September 13 (Bloomberg) — Italian borrowing costs jumped at a 6.5 billion-euro ($8.8 billion) bond auction as contagion from Europe’s debt crisis leaves investors shunning the region’s most-indebted nations.

The Rome-based Treasury sold 3.9 billion euros of a new benchmark five-year bond to yield 5.6 percent, up from 4.93 percent when similar-maturity securities were sold on July 14. Demand was 1.28 times the amount offered, down from 1.93 times at the last sale.

[source]

Uncertainty Prevails

September 13 (USAGOLD) — Gold staged another test below $1800 in earlier trading and those losses once again attracted buying interest. Given the still strong demand for a narrowed field of safe-haven assets, dips are likely to continue to be limited and short-lived.

Continued uncertainty about the fate of Greece and Europe as a whole will negatively impact risk appetite. That spells trouble global stock markets, and in particular banking shares. German Chancellor Angela Merkel once again attempted to reassure investors that Germany and the EU are doing everything in their power to prevent a Greek default. However, given the news late last week that Germany was preparing a plan to shield its banks from a Greek default, it seems at best Ms. Merkel isn’t as confident as she once was. At best I think Europe is now merely doing everything in their power to prevent a disorderly Greek default. A default of some sort seems inevitable.

Similarly, here in the United States, risks to growth abound. The President’s $447 bln jobs bill was presented to Congress yesterday, but probably has very little chance of passing as it was written. The Republican majority in the House may attempt to pass just the tax cut provisions in the President’s plan, but the Democrat controlled Senate is unlikely to play ball. The reality is that there is unlikely to be any progress at all until the Super Committee comes out with their recommendations ahead of Thanksgiving. And even then, there are serious doubts as to whether those on the Super Committee can find common ground to the tune of $1.2 trillion in such a short period, given the contentiousness of the recent debt ceiling debate. The country indeed may just have to muddle along, mired in uncertainty, throughout the next 14-months of the election cycle.

That very uncertainty, a byproduct of bitter partisan politics, is exactly what prompted the S&P downgrade of US sovereign debt. There may be further downgrades in our future, and therefore further demand for safe-haven assets such as gold, unless our political leader can come together and chart an agreeable course through these stormy seas. But don’t think for a minute that if political compromise is achieved the clouds will lift and calm will be restored immediately. Even in that unlikely event, we are probably in for years — if not decades — of slow growth, high unemployment and persistent systemic risks.

September 12 (Bloomberg) — Gold’s “perfect storm” is expected to continue on renewed investor demand for haven assets, potentially driving the metal to its 1980 inflation- adjusted record, according to Morgan Stanley.

The firm retains a positive view on gold for its role as portfolio insurance against a “formidable cocktail” of macro challenges including financial systemic risk, concern of a double dip recession and sustained low interest rates, its analysts including Peter Richardson wrote in a report.

The outlook for gold is now in favor of the firm’s “bull case” target of $1,625 an ounce this year and $1,819 an ounce in 2012, they said. Bullion now has an estimated 85 percent probability of trading between $1,819 an ounce and $2,085 an ounce next year, according to Morgan Stanley’s calculations.

[source]

September 13 (Reuters) — German Chancellor Angela Merkel sought on Tuesday to quash talk of an imminent Greek default as the United States voiced fresh concern at the euro zone’s inability to master its debt crisis.

Merkel said in radio interview that Europe was doing everything in its power to avoid a Greek default and urged politicians in her own coalition to weigh their words carefully to avoid creating turmoil on financial markets.

…Obama was quoted as saying euro zone leaders need to show markets they are taking responsibility for the debt crisis and work out how to tally monetary union with budget policy.

[source]

Bloomberg (September 12) — Greece’s chance of default in the next five years has soared to 98 percent as Prime Minister George Papandreou fails to reassure international investors that his country can survive the euro-region crisis.

The risk of contagion beyond Greece pushed sovereign credit-default swap prices to record highs across the euro region. European bank debt risk also rose to the highest ever amid speculation French lenders will be downgraded because of their holdings of Greek bonds.

