August 15 (King World News) — He (Nixon) said first of all I am imposing national price controls because there was an inflation problem in the United States at the time. The second thing he said was I am putting a 10% surtax of imports on all imported goods coming into the United States. Then about 10 minutes into the speech, very much en passant, he said, ‘Oh by the way we are suspending the convertibility of dollars into gold’ and he immediately went into this Nixonian rant about speculators.

So it was very interesting, there were three earth-shaking announcements. Can you imagine any one of those three things going on today? President Obama or any President saying he was going to impose nationwide price controls, or all Chinese goods would have a 10% surcharge. It would be cataclysmic, yet Nixon did both of those things. Plus (Nixon) took us off the gold standard, so it was quite a dramatic speech.

In a strange way he did us all a favor by making sure we (the US) held on to the gold. So I do think the United States is in a position to revalue the currency using gold to that $7,000 level. That will obviously be a huge benefit to all of the people who invested in gold because they are going to be along for the ride, along with the United States when that gold goes to $7,000.”

Excerpted from an interview that is available here.

PG View: James Rickards is showing up with increasing regularity in the financial media because he continues to prove himself as one of the smartest most logical thinkers out there, unafraid to tackle the macro-issues. And his favorite “currency” is gold.

By severing the dollar’s convertibility to gold in 1971, the president ushered in a decade of inflation and economic stagnation.

By LEWIS E. LEHRMAN
August 15 (The Wall Street Journal) — On the afternoon of Friday, Aug. 13, 1971, high-ranking White House and Treasury Department officials gathered secretly in President Richard Nixon’s lodge at Camp David. Treasury Secretary John Connally, on the job for just seven months, was seated to Nixon’s right. During that momentous afternoon, however, newcomer Connally was front and center, put there by a solicitous president. Nixon, gossiped his staff, was smitten by the big, self-confident Texan whom the president had charged with bringing order into his administration’s bumbling economic policies.

…The most dramatic Connally initiative was to “close the gold window,” whereby foreign nations had been able to exchange U.S. dollars for U.S. gold—an exchange guaranteed under the monetary system set up under American leadership at Bretton Woods, N.H., in July 1944. Recently the markets had panicked. Great Britain had tried to redeem $3 billion for American gold. So large were the official dollar debts in the hands of foreign authorities that America’s gold stock would be insufficient to meet the swelling official demand for American gold at the convertibility price of $35 per ounce.

…The purchasing power of a dollar saved in 1971 under Nixon has today fallen to 18 pennies. Nixon’s new economic policy sowed chaos for a decade. The nation and the world reaped the whirlwind.

[source]

August 15 (Financial Times) — The European Central Bank spent €22bn on government bonds last week – more than ever before – as it sought to prevent the eurozone debt crisis escalating out of control.

The larger-than-expected display of fire-power highlights the scale of the challenge the central bank faces in keeping official borrowing costs under control for Italy and Spain, the eurozone’s third and fourth biggest economies. But the size of the intervention, revealed by the ECB on Monday, raised fresh questions about how long its commitment to act would last.

[source]

Gold Consolidates Last Week’s Gains

Gold has adopted a mildly corrective/consolidative tone after going on a tear last week, which saw the yellow metal establish a new all-time nominal high of 1813.84. The S&P downgrade of US sovereign debt, wild stock market volatility and the escalating sovereign debt crisis in Europe all stoked safe-haven demand for gold.

As we discussed in Friday’s report, there has been a marked rise in various forms of government interventions with an eye on calming jittery investors. However, most notable have been efforts to discourage safe-haven buying of the yen and Swiss franc. As the field of viable safe-haven alternatives is narrowed, the yellow metal shines all that much brighter.

