27-Sep (Financial Times) — A split has opened in the eurozone over the terms of Greece’s second €109bn bail-out with as many as seven of the bloc’s 17 members arguing for private creditors to swallow a bigger writedown on their Greek bond holdings, according to senior European officials.

The divisions have emerged amid mounting concerns that Athens’ funding needs are much bigger than estimated just two months ago. They threaten to unpick a painfully negotiated deal reached with private sector bond holders in July.

…Because of the recent economic downturn and Greece’s slow implementation of austerity measures, officials estimate Athens’ funding needs over the next three years have grown beyond the €172bn forecast this summer.

[source]

PG View: Missed numbers out of Greece? Say it isn’t so. How far beyond €172 bln are we talking here? Does any number they give have any meaning? The funding needs when the last deal was cut back 0n 21-Jul where €109 bln, since then Greece’s needs have exploded about 60%…or more! No sane investor would throw more money into this sinkhole of unknowns.

by Martin Feldstein
27-Sep (ProSyn) — The Greek government needs to escape from an otherwise impossible situation. It has an unmanageable level of government debt (150% of GDP, rising this year by ten percentage points), a collapsing economy (with GDP down by more than 7% this year, pushing the unemployment rate up to 16%), a chronic balance-of-payments deficit (now at 8% of GDP), and insolvent banks that are rapidly losing deposits.

The only way out is for Greece to default on its sovereign debt. When it does, it must write down the principal value of that debt by at least 50%. The current plan to reduce the present value of privately held bonds by 20% is just a first small step toward this outcome.

[source]

27-Sep (BusinessInsider) — The July numbers for the most widely followed measure of house prices, the S&P/Case-Shiller Index, were released this morning.

The numbers weren’t terrible–on a seasonally adjusted basis, July was basically the same as June–but one of the creators of the index, Professor Robert Shiller of Yale University, isn’t taking much solace in them.

The economy has deteriorated significantly since July, Professor Shiller observes, and he suspects that the housing market has followed suit.

[source]

27-Sep (Bloomberg) — Most advanced economies are lapsing back into recession while the U.S. is already in the throes of an economic contraction, according to Nouriel Roubini, co- founder and chairman of Roubini Global Economics LLC.

“The way I see the global economy, I think we’re entering into a recession again in most advanced economies,” Roubini said in a panel discussion today at the Bloomberg Dealmakers Summit in New York. “I think we’re already into one in the U.S. based on the hard and soft data — same with most of the euro zone, same with the United Kingdom.”

[source]

27-Sep (Financial Times) — George Papandreou, the Greek prime minister, has called on German industrialists to stop sniping at Greece and recognise the “superhuman effort” being made by his country to impose drastic austerity measures in a deepening recession.

Against a background of growing speculation in financial markets that his government may be forced to default on its borrowing, in spite of rescue efforts of its eurozone partners, he said: “I can guarantee that Greece will live up to all its commitments.”

[source]

Hope Springs Eternal

Global asset prices are on the mend on the latest expectations of a resolution to the Greek crisis. Greek Prime Minister George Papandreou took his show on the road to Berlin, hoping to convince policymakers in the heart of Europe that with just a little more money, Greece is ready to reform its profligate ways. Papandreou assured German business leaders that further bailout funds wouldn’t be an investment in the failures of the past, but in the future successes of Greece. Given the magnitude of those past failures, core-Europe remains understandably skeptical; worried they’d be throwing good money after bad.

The latest scheme calls for the €440 bln ESFS to be levered up to 8-times, to give the bailout fund more punch. This way, policymakers avoid having to ask EU member states to contribute more money outright to broadly unpopular bailouts of the periphery. Yet in employing leverage, they expose those member states to vastly greater risk. Leverage is very much a double-edged sword. Imagine the populist outrage if further bailouts — like the initial bailouts before them — fail to prevent an eventual default and the fiscal situations in core-Europe are decimated as a result. At that point, you have an even greater problem on your hands…or you gear-up to 32X and try again.

