Rising Interest Rates May Signal Oncoming Inflation

15-Mar (USAGOLD) — Gold is on the mend, having found support ahead of the 61.8% retracement level of the rally from 1522.40 to 1790.55. The yellow metal is now back above the midpoint of that range. Perhaps investors are reconsidering the implications in the wake of yesterday’s broad sell-off of safe-haven assets. In particular, the sharp drop in bonds just might be an early harbinger of inflationary things to come.

While gold is certainly a great asset to hold in times of general economic uncertainty and systemic risks, the yellow metal can really shine when inflation kicks in. And by the way, isn’t inflation exactly what the Fed wants? When you control both the nation’s money supply and the price of that money (interest rates), if inflation is what you want…inflation is what you will get.

As a result of the Fed’s zero percent interest rate policy (ZIRP) and various other accommodations, bondholders have been realizing a real negative interest rate for some time. In an environment where investors are quick to interpret Tuesday’s tepid FOMC statement as call for “risk on” — to flee the perceived safety of bonds to push out along the risk curve in a quest for yield, any yield — its worth questioning what else might be going on.

Stocks have risen of late largely based on expectations that there will be a QE3. Suddenly the most modest optimism on the part of the Fed, which has curtailed expectations of QE3, and risk assets are the place to be. In actuality, the big rally in stocks on Tuesday was likely more attributable to the Fed’s stress test results and resulting stock buy-backs and dividend increases in the banking sector. However, if the premise is that the economy is improving, one would also expect an increase in price risks.

Rumors today that the President plans to tap the strategic oil reserve to check the recent rise in crude and gasoline prices is further evidence of inflation worries. Even if they’re not inclined to count energy and food prices as inflation because they are “too volatile”, those prices (especially energy) eventually seep into the core numbers.

But on top of the inflation threat, economic uncertainty and systemic risks still abound. The national debt isn’t shrinking. We’ve actually seen some disturbing budget and trade deficit numbers recently. The Fed remains engaged in ongoing quantitative measures. Europe is on the verge of recession, if not already in one. Greece remains a mess, even with the hurdles to bailout-2 recently cleared.

Speculators in paper representations of gold may well be lightening their exposure, and perhaps even short-selling, on this week’s sentiment shift. However. physical buyers are either holding pat or are looking to add to their holdings at these attractive prices.

Investment bank Jefferies Group Inc.’s commodities arm has agreed to buy the gold, silver and other precious-metals assets from the trustee liquidating MF Global Holdings Ltd.’s brokerage business.

James Giddens, the trustee overseeing the liquidation of MF Global’s brokerage’s commodities business, said in a court filing Monday that an offer from Jefferies Bache Financial Services Inc. is the “best available opportunity” to sell the remaining physical property under his control.

Jefferies is buying the warehouse certificates—not the actual gold and silver bars—of MF Global’s former commodities customers.

…The sale therefore represents an “attractive opportunity” in a market environment in which other means of liquidating the certificates are unlikely or would be subject to a “far greater liquidation haircut,” Mr. Giddens said in court papers.

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PG View: The trustee’s comments about the liquidity of these warehouse certificates sends a very clear message: Buy physical and take delivery.

An industry insider familiar with the deal tells me this is purely a play by Jefferies to acquire the former commodities clients of MF Global. Jefferies apparently has the connections with HSBC (the custodian of the actual metal) and is far more likely to be able to get the metal or sell the certificates than some lawyer handling the bankruptcy. What they want is these former MF clients to start trading with them.

15-Mar (MarketWatch) — Gold futures edged higher on Thursday, as recent sharp losses attracted bargain hunters and the dollar was weaker.

Gold for April delivery added $5.20, or 0.3%, to $1,647.90 an ounce on the Comex division of the New York Mercantile Exchange.

Gold sank 3% on Wednesday as reduced hopes of monetary stimulus dulled demand for the metal.

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12-Mar (TheStreet) — Michael Green, co-author of In Gold We Trust?, explains why a currency crisis is unavoidable and investors need to protect themselves with gold.