There was a time of course when the dollar was the go-to safe-haven currency. While the greenback may still attract safe-haven flows in times of economic turmoil, along with US Treasuries, the luster of both has been greatly diminished in recent years. In fact today’s TIC data revealed there was a record $18.3 bln in total non-central bank sales of Treasuries in June. The net sale of Treasuries was $4.5 bln, the first net sale since May of 2009, and according to the ZeroHedge blog only the third since the Great Depression. In June, the debt ceiling debate was just ramping-up and serious talk of a US downgrade was beginning to peculate. Our creditors were understandably worried.

Since the debt ceiling agreement, Treasury has already used up 60% of its freshly granted debt ceiling clearance. The contentious political debate over the US debt burden will likely re-intensify early in 2012 when President Obama will likely find it necessary to exercise the authority granted him in the compromise to raise the debt ceiling once again, by an additional half-trillion dollars. Even after that, it is likely that the debt ceiling will have to be raised even further; particularly if growth estimates, and therefore tax revenues, prove to have been too optimistic. This will likely unnerve our foreign creditors even more.

Since President Nixon closed the gold window 40-years ago today, the dollar has fallen more than 70% against the euro/D-mark and the Japanese yen. The decline in the dollar against goods and services has been even more dramatic. As the Forbes article posted earlier points out; “Today, the dollar is worth less than two dimes in buying power compared to the pre-Nixon dollar,” leaving “the average American family is left with no meaningful way to save.”

That of course is the plan. Over the course of those same 40-years, the Nation has morphed from a producing economy to a consuming economy. When your GDP is 70% dependent on consumption, the last thing the government want you to do is save anything. You simply must in their eyes go out and spend every dime you earn to keep the economy chugging along and to keep unemployment in check, so they disincentivise saving by fostering a zero interest rate environment.

Ah, but there is a way to “meaningfully” save. As more investors/savers come to this realization and move a portion of their assets into the gold market, the long-term uptrend is likely to persist for some time to come.

August 15 (The Wall Street Journal) — Gold futures were slightly lower as investors watched for deterioration in equity markets and Europe’s sovereign-debt problems.

The most actively traded contract, for December delivery, was $4.30, or 0.3%, lower at $1,738.30 a troy ounce in early trade on the Comex division of the New York Mercantile Exchange.

…Gold prices were under pressure from stronger equity markets, which curbed investor demand for a refuge. The Dow Jones Industrial Average was up 94.8 points at 11363.8 shortly after trading opened.

…Investors were also watching for news about Europe’s sovereign-debt crisis in the wake of last week’s upheaval surrounding France’s creditworthiness which pushed gold to record highs.

…Meanwhile, talk that the Swiss government may peg its currency to the euro is likely to benefit gold prices.

…”Any type of changes in currency dynamics causes people to get into the yellow currency—gold,” said Mr. Klopfenstein.

[source]

August 15 (Forbes) — Today, Aug. 15, 2011, is the 40th anniversary of President Richard Nixon’s colossal error: severing the final link between the dollar and gold. No other single action by Nixon has had a more profound and deleterious effect on the American people. In the end, breaking the solemn promise that a dollar was worth 1/35th of an ounce of gold doomed his Presidency, and marked the beginning of the worst 40 years in American economic history.

…Since Nixon killed the gold standard, the unemployment rate has averaged over 6% and we have suffered the three worst recessions since the end of World War II. The unemployment rate averaged 8.5% in 1975, almost 10% in 1982, and has been above 8.8% for more than two years, with little evidence of any improvement ahead.

…Moreover, if Nixon and his successors had maintained the promise that a dollar was worth 1/35th of an ounce of gold, a barrel of oil today would sell for less than $2.50.

That’s right, the whole notion of an energy crisis and the ever more intrusive government regulations dictating energy usage are based on the grand illusion that the price of oil has gone up more than 30 fold, when in fact, it is the dollar whose value has fallen relative to gold, oil, and all other goods and services over the past 40 years.

[source]

August 15 (USAGOLD) — Gold is consolidative within Friday’s range with the upside limited by some renewed interest in the stock market. The recent volatile gyrations in the stock market not withstanding, the underlying fundamentals in the gold market remain very constructive.