“The contagion impact of a default will be severe, because next in the firing line will be Italy, Spain and it will take in the whole of the European banking sector too,” Suki Mann, a strategist at Societe Generale SA in London, wrote in a note. “This trio are already under intense pressure, but it will get much worse.”

[Source]

Kick the Can, or Kick-out Greece

Last week UBS released a report that attempted to estimate the costs associated with succession from the European Union. As there is really no mechanism to boot a country out of the EU, heavily indebted nations facing draconian austerity measures would presumably have to leave of their own volition. However, without bailouts from core-Europe and/or ECB buying of periphery debt in the secondary market, countries such as Greece would be forced to seek access to global credit markets on their own. They would be unable to do so at an interest rate they could reasonably afford to pay back, so it would be tantamount to an ejection from the union. They would be forced to secede and then massively devalue their currency.

There would likely be a collapse of the domestic banking system, and numerous corporate defaults on top of the sovereign default. According to UBS, the cost of a peripheral secession would be about €9,500 to €11,500 per person the first year, then €3,000 to €4,000 annually for some period afterward. With unemployment in Greece currently at 16%, and given the dire condition of the Greek economy, this is also a burden that Greece will be unable to bear. There are quite simply no good options here, but UBS seems to suggest that muddling along with the current reactionary patchwork of measures to save Greece is the lesser of two very large evils. This pretty much assures that Greece will be mired in slow growth and high unemployment for years, if not decades to come.

What makes the current situation different than previous iterations of the Greek crisis is last week’s ruling by the German constitutional court. While the court upheld the legality of the EFSF rescue measures — to the great relief of the markets — but, as the FT’s Wolfgang Munchau pointed out, the ruling “categorically rules out any policy option beyond what has been agreed so far.” The court effectively has rendered impossible the two measures that most likely could save Greece and other periphery nations; a permanent bailout facility and/or eurobonds. Even if European policymakers were to embark on the long and painful path to change the treaties governing the EU, there is little hope that Greece can be saved, and perhaps that’s true of all the PIIGS.

Suddenly Germany, which has been the source of all manner of reassurances over the past 16-months, is putting together a contingency plan to protect their banking system if — or perhaps now it’s ‘when’ — Greece defaults. Lars Feld, an economic adviser to German Chancellor Merkel, acknowledged today that an orderly restructuring of Greek debt is indeed being discussed. Feld however warned that “they must also be prepared for an unorderly restructuring that could take place as well.”

The euro has fallen to 7-month lows against the dollar. European stocks have tumbled to levels not seen since the summer of 2009.

Anyone who believes that the turmoil will be contained to Greece — or even that side of the pond — does so at their own financial peril. Germany, who is arguably as well connected to the situation as a country could be, is putting their contingency plan together. So should you.

Finally, the UBS piece ominously reminds us that “almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war.”

September 12 (Bloomberg) — The cost of insuring European sovereign and bank debt rose to records on speculation Germany is preparing for a default by Greece while French lenders may be downgraded because of their holdings of the country’s bonds.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments soared 15 basis points to 351 at 3:30 p.m. in London. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased 17 basis points to 317 and the subordinated index jumped 25 to 560, according to JPMorgan Chase & Co.

[source]

September 12 (USAGOLD) — Gold is under pressure against the dollar, but set a new all-time high against the euro in earlier trading at €1374.93. The EUR-USD rate fell to a new 7-month low, ticking briefly below 1.3500 amid heightened worries that Greece is on the verge of default.

Late last week, it became apparent that Germany was putting together a plan to support its banking sector in the event of a Greek default. Today, a German government adviser acknowledged that an orderly restructuring (i.e. default) of Greek debt was indeed being discussed, in the hope that the problem might be contained.

Expectations for a 50% haircut on Greek debt have sent global banking shares reeling, dragging broader indexes lower.

