August 01 (The Wall Street Journal) — Even arguably the world’s most powerful man seems unable to dampen gold’s shine.

U.S. President Barack Obama said Sunday that the country’s sparring political parties have reached a tentative deal to raise the country’s debt ceiling, cut the federal deficit and avoid a credit default. The news has taken the wind out of gold’s sails, pushing prices some $25 a troy ounce down from their recent high, but the market’s longer-term prospects don’t appear to be significantly dented.

Gold has been widely viewed as a safe place to put money as an alternative to U.S. Treasuries and the dollar, which have suffered as the potential for systemic financial risk has increased. The market peaked at an all-time high of $1,632.74/oz Friday, aided by deteriorating confidence in the U.S. dollar and a euro zone ricocheting from one economic disaster to another.

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Relief? What Relief?

Late last night when party leaders and the President announced that they had reached a bipartisan deal that would allow the debt ceiling to be raised, gold dropped about 1%. Global stocks rallied in relief and briefly, ever so briefly, gold was out of favor. However, as the details were revealed, doubts were reignited: Doubts as to whether such legislation could actually make it to the President’s desk. Doubts that the deal would avert a downgrade of US sovereign debt.

While the CBO scores the package as accomplishing $2.1 trillion in spending cuts over the next 10-years, the CBO baseline also has the deficit rising $6.7 trillion over the same period. The premise apparently being that we’re working our way to actual cutting by cutting to slow the pace of the nation’s proliferate spending. In actuality — and as evidenced below — that CBO baseline may prove to be way too optimistic.

What really lit an intraday fire under gold today was the big miss on US July ISM, which plunged to 50.9. The market was expecting a modest downtick to 55.0 from 55.3 in June. On the heals of last week’s much weaker than expected quarterly GDP data, it has become abundantly apparent that the US economy has slowed to just above stall-speed. David Rosenberg, chief economist at Gluskin Sheff and Associates, noted last week that once the economy slows to a growth rate of 1.6% it has proven historically to be a “point of no return” and recession follows. With Q1 downgraded to just 0.36% and Q2 an anemic 1.3% — and likely subject to future negative revision as well — the writing may well be on the wall.

The debt deal is a short-term kick of the can that at least initially focuses on spending cuts. However, with no mitigation of the uncertainties that have kept private capital sidelined for the past two-years of the so-called recovery, there is little reason to think that a more robust economy is just around the corner. In fact, the opposite may be true. That realization, tipped in by the ISM data, has further escalated the QE3 talk, which prompted gold to retest the record high set Friday at 1632.39. Relief? What relief?

If we get another negative surprise on Friday when July nonfarm payrolls comes out, as the ISM employment index suggests we might, the QE3 talk will intensify ever more in the weeks ahead of the Fed’s Jackson Hole summit. Consensus on July payrolls are running around +100k, although we could see some tempering of those expectations in light of the ISM data.

Even with the announcement of the debt ceiling deal, the dollar remains on the ropes, falling to new record lows against the Swiss franc and the yen. If this deal makes it through both Houses of Congress and is signed by the President, it is just another kick of the can — and a very short one at that — down the road. And with the specter of yet another round of quantitative easing hanging over the market, there is little incentive to buy dollars. Now the BoJ is once again contemplating direct intervention in the market, as I suspect the SNB is. If there are concerted efforts to slow the rise of these currencies, it may make gold an even more alluring option.

August 01 (MarketWatch) — Debt deal? Check. America’s AAA debt rating intact? We’ll see.

The agreement reached by President Barack Obama and congressional leaders late Sunday would raise the government’s debt limit and cut spending by around $2.4 trillion. Read about the debt-ceiling agreement.

If the measure passes the House and Senate, the U.S. government will avoid a potentially disastrous default that the Treasury says could otherwise occur as early as Tuesday.

But economists said it remains uncertain that the major ratings firms — Standard & Poor’s Ratings Service, Moody’s Investors Service and Fitch Ratings — will see the deficit-reduction plans as sufficient to avoid downgrading the country’s AAA rating.

So far, the agencies have remained mostly quiet. But Standard & Poor’s had previously taken the hardest line and remains the most unlikely to give Washington a pass, economists said.