Most notably, the proliferation of paper that commenced with abandon 40-years ago today when President Nixon ended the dollar’s convertibility to gold. This arguably accelerated us along the dangerous fiscal path that has resulted in the oppressive debt burden that we find ourselves saddled with today.

• US TIC inflows +$3.7 bln in Jun ex-swaps vs $24.2 bln in May.
• US Empire State index fell to -7.72 in Aug, below market expectations of 0, vs -3.76 in Jul.
• Canada vehicle sales surged 10.8% in Jun, although preliminary data suggests a significant drop in Jul sales.
• UK Rightmove House Prices -2.1% m/m (nsa) in Aug, vs -1.6% in July; -0.3% y/y.
• Singapore retail sales 10.9% y/y in Jun, near expectations, vs 9.6% y/y in May.
• Japan 1st preliminary Q2 GDP -1.3% q/q (saar), above market expectations of -2.8%, vs -3.6% in Q1.

Hinde Capital’s Ben Davies reminded CNBC Asia last week that gold is a two-tiered market; “there’s a physical market and there’s a paper market, and the physical supply is diminishing.”

Davies also believes central bank gold buying is going to continue.

In all the discussion and debate about the Fed’s targeting interest rates into 2013 at these very low levels, it was overlooked that Bernanke & Company might have given Wall Street what it wanted — QE3. By targeting rates, or better put by pegging rates, the Fed was sending a message: If the world’s markets intend to drive U.S. interest rates higher, the Fed stands ready to drive them back down. It then buttressed that position by stating it was ready to use whatever “tools” it has at its disposal to stave off a recession.

The two components need to be viewed as part of the same policy — a double barreled approach the main feature of which, as time goes by, will likely be renewed, or continued, purchases of U.S. Treasuries across the maturity range. How else would the Fed presume to hold down interest rates over the next two years? And, if so, how is this approach different from the previous versions of quantitative easing?

Many hoped that the markets would get an announcement of QE3 at the most recent Fed meeting. I think they got it and it explains why gold prices jumped over the $1800 level and the stock market bounced back after looking like it was ready to go over the cliff.

The Swiss central bank’s announcement that it would consider pegging the franc to the euro got all the publicity toward the end of last week, but America’s pegging interest rates is the bigger news for the world economy. No Federal Reserve has ever tied its hands behind its back like this one did last week. It’s unprecedented and it’s dangerous — the kind of policy that could lead in the short run to a greatly weakened external market for U.S. Treasuries, and in the longer run, an exacerbation of the already building inflationary pressures.

Michael J. Kosares
The ABCs of Gold Investing: How to Protect and Build Your Wealth with Gold

August 12 (Financial Times) — The cliche “rollercoaster ride” is often overused in financial markets. But this week has been the real thing: the biggest one-day fall and rise in stocks since the 2008 Lehman Brothers’ collapse, record low yields for benchmark US Treasuries and huge swings in the value of the Swiss franc.

“At some point you laugh at it a bit,” says Christopher Blum of JP Morgan Asset Management. “It is exhausting. The market in the very short term can be so volatile: you could even call it irrational.”

So, where exactly are the financial markets at the end of such a turbulent week? In some ways, not so very far away from where they started.

[source]

PG View: The DJIA ended the week down 175 points from last Friday’s close.

August 12 (Bloomberg) — Investors pulled the most money from global stock funds since 2008 in the past week as the Standard & Poor’s downgrade of Treasuries and the deepening European debt crisis prompted a flight into cash and gold.

Funds that buy global equities suffered $3.5 billion in net withdrawals in the week ended Aug. 10, the most since the second week of October 2008, according to Cameron Brandt, director of research at Cambridge, Massachusetts-based EPFR Global. Investors removed $11.7 billion from funds that invest in U.S. equities, the most since May 2010 when investors pulled money following a one-day market crash that briefly erased $862 billion.

“This week had a feeling of capitulation as we saw investors running for cover,” Brandt said in a telephone interview. “The last time we saw this kind of flight to safety” was in 2008, he said.