• Explosion at French Marcoule Nuclear site, north of Marseille. Report of one casualty. ASN says no radioactive leak. CAC40 plunges.
• Italy sold €11.5 bln worth of bills at an average yield of 4.153%, vs 2.959% at previous auction. Bid cover was weak at 1.53.
• Italy industrial production (sa) -0.7% m/m in Jul, vs negative revised -0.8% m/m in Jun, 3rd consecutive monthly contraction; -4.6% y/y (nsa).
• India industrial production 3.3% y/y in Jul, vs 8.8% in Jun.
• Japan Tertiary Industry Index (sa) -0.1% m/m in Jul, vs negative revised +1.8% in Jun.
• Japan domestic CGPI 2.6% y/y in Aug, vs 2.9% in Jul.
• South Korea M2 +3.2% y/y in Jul.
• China M2 +13.5% y/y in Aug.
• China trade balance (USD) $17.8 bln in Aug, vs $31.5 bln in Jul. Exports +24.5%. Imports +30.2%.

September 12 (CNBC) — The European Commission says Greece’s budget deficit for 2011 will stand at 9.5 percent of gross domestic product, far higher than the country’s original forecast for 7.6 percent.

Greece has argued that the deficit targets will have to be revised as the recession is far worse this year than originally predicted.

[source]

PG View: Wake me when Greece DOES hit one of its deficit targets…

A German government adviser has reportedly suggested that an orderly restructuring (i.e. default) of Greece is indeed being discussed, in hopes of containing the problem.

September 12 (BBC) — One person has been killed and four have been hurt in an explosion at the southern French nuclear plant of Marcoule.

There were no radioactive leaks after the blast, caused by a fire near a furnace in a radioactive waste storage site, a French nuclear official said.

A security perimeter has been set up because of the risk of leakage.

[source]

PG View: French CAC40 stock index plunges.

September 08 (WSJ Blogs) — The U.S. Senate, in an unusual procedure, cleared the way Thursday for the U.S. to lift its borrowing authority by $500 billion to $15.19 trillion, enough to keep the support federal government borrowing through late January or early February.

The action came under an unusual legislative procedure spelled out under the August agreement to raise the U.S. debt ceiling and avoid a U.S. credit default. In a 52-45 vote, the Senate blocked an attempt by Republicans to slow down the process that will result in the $500 billion debt-ceiling increase.

[source]

PG View: Shhhhh. Don’t tell anyone, but we blew through that initial $400 bln debt ceiling hike in about a month.

By Barry Eichengreen
September 09 (Project Syndicate) — Europe is again on the precipice. The most recent Greek rescue, put in place barely six weeks ago, is on the brink of collapse. The crisis of confidence has infected the eurozone’s big countries. The euro’s survival and, indeed, that of the European Union hang in the balance.

European leaders have responded with a cacophony of proposals for restoring confidence. Jean-Claude Trichet, the president of the European Central Bank, has called for stricter budgetary rules. Mario Draghi, head of the Bank of Italy and Trichet’s anointed successor at the ECB, has called for binding limits not on just budgets but also on a host of other national economic policies. Guy Verhofstadt, leader of the Alliance of Liberals and Democrats for Europe in the European Parliament, is only one in a growing chorus of voices calling for the creation of Eurobonds. Germany’s finance minister, Wolfgang Schäuble, has suggested that Europe needs to move to full fiscal union.

If these proposals have one thing in common, it is that they all fail to address the eurozone’s immediate problems. Some, like stronger fiscal rules and closer surveillance of policies affecting competitiveness, might help to head off some future crisis, but they will do nothing to resolve this one.

[source]

September 09 (Bloomberg) — Treasuries rallied, pushing 10-year note yields to a record low, as concern Greece may default this weekend stoked demand for a refuge from Europe’s deepening sovereign-debt crisis.

Benchmark 10-year government securities headed for a second weekly gain as German Chancellor Angela Merkel’s government prepared plans to shore up the nation’s banks in the event that Greece fails to meet the terms of its aid package and misses a payment on its debt.

