President Obama is nominating Alan Krueger for chairman of the Council of Economic Advisers. He is more than qualified based on his resume, but the question is whether is the right man for the job right now.

By Daryl G. Jones
August 30 (CNN) — President Obama has been fairly predictable in his selections for key cabinet and personnel decisions. Generally, the key members of the Obama team have two criteria: they have served in government before and they served in the Clinton administration.

…A review of Krueger’s writings has also revealed that he is about as Keynesian as economists come.

[source]

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, August 9, 2011, at 8:00 a.m.

[source]

PG View: Some members “considered conditioning the outlook for the level of the federal funds rate on explicit numerical values for the unemployment rate or the inflation rate.” Further asset purchases and ‘curve-flattening’ were considered, which has added to gold’s bid today on rising expectations of such measures come 21-Sep.

August 30 (Gallup) — Thirty-four percent of Americans say gold is the best long-term investment, more than say so about four other types of investments. Real estate (19%) and stocks (17%) are distant second choices.

…Traditionally, gold — like the U.S. dollar — has been a safe haven in times of economic and political turmoil. It is a globally accepted store of value and one of the most highly desired precious metals.

The demand for gold has soared in recent years, as the financial crisis engulfed the global banking industry. More recently, the efforts of nations around the world and their monetary authorities to stimulate the global economy and avoid a repeat of the 1930s have made gold even more attractive. Current sovereign debt problems have only added to the demand for gold.

[source]

PG View: Then why pray-tell is global allocations to gold such a miniscule percentage of total financial assets (less than 1%)?

The answer of course is that Americans — like much of the rest of the world — have just recently begun to realize that the more traditional asset classes that they have been force-fed for decades aren’t all they are cracked up to be. They are perhaps just beginning to protect some of their wealth with hard assets such as gold. Imagine the likely price reaction in the yellow metal if allocations simply climbed back to 2% of global financial assets!

This reality is also a pretty convincing dismissal of Gallup’s suggestion that one in three American’s viewing gold as a good investment may be indicative of a bubble. While one in three may indeed believe gold is a sound long-term investment, there’s no-way that one in three Americans actually own any gold yet. I’d be surprised if it’s even close to one in one-hundred!

(August 30) Bloomberg — Gold rose in New York on speculation that the Federal Reserve will ease monetary policy further to stimulate the economy, boosting the appeal of the precious metal as an alternative asset.

“We need to do more,” Chicago Fed President Charles Evans said today in a CNBC interview. The Standard & Poor’s 500 Index fell after a report showed confidence among U.S. consumers plunged in August to the lowest in almost two years. Gold has rallied 12 percent this month, touching a record $1,917.90 an ounce on Aug. 23.

“Classic flight-to-safety instruments are getting a bid today,” Adam Klopfenstein, a senior market strategist at MF Global in Chicago, said today in a telephone interview. “The inverse correlation between equities and gold will persist. Liquidity measures put the inflationary card in the picture. It’s the perfect storm to be long gold.”

[Source]

August 30 (MarketWatch) — Gold futures regained the $1,800-an-ounce mark Tuesday, surging more than 2% as investors questioned the rebound for U.S. equities and had lingering concerns about the state of the global economy.

Gold for December delivery rose $41.70, or 2.3%, to $1,833.20 an ounce on the Comex division of the New York Mercantile Exchange.

[source]

Push For QE3 Commences in Earnest

Just days after Fed chairman Bernanke left the door slightly ajar for QE3 in his Jackson Hole speech, the market is already attempting to kick that door wide-open. Bernanke claimed that the central bank has pretty much done all it can do and asked for lawmakers to do more on the fiscal side. However, in the wake of the contentious debt ceiling debate, investors rightfully are assuming there will be no political compromises on fiscal stimulus until after the 2012 Presidential election. And even then, unless one party holds the Oval Office and both Houses of Congress, it would be doubtful.

