiling leaves retired Air Force pilot Phil Pignataro filled with feelings, none of them good.

“All the negative emotions you can think of I pretty much have when I see that there’s no compromise and they’re willing to ruin the economy,” said Pignataro, a 65-year-old who lives in Algonquin, Illinois. “For better or for worse, my retirement is all tied up in the government.”

Polls and interviews conducted over the past two days show Pignataro is among Americans growing disenchanted by and disconnected from congressional leaders and Obama, even as they face a personal economic reckoning.

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July 26 (The Weekly Standard – Judy Shelton) — Chronic budget deficits are evidence of endemic political cowardice when it comes to reconciling government revenues with government expenditures. And our elected officials keep choosing the coward’s way: They “fund” excessive spending through borrowing.

Government borrowing is a convenient ploy for putting off financial inevitability for another generation​—​except for one huge problem. You can’t have sound money if you don’t have sound finances. If we fail to get a handle on government expenses under our current dire circumstances, the dollar is doomed.

A gold standard brakes runaway government spending. It allows individuals to defeat governments that dilute the value of money. A gold standard provides citizens with “a form of protection against spendthrift governments,” as the economist Ludwig von Mises put it. “If, under the gold standard, a government is asked to spend money for something new, the minister of finance can say: ‘And where do I get the money? Tell me, first, how I will find the money for this additional expenditure.’ ”

Under a gold standard, money regains its primary purpose as a vital tool of free markets instead of serving as a corrupted instrument of government policy. Genuine economic growth​—​as opposed to the money illusion of artificial wealth reflected in bloated equities or housing prices​—​is no longer sacrificed to monetary policy encumbered by the fiscal failures of government.

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By Ambrose Evans-Pritchard
July 26 (The Telegrapph) — Calm down. The US will not miss a coupon payment on its $14.3tn debt next Wednesday.

A genuine default would be “Lehman on Steroids” in the words of Ex-Treasury secretary Larry Summers. Precisely for that reason President Obama will not pull the trigger, EVEN IF the debt ceiling talks break down in acrimony.

Obama still has a clutch of cards to play, in extremis.

[One example]…the US Treasury could eliminate the Fed’s entire holding of Treasury bonds at a stroke, gaining an extra two years. This would be a simple accounting transaction. Ben Bernanke might feel uncomfortable, and gold might blast to $3,000, but the Bernanke Fed has proved itself supple.

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US Continue to Hurtle Toward Insolvency

With the United States hurtling toward insolvency, there was briefly a hope that lawmakers would seize the opportunity presented by the need for another hike in the debt ceiling to fundamentally alter our course. However, in a flurry of partisan rhetoric from both sides, any hope of a “grand bargain” that would meaningfully impact our long-term structural deficit has evaporated. Given the proximity to the 2012 election cycle, perhaps it was always just an illusion; there was never really any chance of compromise at all.

Democrats claim the Republicans are simply trying to make the President look bad ahead of the 2012 election. Republicans claim the President and Democrats are simply looking for a “blank check” so they can continue spending, putting this unpleasantness behind them, so they can focus on campaigning. So what we end up with now are two watered down and competing political compromises being advanced by House Speaker Boehner and Senate Majority Leader Reid that fail to address the structural deficit and tax and entitlement reforms. If one of these proposals makes it to the President’s desk it will almost assuredly be signed; the debt ceiling will be raised and the US debt burden will continue to grow toward that new ceiling. It has never really worked any other way; at least since the end of the Second World War.

For now, both sides have their heals dug in and we don’t seem any closer to a deal than we did a week ago or a month ago. Meanwhile market concerns about a potential default are growing with every tick of the clock closer to the 02-Aug deadline declared by Treasury Secretary Geithner. Each tick of the clock also brings us closer to a likely downgrade of the US sovereign debt rating.

There are also rising expectations that a downgrade will occur even if the debt ceiling is raised because both the House and Senate plans would result in a continued rise in the debt/GDP ratio. A downgrade would likely result in the US having to pay higher interest rates on its debt which will make ongoing refunding operations increasingly more expensive. If yields on Treasuries rise, so will the rates on business loans, mortgages, automobile loans and credit cards. This will negatively impact business growth, job creation and consumption, likely sending the US back into recession.

At that point, the Fed would likely step in and try to force rates lower once again via quantitative easing. The corresponding expansion in the monetary base would fuel the next leg higher in the gold market. As you can see from this St. Louis Fed chart below, the monetary base has absolutely exploded and that trend doesn’t appear likely to reverse any time soon. And given the option of default versus devalue, the US will almost assuredly choose devalue. Either way, it’s a positive for gold.