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August 01 (MarketWatch) — The central bank of Greece added further to its gold reserves in June, lifting its holdings by 1,000 troy ounces for a second consecutive month.

According to the International Monetary Fund, the country increased its reserves to 3.585 million ounces in June, from 3.584 million ounces in May and 3.583 million ounces in April.

The debt crisis in Greece and other euro-zone nations like Portugal had led to speculation among market participants and observers over whether Europe’s debt-laden countries may move to liquidate their gold holdings in order to raise cash.

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PG View: So where does the money come from to buy gold in a country that is broke? Take your bailout money and buy gold seems to be a pretty good strategy, unless your the one providing the bailout.

August 01 (Bloomberg) — Rui Lola says gold sales at his foreign exchange and coin store in downtown Lisbon almost doubled this year, draining inventories faster than he can replace them.

What’s happening at the Mundial Agencia de Cambios in the historic center of the capital underscores the global rush from investors seeking refuge from debt and banking crises.

…“I would expect it to be a very popular asset at its peak, and I don’t think we’re anywhere near that. We think it’s a bull market and we’re on it.”

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August 1 (USAGOLD) — Gold fell in Asian trading on news that US lawmakers had reached an accord that would allow for the debt ceiling to be raised. This latest kick of the can signaled “risk on,” reducing the appeal of gold as a safe-haven. However, seemingly you can’t keep a good asset down, and the yellow metal has already retraced about half of the losses seen since the 1632.39 record high that was set on Friday.

Stocks are loving the news and Treasuries have corrected on the revived risk appetite. The dollar however remains on the ropes, on the expectations that the status quo of big deficits and low interest rates is going to be with us for a long, long time. That would suggest that the long-term uptrend in gold is going to be with us for a long time as well.

• Eurozone unemployment rate unchanged at 9.9% in Jun, in-line with expectations.
• UK manufacturing PMI fell to 49.1 in Jul, well below market expectations, vs 51.3 in Jun.
• Eurozone manufacturing PMI confirmed at 50.4 in Jul, in-line with expectations.
• China PMI 50.7 in Jul, above expectations, but a 2-yr low, vs 50.8 in Jun.
• India trade balance -$7.7 bln in Jun, vs -$15.0 bln in May.
• Hong Kong retail sales +28.8% y/y in Jun, above market expectations, vs 27.8% y/y in May.
• South Korea trade balance $7.2 bln in Jul, well above expectations, vs $3.3 bln in Jun.
• South Korea CPI 4.7% y/y, above market expectations, vs 4.4% y/y in Jun.

August 1 (CNBC) — Sunday night’s deal that will see the US debt ceiling raised if it passes a vote in the House is merely a “band aid” and certainly not a game changer, according to an assessment from Barclays Capital.

The deal “is certainly not a game-changing breakthrough, and will keep the possibility of a near-term rating downgrade alive; it represents, in our view, just a band-aid approach on the way to more sustainable public finances,” said Julian Callow, the chief European economist at Barclays Capital in a research note on Monday.

The big problem for Callow is the slowdown in the US economy, which could mean any savings are offset by significantly lower revenue.

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July 31 (New York Times) — Democratic and Republican leaders in Congress announced Sunday night that they have reached a deal to raise the nation’s debt ceiling and avert a default.

President Obama spoke moments later at the White House, telling reporters that “the leaders of both parties in both chambers have reached an agreement that will reduce the deficit and avoid a default.”

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By Ben Feller
July 30 (Associated Press) — “Even if a bitterly divided Congress and President Barack Obama avoid a U.S. debt default by striking a last-second deal, as all sides expect, plenty of damage has been done. People are disgusted. Confidence in the political system is tanking. Nothing else is getting done in Washington. The markets are spooked. The global reputation of the United States has slipped.”

Link

MK View: That about sums it up: . . .plenty of damage has been done.

The word, “dysfunctional,” doesn’t cover it. When these discussions started we were talking about reducing the budget by $4 trillion over a ten-year period, which in itself fell woefully short of the mark. Now we are down to $900 billion. It’s a joke. All of this has happened essentially for no reason. My guess is that unless the politicians opt for default, the markets will react as if nothing happened. If they do default, it is likely to be as terrible as Timothy Geithner suggested, but no worse than it might have been at some point along this tortuous road anyway.

