Gold and silver futures look set on Wednesday to post their biggest one-day losses year to date, but the declines “look overdone,” said Julian Jessop, chief global economist at Capital Economics, in a note.

“The trigger appears to have been disappointment that [Federal Reserve Chairman Ben Bernanke] failed to signal any further quantitative easing,” he said. But “such a signal was never very likely as early as today.”

Bernanke suggested in Congressional testimony that he is slightly more encouraged by the run of stronger economic data, notably from the labor market – and that’s no real surprise, said Jessop.

But Bernanke also described the recovery as “uneven and modest by historical standards” and said Europe still faces critical fiscal and financial challenges.

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Gold plunged, heading for the biggest decline this year, on expectations that the Federal Reserve will refrain from taking new action to bolster the economy. Silver slumped the most since December.

The dollar rebounded after Fed Chairman Ben S. Bernanke, in congressional testimony, gave no signal that the central bank is considering additional measures to spur the economy. He said the inflation outlook is “subdued.” The greenback gained as much as 0.5 percent against a basket of competing currencies. Before today, gold prices climbed 14 percent this year, compared with a 10 percent gain in 2011.

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PG View: On the heels of earlier suggestions that the ECB was hoping to turn off the liquidity spigot after today’s €529.5 bln LTRO, we’ve seen a rather significant round of profit taking in the yellow metal.

29-Feb (USAGOLD) — [REVISED] Gold eked out a new high for the year at 1790.55 in overseas trading before coming under heavy profit taking pressures, leaving important resistance at 1802.80 well protected. The ECB’s second LTRO came in at €529.5 bln, which was pretty much in-line with recent tempered expectations. While larger than the LTRO1 in December, LTRO2 was well shy of early high-end expectations that suggested the take-up could be as large as €1 trillion. Nonetheless, an additional €1.02 trillion ($1.37 trillion) in additional liquidity has been injected into the European banking system in the last 3-months.

Although the ECB stopped short of accepting Greek bonds as collateral, one can only imagine what other rubbish may have been pledged by the 800 banks that participated. The ECB has already expressed aversion to further balance sheet expansion, suggesting that LTRO2 will be the last. Germany’s Jens Weidmann warned that the ECB must not lose sight of its inflation fighting mandate and take on too much risk.

Heightened expectations that the ECB is going to turn off the liquidity spigot has prompted profit taking in the euro and the metals. The corresponding rise in the dollar is adding additional impetus to the corrective retreats. However, rest assured, further deterioration of the sovereign debt crisis and heightened growth risks on the Continent will almost assuredly lead to further central bank accommodations…and quite possibly LTRO3. And even if the ECB is truly on pause for a while, the other central banks may well end up picking up the slack.

While silver extended to a new 5-month high at 37.47, it too eventually succumbed to intraday corrective pressures.

• Chicago ISM rose to 64.0 in Feb, above market expectations of 61.8, vs 60.2 in Jan.
• US Q4 GDP revised up to +3.0%, above market expectations of 2.8%, vs 2.8% advance print.
• Switzerland KOF Leading Indicator -0.12 in Feb, below market expectations of -0.10, vs upward revised -0.15 in Jan.
• Sweden Q4 GDP (sa) Final -1.1%, well below market expectations of -0.4%, vs big negative Q3 revision to 0.9%; 1/1 y/y (nsa).
• German unemployment unch in Feb; rate ticks higher to 6.8% on Jan revision.
• Eurozone CPI -0.8% m/m in Jan, in-line with expectations, vs +0.3% in Dec; 2.6% y/y, core 1.5% y/y.
• Japan Markit/JMMA PMI slips to 50.5 in Jan, vs 50.7 in Dec.
• Japan Industrial Production (sa) – Preliminary +2.0% in Jan, vs negative revised 3.8% in Dec.
• Japan Housing Starts -1.1% y/y in Jan, vs -7.3% in Dec.
• Japan Construction Orders surge 24.6% y/y in Jan, vs 1.5% in Dec.

29-Feb (Financial Times) — The US economy grew slightly faster than previously thought in the final quarter of 2011 in another encouraging sign of stable recovery.