Therefore the ball is squarely in the Fed’s court. If there is to be any stimulus at all, it will have to be the monetary kind. The market is already looking forward to the September FOMC meeting in 3-weeks, anticipating that the punchbowl will inevitably be refilled and the party can continue. Today’s terrible consumer confidence print for August will add further impetus to the cup-banging for ‘more punch.’

Consumer confidence plunged to 44.5 in August, a level not seen since the worst days of the financial crisis in April 2009. The decline from the negatively revised 59.2 reading in July was the biggest point drop since October 2008, just after the collapse of Lehman Brothers.

ZeroHedge cited a Goldman Sachs report today that states that they believe further monetary easing is indeed in the offing. They do suggest that inflation, which continues to be at the high end of expectations, and last week’s better than expected PCE data are potential mitigating factors. Although I would argue that today’s big confidence miss pretty much offsets the latter, and perhaps the former as well.

Goldman suggests some “radical” measures that the Fed might employ that may garner some more favorable results than the QE measures of the past. If the Fed does indeed go “radical,” so too would the gold market in all likelihood. As the pseudonymously named Tyler Durden of ZeroHedge quipped, “we hope readers have their gold $3000 calls firmly in place.”

August 30 (Bloomberg) — Confidence among U.S. consumers plunged to the lowest level in more than two years as Americans’ outlooks for employment and incomes soured.

The Conference Board’s index slumped to 44.5, the weakest since April 2009, from a revised 59.2 reading in July, figures from the New York-based research group showed today. It was the biggest point drop since October 2008. A separate report showed home prices declined for a ninth month.

[source]

August 30 (USAGOLD) — Gold has rebounded in early NY trading to exceed Friday’s high at 1828.85, following dovish comments from the Chicago Fed’s Evans on CNBC. Evans acknowledged that the economy has not reached “escape velocity” and that current weak labor conditions were consistent with a recession. Evans went on to say that he “definitely favors strong accommodation at this point.”

Grim confidence readings out of the eurozone have weighed on the single currency, adding to the bid in gold. Gold continues to retrace recent corrective losses against the euro amid speculation over further ECB bond buying, despite German objections. Weak Italian debt auction.

• US S&P Case-Shiller home prices +1.1% nsa in Jun for 20-cities; -4.5% y/y.
• Canada current account deficit widened to -C$15.3 bln in Q2.
• Eurozone economic confidence fell to 98.3 in Aug, below market expectations, vs 103.2 in Jul. Consumer, industrial and services confidence all fall.
• Eurozone business climate falls to 0.07 in Aug, vs 0.45 in Jul.
• Japan unemployment rate 4.7% in Jul, a tick higher than expectations, vs 4.6% in Jun.
• Japan personal income rose to 1.6% y/y in Jul, vs upward revised -6.0% in Jun; PCE -2.1% y/y, vs upward revised -3.5% in Jun.
• Japan total retail Sales +0.7% y/y in Jul, below market expectations, vs 1.1% in Jun.

August 29 (The Wall Street Journal) — “Delay and pray” is not a viable fix for the household sector’s woes. Indeed, it may only be making things worse.

In a marked shift from their borrow-and-spend behavior during the boom, U.S. households are now by and large prioritizing saving and debt reduction. On Monday, the Commerce Department is to release July figures likely to show the personal saving rate, or proportion of after-tax monthly income unspent, in the 5% to 5.5% range it has maintained for roughly the past 18 months.

Though that remains below the 7% to 8% average of prior decades, this recent upswing is a welcome turn from the near-zero saving rates of years past.

[source]

PG View: While personal consumption expenditures (PCE) rose 0.8% in July, the recent rise in the personal savings rate is certainly not welcomed by retailers, nor the Federal government. They don’t want you to save. They want you to spend. Nothing would please them more than to see the saving rate drop back to zero or even lower. The Fed recently made it clear that they would continue to disincentivize saving by keeping short-term rates near 0% for at least another two-years. This allows banks to pay a negative yield in real-terms, below the rate of inflation. It therefore makes perfect sense to hold some of your savings in gold.