[source]

August 12 (Bloomberg) — Confidence among U.S. consumers plunged in August to the lowest level since May 1980, adding to concern that weak employment gains and volatility in the stock market will prompt households to retrench.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment slumped to 54.9 from 63.7 the prior month. The gauge was projected to decline to 62, according to the median forecast in a Bloomberg News survey.

[source]

Markets Generally Tell the Truth…If You Let Them

It has been an extraordinarily volatile week in global markets, which saw gold establish a new all-time nominal high at 1813.84 before succumbing to corrective pressures. Stocks, bonds and currencies all took wild roller-coaster rides on escalating growth concerns and amid government and central bank interventions, and threats thereof.

In the past couple of weeks we’ve seen the ECB intervening overtly in the periphery bond markets. Some European countries have instituted short-selling bans to stymie bets against shares. The Bank of Japan (BoJ) intervened to squelch the rapid rise in the yen. The Swiss National Bank (SNB) initiated measures to quell safe-haven demand for the Swiss franc. When SNB actions proved unsuccessful, talk of a possible currency peg to the euro circulated, which weighed heavily on the franc into the weekend. Through it all, speculation about additional Fed intervention in the Treasury market, so called QE3, was on the rise.

Why all the interventions? Because freely traded markets eventually will tell you the truth. Sometimes inconvenient truths. Official interventions allow that truth to be distorted, often to fit the preferred narrative that ‘all is well.’ When the housing market collapsed in 2008/2009 and demand for mortgage-backed securities evaporated, the Fed stepped in to provide artificial demand in the MBS market. This price distortion results in inaccurate pricing of risk, which is essentially what led to the financial crisis in the first place.

When US interest rates started to move higher, despite an official zero interest rate policy, once again the Fed stepped in to buy Treasuries in order to suppress those yields. When yields on sovereign debt issuance are artificially suppressed through quantitative easing or other measures, whether its here in the US, Japan or in Europe, it results in an inaccurate pricing of sovereign default risks. The real market strains to reflect something closer to reality, forcing governments and central banks to push harder in the other direction. Increasingly desperate times call for increasingly desperate measures.

When special measures are no longer practical or possible, the terrible truth is all too often revealed with even greater consequences than if there had been no intervention in the first place. As was pointed out on the ZeroHedge blog this week, when the SEC banned short-selling of US financial stocks in 2008, those shares actually plunged nearly 48% in about a month’s time nonetheless. EU/IMF intervention in Greece didn’t do anything to fundamentally alter the disastrous fiscal course that country was on. The result was that Greece was right back looking for a second bailout in less than a year’s time.

Perhaps the most startling intervention chatter of the past week centered on the possibility of Switzerland pegging their currency to the arguably failing euro. While both the SNB and ECB officially denied that a currency peg was being discussed, SNB board member Jean-Pierre Danthine said that “nothing is excluded.” Understandably the SNB would have been thrilled with the plunge in the franc on the peg rumor, as they got what they were unsuccessful in achieving with direct intervention, without spending an additional rappen (cent). It is the SNB’s contention that the franc is “massively overvalued;” but overvalued against what? The dollar? The euro?

Flip the table and it’s pretty hard to argue that either the greenback or the single currency are ‘massively undervalued.’ The recent safe-haven flows into the swissy is reflective of this simple reality: In the world of fiat currency, the Swiss franc is simply the best looking horse at the glue factory. So now they are contemplating hitching their horse to the lamest horse in the pen.

The Swiss franc remains near its recently established all-time low against gold. That’s your real barometer of value. In fact, gold has recently traded at new all-time highs against all of the major currencies; perhaps most notably the dollar, in the wake of S&P’s downgrade of US sovereign debt.

Despite the inconvenient reality illustrated by gold, beggar thy neighbor competitive currency devaluations are likely to continue. Investors seeking protection in certain assets classes will continue to be waylayed by government and central bank actions. As some safe-havens are suddenly made wholly unsafe by design, certain physical assets — like gold — that you hold in your possession will become increasingly appealing as the safe-havens of last resort.