13-Mar (MINEWEB) — South Africa, only a couple of decades ago the world’s largest producer of gold by a huge margin, but recently overtaken by China, Australia and the U.S., and in danger of being overtaken by Russia, has seen the decline continuing according to Statistics SA.

The state statistical body’s report on South Africa’s mine production in January this year sees an overall decline year on year for all metals and minerals of 2.5%, but in the gold sector the decline was a massive 11.3%, more than even that in December when gold output fell by 8.2%.

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PG View: South African gold production hasn’t been this low in 90-years.

15-Mar (Reuters) — Greece’s jobless rate rose to a fresh quarterly record of 20.7 percent in the last three months of 2012, reflecting the country’s deep economic malaise, exacerbated by austerity to repair public finances and emerge from a debt crisis.

Greece secured a new 130 billion euro bailout from its euro zone partners and the IMF this week, after agreeing further painful budget cuts. But the labor market’s sharp deterioration is feeding public discontent and hurting consumer confidence.

On Thursday, statistics agency ELSTAT data showed jobs being shed at a fast pace as unemployment rose from 17.7 percent in the third quarter and 14.2 percent in the last quarter of 2010.

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14-Mar (Bloomberg) — Gold is poised for a 21 percent gain in 2012, extending its bull market to 12 consecutive years, as investors hoard record amounts and central banks expand reserves for the first time in a generation.

Bullion may rise to $1,897 an ounce in New York by Dec. 31 from $1,566.80 at the end of 2011, based on the average of 14 respondents in a survey at the Bloomberg Link Precious Metals Conference yesterday in New York. The rally that began in 2001 is the longest since at least 1920 in London, including a 10 percent gain last year.

Demand has strengthened as Europe seeks to contain its debt crisis, China’s economic expansion slows, and governments from the U.S. to the U.K. keep interest rates at all-time lows to shore up growth. Central banks have been net buyers for three straight years, the longest stretch since 1973, World Gold Council data show. Holdings (.GLDTONS) in exchange-traded funds backed by the metal reached a record 2,410.2 metric tons yesterday, data compiled by Bloomberg show.

…“Gold has become an investment, an asset class, and over time, we are only going to be building it up. The central banks are holding gold because they are not sure if the euro will remain five years later.”

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PG View: Outlook makes the current price look like a bargain…

14-Mar (MarketWatch) — Gold futures were on track for a third session of losses on Wednesday as risk appetite returned to markets and investors ploughed into equities.

Gold traders also continued to react negatively to Tuesday’s Federal Reserve policy statement and moderately positive views of the U.S. economy. That buried any hopes of more monetary easing in the short term and took away one of the main pillars of support for the metal.

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14-Mar (Bloomberg) — Citigroup Inc. (C), the lender that took the most government aid during the financial crisis, will try again to win approval for its capital plan after failing to meet minimum standards in U.S. stress tests.

The Federal Reserve objected yesterday to Citigroup’s plan — which may have included a request for a higher dividend — prompting the bank to say it will submit a revised version later this year. SunTrust Banks Inc. (STI), Ally Financial Inc. and MetLife Inc. (MET) also fell short in the Fed’s test of how 19 of the nation’s biggest lenders would fare in a severe economic slump.

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14-Mar (Financial Times) — The new €174bn bailout of Greece cleared its last European hurdle on Wednesday after national and parliamentary approvals were completed in all eurozone countries, according to Jean-Claude Juncker, the Luxembourg prime minister who chairs the group of eurozone finance ministers.

The approval releases the first €39.4bn in European Union aid disbursements to Athens, much of which will be used for a rapid recapitalisation of Greece’s banking sector, which saw a large portion of its capital base wiped out when the Greek sovereign bonds it held were slashed in value as part of Greece’s €206bn debt restructuring.

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PG View: So the troika wipes out a large portion of the capital of the Greek banking sector as a prerequisite for a bailout to rebuild said capital? Okay, the value of those Greek bonds where going to be wiped out one way or another by a Greek default, but as John Mauldin said in his newsletter this week; “The taxpayers of Europe are in theory going to lend €130 billion to Greece to pay back €100 billion in Greek debt that is owed to private lenders.” They’re playing a shell game of hide the debt, with the taxpayers in Europe playing the patsies.