[source]

PG View: Everybody out of Europe and into the dollar and Treasuries! However, given the sub-2% yield on 10-year notes, America’s own massive debt problems and rather substantial currency risk, its hard to believe these new allocations to the US will prove ‘sticky.’ Where to next? Undoubtedly some of these safe-haven flows will ultimately find their way to the gold market.

JK Comment: In this video, Faber makes a prediction that gold could achieve highs of $6000-$10000/oz. While extremely bullish, I liked this video for the macro-economic context Faber offers on the gold market. Well worth the watch…

September 09 (Bloomberg) — Chancellor Angela Merkel’s government is preparing plans to shore up German banks in the event that Greece fails to meet the terms of its aid package and defaults, three coalition officials said.

The emergency plan involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next tranche of Greece’s bailout is withheld, said the people, who spoke on condition of anonymity because the deliberations are being held in private. The successor to the German government’s bank-rescue fund introduced in 2008 might be enrolled to help recapitalize the banks, one of the people said.

The existence of a “Plan B” underscores German concerns that Greece’s failure to stick to budget-cutting targets threatens European efforts to tame the debt crisis rattling the euro.

[source]

September 09 (Financial Times) — The European Central Bank has been dealt a serious blow by the unexpected resignation of its German board member in a conflict over the bank’s controversial bond-buying programme.

Jürgen Stark said he would quit the ECB’s six-man executive board for “personal reasons”, without giving further details. His departure reveals the extent of the conflict within the ECB over its purchases of government debt, which last month were ramped up to include Italian and Spanish bonds.

[source]

September 09 (USAGOLD) — Gold has been quite choppy thus far today. As the yellow metal neared $1900 once again in Europe, rumors of yet another CME margin hike surfaced, sparking a precipitous $60 sell-off. There has also been more widespread acknowledgement of possible “official” gold selling this week, although if there were any indication of an official offer earlier in Europe, I haven’t heard it yet.

While the CMEGroup did announce a margin increase on the very thinly traded London gold forwards yesterday, they have already denied the rumor that another margin hike on gold futures is in the offing. Gold is on the mend, and has already retraced more than half of today’s intraday losses.

The dollar has firmed as the euro tumbled to new 6-month lows. Ongoing concerns about the impending default of Greece, mounting growth risks and the resignation of the ECB’s chief economist Jürgen Stark over periphery bond purchases, have all weighed on the single currency.

• US wholesale sales unch in Jul, below market expectations of +0.8%, vs +0.6% in Jun; inventories +0.8%.
• ECB chief economist Jürgen Stark may resign from ECB over bond purchases conflict.
• France industrial production +1.5% m/m in Jul, well above market expectations of +0.4%, vs upward revised -1.5% in Jun; 3.7% y/y.
• France manufacturing production +1.4% m/m in Jul, vs upward revised -1.8% in Jun; 4.2% y/y.
• Italy Q2 GDP – Final (sa & wda) as expected at 0.3% q/q; 0.8% y/y.
• German Aug CPI – Final unexpectedly revised up to 2.4% y/y, vs 2.3% previously; HICP revised higher as well to 2.5% y/y, vs 2.4% previously.
• Malaysia industrial production falls to -0.6% y/y in Jul, vs +1.3% y/y in Jun.
• Japan consumer confidence index (sa) steady in Aug at 37.0.

Washington Post columnist Ezra Klein summed up the American Jobs Act, pitched by the President last night, thusly: “The plan, taken as a whole, attempts to include every single theory of how to address the jobs crisis. If you believe we need more direct spending, you’ve got the infrastructure component. More tax cuts? The plan has $250 billion in tax cuts. More help for the unemployed? Yep. More deficit reduction? Next week, the White House will release a package that offsets this plan and reduces the deficit by more than $1.5 trillion on top of that.

“Of course, in much the same way that everyone can find something to like in this plan, everyone can find something to dislike.”

