21-Sep (USAGOLD) — The Fed’s FOMC committee announced today that they would keep the target range for the federal funds rate at 0 to 1/4 percent, reiterating the guidance from last month that rates would likely remain exceptionally low at least through mid-2013.

They have added an Operation Twist on top of their current QE2.5 re-monitization program, with plans to sell $400 bln in Treasuries with remaining maturities of 3-years or less and buy an equal amount of Treasuries with remaining maturities of 6 to 30 years by the end of June 2012. This will in effect ‘twist’ of flatten the yield curve.

The Fed also said that they would reinvest principal payments from their holdings of agency debt and agency mortgage-backed securities to buy additional agency mortgage-backed securities in the hope that it will provide lower mortgage rates.

“Fuller discussion” provided by extra day added to FOMC meeting, failed to sway any of the dissenters; Fisher, Plosser, & Kocherlakota.

The QE hits keep coming…

[FOMC Statement]

21-Sep (Bloomberg) — Bank of America Corp. and Wells Fargo & Co. had their long-term credit ratings downgraded by Moody’s Investors Service, citing a decreasing probability that the U.S. would support the lenders in an emergency. Citigroup Inc.’s short-term rating also was cut.

The government is “more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled, as the risks of contagion become less acute,” Moody’s wrote in statements today on Bank of America and Wells Fargo. While Citigroup may lose backing as well, its stand-alone credit has shown improvement, Moody’s said, confirming the bank’s long-term rating.

[source]

20-Sep (CNN) — Our government is utterly broke. There are signs everywhere one looks. Social Security can no longer afford to send us our annual benefit statements. The House can no longer afford its congressional pages. The Pentagon can no longer afford the pension and health care benefits of retired service members. NASA is no longer planning a manned mission to Mars.

We’re broke for a reason. We’ve spent six decades accumulating a huge official debt (U.S. Treasury bills and bonds) and vastly larger unofficial debts to pay for Social Security, Medicare, and Medicaid benefits to today’s and tomorrow’s 100 million-plus retirees.

The government’s total indebtedness — its fiscal gap — now stands at $211 trillion, by my arithmetic.

[source]

21-Sep (Bloomberg) — President Barack Obama said the global economic recovery is fragile and requires urgent, unified action to sustain it.

“We acted together to avert a depression in 2009,” Obama said in the text of his remarks to the United Nations General Assembly today in New York. “We must take urgent and coordinated action once more.”

The U.S. president didn’t specify what steps should be taken.

[source]

PG View: Major central banks agreed last week to pump liquidity like mad into Europe. The BoE has indicated that additional QE is likely and the Fed may well do the same later today. I wonder what exactly the President has in mind, beyond his jobs bill that has little hope of passing the House…

21-Sep (The Wall Street Journal) — Gold was trading in a narrow range in Asia with investors reluctant to take new positions amid cautious trading ahead of the much-awaited outcome of the U.S. Federal Reserve’s two-day policy meeting.

“Investors are mostly on the sidelines and prices are likely to remain range-bound ahead of the Federal Reserve’s decision,” said a Hong Kong-based trader.

Much would depend on the extent of the Fed’s determination to push with a solution.

If Chairman Ben Bernanke comes out with another stimulus by extending the average duration of the Fed’s asset holdings, it is unlikely to have a major impact on markets as current price levels have factored that in already.

But “if there is additional guidance, or something more accommodative comes out of the meeting, the dominant uptrend in gold would likely start to re-exert itself,” Peter Grant, economist at USAGOLD-Centennial Precious Metals.

[source]

21-Sep (Washington Post) — Nearly half of the euro area’s $9 trillion in outstanding government debt is “at heightened credit risk,” the International Monetary Fund said Wednesday in a report that slams leaders of the developed world for their lack of action on public debt and outlines the potentially devastating fallout if the problem widens.

Already, the IMF estimated, the rising threat of losses on the government bonds of half a dozen countries — Greece, Portugal, Ireland, Italy, Spain and Belgium — represents an implicit cost to banks of around $240 billion.

With so much total debt outstanding, and markets worried that a large country such as Italy may need a bailout that Europe and the IMF can’t afford, the situation has caused investors to steadily abandon weaker countries.

[source]

by Global Macro Monitor
20-Sep (CreditWritedowns.com) — Here’s a great chart just released by the International Monetary Fund. Note that almost half — 47 percent – of the US$14.7 trillion U.S. federal government debt is held by the Federal Reserve and the government itself, such as the Social Security trust fund. Add to that the 22 percent foreign official holdings (mainly central banks) and almost 70 percent of the debt of the U.S. government is held by non-market/non-profit oriented investors. Stunning!