The German’s seem keenly aware of the risk with recent polls showing nearly 75% oppose pledging more money to debt ridden EU members. German Chancellor Merkel is walking the tight-rope in between her conviction that the euro must be saved and the political reality of the aforementioned polls.

Merkel said that Germany would provide “any support possible” to rebuild confidence in Greece, knowing full-well that there are indeed limits to what Germany is willing to do — or can do for that matter — as support within her own coalition continues to crumble. With a critical parliamentary vote slated for Thursday, there have already been reports from officials within Germany today that leveraging of the EFSF is off the table…if it was ever really on the table.

While the daily proclamation that “we have a plan” is growing tiresome, the charade has succeeded in buying time. Greece has yet to default even as CDS premiums have screamed for months that such an outcome is all-but assured. The troika will reportedly return to Greece tomorrow to resume their audit, but the market is getting increasingly impatient. In continuing to drag-out the Greek drama, the vested parties risk completely losing the confidence of the market, precipitating the very disorderly default that they are so desperately seeking to avoid.

Sept 28 (Reuters) — The recent sell-off in gold may not be enough to make some hedge funds with long-term bull positions change their views that the metal is still one of the best bets for profit in a perilous global economy.

Gold has dropped around 11 percent since the start of last week as liquidity-strapped investors scrambled to convert gold into cash amid fears over Greece’s near-bankruptcy, likely hitting a number of hedge funds which have profited from its bull run in recent years.

However, the yellow metal is still around 7 percent above its level at the start of July, and is up 14 percent this year, leaving long-term holders comfortably in the black for now.

“I don’t think… people who hold it as another currency… are changing their view,” said Morten Spenner, chief executive of $2.8 billion fund of funds firm International Asset Management

[Source]

27-Sep (Reuters) — Talk of beefing up the euro zone’s bailout fund lifted stocks on Tuesday but complicated the debate in Germany where Angela Merkel is struggling to rally her coalition behind her in aiding Europe’s weak economies and banks.

European shares rallied for a second day and safe-haven German bonds fell on reports that European policymakers were preparing more decisive action to tackle the bloc’s sovereign debt crisis by leveraging up the 440 billion euro rescue pot.

[source]

27-Sep (USAGOLD) — Gold has retraced nearly 38.2% of its recent correction, having found support yesterday right in front of the 200-day moving average. The broad rebound in assets is being largely attributed to the latest in a long string of plans to save Europe, which has resulted in a rise in risk appetite. The new scheme calls for the €440 bln EFSF rescue fund to be leveraged up to 8-times, with those funds being used to buy periphery sovereign debt, in the hopes of preventing contagion to core-Europe.

With little political or public resolve in core-Europe to increase the size of the bailout fund, policymakers are making an end-run around the will of the people: If you wont give us more money to bailout the PIIGS, we’ll just leverage up the money we have. Ah, but leverage is very much a double-edged sword…

• US consumer confidence edged higher in Sep to 45.4, below market expectations of 46.0, vs upward revised 45.2 in Aug.
• US S&P Case-Shiller home price index for 20-cities +0.9% in Jul to 142.8 (nsa); -4.1% y/y, not quite as bad as expectations.
• Eurozone M3 money supply growth unexpectedly accelerated to 2.8% y/y in Aug.
• Germany GfK consumer confidence unch at 5.2 in Oct, slightly better than market expectations.

26-Sep (Reuters) — President Barack Obama said on Monday the debt crisis in Europe was “scaring the world” and that leaders in the euro zone were not dealing with the issue quickly enough.

The recovery of the U.S. economy suffered setbacks this year due to problems around the world, Obama said, including the Arab Spring uprisings that drove up energy prices and worries about the financial health of European nations.

…”So they are going through a financial crisis that is scaring the world and they are trying to take responsible actions but those actions haven’t been quite as quick as they need to be.”