Gold ounces held in your possession are unencumbered by counter-party risks. They are unaffected by margin hikes. And for all intents and purposes they can be considered AAA rated.

August 12 (Financial Times) — The French economy delivered no growth in the second quarter against expectations of a 0.2 per cent rise, intensifying pressure on the government to find significant new spending cuts to ensure France will meet its pledge to bring the public deficit to 3 per cent of GDP by 2013.

Francois Baroin, finance minister, said he was confident France would meet its target of 2 per cent growth this year despite a disappointing performance in the second quarter. “We will be in line with our objectives,” he said on RTL radio minutes after the figures were published by Insee, the state statistic agency.

…Rumours that French sovereign debt was set to lose its Triple A status have been denied by all three ratings agencies as well as the government, but continued to circulate in a febrile market atmosphere. French banks have also been the subject of unfounded rumours over their financial strength – strongly denied by the Bank of France.

[source]

August 12 (CNNMoney) — Regulators imposed a temporary short-selling ban in four European nations, effective Friday, in order to tame the wild market volatility that has taken markets throughout the world on a roller coaster ride.

The European Securities and Markets Authority, which is the European version of the Securities and Exchange Commission, said France, Italy, Spain and Belgium have all “decided to impose or extend existing short-selling bans in their respective countries.”

“They have done so either to restrict the benefits that can be achieved from spreading false rumors or to achieve a regulatory level playing field, given the close interlinkage between some EU markets,” the authority said in a statement.

[source]

August 12 (USAGOLD) — Gold is consolidative at the end of a volatile week, amid further official interventions. The short-selling ban in Europe seems to have provided some calm to the market for the time being, tempering gold’s appeal as a safe-haven.

The Swiss franc’s appeal as a safe-haven continues to erode as well as talk of a peg to the euro persists.

• US retail sales +0.5% in Jul, above market expectations of +0.4%, vs upward revised +0.3% Jun; +0.5% ex-autos.
• Eurozone industrial production -0.7% m/m in Jun, below market expectations, highlighting downside GDP risk.
• French prelim Q2 GDP flat q/q, below market expectations of +0.4%, vs +0.9% in Q1.
• Italy cancels bond auction.
• India industrial production +8.8% y/y in Jun, well above market expectations of +5.7%, vs +5.6% y/y in May.
• Hong Kong Q2 GDP +5.1% y/y, below market expectations of +6.0%, vs +7.5% y/y in Q1.
• Japan Jun industrial production little-revised at +3.8% m/m.

by Jeff Cox
August 11 (CNBC) — So whether this equals, falls short of, or exceeds the financial crisis of 2008 hardly seems to matter—investors are afraid, very afraid, and the question as much as anything in the minds of many market pros will be what soothes that fear.

Analyst Dick Bove at Rochdale Securities says he knows why: More restrictive capital requirements and near-zero interest rates set at the Federal Reserve that make lending neither easy nor lucrative, a trend that will make it difficult for the economy to grow.

“If one thinks through these limitations it can be seen that banks must shrink their balance sheets and change their business patterns to maintain their profits. What they are unlikely to do is to expand their lending activities in order to grow the economy,” Bove wrote in a lengthy banking analysis Thursday.

“However, the Federal Reserve is suggesting that the economy is unlikely to grow,” he wrote. “If the Fed is prescient, then banks are facing higher loan losses, lower loan volume, and reduced margins on a wide array of banking products. The outlook is not appealing.”

“Even though the United States is able to both print and borrow money, it is as bankrupt as the Europeans,” Bove wrote. “Covering deficits and paying debt with borrowed funds, some of which is newly printed, does not constitute meeting debt service requirements.”

The worries in the market, then, seem to be as substantive as they are superstitious that a crisis lurks somewhere, even if investors aren’t able to pinpoint exactly where.

