Brief:
(August 23, discussion) Gold’s ascent over the past few weeks has been remarkable. Following the downgrade of US debt by S&P, gold covered the distance between $1600 and $1900 in less than three weeks. Talk of gold being in a bubble quickly resurfaced as gold surged, but very little supports such conclusions. Net global investment in gold remains less than 1% of total assets, compared to levels as high as 5% in the 1960′s. Perceived safe haven currencies such as the Yen and the Swiss Franc are being forcibly suppressed, while the dollar and Euro remain under pressure. As Alan Greenspan said earlier this week, “Gold, unlike all other commodities, is a currency. And the major thrust in the demand for gold is not for jewelry. It’s not for anything other than an escape from what is perceived to be a fiat money system, paper money, that seems to be deteriorating.” Also discussed is Hugo Chavez’ effort to repatriate Venezuela’s gold from the Bank of England, setting the stage for other countries to attempt the same, raising questions about availability if this trend gains momentum. Last week was also the 40th anniversary of Nixon closing the gold window. — With Peter Grant, George Cooper, and Jonathan Kosares. 21min.

August 25 (Bloomberg) — The Federal Reserve’s decision to keep record-low interest rates and the possibility of more steps to stimulate the U.S. economy may boost commodity prices and fan inflation in India, the Asian nation’s central bank said.

“Given the fiscal limitations and growing signs of weakness in the U.S., the Fed has already indicated that it will pursue its near-zero rate policy at least till mid-2013,” the Reserve Bank of India said in its annual report in Mumbai today. “It has also hinted at another dose of quantitative easing. This policy stance may keep the commodity prices elevated.”

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August 25 (Reuters) — Greece’s central bank has activated an emergency liquidity assistance scheme so that it is available if banks need to draw from it, financial daily Imerisia wrote on Thursday without citing any source.

The Emergency Liquidity Assistance (ELA) is one of the options the euro zone has at its disposal to keep Greek banks afloat if the country’s sovereign debt is pushed into default by a new bailout deal that was put together by EU leaders last month, and the ECB stops accepting it as collateral.

…Rising bad loans, sovereign debt downgrades, deposit outflows and a deepening recession have taken their toll on Greek banks, which also stand to suffer write-downs from a bond swap deal that is part of the country’s second rescue package.

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By Mohamed El-Erian
Ben Bernanke, the chairman of the US Federal Reserve, is in a really tough spot. With other policymakers essentially missing in action, many hope that he will provide a remedy for America’s increasingly deep-rooted economic problems at Jackson Hole on Friday. Possibilities include enlarging the Fed’s balance sheet, extending the average maturity of the financial assets it holds and, even more controversially, expanding the range of assets it buys in the marketplace.

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Dollar Remains Weak, Despite Gold’s Correction

While gold has corrected dramatically this week, weighed by options expiration, another margin hike, as well as a generally overbought condition that resulted from the last several weeks of strong gains, the dollar remains on the ropes. The inability of the greenback to garner even a modest bid as gold retreated is indicative of the underlying dollar weakness.

In the above dollar index chart, it shows the greenback consolidating within a narrowing range throughout the summer. Breakouts from such chart patterns tend to come more often than not in the direction of the dominant trend; which remains unquestionably bearish. It is also worth remembering that the dollar recently set new all-time lows against the Swiss franc and Japanese yen, as well as new post hard-peg lows against the Chinese yuan. It’s hard to envision a scenario in which the dollar’s downtrend is going to be reversed any time soon, which in turn bodes well for the long-term uptrend in gold.

Over the past couple of months we’ve seen some pretty significant downward revisions to US GDP expectations. We’ve also seen US sovereign debt downgraded by one of the major rating agencies. And despite the debt ceiling deal early in the month, the CBO reported yesterday that the FY2011 budget deficit will be $1.3 trillion. That’s $1.3 trillion in the current fiscal year, versus $917 billion in spending reductions over the next decade that were negotiated. The new super-committee is tasked with finding an additional $1.5 trillion in spending cuts over the next 10-years, but the CBO reports that the government will accumulate an additional $6 trillion in debt over the same period. Bottom-line: We are saddled — and will remain saddled — with a massive debt burden for years to come.