[source]

PG View: While we have our own massive debt problem here in America, and we’re on the verge of a government shut-down once again, there’s nothing “scary” going on here… It’s all Europe’s fault.

26-Sep (Der Spiegel) — The new Bundesbank president, Jens Weidmann, used to be one of Merkel’s closest advisers. Now, he is one of her staunchest critics over the euro rescue. He is strictly opposed to the European Central Bank’s policy of buying up bonds from debt-stricken countries — and is winning a growing number of allies for his cause.

…Weidmann has criticized decisions related to the euro bailout as “inconsistent” and “highly risky.” He has called on politicians in Berlin to change their course, and he has been advocating “the Bundesbank’s principles regarding stability.” All of those things put him at odds with top officials at the European Central Bank (ECB).

Behind the glass facade of ECB headquarters in Frankfurt, a fierce battle over fundamental beliefs has been smoldering for months. ECB President Jean-Claude Trichet and the majority of his colleagues are willing to rush to the aid of embattled EU finance ministers and to make major purchases of the sovereign bonds of debt-ridden euro-zone countries, such as Greece, Portugal and Italy.

For his part, Weidmann is strictly opposed to these measures. He believes they amount to an unacceptable means of financing states through effectively printing money. In fact, he has come to assume the mantle of the last staunch defender of monetary stability.

[source]

26-Sep (The Wall Street Journal) — European officials are working on a scheme to build a special purpose vehicle that would lever up existing EFSF money 8 to 1 to buy up European sovereign debt and then issue bonds, CNBC is reporting.

Naturally, stocks are through the roof on this. Because what could possibly go wrong with an SPV? Or a CDO-squared, as Zero Hedge called it?

[source]

PG View: Gearing up bailout funds to buy junk sovereign debt? Seriously…what could possibly go wrong?

26-Sep (Bloomberg) — Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said a central bank seeking to control inflation needs to find a balance between supporting a government’s debt issuance and allowing for sovereign default.

“It may turn out to be optimal for central banks to guarantee fiscal authority debts in some situations,” Kocherlakota said today in a panel discussion in Chicago. If so, economists may need to consider control of inflation as “something that is done jointly by the fiscal authority and the central bank.” He didn’t back such guarantees, saying a central bank furthers its independence by avoiding “interventions.”

[source]

PG View: More junk in the balance sheets of central banks? They better be stocking up on paper and ink!

26-Sep (USAGOLD) – Gold extended lower in overseas trading, touching levels not seen since early-July, as global deleveraging continued. The important 200-day moving average (1529.00) successfully contained the downside, and the yellow metal subsequently rebounded more than $100. More recently, a consolidative intraday tone has emerged around the $1600 level.

There was apparently some progress on Greece at the weekend IMF meeting. Seems like we’ve heard that before. Nonetheless, Greece is now racing to secure the necessary Parliamentary approval of further austerity measures. Seems like we’ve heard that before too. That vote is likely to occur tomorrow. More strikes and protests are already queued up for the coming weeks.

The troika is expected to return to Greece this week to resume their fiscal audit. Even with assurances of further austerity, it seems that providing the next tranche of bailout funds has little real hope of a preventing a default. It is this expectation of default, and expected haircuts for Greek bondholders that has been a major contributing factor to the broad deleveraging sell-off across a wide swath of asset classes.

Gold continued its sell-off overnight, plunging over $100 from Friday’s close for the second straight day – but is now showing signs of bottoming. Over the past 10 years of this gold bull market, large scale corrections have frequently taken the price back to/or near the 200 day moving average. Only once has a correction breached the 200 day moving average – during the height of the financial crisis in 2008. Last night, gold reversed right at the 200 day moving average, touching it for only a moment, before rallying $50 in a few minutes, and is now trading almost $80+ over that level.