How did a Philadelphia family get hold of $40 million in gold coins, and why has the Secret Service been chasing them for 70 years?

by Susan Berfield
August 25 (Business Week) — The story of a Philadelphia coin dealer, and his family, and how they came to possess 10 1933 $20 St. Gaudens, found unexpectedly in their safe deposit box…only to lose their battle to retain ownership in a Philadelphia courthouse.

[Story]

August 29 (Bloomberg) — Central bankers gathered at an annual retreat in Jackson Hole, Wyoming, this weekend had a message for political leaders: monetary policy alone can’t keep the global expansion going.

Federal Reserve Chairman Ben S. Bernanke urged adoption of “good, proactive housing policies” to reverse the depressed U.S. real estate market and warned lawmakers to avoid steps that may hurt short-term growth. Ewald Nowotny of the European Central Bank Governing Council said euro-area governments should expand the powers of their regional bailout fund.

“Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank,” Bernanke said at the annual conference of policy makers and economists, sponsored by the Kansas City Fed.

[source]

August 29 (Reuters) — Record gold prices, rather than denting China’s enthusiasm for bullion, have emboldened investors to plough more money into gold bars and riskier bullion-based derivatives.

August is traditionally a slow month for Chinese jewelers, but many shops in Shanghai visited by Reuters reported surprisingly solid gold sales over the last few weeks, with shoppers unfazed by gold’s stellar price gains over the past few months.

[source]

German Chancellor Angela Merkel no longer has enough coalition votes in the Bundestag to secure backing for Europe’s revamped rescue machinery, threatening a consitutional crisis in Germany and a fresh eruption of the euro debt saga.

By Ambrose Evans-Pritchard
August 28 (The Telegraph) — Mrs Merkel has cancelled a high-profile trip to Russia on September 7, the crucial day when the package goes to the Bundestag and the country’s constitutional court rules on the legality of the EU’s bail-out machinery.

If the court rules that the €440bn rescue fund (EFSF) breaches Treaty law or undermines German fiscal sovereignty, it risks setting off an instant brushfire across monetary union.

The seething discontent in Germany over Europe’s debt crisis has spread to all the key institutions of the state. “Hysteria is sweeping Germany ” said Klaus Regling, the EFSF’s director.

German media reported that the latest tally of votes in the Bundestag shows that 23 members from Mrs Merkel’s own coalition plan to vote against the package, including twelve of the 44 members of Bavaria’s Social Christians (CSU). This may force the Chancellor to rely on opposition votes, risking a government collapse.

[source]

Dregs in the Punchbowl…For Now

Fed chairman Bernanke didn’t refill the punchbowl today as some had expected, choosing instead to reiterate the message from the FOMC statement earlier in the month, that “the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus.” While perhaps not as overt as the signal of QE2 at last year’s Jackson Hole meeting, the market seemed to think that the Fed stands ready to offer further accommodations, perhaps as soon as the September FOMC meeting. That meeting was expanded to a two-day meeting (Sep 20/21), to “allow a fuller discussion.” In the interim, the market is going to have to get by with the dregs provided by ongoing reinvestment of maturing assets.

Stocks originally sold off on Bernanke’s speech, then rebounded as the chairman’s words were evaluated by seasoned Fed watchers, familiar with the nuances of Fedspeak. Gold down-ticked modestly early on, then continued to retrace the sharp correction that commenced after the yellow metal set a new all-time high at 1911.69 on Monday. Gold closed on its highs for the day, with nearly 61.8% (an important Fibonacci retracement) of the entire correction from 1911.69 to 1702.95 recouped. Despite the volatility this week, gold ended up down just 1.3%.