Asked whether the market was merely having a knee-jerk reaction to fear or taking a more careful measure of fundamentals, Rick Bensignor, chief market strategist at Dahlman Rose in New York, said, “Can I answer both questions ‘Yes’?”

“There’s paranoia and there are real reasons,” he said. “There’s been a real repricing of risk in the markets.”

[source]

by Frank Byrt
August 11 (Globe and Mail) — Standard & Poor’s is recommending gold and gold miners as top investment picks only days after downgrading U.S. Treasuries, which sparked a firestorm in financial markets worldwide that boosted the price of the precious metal.

Gold futures (GC-FT1,770.00-14.30-0.80%) tumbled today after CME Group, owner of the world’s biggest futures market, increased margins on gold contracts by 22 per cent. Gold had soared 8 per cent in the previous three days, bringing a one-year gain to 49 per cent, on U.S. and European debt concerns and a slowdown in global economic growth.

“We believe that gold is in a bull market,” writes S&P analyst Leo Larkin in a research note, because demand will outstrip supply “for the foreseeable future.

“Gold’s price still has room to run despite its stellar advance and we believe that the precious metal could also continue to carry the prices of certain gold-related equities right along with it,” he added.

[Source]

By Ambrose Evans-Pritchard
August 11 (The Telegraph) — The franc retreated against the euro in a wild-one day move on Thursday after top officials at the Swiss National Bank (SNB) floated ideas for a temporary euro peg, a once unthinkable move.

“Nothing is excluded,” said Jean-Pierre Danthine, a SNB board member. “The situation is extremely complex and difficult. There is no magic wand.”

The Swiss franc has moved with gold over recent weeks, acting as a magnet for capital flight from the discredited debt currencies of West. The SNB said the franc is “massively overvalued” and has moved into dangerous territory over the past month.

[source]

PG View: So it begs the question; “massively overvalued” against what? That statement would suggest that the euro and the dollar are ‘massively undervalued.’ It’s pretty hard to make either case. The franc just happens to be the best looking horse at the glue factory. The swissy remains near record lows versus gold: There’s your true gauge of value.

August 11 (Financial Times) — Food commodities prices surged after the US government slashed its forecast for the country’s crops due to the impact of a heatwave and drought.

The US Department of Agriculture painted a bullish picture in particular for corn prices, saying: “Unusually high temperatures and below average precipitation during July across much of the Corn Belt sharply reduced yield prospects.”

…But it could reduce central banks’ room for manoeuvre as higher corn prices rapidly translate into more expensive beef, lamb, pork and poultry and, thus, higher food inflation. China, India and other developing countries have raised interest rates this year in part due to rising food inflation.

[source]

PG View: If food price inflation is indeed kicking in again, can a rebound in gold be far behind?

August 11 (Bloomberg) — Gold futures fell the most in seven weeks after CME Group Inc. (CME) boosted margins on Comex contracts, prompting investor sales after a three-day rally to a record topping $1,800 an ounce and as equities rebounded.

CME Group, owner of the world’s largest futures market, raised margins on gold contracts by 22 percent. The minimum amount of cash that speculators must keep on deposit for an initial account increased to $7,425 on a 100-ounce contract from $6,075. The Standard & Poor’s 500 Index rose as much as 3.2 percent after a drop in U.S. jobless claims.

“The strength in equities, coupled with the increase in margins, is pushing gold down,” Matthew Zeman, a strategist at Kingsview Financial in Chicago, said in a telephone interview. “Investors are waiting for a deeper correction before they start buying again.”

[source]

August 11 (Financial Times) — The Swiss National Bank, which has been waging battle to rein in the strength of the currency, has left open the possibility of pegging the Swiss franc to the beleaguered euro.

Thomas Jordan, vice-president of the SNB, said a temporary franc peg with the euro was within the range of options that policymakers might use to stem the Swiss franc’s strength. “Any temporary measures to influence the exchange rate are permissible under our mandate as long as these are consistent with long-term price stability,” he said.

[source]