August 16 (Bloomberg) — Switzerland, the nation that hasn’t gone to war with a foreign power since Napoleon, is reluctantly debating a generational taboo: ceding monetary independence to win a battle over its runaway currency.

Swiss National Bank Vice President Thomas Jordan said the central bank is assessing “a whole range of options” to prevent the franc, which reached a record against the euro this month, from making Swiss goods prohibitively expensive. Even a cup of coffee at Cafe St. Gotthard in Zurich costs $8.30, with one Swiss franc buying $1.2816 at today’s exchange rate.

Billionaire entrepreneur Christoph Blocher, one of the politicians who called on SNB President Philipp Hildebrand to resign after the bank lost $21 billion last year in a vain attempt to restrain the currency, now supports a franc target.

“The franc is catastrophically overvalued,” said Blocher, a former justice minister for the People’s Party, Switzerland’s largest. “It’s almost like economic warfare — to wage a war, you must use all measures at your disposal, and you must win.”

[source]

PG View: Again I ask; “catastrophically overvalued” against what? It’s pretty hard to assert with a straight face that the euro, sterling or the dollar are “catastrophically undervalued” given their respective fiscal and monetary woes. I would also contend that there’s nothing “almost” about the economic warfare that is emerging.

August 16 (AP) — All countries that use the euro should have mandatory balanced budgets and better coordination of economic policy, the leaders of France and Germany said Tuesday, pushing for long-term political solutions instead of immediate financial measures like a single European bond.

French President Nicolas Sarkozy and German Chancellor Angela Merkel also pledged to harmonize their countries’ corporate taxes in a move aimed at showing the eurozone’s largest members are “marching in lockstep” to protect the euro.

Both leaders stressed their commitment to defending the common currency, a cornerstone of integration on this long-fractured continent.

…The two leaders ruled out, however, issuing common government debt in the form of eurobonds, at least for now, despite demand by many investors for such a bold but politically difficult move.

[source]

PG View: What is being proposed would require renegotiation of the Lisbon Treaty and the implication is that core-European nations would hold even greater sway over periphery policies and budgets. I’m not so sure the Italians and Greeks for example are necessarily inclined to be “more German.” The failure to advance the eurobond issue, or to expand the ESFS means the immediate crisis will remain in full swing.

August 16 (Bloomberg) — The yen may climb past the record it reached in March as the fading influence of the U.S. and Europe in the global economy spurs investor flight to haven assets, said Eisuke Sakakibara, formerly Japan’s top currency official.

The U.S. economy has yet to overcome the fallout from the collapse of Lehman Brothers Holdings Inc. in 2008 and now faces the risk of a double-dip recession, Sakakibara said in an interview yesterday. The U.S. will enter a “lost decade” as Japan experienced in the 1990s, while Europe’s debt crisis may deepen, he said.

“What we’re seeing is the downfall of the West,” Sakakibara, 70, said in Tokyo. “Dollar weakness will be unavoidable, and the U.S. will likely tolerate that.”

[source]

EUR rallied then retreated.

August 16 (Financial Times) — German economic growth slowed to a near standstill in the second quarter of this year, dealing a further, unexpected blow to the crisis-hit eurozone.

The surprisingly-sharp deceleration in activity in Europe’s largest economy hit overall eurozone growth and intensified fears about the global slowdown. It also threatened to complicate the challenge facing the region’s policymakers as they seek to combat its escalating debt crisis.

[source]

August 16 (USAGOLD) — Gold continues to retrace the recent corrective losses as global markets go ‘risk-off’ once again. The yellow metal have moved back within $15 of the $1800 level after GDP data released today revealed that the eurozone economy slowed more than expected in Q2. More significantly, economic growth in Germany came in at a much weaker than expected 0.1% in Q2, on expectations of 0.5%. Germany is the last real economic engine in the EU, if that engine fails there will be nothing to keep the eurozone aloft. If Germany turns inward to address its own growth risks, that will raise doubts about their ability to simultaneously support the periphery, not to mention the weaker core nations like Italy and Spain.

Despite the grim GDP data, escalating talk about possible eurobond issuance has helped keep the single currency underpinned, as has ongoing discouragement to buy former safe-haven alternatives like the Swiss franc. The narrowed safe-haven field makes gold shine all that much brighter.

• US industrial production +0.9% in Jul, above market expectations of +0.4%; cap use 77.5%.
• US housing starts -1.5% to 604k pace in Jul, above market expectations of 600k.
• US import prices +0.3% in Jul, above market expectations of -0.1%; export prices -0.4%.
• Canadian manufacturing shipments -1.5% in Jun, well below market expectations of -0.6%, vs -0.7% May.
• UK CPI – EU Harmonized 4.4% y/y in Jul, above market expectations of 4.3%, vs 4.2% in Jun.
• Spain Q2 GDP Preliminary +0.2% q/q (sa), near expectations, vs +0.3% in Q1.
• Germany GDP Q2 1st Release +0.1% q/q (sa), well below market expectations of +0.5%, vs negative revised +1.3% in Q1.
• Eurozone GDP Q2 1st Release +0.2% q/q (sa), below market expectations of +0.3%, vs +0.8% in Q1; +1.7% y/y.
• India monthly WPI 9.22% y/y in Jul, near expectations, vs 9.44% in Jun.

by Egon von Greyerz
August 15 (GoldSwitzerland.com) — Gold has gone up for 12 straight years in a stealth market. In the last ten years gold has had a compound annual growth of 20.5%. This is an absolutely outstanding return but investors should not look at gold as an investment but as money. Gold reflects governments’ deceitful actions in totally destroying the value of paper money by printing unlimited amounts of it. With gold up 7 times since the bottom in 1999, is it too late to jump on the Goldwagon?

The answer to the above question is a categorical NO. Virtually no major investor group has participated in gold’s spectacular rise. In spite of a seven fold increase in the gold price, only circa 1% of world financial assets are invested in gold. Whenever I talk to major institutional investors, not only do they not own gold, but they don’t understand gold either.

[source]

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.