The Bureau of Economic Analysis revised its initial estimate of annualised growth in the fourth quarter from 2.8 per cent up to 3 per cent, ahead of market expectations of an unchanged estimate.

But the revision did not change the fundamental picture of a quarter where most growth was due to an inventory build up and final consumer demand was sluggish. It is unlikely to change US Federal Reserve chairman Ben Bernanke’s views ahead of testimony to Congress on Wednesday morning.

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28-Feb (USAGOLD) — Gold is well bid this morning, underpinned by dollar weakness, firm oil and fresh 5-month highs in silver. The euro is surprisingly buoyant after S&P declared Greece to be in a “selective default’. Recent action by the credit rating agencies is making it increasingly difficult for policymakers to maintain their insistence that the bond swap is not a credit event, and therefore not a trigger for the credit default swaps.

Weaker than expected January durable goods orders and continued weakness in the US housing market through the end of last year has the stock market looking increasingly suspect up here in the vicinity of DJIA 13,000. Durable goods orders for January fell by 4.0%, on a larger than expected seasonal effect. The Case-Shiller 20-city composite home price index dropped 1.1% in December. While this was near expectations, the 4.0% y/y decline in 2011 suggests that recent talk of a housing market recovery is premature.

This grim economic news was tempered somewhat by a new 1-year high in consumer confidence in February. The negative wealth effect associated with persistent weakness in the housing market may ultimately lead to a reversal of the recent rise in consumer confidence.

Flows out of stocks, driven by heightened risk aversion, may well find their way into the metals market. Historically, there is an inverse correlation between gold and shares. It would be reassuring to see that more normal relationship reestablished.

• US consumer confidence jumped to 70.8 in Feb, above market expectations, vs upward revised 61.5 in Jan; highest level in a year.
• US Case-Shiller 20-city composite home price index (nsa) -1.1% to 136.7 in Dec, vs neg revised 138.2 in Nov; -3.99% y/y.
• US durable goods orders -4.0% in Jan, well below market expectations of -1.0%, vs positive revised +3.2% in Dec; -3.2% ex-trans.
• Germany GfK Consumer Confidence ticked higher to 6.0 for Mar, in-line with expectations, vs 5.9 in Feb.
• Germany CPI +0.7% in Feb, above market expectations of 0.5%, vs -0.4% in Jan; 2.3% y/y.
• Eurozone Economic Confidence higher at 94.4 in Feb, just above expectations of 94.0, vs 93.4 in Jan; consumer confidence weaker at -20.3.
• Japan Large Retailer Sales -1.0% y/y in Jan, vs positive revised -0.3% in Dec.
• Japan Total Retail Sales +1.9% y/y in Jan, vs +2.5% in Dec.

28-Feb (The Wall Street Journal) —The European Central Bank, responding to the latest rating agency downgrade of Greece, said it would no longer accept the country’s bonds as collateral for loans, but added the move was a temporary one that could be reversed once the new Greek bailout package goes into effect.

Until then, the ECB said it would be up to national central banks to decide whether to accept the bonds as collateral for their own emergency lending facilities. Greek banks, which would collapse without the support, would still be able to access loans directly from the Greek central bank’s lending window, albeit at a higher interest rate.

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PG View: Any bank that didn’t use their Greek bonds as collateral in the Dec LTRO is out of luck tomorrow…

28-Feb (BBC) — Rating agency Standard & Poor’s has classified Greek debt as in “selective default” following the deal it made with creditors to reduce its debts.

S&P says the terms of that deal triggered the latest downgrade. Greek debt already had a “junk” grade rating from the agency.

Separately, the European Central Bank said it was suspending the eligibility of Greek bonds as collateral for loans to commercial banks.

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28-Feb (The Wall Street Journal) U.S. home prices ended 2011 at the lowest levels since the housing crisis began in mid-2006, according to Standard & Poor’s Case-Shiller home-price indexes.

During the fourth quarter, home prices reached new lows, falling 3.8% from the pre and 4% year-to-year. Prices are down 33.8% from their peak in the second quarter of 2006.

“While we thought we saw some signs of stabilization in the middle of 2011, it appears that neither the economy nor consumer confidence was strong enough to move the market in a positive direction as the year ended,” said David Blitzer, chairman of S&P’s index committee. “After a prior three years of accelerated decline, the past two years has been a story of a housing market that is bottoming out but has not yet stabilized.”