The ratings agencies are likely to continue on the road to downgrading U.S. debt, and the credit rating of the United States, no matter which way the Potomac rabbit jumps. Underscoring the level of confusion about how all of this is affecting the markets, one Wall Street Journal article this morning cited a run to the safety of ten-year Treasuries as the reason for yields buckling, while another cited the flight from 30-day Treasuries, and rising yields, as a direct result of the bungling in Washington. Who/What are we supposed to believe?

I’ve read quite a bit about the effects of the debt ceiling mess in Washington over the past few days, the article linked above captures best the likely result in terms of America’s longer-term image. “In the biggest sense, ” says Ben Feller, AP’s White House reporter, “everyone has lost.” The best thing America (and the dollar) has going for it is that it is the best of a bad lot — “the healthiest horse in glue factory,” as former Wyoming senator Alan Simpson put it.

All of which unerringly leads the searching eye to the glint of gold.

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July 29 (Financial Times) — You go to the cinema or the theatre to see the stars perform. What happened on Thursday in the US House of Representatives was that hardly any of them turned up, the real drama was all offstage and the play never got to the final act. No wonder the national audience wants its money back.

Rarely has Washington’s theatre of the absurd been seen in such sharp relief as in the “debate” over Speaker John Boehner’s bill to cut spending enough to raise the debt ceiling for a few miserly months. The probability is that this bill, whatever its ultimate fate, has not a prayer of passage in the Senate. But posturing in Washington, sometimes known as the “optics”, is now a minor art form.

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Fed Audit Confirms US Central Bank is Lender of Last Resort to the World

The market is understandably largely focused on the contentious debt ceiling wranglings this week, but somewhat behind the scenes, the market is also rejecting last week’s agreement to provide a second bailout for Greece. The alleged support in the House for the Boehner debt proposal evaporated late on Thursday, forcing the speaker to withdraw plans for a vote and return to the drawing board for further tweaks. Of course there was little hope that the House plan would pass the Senate anyway, and the tweaks are likely to make the proposal even less palatable to the Senate and the President.

Meanwhile, yield spreads in Europe have been retracing the narrowing that occurred in the wake of the EU summit, as the respite is contagion risks is proving brief indeed. Andrew Balls of PIMCO worried this week that the efforts by eurozones leaders to fight contagion are “too little” and “too late.”

Auctions this week in Italy and Spain didn’t go so well, with both experiencing higher than expected refinancing costs. Moody’s placed Spain’s Aa2 sovereign debt rating on review for a possible downgrade on Friday. Belgian 10-year yield spreads hit a record wide 179bp; Greek 2-year yields surged to 33.05%; and even Denmark CDSs jumped by nearly 20% overnight. We’ve noted in past commentaries that the span between relief associated with official attempts to mitigate the EU debt crisis and a return to crisis mode is getting shorter and shorter, but less than a week is wholly unprecedented. Faith in the ability of governments and international agencies to resolve these crises, both in Europe and here in the US is eroding rapidly and a global crisis of confidence appears to be at hand.

Through all of this — and largely unnoticed — the GAO released the details of their audit of the Fed. What little coverage it did get focused on conflicts of interest centered on the discovery that employees and contractors of the Fed were allowed to own stock in companies receiving aid from the central bank. However, the bigger deal in my opinion was that the Fed authorized more than $16 trillion in largely secret lending during the financial crisis without one bit of Congressional oversight.

The report is entitled GAO-11-696 FEDERAL RESERVE SYSTEM: Opportunities Exist to Strengthen Policies and Processes for Managing Emergency Assistance. It’s a long title and a long report, but the recommendations of the GAO are summed up in a single paragraph:

While creating control systems at the same time that the emergency programs were being designed and implemented posed unique challenges, the recent crisis provided invaluable experience that the Federal Reserve System can apply in the future should the use of these authorities again become warranted. Going forward, to further strengthen policies for selecting vendors, ensuring the transparency and consistency of decision making involving the implementation of any future emergency programs, and managing risks related to these programs, the Chairman of the Federal Reserve Board should direct Federal Reserve Board and Reserve Bank staff to revise Reserve Banks’ formal acquisition policies and procedures to provide additional guidance on the steps staff should follow in exigent circumstances, specifically to address soliciting as much competition as possible, limiting the duration of noncompetitive contracts to the period of the exigency, and documenting efforts to promote competition.

