July 27 (Financial Times) — The cost of buying insurance against a default by the US rose to a record on Wednesday, in a sign of growing unease that gridlock in Washington over raising the federal debt ceiling may result in the Treasury failing to pay interest to bondholders.

The market for buying and selling insurance on the creditworthiness of the US is thinly traded, denominated in euros and dominated by European and UK banks in London. But trading in so-called credit default swaps has picked up as the threat of a default has grown.

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July 27 (Finacial Times) — Gold prices rallied to a fresh nominal high on Wednesday as the stalemate over the US debt ceiling persisted ahead of the August 2 deadline. Without a deal, the US may be forced to default to creditors next week.

Investors are concerned because US debt markets have usually been seen as “risk-free”. Even if a deal is reached to raise the debt ceiling, the US could still lose its coveted triple A rating status. These worries pushed investors into gold.

“Gold, along with a few select currencies, is increasingly the “go to” asset as investors seek it out for.

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By Mary Anne & Pamela Aden
July 27 (SafeHaven) — Gold has been shooting up this week, hitting one record high after another, hovering around $1600. Recently, it sold off on signs a debt-ceiling deal may soon be reached. Nevertheless, gold remains super strong.

This U.S. debt standoff has been dominating the markets, along with almost daily ups and downs in the Eurozone’s debt crisis. That’s especially affected the precious metals markets.

The flight to safety has been the primary market mover and this is unlikely to change in the weeks or months ahead.

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July 27 (CNBC) — A real estate source I knew recently told me about a guy he knows in Atlanta who has been hired by several different banks to winterize their REO’s (real estate owned, i.e. the bank-owned foreclosures).

The homes are abandoned and empty, and clearly the banks think they’re going to stay that way for a while.

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July 27 (BullionVault) — So is the U.S. housing market nearing its low? Priced against gold it just might be.

Falling hard as the gold price doubled and more since 2006, the average US home is now priced at 103 ounces of gold – little more than one gold bar for settlement of a 100-ounce Comex gold futures contract.

Housing has only been cheaper in 26 of the last 121 years, and is currently priced around half the long-run average of 201 ounces.

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July 27 (ZeroHedge) — There’s one question that I’ve been seeing over and over for the last several weeks as the price of gold has taken out its all-time highs and continued a nearly uninterrupted ascent: Should I buy gold now?

It’s understandable, especially for people who don’t own precious metals yet. Nobody wants to be the sucker who buys gold at the top, only to watch it crater back to $1200 or below. But here’s some food for thought–

The US dollar is shattering historic lows against currencies like the Swiss franc, Australian dollar, and Singapore dollar. Any currency that isn’t a complete disaster is now being viewed as a safe haven. And the mainstream world is now, finally, waking up to the reality that the United States might actually default.

…So instead of worrying about buying gold at its all time high, ask yourself another question instead: Over the next few years, do you expect that these broken, bankrupt governments will inspire confidence among institutional investors, or do you think that confidence will continue to erode?

If you’re leaning towards the latter, you can be sure that more money will flow into gold, and that prices will rise.

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July 27 (Politico) — Rep. James Clyburn and a group of House Democrats are urging President Barack Obama to invoke the 14th Amendment to raise the debt ceiling if Congress can’t come up with a satisfactory plan before the Tuesday deadline.

Clyburn, the third-ranking House Democrat, said Wednesday that if the president is delivered a bill to raise the debt ceiling for only a short period of time, he should instead it and turn to the phrase in the Constitution that says the validity of the U.S. government’s debt “shall not be questioned.”

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PG View: So apparently budgets are optional these days and any accountability imposed by the debt ceiling is a political inconvenience. The next thing you know, the Justice Department will start drafting arrest warrants for the executives of the ratings services; just in case they dare to continue questioning the validity of US government debt.

July 27 (RTT News) — In early European trading on Wednesday, the dollar slipped to fresh record lows against the Swiss franc, Aussie and the New Zealand dollar and a 4-month low against the yen amid a lack of progress in talks between U.S. President Barack Obama and congressional leaders to raise the country’s debt ceiling.

Against the Swiss franc, the dollar broke its 0.80 level for the first time in history and touched a record low of 0.7998. This may be compared to yesterday’s close of 0.8017.

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JK Comment: Its not just all time highs for gold in terms of dollars….its all time lows for the dollar in terms of almost everything.

July 27 (Bloomberg) — Gold surged to an all-time high in New York as investors sought to protect their wealth against the possibility of a U.S. default that may come as soon as next week amid a standoff over the country’s $14.3 trillion debt limit.

U.S. politicians remain deadlocked after a House vote on Speaker John Boehner’s two-step plan to raise the debt ceiling and pare the deficit was postponed from today. President Barack Obama has threatened to veto the measure, sending the dollar to a record low against the Swiss franc yesterday, while pushing the cost of insuring U.S. debt to a 17-month high.

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July 27 (USAGOLD) — Gold continues to march higher as US policymakers continue to dicker over the terms of a debt ceiling hike. The all-time high currently stands at 1628.55. Silver is trading with a 41 handle for the first time in 12-weeks.

In Europe, the relief over the Greek bailout deal struck at last week’s summit in Brussels is proving to be short-lived. While eurozone yield spreads remain within their recent ranges, they are widening out again, suggesting a lack of confidence that the plan for Greece will be successful in containing the crisis. German FinMin Wolfgang Schäuble said today that it would be “a mistake to think that the crisis of trust in the euro area can be solved by a single summit.” Mr. Schäuble also said that Germany would not be writing “any blank checks” to fund bond purchases by the euro-zone’s sovereign bailout fund.

• US durable goods orders -2.1% in Jun, well below market expectations of +0.3%; ex-trans +0.1%.
• US MBA mortgage market index -5.0%; purchases -3.8%, refis -5.5%
• UK CBI reports waning optimism in Jul: industrial trends total orders -10 on expectations of -2; export orders -8.
• Swiss Kof leading indicator 2.04 in Jul, below market expectations of 2.09, vs 2.23 in Jun.
• Eurozone M3 growth unexpectedly decelerated to 2.2% SA y/y in Jun, vs 2.4% in May.
• Taiwan leading economic index +0.2% m/m in Jun, vs negatively revised 0.2% in May.
• Japan total retail sales -0.5% y/y in Jun, vs -1.3% in May.

July 27 (The Wall Street Journal) — Spanish and Italian bonds fell Wednesday, but didn’t break out of their recent trading ranges, after German Finance Minister Wolfgang Schäuble said that Germany won’t write “any blank checks” to fund bond purchases by the euro-zone’s sovereign bailout fund.

Moves to allow the European Financial Stability Facility, or EFSF, to intervene in secondary bond markets and stop funding costs for vulnerable euro-zone countries rising too high were a key element of last week’s emergency package to support Greece and stop its debt crisis spreading throughout the single currency area. Spanish 10-year yields rose back above 6% on Mr. Schäuble’s comments before recovering slightly to trade at 5.967%, according to Tradeweb.

…Mr. Schäuble made his comments in a letter to comrades in the Bundestag. He also said it would be “a mistake to think that the crisis of trust in the euro area can be solved by a single summit“…

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July 27 (Bloomberg) — Treasuries and Asian stocks declined while gold rose for a fourth day as U.S. lawmakers wrangled over the nation’s debt ceiling. The Australian and New Zealand dollars climbed to post-float records versus the U.S. currency.

Ten-year Treasury yields were two basis points higher as of 11:26 a.m. in Tokyo, while the dollar slid against 10 of its 16 major counterparts.

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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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