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27-Feb (FX Street) — The Bundestag, Germany’s lower house of parliament, approved with a large majority the second bailout for Greece worth €130 billion which was agreed by euro zone finance ministers last week.

As widely expected and with a large majority, the Greek aid proposal was approved with 496 votes in favor, 90 against and 5 abstentions. An approval of the Bundesrat the upper house of parliament representing the 16 states is not necessary. On the other hand, the Euro has been hurt by the S&P downgraded of the EFSF outlook and the bullish movement of the last days has been undermined for this decision.

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27-Feb (Der Spiegel) — German Interior Minister Hans-Peter Friedrich has advised Greece to leave the euro zone — the first time a member of the German government has openly called for such a radical step.

“Greece’s chances to regenerate itself and become competitive are surely greater outside the monetary union than if it remains in the euro area,” Friedrich told SPIEGEL. He emphasized, however, that he did not support a forced exit. “I’m not talking about throwing Greece out, but rather about creating incentives for an exit that they can’t pass up.”

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27-Feb (USAGOLD) — Gold has snapped back from overseas losses and is now trading higher on the day. Last week’s high at 1782.82 now provides an intervening barrier ahead of important resistance defined by the November high at 1802.80.

Over the weekend the G20 ramped up pressure on Europe, and Germany in particular, to come up with more money as a condition of further IMF support. The G20 is reportedly attempting to compile nearly $2 trillion in resources as quickly as April, but they would like to see the firebreaks already in place bolstered. German Chancellor Merkel, facing intense political pressures at home, was quick to oppose an increase in the size of the EFSF/ESM.

The Eurogroup will meet again this week to discuss Greece amid rising expectations that the recently agreed to bond swap will be viewed by the rating agencies as a default. If that is the case, the swap will be considered a credit event, triggering CDS and potentially starting a chain reaction that may well put the global financial system under extreme duress once again.

On Wednesday, the ECB will have their second LTRO, once again offering up unlimited 3-year money to European banks. Their last LTRO back in December resulted in an astonishing €489 billion in take-up, this next one is expected to be bigger yet — and potentially much bigger — as the ECB has been hinting that they would like it to be their last. The as yet unknown counterparties that wrote the Greek CDSs could very well have an interest in boosting their cash holdings.

An additional boost to global liquidity in the range of €500-1,000 trillion is very likely to boost gold as well.

• US NAR pending home sales index +2.0% to 97.0 in Jan, vs negative revised 95.1 in Dec.
• France PPI +0.6% m/m in Jan, vs -0.1% in Dec; 4.2% y/y.
• Italy business confidence erodes to 91.5 in Feb, vs 92.1 in Jan.
• Eurozone M3 (sa) +2.5% y/y in Jan, well above market expectations of +1.7%, vs +1.6% in Dec.

26-Feb (LA Times) — A bit player only a decade ago, China has emerged as one of the most important forces in the global gold market, helping fuel the rising value of the precious metal.

Already the world’s largest producer — it overtook South Africa in 2007 — China is now bedecking itself in bling. It’s on track to become the globe’s largest consumer of gold as early as this year, knocking off India — whose elaborate wedding dowries kept it on top for years.

Some of China’s gold is going to its central bank as the government quietly boosts reserves. But the biggest driver is Chinese consumers. They’re snapping up jewelry, coins and bars as a hedge against inflation and to flaunt their rising wealth.

…Chinese demand reached nearly 770 metric tons last year, up 20% from the year before, according to the World Gold Council in London. Desire for the yellow metal is so strong that China is buying record amounts from abroad because its mines can’t keep pace. China imported more gold than India in the fourth quarter of 2011.

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26-Feb (Reuters) — Leading economies told Europe it must put up extra money to fight its debt crisis if it wants more help from the rest of the world, piling pressure on Germany to drop its opposition to a bigger European bailout.

Euro zone countries pledged on Sunday at a Group of 20 meetings of finance leaders to reassess the strength of their bailout fund in March, which could clear the way for other G20 countries to give more funds to the International Monetary Fund.