The GAO seems generally nonplussed by the extraordinary size and scope of the Fed measures, the lack of any oversight, and the fact that a large percentage of US funds went to foreign banks and businesses. I suspect it was simply the GAOs responsibility to compile the facts, not to pass judgement. I would hope that once there is ultimately a deal on the debt-ceiling, lawmakers in Washington would have something to say about that astounding $16 trillion figure.

One thing is abundantly clear though — as both the US and Europe unravel under the weight of oppressive debt burdens — the US Federal Reserve is the lender of last resort to the world. That is a reality that should not be discounted by neither the individual investors, nor our Representatives in Washington as we continue our march toward the precipice that is another global financial crisis.

I posted this graph of the US monetary base earlier in the week because it is so terribly telling. My fear is that we haven’t seen anything yet.

July 29 (The Wall Street Journal) — Gold futures soared to record territory after data showing weaker-than-expected U.S. growth prompted a flight to safety.

The U.S. economy grew at 1.3% in the second quarter this year, well short of the 1.8% growth forecast by economists. The government’s first quarter growth reading was slashed to a paltry 0.4% from a previous estimate.

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July 29 (Politico) — President Barack Obama said Friday that Democrats and Republicans are not far apart on an agreement to raise the debt ceiling, but they must forge a compromise that can survive votes in both the House and the Senate.

“There are plenty of ways out of this mess, but we are almost out of time,” he said from the Diplomatic Reception Room of the White House.

…The bill put forward by House Speaker John Boehner (R-Ohio) “does not solve the problem and … has no chance of becoming law,” Obama said, as he urged bipartisan compromise.

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July 29 (MarketWatch) — Gold futures traded at a record Friday, thriving on the bad news about the U.S. economy and after House leaders postponed a vote on the U.S. debt plan. Gold for December delivery added $16.10, or 1%, to trade at $1,632.10 an ounce on the Comex division of the New York Mercantile Exchange. It earlier traded as high as $1,637.50 an ounce.

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July 29 (USAGOLD) — Gold is pressuring record highs again after speaker Boehner’s plan to pass legislation that would allow the debt ceiling to be raised disintegrated last night in the House. It would seem that yesterday’s rumors that Congressmen affiliated with the Tea-Party were falling in line behind the speaker were unfounded.

On top of that, it was revealed this morning that the economy continues to slow, and all-but came to a standstill in Q1. The Washington Post’s Ezra Klein summed it up succinctly in a tweet this morning: “The economy is terrible and Congress is a mess.”

Meanwhile, the situation in Europe continues to deteriorate with spreads continuing to widen back out as confidence in the second deal to save Greece remains on the wane.

• US Q2 GDP +1.3%, below market expectations of 1.7%, vs big negative revision from 1.9% to just 0.4% in Q1.
• US Q2 ECI +0.7%, above market expectations of 0.5%, vs 0.6% in Q1.
• Moody’s placed Spain’s AA2 rating on review for possible downgrade.
• Eurozone HICP decelerated to 2.5% y/y in Jul, below market expectations of 2.7%, vs 2.7% in Jun.
• German retail sale +6.3% m/m in Jun, well above market expectations of +1.6%, vs positively revised -2.5% in May.
• UK Nationwide home prices +0.2% m/m in Jul, above market expectations; -0.4% y/y and outlook remains negative.
• UK GfK consumer confidence -30 in Jul, below market expectations of -27.
• South Korea industrial production +6.4% y/y in Jun, below market expectations of 7.0%, vs negatively revised 8.1% in May.
• Taiwan Q2 GDP 4.88% y/y, above market expectations, vs 6.2% in Q1.

July 29 (The Wall Street Journal) — Rising signs of strain emerged across financial markets on Thursday as investors pulled out billions of cash out of money-market funds, in turn driving the funds to rein in lending in short-term markets.

Financial markets have become increasingly alarmed at the deepening divide in Washington and the potential that the U.S. could be downgraded by credit-rating agencies or, worse, default on its debt.