None of this can be even remotely construed as dollar positive, and in reality a higher dollar is about the last thing our policymakers want right now. About the only thing that can turn the dollar around is a higher yield on US Treasuries, or perhaps a complete collapse of another major international currency (the euro leaps to mind). However, higher yields would make it increasingly expensive to roll-over our massive debt. As debt servicing costs rise as a percentage of GDP, it further hamstrings growth.

There are no real good options for Fed chairman Bernanke when he speaks in Jackson Hole tomorrow, which is why many think he will simply tow the FOMC line from the meeting earlier in the month.

August 25 (USAGOLD) — Gold extended corrective losses in overseas trading after the CMEGroup hiked margin requirements by another 27% late on Wednesday. The yellow metal set a new 2-week low at 1702.95 before finding support. It’s not uncommon to see markets hit into options expiration as the writers try to drive as many calls out of the money as possible.

Meanwhile, waning expectations that Fed chairman Bernanke will hint at further accommodations tomorrow when he speaks at the KC Fed’s symposium in Jackson Hole, have also contributed to unwinding of long gold positions. In light of recent weak economic data there were expectations that the Fed would indeed act to jump-start the economy, but such suspicions have been tempered by Washington Post, Wall Street Journal and Bloomberg articles this week that have discounted the likelihood.

• US initial jobless claims +5k to 417k in the week ended 20-Aug, above market expectations, from upward revised 412k in previous week.
• UK Nationwide’s consumer confidence fell to 49 in Jul, just 8 pts off all-time low from Feb, vs 51 in Jun.
• UK CBI Distributive Trades Survey (Realized) fell to -14 in Aug, below market expectations, vs -5 in Jul; Expected -7.
• Germany GfK Sep consumer confidence eased to 5.2, as expected, vs negative revised 5.3 for Aug.
• South Korea consumer confidence fell to 99 in Aug, lowest in 5 months, vs 102 in Jul.
• Hong Kong trade balance eased to -HKD35.9 bln in Jul, vs -HKD40.3 bln in Jun.
• NZ Q2 retail trade +0.9% (q/q), above market expectations, vs +1.1% in Q1.
• Philippine trade deficit -$376 mln.

August 24 (MarketWatch) — The CME Group Inc., the parent company of the main metals and energy exchanges in the U.S., on Wednesday announced an increase in margin requirements to trade gold. The money needed to trade gold contracts increased 27%. Initial margin requirements rose to $9,450 from $7,425 per 100-ounce contract; maintenance margin requirements rose to $7,000 from $5,500, both effective as of the close of trading on Thursday. The CME had increased margins for gold two weeks ago.

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August 24 (USAToday) — The Congressional Budget Office projects slow growth and high unemployment for years to come as a result of the financial crisis and recession, a new report shows.

In its semiannual update of budget and economic data, the agency — which serves as the official scorekeeper for President Obama and Congress — projects the jobless rate will fall to 8.9% by the end of this year but remain above 8% until 2014.

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August 24 (MarketWatch) — If gold was actually in a bubble, has that bubble popped? It’s a question some traders are asking today with gold GC1Z dropping by as much as $97 an ounce, or over 5%, but it’s probably safer not to read too much into the metal’s decline.

…But Austin Kiddle, an analyst at London-based bullion brokers Sharps Pixley, said Wednesday that the current downward movement in gold is “more in line with profit taking than a move out of safe-haven territory,” especially given that next month is a big month for gold as the Indian wedding season begins.

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August 24 (MarketWatch) — Gold futures dropped more than 4% Wednesday, trading below $1,800 an ounce and extending losses to a second day as a correction that started after five records in six sessions suddenly got much steeper.

Gold for December delivery dropped $80.20, or 4.3%, to $1,781.10 an ounce on the Comex division of the New York Mercantile Exchange.

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August 24 (Bloomberg) — Central banks, net buyers of gold for the first time in a generation, are likely to retain their holdings even if they need to raise cash to counter an escalating debt crisis, according to Morgan Stanley.

“Once they’ve sold, that’s it, and buying back would be extremely expensive,” said Peter Richardson, chief metals economist at Morgan Stanley Australia Ltd., who’s studied metals markets for 20 years. “They would rather have the backing of a rising asset within their reserve portfolios than use it to reduce debt.”

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August 23 (Financial Times) — A prominent member of Angela Merkel’s government has broken ranks with cabinet colleagues by calling on Germany to ask Greece to post billions in collateral in return for new emergency loans, following in the footsteps of Finland.