[source]

PG View: I would argue that “non-market/non-profit oriented investors” own the vast majority of government debt, because the risk/reward ratios have been so grossly distorted by government and central bank interventions that real investors have no interest is such assets. And it sure looks like official efforts to continue mispricing risk are going to continue.

21-Sep (Bloomberg) — Bank of England officials said they may need to buy more bonds to bolster a faltering recovery after holding off adding stimulus this month in a decision that was “finely balanced.”

Most policy makers said it was “increasingly probable that further asset purchases to loosen monetary conditions would become warranted at some point,” the minutes of the Monetary Policy Committee’s Sept. 8 decision said. “For some members, a continuation of the conditions seen over the past month would probably be sufficient to justify an expansion of the asset purchase program at a subsequent meeting.”

[source]

PG View: It remains to be seen what the Fed will do today, but it sure appears that global central banks are inclined to flood the world with even more liquidity.

20-Sep (Financial Times) — The gold market is revving up to reach new record highs in excess of $2,000 an ounce in the next year, according to the average forecast of bankers, traders and investors at the gold industry’s largest annual gathering.

The bullish prediction, if correct, suggests that the gold bull market remains intact, despite the price of the metal having already gained almost 30 per cent this year and 600 per cent over the past decade.

The widespread optimism at the London Bullion Market Association conference in Montreal, the largest gathering of the gold industry, comes as the gold market has been transformed from a backwater dominated by jewellery demand to one of the hottest investment assets.

…The bullish sentiment has been underpinned by the strength of demand for coins and small bars from retail investors from Germany to China.

[source]

20-Sep (King World News) — With gold hovering near the $1,800 level, a trader out of London told King World News, “China is trading gold at a $17 premium today vs COMEX futures. Silver is trading at a premium of $2.48 vs futures price (COMEX). What this tells you is that these people in China are willing to pay the equivalent of roughly $12,500 more per contract than what silver is being traded for on the COMEX.”

London Trader continues:

“As soon as China closes trading each day, that is when the selling starts in the paper markets. These raids on the price are designed to get weaker players flushed out of the futures markets so they (commercials) can cover some of their short positions.

If there is that strong of a bid for gold out of the Eastern hemisphere, what that tells me is that all of the heavily leveraged paper manipulation in the West will not have much more downside impact. All the manipulators are doing at this point is compressing a spring, but at some point this market is eventually going to gap up incredibly hard against them.

…There are massive orders for tonnage of gold, incredible amounts between $1,715 and $1,760. This has the effect of putting a physical floor under the price of gold.

[source]

20-Sep (Xinhua) — Three years after the outbreak of the global financial crisis, the world economy still grows at a painfully slow pace as both the United States and the European Union (EU) face unprecedented levels of public debt and heightened economic uncertainty.

During the darkest days of the financial crisis late 2008, China, together with other major developed and emerging economies, rolled out ambitious stimulus plans, helping to stabilize the global financial markets and successfully bring the world economy back from an unfathomable abyss.

However, stimulus measures in many countries are running out of steam and private sectors have failed to live up to the task of leading economic growth. These negative signs, coupled with unsustainable debt and deficit levels in many developed countries, mean the world economy now faces substantial downward pressure.

For the United States and Europe, the worst part of the ongoing economic mess is that they have little policy maneuvering room to boost their economies compared to three years ago.

[source]

PG View: Message from China seems to be, “Hey, our massive FX reserves may come in handy given the dire economic circumstances in the West. Shun us at your own peril.”

Gold Range Bound, Awaiting FOMC Decision

20-Sep (USAGOLD) — Gold remains well contained within the recent range, awaiting the Fed’s decision tomorrow regarding further accommodations. The FOMC meeting that commenced today was expanded by an additional day to “allow for a fuller discussion,” which probably more accurately translates into chairman Bernanke needs more time to get dissenters, Fisher, Plosser and Kocherlakota, in-line behind new measures.

Getting the dissenters to at least concede that risks to growth have increased dramatically in recent weeks should be fairly easy, given the fact that no new jobs were added in August and confidence has plunged. Even the Fed itself has negatively revised its growth outlook and last week’s release of the Fed report on household balance sheets through Q2 showed some pretty devastating declines in net worth that are expected to continue through Q3. Today’s negative revisions by the IMF to both global an US growth forecasts for this year and next, tip-in the reality that everyone seems to already be aware of, that the US is slipping back toward recession. And that in turn, is weighing heavily on global growth prospects.