Banks, meanwhile, are scrambling to design emergency plans to avoid a trading logjam in the huge markets for Treasurys and short-term funding facilities if Congress fails to raise the U.S. borrowing limits by next Tuesday’s deadline.

[source]

July 29 (The Hill) — House Republican leaders have postponed indefinitely a vote on Speaker John Boehner’s (R-Ohio) debt limit bill after they could not persuade enough Republicans to support the measure.

“No vote tonight,” the third-ranking House Republican, Majority Whip Kevin McCarthy (R-Calif.), told reporters after leaving Boehner’s office shortly before 10:30 p.m. The move throws into upheaval the desperate push in Washington to raise the nation’s $14.3 trillion debt limit to avert a national default on Aug. 2.

[source]

PG View: Rumors that freshman Republicans were falling in line seem to have been unfounded. Tick-tock…

July 28 (King World News) — When asked about gold Hathaway remarked, “Basically you have a very orderly rate of increase. If you go back to 1979 gold doubled in a single year, well it hasn’t doubled in any year in the last ten years. So as this move is ending it’s conceivable to me that you are going to see a doubling of the gold price from some higher level, but I feel very good about the sustainability of the current action in the gold price.

Gold is up (roughly)13% year to date, if you tack on another 10% in the second half that is not unsustainable in terms of the macro picture that I see. What’s going to drive it (gold) crazy is when institutional buying starts to take place, and we really haven’t seen that (accelerated) sovereign wealth and (accelerated) central bank buying. That still lies out there and that’s the fuel that’s going to get the gold price up to numbers that I’m almost afraid to mention on air or in print.”

[Source]

July 28 (Commodity Online) — 1) Global financial uncertainties: Deteriorating US economic data and deadlock over the $14.3bn debt ceiling negotiations, Europe’s sovereign bond crisis, and hints from the Fed that additional policy stimulus may be on the horizon, all fuelled the rally.

2)Energy Inflation: The rapid rise in energy prices over the first half of this year, the fall-out from the Japanese earthquake and tsunami disasters as well as the end of QE2 have dented growth and sparked fears that the US may not be in a soft patch but rather entering a double dip recession.

3) Eurozonde Debt: Investors also focused on problems in the Eurozone, where risks of contagion from the Greek debt crisis also supported investment activity in gold. While disagreement over a Greek bailout plan continued Moody’s downgraded Ireland’s government paper to below investment grade (to junk status, from Ba1 from Baa3).

4)QE 3 possibilities: However, the key catalyst to drive gold over the $1,600-level was news that the Fed was considering further policy easing. The release of minutes from the FOMC’s June meeting revealed that various members were, dependent upon further weakening in the job market, in favour of fresh stimulus so long as inflation remained in check. On 13 July Bernanke in testimony before Congress made a statement long awaited by Gold investors: “On the one hand, the possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might re-emerge, implying a need for additional policy support.

According to Jeff Nichols, the present gold rally “..is just the beginning of gold’s next great leap upward, a move that very likely will carry the metal to $2000 an ounce in 2012 — with prices still headed higher, quite possibly to $3000, $4000, and maybe even $5000 an ounce by the mid-to-late years of the decade.”

JK Comment: Its not hard to understand why Nichols places such a high nominal target for the gold price over the next decade. Quite simply, its hard to envision how the catalysts that drove gold to all time high over the past week have any real chance of reversing. It seems, if anything, they are intensifying. Five years ago, a financial event like the European debt crisis, the debt ceiling debate or energy price shocks due to political upheaval in the Middle East would have been big news. Yet, ever since our own financial crisis, it seems these major catalysts are occurring closer and closer to one another, perhaps diminishing their individual “shock factor”, but collectively fueling a rapidly accelerating pace of ascent in the gold market. As our debt ceiling debate carries on, I find myself concluding that though an agreement may be reached, we will very likely be doing nothing more that kicking the can down the road, leaving ourselves to the very same conversation in the not too distant future. The same can be said of the European debt crisis. And the one consistent theme seems to be that each time these issues come back around, they are bigger and more problematic than our previous encounter with them. Though achieving the $3000, $4000, $5000 levels in gold over the next decade could be perceived as overly bullish….permanently resolving all of these intensifying and increasingly frequent problems is even more far-fetched.