OPINION

With Europe on the brink of a full blown sovereign debt crisis, broad systemic failures are again front page news, with some talk of the Euro failing as a currency altogether. Those who participated in the gold market in late 2008 saw the price drop dramatically from $930 an ounce to $685 in two week’s time (a 35% drop). The drop in gold over the past two weeks is eerily similar in both pace and magnitude. The counter-intuitive nature of the drop in 2008 prompted massive physical shortages as investors flocked to the yellow metal as a safe haven. The price responded thereafter as well…nearly tripling in three years. Physical demand through this pullback has been just as vigorous. So while the latest move will test the conviction of even the most ardent believer, those who remain committed in their resolve may very well see this range as the best buying opportunity in the gold market since 2008.

Opinions expressed in commentary on the USAGOLD.com website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. Centennial Precious Metals, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD – Centennial Precious Metals does not warrant or guarantee the accuracy, timeliness or completeness of the information found here.

23-Sep (Financial Times) — Time is running out to find a solution to the eurozone crisis and prevent another global recession, finance ministers warned on Friday, as they hinted that discussions were under way to boost the firepower of European rescue funds.

Financial markets experienced another day of intense volatility as investors struggled to interpret an emergency statement from the Group of 20 leading economies, which met on the sidelines of the International Monetary Fund and World Bank meetings in Washington.

…Gold continued to slide sharply and US oil prices traded below $80 a barrel, their lowest in more than a year. Shares rallied modestly in Europe and the US, accompanied by selling in government bonds and the dollar.

[http://www.ft.com/intl/cms/s/0/9bedaa82-e603-11e0-960c-00144feabdc0.html#axzz1YUm6X1iD]

23-Sep (MarketWatch) — The CME Group CME +0.00% , the parent company of the New York Mercantile Exchange, on Friday raised margin requirements for some gold, silver and copper futures contracts. Margins are money investors must put up to be able to trade and hold futures contracts. Initial requirements for gold’s benchmark contract rose 21% to $11,475 per contract, from $9,450 and maintenance margins climbed to $8,500 from $7,000 per contract. Initial requirements for silver’s benchmark contract rose 16% to $24,975 per contract, from $21,600 and maintenance margins climbed to $18,500 from $16,000 per contract.

[source]

PG View: It is likely that expectations of this margin hike factored into today’s sell-off.

23-Sep (Bloomberg) — Gold fell, capping the biggest two- day plunge since 1983, on investor sales following routs in global equity and commodity markets.

More than $3.4 trillion has been erased from equity values this week, sending a global measure of shares into a bear market, on concern that governments are running out of tools to avert a recession. The Standard & Poor’s GSCI Index of 24 commodities fell to a nine-month low today. Gold has dropped 15 percent since reaching a record $1,923.70 an ounce on Sept. 6.

“Gold has become the source of liquidity for global margin calls,” said Michael A. Gayed, the chief investment strategist at Pension Partners LLC. “Also, deflationary pressures are acting on gold.”

[source]

PG View: We’ve seen very strong physical buying interest on this retreat. Savvy investors know from experience that deleveraging breaks provide buying opportunity. The dollar and bonds may be up for now, but most realize that they aren’t the true safe-havens that they once were, and such allocations are therefore unlikely to prove sticky.

23-Sep (Wall Street Journal) — Fears of a possible Greek default and the U.S economy dipping back into recession pushed the Dow Jones Industrial Average to its worst weekly decline since the depths of the financial crisis.

Stocks edged slightly higher on Friday, as a pledge from global officials to maintain financial stability alleviated some investor anxiety. The slim gains, however, failed to overshadow the market’s poor weekly performance.

The Dow edged up 37.65 points, or 0.4%, to 10771.48. But the index, which plunged 675 points on Wednesday and Thursday, finished the week down 6.4%, its worst performance since the week ended Oct. 10, 2008.

[source]

23-Sep (Financial Times) — The Group of 20 leading economies pledged a “strong and co-ordinated” effort to stabilise the global economy in an attempt to calm tumbling equities markets spooked by fears of recession in the eurozone and a gloomy economic outlook in the US.