Labour minister Ursula von der Leyen, who is also a deputy leader of Ms Merkel’s Christian Democratic Union (CDU), said forcing Greece to put up securities would “ensure that agreements [regulating a second bail-out] won’t be broken”.

She made the suggestion in an interview with the Hannoversche Allgemeine, a German newspaper, and followed this with comments on public television in which she suggested Athens could post gold reserves or stakes in state-owned companies as collateral.

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PG View: Merkel continues to dismiss the need for collateral, but the German people realize that they got taken for a ride on bailout 1.0 and are probably disinclined to provide further support without something of value pledged in return. The surge in Greek yields to new record highs is reflective of the market perception that the risk of a Greek default has never been greater.

August 24 (Washington Times) — The government will run another $1.3 trillion deficit in fiscal year 2011, Congress’s chief scorekeeper said Wednesday — easily eclipsing the $917 billion in savings over the next decade lawmakers scratched out earlier this month in their debt-reduction deal and underscoring the deep challenge they face going forward.

And over the next decade, the Congressional Budget Office said, the federal government will rack up nearly $6 trillion in new deficits — far outstripping the $1.5 trillion in future savings the new deficit super committee is charged with recommending to Congress.

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By Neil Irwin
August 23 (Washington Post) — This time a year ago, Federal Reserve Chairman Ben S. Bernanke headed to an annual gathering of central bankers in Jackson Hole, Wyo., amid a faltering U.S. economy, a perilous global situation, and rising calls on Wall Street for the Fed to do something to address both.

Here we go again.

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Aug 24 (Dow Jones) — Gold waded deeper into negative territory Wednesday as investors continued cashing out after recent record gains.

The most actively traded contract, for December delivery, was recently down $43.00, or 2.3%, at $1,818.30 a troy ounce on the Comex division of the New York Mercantile Exchange.

…Investors streamed out of the gold market as gold’s $100 decline from Tuesday’s intraday record spurred investors to lock in the gains earned on gold’s fast-paced rally.

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Aug 24 (USAGOLD) — Gold remains defensive after coming under corrective pressure on Tuesday. While the market had been stabilizing at modestly higher levels in overseas trading, a better than expected US durable goods print for Jul further heightened risk appetite. Stocks pared pre-open losses, despite rising doubts that Fed chairman Bernanke will hint at further accommodations when he speaks in Jackson Hole on Friday.

Such doubts have likely played a role in gold’s retreat, but if data continue to evidence a deteriorating economy, investors have proven in recent weeks that they will be quick to exit risk trades. If stocks slide again, a rebound in the yellow metal — driven by renewed safe-haven flows — would be likely.

• US durable goods orders +4.0% in Jul, well above market expectations of +2.4%, vs upward revised -1.3% in Jun.
• Germany Ifo Business Climate slipped to 108.7 in Aug, below expectations, vs 112.9 in Jul. Current assessment 118.1. Expectations 100.1.
• Eurozone industrial orders -0.7% m/m in Jun (sa), below market expectations of +0.5%, vs +3.6% in May; y/y pace falls to 11.1%.
• Moody’s downgrades Japan sovereign debt to Aa3, citing frequency in turnover of political leadership.
• Bank of Thailand hikes O/N repo rate 25bp to 3.50%, in-line with expectations.

August 22 (CBSNews) — The latest posting by the Treasury Department shows the national debt has now increased $4 trillion on President Obama’s watch.

The debt was $10.626 trillion on the day Mr. Obama took office. The latest calculation from Treasury shows the debt has now hit $14.639 trillion.

It’s the most rapid increase in the debt under any U.S. president.

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August 23 (Bloomberg) — Gold dropped the most since May as some investors sold the metal after signs of slowing growth spurred a rally to a record $1,917.90 an ounce.

The relative-strength index of futures in New York has topped 70 since Aug. 8, a signal to some investors that prices were poised to decline. Bullion has jumped 14 percent in August amid speculation that Federal Reserve Chairman Ben S. Bernanke will signal further measures to stimulate the U.S. economy later this week and as debt crises spurred demand for haven assets.

…Before today, prices surged 17 percent in three weeks. The metal is in the 11th year of a bull market, the longest winning streak since at least 1920 in London, as investors seek to diversify their holdings away from equities and some currencies. Bullion also reached all-time highs in euros, British pounds and Swiss francs today.