If more Fed “juice” is indeed forthcoming, as the market clearly seems to expect, gold will likely continue it’s march higher. However, what do we really stand to gain? US Q2 GDP was revised lower on Friday to a paltry 1.0%, and that anemic growth was during the midst of the Fed’s QE2 campaign. I’m not sure that we can expect much better results if additional asset purchases are in the offing, and Bernanke himself has expressed concerns about further expansion of the Fed’s balance sheet.

There was an interesting article on the Project Syndicate website this week by Stephen Roach, entitled One Number Says it All. The number to which Roach refers is 0.2%, “the average annualized growth of US consumer spending over the past 14 quarters – calculated in inflation-adjusted terms from the first quarter of 2008 to the second quarter of 2011.” Roach goes on to say, “Never before in the post-World War II era have American consumers been so weak for so long.”

That is indeed a terrible number, perhaps even downright devastating for an economy that is 70% driven by consumption. It also drives home a point that I’ve been making for some time about deficit and debt projections being based on a wildly optimistic growth outlook. Roach concurs, saying, “persistent weakness in consumption and GDP growth puts the US economy on a much weaker growth trajectory than that which is built into the government’s long-term budget estimates.” The CBO just upped their estimate of the FY2011 deficit to $1.3 trillion, and that too is likely to be revised higher over time. Meanwhile, Congress compromised on the debt ceiling hike by promising to cut $917 bln in spending…over the next 10-years! The first rule for getting out of a hole: Stop digging!

As the US is saddled with an ever greater debt burden, the Fed may indeed be obliged to offer further accommodations ‘to infinity and beyond’ (to borrow a phrase from Buzz Lightyear), lest debt servicing costs become such an oppressive percentage of GDP that all-hope of recovery is dashed. But even with more easing, it is unlikely to end our consumption malaise. That won’t happen until household debt has been deleveraged and Americans are once again feeling secure in their jobs. Bernanke must be aware of this reality; and perhaps that figured into his decision today to keep his remaining powder dry and chastise Congress for its ineptness in crafting any kind of meaningful fiscal policy response. Getting out of the debt hole can not be simply left on the Fed’s doorstep as a matter of political expediency.

Monetary policy is a blunt instrument. The Fed does us no favors by printing money and artificially suppressing yields indefinitely through asset purchases, but our elected officials have done neither the Fed nor us any favors by shirking their responsibilities on the fiscal side.

Given the realities within the beltway, it is likely that we have years of slow growth and high unemployment ahead of us, with severe bouts of systemic risks to boot. If by some miracle, our lawmakers put their partisan ways aside and America takes her bitter medicine, its going to burn like hell going down, but we just might come out of this stronger on the other side. Arguably the former is far more likely; but however this ultimately shakes out, gold will continue to serve as a critical hedge and means of wealth preservation.
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Also, if you have a spare 21 minutes over the weekend, be sure to check out our latest Video Roundtable.

August 26 (Reuters) — Russia’s central bank will offer gold-backed loans for up to 90 days at an interest rate of 7 percent, it said in a statement on Friday, expanding its lending facilities for dealing with any future liquidity crunch in the banking system.

The gold-backed lending was approved by the board of directors at a meeting on Friday. The rate on the facility is in line with the central bank’s Lombard rate on borrowing secured against high-quality bonds.

[source]

August 26 (Financial Times) — Greece warned on Friday it may call off a proposed €135bn debt swap if fewer than 90 per cent of private investors sign up for the deal.

The warning came in a letter from the Athens finance ministry to 60 global governments, giving details of a swap and rollover plan agreed last month with European Union partners as part of a second Greek bail-out package.

[source]

PG View: Greek bailout 2.0 seems to be falling apart on all fronts.

August 26 (MarketWatch) — Federal Reserve Chairman Ben Bernanke on Friday put off a lengthy discussion of the easing options available to the central bank until the next Federal Open Market Committee meeting late next month.

“The Fed has a range of tools that could be used to provide additional monetary stimulus,” Bernanke said.

These options were discussed in August and “we will continue to consider these and other pertinent issues…at our meeting in September,” Bernanke said.