Bowing to pressure from investors to take action, finance ministers from the G20 economies said in a communiqué issued late on Thursday that they would stop the European debt crisis from deluging banks and financial markets, and take the necessary steps to bolster the eurozone’s rescue fund and assist banks to boost capital reserves in line with new global regulations. The statement followed a day in which the equity markets suffered some of the biggest falls since the collapse of Lehman Brothers in 2008, as investors rushed to safety in a widespread sell-off.

“We commit to take all necessary actions to preserve the stability of banking systems and financial markets as required,” the group said in a statement. “We will ensure that banks are adequately capitalised and have sufficient access to funding to deal with current risks and that they fully implement Basel III along the agreed timelines.”

[source]

23-Sep (Financial Times) — Risk aversion in equity and commodities markets drove the dollar higher this week as hopes for economic recovery were dealt another blow by the Federal Reserve’s latest assessment of US growth.

The dollar climbed across the board on Thursday as investors sought safety and global equity markets tumbled with other risk assets, including industrial metals and oil. The latest catalyst for investors to flee for cover was the Fed’s statement on Wednesday that there were now “significant downside risks to the economic outlook”.

[source]

PG View: Should more accurately say “perceived” or “relative” safety.

23-Sep (MarketWatch) — Gold futures slid below $1,700 an ounce on Friday, losing more than 4% as turmoil in global financial markets continued and investors rushed to sell metals positions to raise cash.

[source]

23-Sep (USAGOLD) — Gold extended sharply lower in overseas trading, pushing below the $1700 level for the first time in 7-weeks, as the global asset rout continues. The dollar remains well bid, trading near 7-month highs, bolstered by flight out of stocks and out of the euro.

The G20 vowed “strong and co-ordinated” support in their communiqué late yesterday, saying “We commit to take all necessary actions to preserve the stability of banking systems and financial markets as required.” However, the absence of specifics did little to reassure markets. The market now looks to weekend IMF and World Bank meetings for guidance.

Meanwhile, Congress is embroiled in yet another partisan battle, this time centered on a continuing spending resolution. The Republican controlled House passed a spending bill yesterday, but the Democrat controlled Senate has vowed to shoot it down. Failure to pass a resolution could result in a government shut-down next week. This is exactly the kind of behavior that promoted S&P to downgrade the US.

• France business confidence falls to 99 in Sep, below market expectations, vs 105 in Aug; production outlook tumbles to -29.
• Italy retail sales (sa) -0.1% m/m in Jul, below market expectations of +0.2%, vs negative revised -0.3% in Jun; -2.4% y/y.

22-Sep (Bloomberg) — The Federal Reserve’s effort to reduce borrowing costs with an unconventional policy tool may also be highlighting limits to its power to fix what ails the U.S. economy.

Investors sought safer assets for a second day after the Fed announced it would shift $400 billion of its Treasury securities holdings into longer-term debt. Treasury 30-year bonds rallied, sending yields to the lowest level in almost three years, while the Dow Jones Industrial Average suffered its biggest two-day loss since December 2008.

[source]

22-Sep (HousingWire) — The Dow Jones Industrial Average plunged about 500 points Thursday before closing down 391 points, or 3.5%, as dim economic news from monetary policymakers and the growing European debt crisis spooked investors.

Global financial markets are reacting to a series of negative reports, including Treasury Secretary Timothy Geithner’s assertion that political instability and a debt crisis overseas are the greatest risks to the American economy, according to a Reuters report.

Fears of a European debt crisis hurting U.S. growth prompted the Senate Banking Committee to invite a panel of European economists and banking experts to discuss how their debt issues will impact the fledgling U.S. economy.

[source]

22-Sep (The Wall Street Journal) — Investors staged a flight from risk in global markets that sent U.S. stocks plummeting and 10-year Treasury yields to 1940s levels, after a gloomy outlook by the Federal Reserve renewed fears of a global economic slowdown.