Bernanke might also argue that with the economic slowing, price risks have moderated. Additionally, further stimulus on the fiscal side — in the form of President Obama’s jobs bill — has very little chance of advancing. It’s up to the Fed to act, or there will likely be a double-dip.

Undoubtedly, events unfolding on the other side of the pond are factoring heavily into the FOMC’s discussions as well. The Fed’s agreement last week to basically provide unlimited dollar liquidity to Europe is an ominous acknowledgement to the direness of the situation on the Continent. Market analyst John Mauldin wondered this week, what “is the Fed doing, giving essentially unlimited funds to European banks? What are they seeing that we do not?” His conclusion seems to be that the Fed, in conjunction with the ECB, SNB, BoE and BoJ, are seeking to build a firebreak against a catastrophic Lehman-type default. If the answer for Europe is more liquidity, the likely answer for US banks is to bolster liquidity here as well.

With short-term interest rates at 0% and the 10-year yield trading below 2.0%, the Fed really has limited options at their disposal. They can pump the liquidity domestically via the traditional means of quantitative easing, buying shorter-dated securities, confirming their commitment to keep short-term rates exceptionally low into mid-2013. However, after the previous QE1, QE-lite, QE2 and the ongoing QE2.5 operations, that strategy has proven to be largely ineffective. That leaves an attack on the long-end of the curve as a new potential ‘twist’ to QE; selling their shorter-dated holdings and buying 7- to 10-year notes to twist the yield curve and bring down longer-term rates. While this would arguably drive down rates on longer-term business loans and mortgages, there’s still a huge problem with getting businesses and people qualified for these loans.

There is additionally the chance for even more explicit guidance than the “mid-2013″ offered up last month. They could also stop paying the admittedly paltry 0.25% rate that they are currently giving on reserves, in the hope that it might force some of those funds into circulation. The latter strikes me as having limited value.

The most likely scenario is that the Fed will announce some plan along the lines of Operation Twist to extend the maturities on their balance sheet. That is largely baked into the cake at this point, so if the Fed meets expectations, I wouldn’t expect any kind of big market reaction. But, I would also say that it wouldn’t be detrimental to gold’s long-term uptrend. On the other hand, if there is additional guidance, or something even more accommodative comes out of the meeting, the dominant uptrend in gold would likely start to re-exert itself.

20-Sep (Bloomberg) — Gold futures rose as European debt concerns and prospects for more steps by the Federal Reserve to bolster the U.S. economy spurred demand for the precious metal as an alternative investment.

Standard & Poor’s cut Italy’s credit rating yesterday, adding to concern that Europe’s fiscal crisis will raise borrowing costs for countries in the region. Fed officials begin a two-day meeting today and may decide to replace some of the short-term Treasuries in its $1.65 trillion portfolio with longer-maturity debt in a bid to lower borrowing costs, according to economists.

“The Fed may announce some stimulus measures today,” Graham Leighton, a director of metals at Newedge USA LLC in New York, said in a telephone interview. “The long-term bullish story for gold remains intact.”

[source]

PG View: The FOMC statement actually won’t come out until tomorrow as the meeting was expanded to an extra day.

20-Sep (USAGOLD) — Gold has regained the $1800 level once again, following yesterday’s late downgrade of Italy by S&P. The only surprise there was that it was S&P, rather than Moody’s, that issued the downgrade. It was widely anticipated that Moody’s would downgrade Italy late last week when their normal 90-day review period lapsed. They have yet to do so, as the review apparently continues. The euro pretty readily absorbed the news, dipping briefly back below 1.3600, but it didn’t stay down for long.

The IMF slashed both global and US growth expectations this morning: The IMF now believes the global economy will grow just 4% this year and next, a negative revision from their June estimates of 4.3% for 2011 and 4.5% next year. IMF cut its US growth forecasts to 1.5% for this year, versus 2.5% previously and 1.8% for 2012, versus 2.7% previously. The IMF’s confirmation of growth risks intensifies expectations that the Fed will be forced to offer additional accommodations when the 2-day FOMC meeting concludes tomorrow.