[Fact Sheet: The American Jobs Act]

PG View: We won’t find out how the Administration plans to pay for this package until next week, but again I imagine everyone will be able to find something to like and something to dislike in those proposals.

September 08 (MarketWatch) — U.S. stocks declines accelerated into the close Thursday, resulting in a triple-digit loss for the Dow average, after Federal Reserve Chairman Ben Bernanke revealed no plan for additional monetary easing.

[source]

John Mauldin is a renowned financial expert and a New York Times best selling author. His latest book “Endgame” details the Debt Supercycle and the sovereign debt crisis, and shows that, while there are no good choices, the worst choice would be to ignore the deleveraging resulting from the credit crisis.

The following are his thoughts on gold, from this week’s Thoughts from the Frontline e-newsletter:

The question I am asked the most is some variant on “What do you think about gold?” So, let me deal with that question here, as it has been a while.

First, I do not think of gold as an investment. It is insurance for me. I buy a rather fixed amount of gold nearly every month, no matter the price. I hope the price of gold goes down, because that means I get more coins in the mail to go into the vault. Yes, I take delivery of my gold, and it is near me if I need it.

My fondest dream is that I will give my gold coins to my great-great grandkids some 70-80 years from now, and they will be rather embarrassed that their “Papa John” bought all that much of that barbarous yellow metal instead of more biotech stocks. But as I live in the real world, I buy gold, even though I am optimistic we’ll get through this rough patch; because I simply don’t trust the bas*%*ds who are driving this ship with 100% of my money in dollars, or any fiat currency, for that matter.

[source]

PG View: I post this excerpt because Mr. Mauldin’s take on gold very closely reflects my own personal view, as well as the philosophy of gold ownership espoused by our firm.

By Allen Sykora
September 07 (CommodityOnline) — Newsletter writer Dennis Gartman says he suspects the heavy selling in Gold overnight may have been “governmental in nature,” but he is still viewing retreats as a buying opportunity. He cited “massive, relentless offerings of gold” during Asian hours.

“It is far too early to know who the seller was and continues to be, but if our intuition serves us…it shall almost certainly be a government of some sort. Time only shall tell,” he says in The Gartman Letter.

[source]

PG View: This is a story that we picked up on early yesterday as well, when gold was under heavy selling pressure.

The China Cables and Gold

Much was made earlier in the week about the ‘Wikileaked’ US Embassy cable out of Beijing that referenced China’s gold reserves. The cable was originally sent around the same time in 2009 when China surprised the world in revealing that it had nearly doubled its gold reserves to 1,054 tonnes, from just 600 tonnes in 2003. A couple of months later, China indicated that it was interested in securing an additional $80 bln worth of the yellow metal for its Dragon’s Hoard; about 2,600 tonnes based on sub-$1,000 gold at the time (June 2009 close: $929.15).

China is indisputably buying gold, and speculation about their motives notwithstanding, the salient excerpt from the cable in my opinion is as follows: “China’s increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB.” In other words, if China is buying gold, other countries are likely to buy gold as well.

It does indeed appear that China was a trendsetter. The WGC projects that global central banks will be net gold buyers this year, for the first time in a generation. Besides China, recent notable sovereign gold buyers include Russia, India, Mexico, Bangladesh, South Korea and Columbia. The recent Venezuelan demand that their gold reserves be repatriated and the nationalization of their gold mining and processing industries plays into this theme as well. Just this week, Romania and Bolivia indicated that they wanted to build their gold reserves, likely by buying up their domestic production.

I also don’t think there is any question that the Chinese would like to advance the status of the yuan as it continues to solidify its position as an economic powerhouse in the world. In fact, Commerce Minister Deming said just today that China is not only exploring ways to diversify their FX reserves (which likely translates into further gold reserves), but it also plans to make it easier for Chinese firms to use the yuan to invest abroad. Recent currency pacts with Russia and Brazil are just two examples of progress in this direction. China’s participation in the EU bailouts, via periphery debt purchases, have also been viewed as the Middle Kingdom trying to make inroads into the eurozone.