U.S. stocks hit successive lows throughout Thursday’s session as investors sold off assets perceived as “risky” and fled to the dollar and to government bonds. The selloff started Wednesday. The Fed moved to increase the share of longer-dated Treasurys within its portfolio by $400 billion by June 2012, while selling shorter-term paper. But the planned effort, which investors dubbed “Operation Twist,” was overshadowed by a gloomy statement from the central bank noting “significant downside risks” to the global economy. The Fed also noted “strains” in global financial markets, widely interpreted as a reference to Europe’s sovereign-debt crisis.

[source]

PG View: Investors may be fleeing stocks in favor of the dollar and bonds, but they are unlikely to stay there. Growth risks that tanked stocks are just the catalyst for additional central bank measures that would be dollar negative. And the yields on US Treasuries simply don’t accurately reflect the true risks.

22-Sep (Financial Times) — European officials look set to speed up plans to recapitalise the 16 banks that came close to failing last summer’s pan-EU stress tests as part of a co-ordinated effort to reassure the markets about the strength of the 27-nation bloc’s banking sector.

A senior French official said the 16 banks regarded to be close to the threshold would now have to seek new funds immediately. Although there has been widespread speculation that French banks are seeking more capital, none is on the list. Other European officials said discussions were still under way.

[source]

Gold Retreats as Global Growth Risks Mount

22-Sep (USAGOLD) — Weak PMI data out of China and the eurozone have weighed heavily on global shares and the commodity complex on Thursday, just a day after the Fed offered a pretty dire assessment of the US economy. Broad-based risk aversion has prompted flows out of stocks and commodities and into the perceived safety of dollars and low yielding sovereign debt. While this risk-off trade is also weighing on gold, because of its allocation to commodity pools and funds, the safe-haven aspects of the yellow metal suggests that downside potential may prove to be limited in the face of all the global uncertainty.

It would seem that Europe is on the verge of recession, on top of heavy stresses associated with the sovereign debt crises. Meanwhile, even the Chinese economy may be sputtering under the weight of carrying the water for the rest of the world. As for the US economy, leading indicators were up slightly in August, but initial jobless claims once again disappointed, remaining well above 400k.

The Fed moved on Wednesday to offer additional accommodations via an Operation Twist, hoping that in driving down longer term yields, it might spark some economic activity. While this move was widely anticipated, the market’s assessment seems to be that simply swapping $400 bln in maturities less than 3-years for $400 bln in maturities greater than 6-years, is unlikely to have any meaningful impact on growth. The Royal Bank of Canada summed it up thusly, “the economic impact will be low; the private sector is simply not responding to low yields and the housing market is languishing amid low confidence and demand while mortgage lending standards are tightening.” Arguably, the private sector is being prevented from responding to lower yields by those tighter lending standards.

The weaker growth outlook certainly mitigates inflation risks, and that may be factoring into gold’s return to the low end of the 5-week range as the dollar jumped on FX flows out of the euro and into something perhaps not quite as ugly. However, a return to recession also heightens systemic risks (just look at banking shares today), raising expectations that the central banks of the world will react in the only way they know how, with the blunt-instrument of ever-more accommodative monetary policy. The Fed and the BoE at least are very unlikely to sit idly by and allow for deflation. They will print and pump to maintain at least some inflation.

It appears that the BoE is very likely to launch additional QE measures, perhaps as early as next month. The ECB, due to hotly contested rate hikes earlier in the year, has some limited maneuvering room. The Fed, in opting for Operation Twist, has left the arrow of more full-on QE in the quiver, to perhaps be used at a later date. On top of all that, there are rumors circulating today that the Fed is planning to slash rates on the swap lines that were vastly expanded last week; a further indication of just how tight liquidity is getting.

If further expansion of the monetary base, here in the US and elsewhere in the industrialized world, is to be forthcoming — and given the well-established trend, it’s hard to believe that it won’t be — then gold’s pullback within the range is likely to be short-lived.