• US housing starts -5.0% to 571k pace in Aug, well below market expectations of 593k, vs negative revised 601k in Jul.
• Canada leading indicator flat in Aug, above market expectations of -0.1%, vs +0.1% in Jul.
• Canada wholesale trade +0.8% in Jul, just above expectations, vs flat in Jun.
• Switzerland trade balance CHF0.8 bln in Aug, vs 2.825 bln in Jul.
• Sweden GDP – Final (sa) revised down to 0.9% in Q2, just below market expectations, vs 1.0% previously.
• Italy industrial orders (sa) +1.8% m/m in Jul, vs 4.1% in Jun; 6.5% y/y.
• Germany PPI -0.3% m/m in Aug, below market expectations of 0.2%, vs 0.7% in Jul; 5.5% y/y.
• Germany ZEW economic sentiment falls to -43.3 in Sep, below market expectations, vs -37.6 in Jul; Current situation drops to 43.6 from 53.5.
• Japan leading index (revised) 2.6 m/m in Jul, vs 2.7 previously.

19-Sep (Bloomberg) — Venezuelan President Hugo Chavez ordered the nationalization of the gold industry and gave companies 90 days to form joint ventures with the state as he seeks to boost control over the nation’s metals producers.

The government will hold at least 55 percent of any joint ventures, according to a decree in today’s Official Gazette. The decree sets a royalty rate of 10 percent to 13 percent and says that all Venezuelan gold production will be sold to the state.

Chavez first announced the nationalization of the industry and plans to repatriate Venezuela’s foreign gold reserves on Aug. 17.

[source]

20-Sep (CNNMoney) — The International Monetary Fund lowered its global growth outlook, warning that “the global economy is in a dangerous new phase.”

The IMF, a global financial institution comprising 187 nations, released excerpts from the latest edition of its World Economic Outlook Tuesday, ahead of its fall meeting in Washington this weekend.

It now expects the world’s economic output to increase 4% in both 2011 and 2012, compared with growth of 5.1% in 2010. In June, the IMF had forecasted slightly more robust growth rates of 4.3% for this year.

The IMF also sharply reduced its forecast for economic growth in the United States this year to 1.5%, down from 2.5% in June. It also lowered its expectations for growth in 2012 to 1.8% from 2.7%.

[source]

20-Sep (Financial Times) — Standard & Poor’s has cut Italy’s credit rating in a move that buffeted stock markets and the euro, and underlined how the eurozone’s third-largest economy is being sucked deeper into the sovereign debt crisis.

S&P on Monday downgraded Italy by one notch to A with a negative outlook, meaning further downgrades are possible. The move – S&P’s first downgrade of Italy since 2006 – places S&P’s rating on Italy three notches below that of Moody’s, the rating agency that many had expected to cut first. Moody’s on Friday said it was extending its review of Italy’s finances.

[source]

by Nouriel Roubini
19-Sep (Financial Times) — Greece is stuck in a vicious cycle of insolvency, low competitiveness and ever-deepening depression. Exacerbated by a draconian fiscal austerity, its public debt is heading towards 200 per cent of gross domestic product. To escape, Greece must now begin an orderly default, voluntarily exit the eurozone and return to the drachma.

The recent debt exchange deal Europe offered Greece was a rip-off, providing much less debt relief than the country needed. If you pick apart the figures, and take into account the large sweeteners the plan gave to creditors, the true debt relief is actually close to zero. The country’s best current option would be to reject this agreement and, under threat of default, renegotiate a better one.

[source]

13-Sep (CommodityOnline) — A newly enacted Gold policy in Austria that restricts the free purchase of gold by individuals may just be the start of a European policy shift that might border on infringing an individual’s financial freedom.

As per the new Austrian policies, individuals who wish to purchase gold will be restricted to purchase only 15000 Euros worth of gold at a time making gold an officially “restricted” commodity.

[source]

PG View: The new restriction limits individual purchases to about 11 ounces of gold.

17-Sep (The Telegraph) — Back in April, the Financial Stability Board (FSB), an international super-regulator, wrote a prescient if less than catchily-titled paper “Potential financial stability issues arising from recent trends in Exchange Traded Funds (ETFs)”.

Its central warning – that ETFs are not the cheap and transparent vehicles the marketers would have us believe – was spot on. When UBS’s $2bn black hole hit the screens on Thursday, no one who read the FSB report was surprised to see the words ETF and rogue trader in the same sentence.

…around half of the ETFs in Europe today do not match the index they are designed to track by holding all of its constituent shares. Unlike the plain vanilla “full replication” ETFs which do, 45pc of the market is in the form of so-called “swap-based” ETFs which instead use derivative agreements, often with investment banks, to simulate the performance of the underlying assets.