Bernanke announced that the Fed had decided to expand its September meeting to two days – Sept. 20 and 21 – to review the pros and cons of further easing.

…Bernanke also criticized Congress, saying the recent debate over the debt ceiling had hurt the economy.

[source]

August 26 (Financial Times) — The US Federal Reserve “is prepared to employ its tools as appropriate to promote a stronger recovery”, chairman Ben Bernanke said in a speech at Jackson Hole on Friday, dropping a broad hint that the US central bank will soon do more to support an ailing economy.

But Mr Bernanke avoided the emphatic language he used in a similar speech last year, and offered no detailed discussion of the Fed’s easing options, suggesting that he wants to manage expectations carefully of how much the central bank might do.

[source]

PG View: I didn’t read the Bernanke speech as being any different than the FOMC statement earlier in the month: We’ve got the tools and we’ll use them if warranted. However, if the FT’s take is closer to the truth, it would certainly explain why gold rebounded to set new intraday highs.

August 26 (MarketWatch) — The gold market got just what it needed this week: a two-session, $135-an-ounce drop in prices and a stark reminder that the higher the price, the higher the volatility.

“Everyone knew that gold had gotten ahead of itself and we needed to blow away the speculative froth,” said Brien Lundin, editor of Gold Newsletter, adding that traders who sold gold on Wednesday weren’t buying gold for the long term.

…“As $100 becomes an ever smaller percentage of the gold price, and as market volatility in general continues to rise, I think it’s reasonable to expect more $100 days in gold,” said Peter Grant, senior metals analyst at USAGold-Centennial Precious Metals Inc.

…But Steven Evanson, chief executive officer at Evanson Asset Management, said he does not believe gold is in a bubble by any conventional definition of a bubble.

“Retail and institutional levels of ownership are very low, the financial press has been more negative than positive about gold … the 10-year chart for gold shows rises, corrections [then] further rises, and fundamentals and macros support gold — unlike bubbles where prices detach from value,” he said.

[source]

August 26 (Financial Times) — US economic growth in the second quarter was revised down to 1 per cent amid pessimism over a prolonged slowdown.

The revision from a preliminary estimate of 1.3 per cent signals that what had been viewed as a “soft patch” in the post-recession recovery has extended into a protracted stalling of the economy. The economy grew just 0.4 per cent in the first three months of the year.

The figures from the Bureau of Economic Analysis were in line with market expectations. A wide swath of downbeat indicators released over the summer in sectors ranging from manufacturing to housing to the labour market have further diminished consumers’ and investors’ confidence that the pace of growth will pick up anytime soon. Demand has weakened as Americans tightened their belts and businesses have largely remained on the sidelines, holding back on hiring and investing in an uncertain climate.

[source]

Chairman Ben S. Bernanke
At the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming
August 26, 2011

Good morning. As always, thanks are due to the Federal Reserve Bank of Kansas City for organizing this conference. This year’s topic, long-term economic growth, is indeed pertinent–as has so often been the case at this symposium in past years. In particular, the financial crisis and the subsequent slow recovery have caused some to question whether the United States, notwithstanding its long-term record of vigorous economic growth, might not now be facing a prolonged period of stagnation, regardless of its public policy choices. Might not the very slow pace of economic expansion of the past few years, not only in the United States but also in a number of other advanced economies, morph into something far more long-lasting?

I can certainly appreciate these concerns and am fully aware of the challenges that we face in restoring economic and financial conditions conducive to healthy growth, some of which I will comment on today. With respect to longer-run prospects, however, my own view is more optimistic. As I will discuss, although important problems certainly exist, the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years. It may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals. In the interim, however, the challenges for U.S. economic policymakers are twofold: first, to help our economy further recover from the crisis and the ensuing recession, and second, to do so in a way that will allow the economy to realize its longer-term growth potential. Economic policies should be evaluated in light of both of those objectives.