…“In the long-term, gold is attractive,” Zeman of Kingsview said. “Fiscal deficits are completely out of control. It’s no wonder that investors are losing faith in paper money.”

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August 23 (CNBC) — The euro zone could collapse if its member countries do not work together to solve its debt crisis, but China is pleased to see that Germany and France are cooperating to avert that risk, a Chinese vice foreign minister said in an interview.

China’s leaders, including Premier Wen Jiabao, have repeatedly expressed confidence in the euro zone, though officials and media commentary have also reflected anxieties about Europe’s economic prospects.

On Monday, China’s leading official newspaper likened the euro zone debt crisis to the Black Death, days before French President Nicolas Sarkozy is due to meet Chinese President Hu Jintao in Beijing.

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August 23 (Der Spiegel) — Chancellor Angela Merkel will meet conservative parliamentarians on Tuesday evening to try to allay their concerns about her management of the euro crisis. Many are unhappy about the EU deal to increase the scope of the bailout fund — and are dissatisfied with Merkel’s leadership style.

Many in Chancellor Angela Merkel’s conservative Christian Democratic Union party are unhappy about Germany’s growing commitment to euro bailout packages and fear that the nation is being locked into a “transfer union” in which German taxpayers will end up bankrolling high-debt nations that got themselves into trouble through their own profligacy.

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Resentment in the North: Rich EU Members Lose Patience with the ‘Olive Zone’

August 23 (Der Spiegel) — The rich countries of the northern euro zone are bearing the brunt of bailing out their debt-stricken fellow members. Resentment is growing among their populations, helping euroskeptic right-wing populists to win support. But there is little awareness of how much the European Union has done for their own countries.

Officially, of course, the one-euro coin is worth the same everywhere. But given the current state of the euro zone, you could be forgiven for thinking that the coin with the Greek owl or Spanish king on its reverse is worth less than one bearing, say, a German eagle or the silhouette of the Netherlands’ Queen Beatrix.

An invisible crack now divides the euro zone. With their triple-A rating from the American credit rating agencies, six of the euro zone’s 17 member states are considered sound borrowers. And the more government finances in Greece, Portugal, Italy, Spain and Ireland are thrown out of kilter, the more the countries with the best credit ratings are expected to vouch for the euro. They include, in addition to Germany and France, Finland, Luxembourg, the Netherlands and Austria.

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August 23 (BusinessInsider) — The San Francisco Fed has come out with a research paper connecting the dots between the retiring baby boomers and stock prices. The thinking is that the boomers will divest themselves of stocks as they retire and eat into their savings.

…These conclusions are just horrendous! The suggestion is that there is a 15-year bear market in front of us. Multiples will fall by 50%!!

…“We do see it as something of a headwind as the economy is attempting to recover.”

This is worst kind of “Fed Speak” in my opinion. These deep thinkers have it completely wrong. They think that the key to having a stronger economy is higher stock prices. So they spend all of their efforts dreaming up ways to keep the S&P ramping up. I think it is the exact other way around. If the economy were to be growing, it is reasonable to assume that stock price might rise. It is completely false to assume that attempts to jigger stocks higher will lead to a stronger economy.

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August 23 (Reuters) — German Labour Minister Ursula von der Leyen — who is also a deputy president of Chancellor Angela Merkel’s Christian Democrats (CDU) — said on Tuesday that future euro zone bailout payments should be covered by collateral such as gold reserves or stakes in state industry.

Von der Leyen, wading into the debate about Finland seeking collateral from Greece for the Finnish contribution to existing bailout payments, told German public broadcaster ARD that future bailouts should only be made against collateral, according to a news release from ARD.

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PG View: There have been no collateral requirements in the past because there was no real expectations that the bailouts would be repaid. Now that we’re into the second round of bailout, that seems to be an issue for some countries.

August 23 (Financial Times) — Eurozone economic growth remains close to a standstill, with the region’s manufacturing sector contracting this month for the first time in two years, according to a closely-watched survey.

Private sector activity barely increased in August as German prospects weakened further, purchasing managers’ indices for the 17-country region indicated on Tuesday, adding to the difficulties facing the region’s leaders as they seek to restore confidence in Europe’s monetary union.

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