Some have suggested that the Wikileak cables are proof that China is attempting to destroy the dollar’s reserve status, but given China’s still massive holdings of dollars and US Treasuries, that seems like a pretty ill-advised strategy. I certainly understand China’s desire to diversify out of a currency that is being systematically devalued with purpose, but China is smart enough to know that they shouldn’t destroy the biggest customer for their manufactured goods. The yuan’s ascension (albeit a tightly controlled ascension) will — as a byproduct — have a negative impact on the status quo, but it’s certainly not just China that’s driving this global shift. In fact, we may be our own worst enemy, as evidenced by last month’s S&P downgrade of US sovereign debt due to what has become a terribly partisan political process.

But again, the main take away here is that China and others are buying gold…and in a big way.

Do you have any gold yet? If not, you should.

If you do own gold already; do you have enough?

September 08 (MarketWatch) — Gold futures bounced higher Thursday, taking another stab at $1,900 an ounce, after the European Central Bank cut growth forecasts and U.S. jobless claims edged higher.

Gold for December delivery gained $33.50, or 1.8%, to $1,851.20 an ounce on the Comex division of the New York Mercantile Exchange, extending advances in Asian and European trading hours after a rush of ECB remarks and U.S. data.

[source]

September 08 (ZeroHedge) — Yesterday we documented that the by now widely bashed Operation Twist has been a failure before it was even launched as confirmed by recent trends in mortgage refinancing, or more specifically, lack thereof. Today, none other than market (and alleged bar) veteran Art Cashin confirms precisely what we said: that the one goal of the Twist – to get mortgage rates lower and refinancing higher – is and will be a failure. Again, it is very unfortunate that what is by now glaringly obvious to all will never become clear to the Fed until after the economy has finally been pushed over the precipice.

…So “Operation Twist” would reduce the yield on the 10-year Note and likely even cause mortgage rates to decline a little. But it would do nothing to help the housing market or the economy. It would not stem the tide of foreclosures…it may even cause more frustrated homeowners to stop paying their mortgage as the only way out. The same individuals who refinanced these past few months would refinance again…saving a few more dollars, but not making any significant improvements in the economy.

[source]

PG View: This one of the better summaries of Operation Twist; how it would work, what the Fed would be looking to accomplish and why, if implemented, it may ultimately prove unsuccessful. As Art Cashin sums up, “Mr. Bernanke may be working with wet tinder.”

September 08 (Bloomberg) — U.S. mortgage rates tumbled to the lowest in at least four decades as stagnant job growth and concern that Europe’s debt crisis is deepening drove investors to the relative safety of government bonds.

The average rate for a 30-year fixed loan dropped to 4.12 percent in the week ended today from 4.22 percent, Freddie Mac said in a statement today. That’s the lowest in the McLean, Virginia-based company’s records dating back to 1971. The average 15-year rate fell to 3.33 percent from 3.39 percent.

…“The housing market remains challenging primarily due to uncertainty caused by general domestic economic and political concerns, stock market volatility and turbulent international economic conditions,” Ara K. Hovnanian, chairman and chief executive officer of homebuilder Hovnanian Enterprises Inc., said in a statement yesterday. “We see very few indicators that any recovery in the housing market has begun.”

[source]

PG View: Too bad very few can actually get those low rates.

September 08 (Bloomberg) — Credit-default swaps on Greek government debt surged to a record, signaling a 91 percent chance the nation will fail to meet debt commitments, after its economy shrank more than previously reported.

Five-year contracts on the country’s sovereign bonds jumped 196 basis points to 3,001 basis points, at 3:45 p.m. in London, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

…Greek two-year note yields jumped as much as 85 basis points to a euro-era record 55.76 percent today. The nation’s 10-year yield climbed to an all-time high 20.13 percent.

[source]

PG View: Greek 1-year money has been trading near 100% this week.