14-Mar (StraitsTimes) — Currently, only about 2 per cent of the world’s traded gold is imported into or exported out of Singapore.

But by the next decade, the Government hopes that this number will jump by at least fivefold.

Singapore is setting its sights on becoming an Asian trading hub for precious metals, and it hopes to achieve this aim by scrapping the goods and services tax (GST) on the import and supply of investment-grade gold.

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14-Mar (ZeroHedge) — In an update of our post from a week ago, the ECB has increased its margin calls on European banks by EUR162 million this week to another record high of over EUR17.3 billion. While our pointing out of this huge jump from ‘average’ historical margin calls last week was met with – it’s temporary/transitory due to temporary/transitory ineligibility of defaulted (and since undefaulted) Greek bonds (which given the rise this week has now been proven incorrect) or the more prosaic “don’t worry, be happy”, we remain concerned at both the velocity and now sustained size of these margin calls (as clearly collateral quality has dropped rapidly and remained weak).

…And gold remains offered as the need to fund these margin calls means finding money under every mattress and selling whatever banks have to meet the central banks demands.

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14-mar (USAGOLD) — Gold extended to fresh 8-week lows in the wake of yesterday’s FOMC statement. The economic assessment within that statement has been broadly characterized as ‘rosy’, which prompted the Fed to withhold any hints of additional quantitative measures that might be on the horizon.

As was widely anticipated, the Fed decided to hold steady on rates yesterday. They noted that the economy “has been expanding moderately”, that labor market conditions have “improved further” and that “strains in global financial markets have eased.” While the Fed also acknowledged some persistent headwinds, investors were generally encouraged. There may have been a brief moment of disappointment that there was no mention of QE3, but that was quickly offset by leaks that most banks fared well in the most recent Fed stress tests.

JPMorgan Chase announced a $15 bln stock buyback and higher than expected dividends before the Fed officially announced the stress test results. Other banks followed suit and the surge in financials bolstered the broader indexes. The DJIA closed up nearly 218 points.

The sense that the dollar wasn’t going to be further debased any time soon via additional quantitative easing underpinned the greenback. A firmer dollar and rising stocks individually tend to diminish the appeal of the yellow metal as a safe-haven. When the dollar is rising in conjunction with stocks, you get days like today.

While speculators may be lightening up on their gold positions to allocate more toward shares, the fundamental reasons to own physical metal as part of a well diversified portfolio haven’t changed one bit. In fact, these types of retreats into the range allow for such diversification to be accomplished more efficiently.

Another record high for ECB margin calls may also be weighing on gold.

• Norges Bank cuts benchmark interest rate 25 bps to 1.50% to knock down its currency.
• US import prices +0.4% in Feb, below expectations of +0.6%; exports +0.4%, above expectations of +0.2%.
• US current account deficit widened in Q4 to $124.1 bln, above market expectations of $114.2 bln, vs upward revised -$107.6 bln in Q3.
• Canada capacity utiliization rose to 80.5% in Q4, below market expectations of 81.5%, vs negative revised 80.0% in Q3.
• Canada vehicle sales +15.4% in Jan, below market expectations of +16.0%, vs negative revised -3.6% in Dec.
• UK ILO Unemployment Rate (3m) holds steady at 8.4%; average weekly earnings (including bonus) +1.4%.
• Eurozone CPI +0.5% m/m in Feb, in-line with expectations, vs -0.8% m/m in Jan; 2.7% y/y. Core 1.5% y/y.
• Eurozone industrial production (sa) +0.2% in Jan, below market expectations of +0.7%, vs -1.1% in Dec; -1.2% y/y.
• South Korea unemployment rate (sa) rises to 3.7% in Feb, vs 3.2% in Jan.