Derivative trades add a second layer of uncertainty to the unavoidable ups and downs of the market, the counterparty risk that the organisation on the other side of the contract might go bust. Even worse, the provider of the ETF might sometimes be a part of the same organisation as the derivatives desk carrying out the swap.

…For reasons which I’m not sure I could explain even if I had the space, it is possible for the number of shares sold short in an ETF to massively exceed the actual number of shares available.

[source]

19-Sep (Financial Times) — European central banks have become net buyers of gold for the first time in more than two decades, the latest sign of how the turbulence in the currency and debt markets has revolutionised the bullion market.

The purchases are minuscule compared with the size of the global gold market, but highlight a remarkable turnround from a wave of heavy selling by European central banks.

…The switch from large selling to buying has helped propel the gold price more than 25 per cent higher so far this year, hitting a nominal record of $1,920 a troy ounce this month. The shift in Europe comes as central banks in emerging markets are also loading up on gold.

…“We’re going back to a time when gold is seen very much as money,” Jonathan Spall, director of precious metals sales at Barclays Capital, told FT.com in a video interview. “It has been a complete reversal of the attitudes we saw during the 1990s.”

[source]

19-Sep (Bloomberg) — Inflation flashing red may be less of a green light for higher interest rates as global growth falters.

Some Federal Reserve policy makers favor keeping their benchmark rate close to zero until price increases reach a level Vincent Reinhart, a former top official, says could be 3 percent. The Bank of England has held its key rate at a record low even as U.K. inflation breached its 2 percent target for 21 months.

…“There’s a hint of desperation here,” said Kochan, who helps manage $216 billion in Menomonee Falls, Wisconsin. “They’re clearly concerned that monetary policy to date hasn’t really accomplished what they expected it to.

[source]

19-Sep (USAGOLD) — Gold has ticked back below the $1800 as the dollar is back on the rise. Resurgent worries about Greece have resulted in the euro retracing much of last week’s rebound into Friday’s meeting of European financial ministers in Poland. Despite the dire situation in Greece, not much came out of that meeting. In fact, the final decision on whether Greece will get their next tranche of bailout funds was forestalled until October.

As we noted on Friday, there is either no sense of urgency on Greece, or their is no consensus that they should get the additional funds. The former seems rather unlikely…

The lack of action on the part of the FinMins to avert a Greek default is weighing heavily on stocks once again. The DJIA is now down more than 200 points and every European index is lower as well. Funds coming out of stocks seem to initially be going into the dollar and low yielding bonds, such as US Treasuries and German bunds. We know from history, that such allocations tend not to be terribly sticky and that true safe-havens like gold tend to benefit in the long-run after initial bouts of deleveraging.

Quiet day data-wise today. Everyone is eagerly awaiting the results of the expanded 2-day FOMC meeting that commences tomorrow. Last month’s outlook downgrade and statement that Fed funds will be kept near 0% into mid-2013 has most analysts leaning toward the dovish side for Wednesday’s FOMC statement. Some version of Operation Twist, a flattening of the yield curve that would likely be accomplished by the Fed selling shorter-dated Treasuries and buying further out on the yield curve, seems to be the front-running expectation.

19-Sep (The Wall Street Journal) — U.S. stocks fell sharply in early trading Monday, following blue chips’ largest weekly gain in more than two months, as investors fretted that Greece’s debt crisis is coming to a head.

The Dow Jones Industrial Average dropped 172 points, or 1.5%, to 11337, with all 30 Dow components losing ground.

[source]

19-Sep (Bloomberg) — Gold, platinum and Brent oil will lead gains in commodities as investors seek to protect their assets and shortages emerge, according to Tony Hall, the hedge- fund manager who earned 33 percent for his clients this year.

Gold may climb 21 percent to a record $2,200 an ounce by the end of 2011, platinum may gain 10 percent and Brent could rise 25 percent to $140 a barrel in six months, said the London- based chief investment officer of Duet Commodities Fund Ltd., which manages more than $100 million of assets.

…“We still believe in the gold story. If you believe the world is in trouble or in further economic growth disruption, then gold is a good safe haven. If you believe that the world is going to come out okay, then it’s a good inflation hedge.”

[source]

16-Sep (Bloomberg) — Household wealth in the U.S. dropped in the second quarter for the first time in a year, hurt by falling share prices and declining home values.

Net worth for households and non-profit groups decreased by $149 billion, a 1 percent drop at an annual pace, to $58.5 trillion, the Federal Reserve said today in its flow of funds report from Washington. It rose at a 7.4 percent rate in the previous three months. Housing wealth decreased for a fourth consecutive quarter from April to June.

[source]