…Germany, as Europe’s largest economy, came under intense pressure to support enlarging the region’s war chest. But facing political hurdles at home, it has sent conflicting signals over whether it was ready to move.

…The G20 is racing to line up massive international resources worth nearly $2 trillion – including existing and new funds – possibly by late April.

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27-Feb (Bloomberg) — Sweden’s central bank gold reserves were unchanged at 125.7 metric tons in January, Joanna Gerwin, acting head of communication, said by phone today.

The International Monetary Fund earlier reported an 18.3 metric-ton increase in the bank’s reserves.

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Daily FX (Feb 24) — “Gold’s break higher shifts focus to the November high at 1813.30, the 61.8% extension of the 1527.30-1764 rally at 1853.85 and ultimately the September and all time high at 1932.60.” Near term structure remains bullish with the recent pullback probably composing a small 4th wave. 1773 is support.

Bottom Line – Higher

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Reuters (Feb 24) — Greece formally launched a bond swap offer to private holders of its bonds on Friday, setting in motion the largest-ever sovereign debt restructuring in the hope of getting its messy finances back on track.

The debt exchange and the new bailout also buy time to stabilize the 17-nation euro zone currency bloc and shield it against a Greek default, which remains a long-term threat.

Despite offering some relief to Greeks and policymakers fretting about an imminent bankruptcy, the deal has yet to quell doubts about the viability of Greek debt and whether the stricken nation can get back on its feet.

Greece said it was not obliged to carry out the swap unless it had 90 percent participation. If the participation was below 90 percent but above 75 percent, then Greece would consult with its public creditors.

If the rate was less than 75 percent and it did not receive required consents, it would not go through with the deal, it said.

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The AU Report (Feb 20) — “I think in the immediate term it’s very difficult to predict, but before year-end we’re going to run to the next new highs in gold and silver. I would expect gold to be well above the $2,100/oz level in this next run with silver pushing toward $70/oz. The driver for this will be QE3 and the stoppage of the manipulation game in New York on the Comex. That game has been played for a long time now, over 15 years in my opinion, but will soon be vacated by the shorts due to horrendous losses as other big players—Russia and China—fight against them.”

“In the longer term, the end game for all this debt and fiat currency insanity will take gold to a minimum of $6,500/oz. In reality, it will probably go much higher than that as governments topple and civil unrest unfolds. As an example, if you took all the current debts known to the world in the system right now and had to cover those debts with gold, it would take a price of $19,500/oz to do so! Of course, this is just one methodology of trying to figure out just how high gold could go, but I think you get the picture. What I am trying to say is that my $6,500/oz number is probably very conservative. How long is it going to take to get there? I don’t have a crystal ball. Those prices would happen as the world financial system hits systemic collapse.”

“In this next run higher for this year, gold could easily hit $2,500/oz to $3,000/oz, depending on how much QE3 is injected into the system. The more QE3 that is done, the higher the precious metals prices would go. Also, the vacating short situation on the Comex could be a big swing factor. Silver could easily see $70, $75, even $80/oz if these events occur this year as I expect. That’s also going to lift our junior mining shares and get them going once again.”

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IB Times (Feb 24) — GOLD PRICE NEWS – The gold price ­traded near unchanged Friday, hovering near $1,780 per ounce. The spot price of gold climbed to $1,789.10 – the highest level since November 11, 2011 – during yesterday’s session, but pared its gains as short-term traders took profits in the yellow metal. With its slight advance, the gold price extended its weekly and year-to-date gains to 3.4% and 13.8%, respectively.

While the gold price held near unchanged yesterday, silver continued its ascent. The price of silver jumped $0.94, or 2.7%, to $35.42 per ounce amid widespread strength in commodities and weakness in the U.S. dollar. Thus far in 2012, silver has now surged 27.8%, making it one of the best performing asset classes this year.

Another standout performer in the commodities complex was crude oil, which rallied to a nine-month high above $108 per barrel as geopolitical tensions in Iran provided a solid underpinning. Nikos Kavalis, a strategist at Royal Bank of Scotland, noted in a report that “The fact that we have Iran in the background is certainly helping through higher oil prices, which are a negative for most other industrial commodities. But for gold, it’s positive as it boosts inflation-hedging and boosts its safe-haven attributes.”

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