13-Mar (FRB) — Information received since the Federal Open Market Committee met in January suggests that the economy has been expanding moderately. Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated. Household spending and business fixed investment have continued to advance. The housing sector remains depressed. Inflation has been subdued in recent months, although prices of crude oil and gasoline have increased lately. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects moderate economic growth over coming quarters and consequently anticipates that the unemployment rate will decline gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook. The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate through late 2014.

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13-Mar (The Wall Street Journal) — U.S. Federal Reserve officials held their course Tuesday, taking no new actions and offering few hints about their willingness to embark on future programs to bolster the economic recovery.

In their assessment of the U.S. economy, the central bank officials acknowledged improvements in the labor market, but cautioned that economic risks remain and that inflation could rise temporarily because of the recent increase in oil and gas prices.

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13-Mar (USAGOLD) — Gold slipped deeper into the range in early New York trading, weighed by fresh dollar gains as the euro slipped to new 4-week lows. A generally stronger dollar tone has emerged recently amid ongoing worries over events in Europe. The greenback also got a boost yesterday when the PBoC sharply lowered the midpoint of the yuan range against the dollar in reaction to the troubling swing to a trade deficit.

Despite the dollar’s gains, stocks are being supported by an ever-so slightly better than expected retail sales print for February, and a favorable revision to January’s data. While business inventories grew more than expected in January as well, shipments rose by a similar amount, leaving the I/S ratio unchanged for a 6th consecutive month. When the dollar and stocks are higher simultaneously, generally gold is going to be suppressed. However, much of those early losses have already been retraced, leaving support at 1677.50 well protected.

Now the market’s attention will turn to the Fed’s FOMC statement at 18:15 GMT. The FOMC is not expected to significantly alter its policy statement today, although recent talk of “sterilized” bond purchases will have all the Fed watchers trying to read between the lines with regard to likelihood and timing. No discernible indication of impending additional quantitative measures may deflate the stock market somewhat, which could offer a later boost to gold.

• US business inventories +0.7% in Jan, above market expectations of +0.5%, vs upward revised +0.6% in Dec.
• US retail sales +1.1% in Feb, near market expectations of +1.0%, vs upward revised +0.6% in Jan; 0.9% ex-autos.
• CPI for Feb: France 2.3% y/y. Spain 2.0% y/y. Italy 3.3% y/y. Sweden 1.9% y/y.
• UK Trade Balance – Visible -£7.5 bln in Jan, inside market expectations of -£7.8 bln, vs downward revised -£7.2 bln in Dec.
• Germany ZEW Economic Sentiment surged to 22.3 in Mar, well above expectations of 10.0, vs 5.4 in Feb; current situation falls to 37.6, vs 40.3 in Feb.
• Russia trade surplus ticks higher to $20.5 bln.
• Japan Tertiary Industry Index (sa) -1.7% m/m in Jan, vs upward revised 1.8% in Dec.
• BoJ hold steady on Target Overnight Call Rate at 0%-0.1%, in-line with expectations.

13-Mar (Reuters) — Japan said on Tuesday it had received approval from China’s government to purchase 65 billion yuan ($10.3 billion) in Chinese government debt in a move that can help Japan diversify its reserves away from the dollar and strengthen economic ties between the two Asian countries.

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12-Mar (The NY Sun) — When I was collecting my annual tax forms to send to my accountant earlier this month, I couldn’t find one — the one called the Form 1099-INT. That’s the form I’ve gotten in past years from banks or mutual fund companies to report interest I’ve received on bank accounts or money market funds.

The form didn’t seem to be downloadable from the bank or mutual fund Web sites, either, so I finally called up and asked a call center representative where my form 1099-INT was. Wearily, she explained that the bank doesn’t have to issue the form if an account generates less than $10 in annual interest. Lots of other callers, she said, had been asking the same question, and getting the same response.

It’s not that I have less money in the bank than I used to. Okay, maybe a little less. The point, though, is that the Federal Reserve’s zero interest rate policy — “zirp,” for short — means that whatever I do have in the bank isn’t generating much interest. And that’s part of the reason I’ve got less money in those bank accounts.

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