July 25 (Financial Times) — “Let everyone be certain,” said George Papandreou in March 2010. “Greece will not default.” Few believed him then. None do now with default agreed as part of the latest rescue plan.

The European Central Bank’s threats to cut off Greek banks was also exposed as bogus. So were many claims by European leaders. This matters because part of the latest rescue plan’s attempt to stop Greece taking down Portugal and Ireland was a European promise.

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PG View: It has become widely expected that policymakers will lie, and lie consistently. From US Treasury Secretary Geithner’s assurance that Lehman Brothers was adequately capitalized, to French President Sarkozy’s recent pledge that the deal Greece just got will not be offered to any other country. As confidence in governments wane, the markets gain the upper-hand in dictating outcomes. Generally this is a good thing, but policymakers have kicked the can for so long that relatively modest problems have turned into huge problems with all the attendant contagion risks that could result in devastating problems. Do you kick the can again, or do you take your medicine and hope to come out strong and viable on the other side? Kick the can is the easier solution so a kick is inevitably what we get, but the market is increasingly less convinced that governments and international agencies have the answers. That is why we continue to see robust investment demand for gold as a hedge against what is increasingly being viewed as an inevitability.

July 26 (Bloomberg) — Gold, trading little-changed in New York, may decline as some investors sell the metal after its rally to a record yesterday and amid concern prices might fall if U.S. lawmakers agree to raise the nation’s debt ceiling.

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PG View: Gold could indeed correct if some kind of compromise is reached that would allow for the debt ceiling to be raised before the US defaults or is downgraded. However, let’s be honest here, the negotiations have been reduced to a pair or competing political bargains rather than anything that would meaningfully impact the long-term structural deficit. Hopes of a “grand bargain” that would make fundamental changes to spending, entitlements and taxation have been dashed; if there was ever any real hope at all. So if there is some compromise and the debt ceiling is raised, the US debt will simply resume its march upward toward that next debt limit. And while gold may retreat initially on relief, it too will ultimately continue its march higher as well.

July 26 (USAToday) — President Obama used the words “balance” or “balanced” eight times last night.

He used the word “compromise” six times, all in the second half of a 15-minute speech.

He did not use the word “veto.”

As observers parse Obama’s prime time address from last night, the president himself will spend the next few days largely as a bystander, watching Congress wrestle with competing debt ceiling and debt reduction plans offered by House Republicans and Senate Democrats.

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New York, July 26, 2011 – Data through May 2011, released today by S&P Indices for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, showed a second consecutive month of increase in prices for the 10- and 20-City Composites. The 10- and 20-City Composites were up 1.1% and 1.0%, respectively, in May over April. Sixteen of the 20 MSAs and both Composites posted positive monthly increases; Detroit, Las Vegas and Tampa were down over the month and Phoenix was unchanged. On an annual basis, Washington DC was the only MSA with a positive rate of change, up 1.3%. The remaining 19 MSAs and the 10- and 20- City Composites were down in May 2011 versus the same month last year. Minneapolis fared the worst posting a double-digit decline of 11.7%.

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July 26 (USAGOLD) — The dollar tumbled in overseas trading as televised speeches by President Obama and Speaker Boehner gave the impression that the US is not remotely close to a debt ceiling deal. New record low against the Swiss franc, new 4-month low versus yen. The yen fell briefly intraday on reports that the MoF and BoJ are contemplating intervention. Commodity currencies gained as well at the greenbacks expense. Gold on the other hand has been comparatively well contained, although that seems unlikely to last as long as a debt ceiling deal remains elusive.

Spain and Italy auctioned bonds today and the results were poor, with lower bid covers than recent auctions and higher yields. This suggests that last week’s deal to provide a second bailout for Greece isn’t necessarily the tonic it was widely reported to be, with the market worried about implementation risks. New IMF chief Christine Lagarde acknowledged today that there remains a “level of uncertainty” in the market regarding the Greek deal.

• US S&P Case-Shiller home prices +1.0% in May for 20-cities, -4.5% from a year ago.
• Dollar weakness pushes NYMEX crude back to $99.
• UK prelim Q2 GDP at +0.2% q/q, above market expectations of +0.1%, but y/y pace falls to 0.7% vs 1.6% in Q1.
• German Gfk consumer confidence 5.5 for Aug, below market expectations, vs negatively revised 5.5 in Jul.
• South Korea GDP (advance) slowed to 3.4% y/y in Q2, just below expectations, vs 4.2% in Q1.
• Japan CSPI inflation gauge +0.3% m/m in Jun; y/y pace narrowed to -0.7%.
• Australia CPI moderated to +1.0% q/q in Q2, vs 1.6% q/q in Q1.

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.