This morning I will offer some thoughts on why the pace of recovery in the United States has, for the most part, proved disappointing thus far, and I will discuss the Federal Reserve’s policy response. I will then turn briefly to the longer-term prospects of our economy and the need for our country’s economic policies to be effective from both a shorter-term and longer-term perspective.

[full text]

Key excerpts:

…In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.

…Notwithstanding the severe difficulties we currently face, I do not expect the long-run growth potential of the U.S. economy to be materially affected by the crisis and the recession if–and I stress if–our country takes the necessary steps to secure that outcome.

…To achieve economic and financial stability, U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time. As I have emphasized on previous occasions, without significant policy changes, the finances of the federal government will inevitably spiral out of control, risking severe economic and financial damage.1 The increasing fiscal burden that will be associated with the aging of the population and the ongoing rise in the costs of health care make prompt and decisive action in this area all the more critical.

…Finally, and perhaps most challenging, the country would be well served by a better process for making fiscal decisions. The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses. Although details would have to be negotiated, fiscal policymakers could consider developing a more effective process that sets clear and transparent budget goals, together with budget mechanisms to establish the credibility of those goals. Of course, formal budget goals and mechanisms do not replace the need for fiscal policymakers to make the difficult choices that are needed to put the country’s fiscal house in order, which means that public understanding of and support for the goals of fiscal policy are crucial.

…The Federal Reserve will certainly do all that it can to help restore high rates of growth and employment in a context of price stability.

August 26 (USAGOLD) — Gold has retraced more than 38.2% (important Fibonacci level) of this week’s correction, but gains faltered ahead of $1800, leaving the more important halfway-back point at 1807.32 protected. The market is eagerly awaiting Fed chairman Bernanke’s Jackson Hole speech on “Near- and Long-Term Prospects for the U.S. Economy,” which is scheduled to commence at 10:00ET. This morning’s bigger than expected downward revision to Q2 GDP sets the stage for the “near-term” component of his speech; the economy is barely growing so there is little hope for any immediate relief on the jobs front, which begets further economic weakness.

Most Fed watchers seem to think Bernanke will not overtly signal further asset purchases (QE3), but will likely remind everyone that further expansion of the Fed’s balance sheet remains an arrow in his quiver, to be drawn as economic conditions warrant. There is also some speculation that the Fed will seek to flatten the yield curve via a new operation twist. However, New York Times economist Paul Krugman believes that Bernanke and the supposedly politically independent Fed has been forced into inaction by outside political pressure.

Arguably that outside political pressure is reflective of the personal feelings of a large swath of American voters, who realize that printing money and using that money to buy bonds in order to artificially suppress yields is hardly a panacea for our economic woes; and may in fact do more harm than good. Those trade-offs are something that Mr. Bernanke himself has alluded to in the past.

• Bernanke’s Jackson Hole speech on “Near- and Long-Term Prospects for the U.S. Economy” scheduled for 10:00ET.
• US Q2 GDP revised down to 1.0%, below market expectations of 1.1%, vs 1.3% previously.
• Spain, Italy and France extend short selling ban.
• Germany import price Index 0.8% m/m in Jul, vs -0.6% in Jun; 7.5% y/y.
• Eurozone M3 sa +2.0% y/y in Jul, vs downward revised 1.9% in Jun.
• Spain Q2 GDP sa (final) confirmed at 0.2% q/q; 0.7% y/y.
• UK Q2 GDP (second release) confirmed at 0.2% q/q; 0.7% y/y.
• Switzerland KOF leading indicator fell to 1.61 in Aug, below market expectations, vs 1.98 in Jul.
• Singapore manufacturing production 7.4% y/y in Jul, vs 10.7% y/y in Jun.
• Taiwan leading economic index 0.0% m/m in Jul, vs 0.1% in Jun.
• Japan CPI (National) +0.2% y/y in Jul, vs negative revised -0.4% in Jun; Tokyo -0.02% y/y.