19-Mar (Forbes) — Do you know why oil and prices are moving sharply higher? Some blame the oil companies, charging they are manipulating prices. Others cite U.S. sanctions on Iran and the threat of a military encounter that would disrupt the flow of oil from the Middle East.

Speculators, too are blamed for ostensibly bidding up the price of oil. In the political arena, President Obama is taking credit for increased domestic oil production even as his critics point out the slow pace of drilling permits issued by his Administration soon will hamper additional increases in the U.S. oil production.

Yet, the basic reason for higher energy prices is being overlooked, even though it is right before our eyes: Oil prices are up because the value of the dollar is down. Our common sense hides this source of higher prices because we view the dollar as fixed, and prices as moving. News reports explain the sharp rise in consumer prices in February were caused by higher energy and food prices, implying that higher prices cause inflation. Of course, higher prices do not cause inflation. Higher prices are inflation.

…Even these results miss the full decline in the dollar’s value because the value of all of these currencies, too, have fallen over the past decade. If the dollar had been as good as gold, the price of oil today would be about $20 a barrel, and the price of gasoline would be down near $1 a gallon. That’s right, the lower prices produced by the increase in oil and natural gas production have been disguised by the fall in the value of the dollar.

[source]

19-Mar (Bloomberg) — A widely held assumption about a pre-emptive strike on Iran’s nuclear facilities is that it would spur Iranian citizens — many of whom appear to despise their rulers — to rally around the regime. But Netanyahu, I’m told, believes a successful raid could unclothe the emperor, emboldening Iran’s citizens to overthrow the regime (as they tried to do, unsuccessfully, in 2009).

You might call this the Museveni Paradigm. It’s one of several arguments I’ve heard in the past week, as I’ve shuttled between Tel Aviv and Jerusalem, that have convinced me that Israeli national-security officials are considering a pre- emptive strike in the near future.

[source]

PG View: The threat of a preemptive strike against Iran, and a possible war as a result, trumps any promise of increased oil output on the part of the Saudis. Should also be viewed as an underpinning for gold.

20-Mar (Bloomberg) — Greece’s bonds and credit ratings are factoring in a third bailout for the nation that analysts and investors say will require greater concessions from its international creditors.

Within a week of euro-area member states giving their formal approval to a second bailout package for Greece, the International Monetary Fund said the country may require additional funding or a further debt restructuring. Pacific Investment Management Co., which runs the world’s biggest bond fund, said it remains “cautious” on euro-area government debt even after the largest-ever sovereign refinancing because the risk remains that Greece will leave the single-currency area.

Greece’s ratio of debt to gross domestic product will fall to 116 percent in 2020 from 165 percent in 2011 if the nation’s “ambitious” program to overhaul the economy is implemented. Photographer: Kostas Tsironis/Bloomberg
HSBC’s Bloom Discusses FX Strategy

“It’s still a very steep mountain to climb,” said Harvinder Sian, a senior fixed-income strategist at Royal Bank of Scotland Group Plc in London. The restructuring deal “doesn’t do anything to put Greece on a sustainable path,” he said. “A third bailout will become necessary.”

[source]

20-Mar (USAGOLD) — Gold is back on the defensive within the range as fresh worries about Chinese growth sap risk appetite and promises from Saudi Arabia of increased oil supplies diminish inflation concerns somewhat.

BHP Billiton, the world’s biggest mining company, reported today that Chinese steel production is slowing, adding to recent concerns about economic growth both in China and globally. Asian stocks swooned and European and US shares have subsequently followed suit. Diminished risk appetite lifted the dollar and Treasuries, which has weighed on gold.

Saudi Arabia has pledged to bring down the high price of oil by increasing their output. Oil prices did indeed fall on the news, putting additional pressure on gold. Energy inflation has been a major theme underpinning the yellow metal.

• US housing starts -1.1% in Feb to 698k, near expectations, vs upward revised 706k in Jan.
• Germany PPI decelerated to +0.4% m/m in Feb, below market expectations of +0.7%, vs +0.6% in Jan; 3.2% y/y.
• UK Core CPI moderates in Feb to 2.4% y/y, vs 2.6% in Jan.
• UK RPI rebounds to +0.8% m/m in Feb, vs -0.6% in Jan; 3.7% y/y, above expectations of 3.5%.
• UK CBI Industrial Trends Monthly – Total Orders -8 in Mar, below expectations of -5, vs -3 in Feb.
• UK CBI Industrial Trends Monthly – Export Orders -11 in Mar, below expectations of -3, vs -2 in Feb.
• Taiwan Export Orders rebound to 17.6% y/y in Feb, vs -8.6% y/y in Jan.

by Amity Shlaes
14-Mar (Bloomberg) — A little is all right. That’s the message Federal Reserve Chairman Ben S. Bernanke has been giving out recently when asked about the evidence of inflation in the U.S. recovery.

Sometimes Bernanke doesn’t even go that far. He simply says he doesn’t see inflation. The Fed chairman recently described the prospects for price increases across the board as “subdued.”

“Sudden” is more like it. The thing about inflation is that it comes out of nowhere and hits you. Monetary policy is like sailing. You’re gliding along, passing the peninsula, and you come about. Nothing. Then the wind fills the sail so fast it knocks you into the sea. Right now, the U.S. is a sailboat that has just made open water, and has already come about. That wind is coming. The sailor just doesn’t know it.

[source]

19-Mar (VOX) — The patterns of gold holding remain a debatable topic at times when the relative price of gold has appreciated while the global economy has experienced recessionary effects. This column studies the curious patterns of gold holding and trading by central banks from 1979 to 2010. It suggests that a central bank’s gold position signals economic might, and gold retains the stature of a ‘safe haven’ asset at times of global turbulence.

…While we focus on the OECD countries, we include also the two emerging ‘super countries’, China and India, noting that their recent gold holdings increased in tandem with the sharp rise in their economic power (Figure 4). As of November 2011, China is the 6th largest gold holder in the world, Russia is the 8th, and India is the 11th largest. These patterns are consistent with the desire of ‘super emerging markets’ to signal their economic might, to diversify their reserves, and to insure themselves during the global turbulence.

…To conclude, gold retains its unique stature of a ‘safe haven’ asset at times of global turbulence, where large central banks’ gold position signals economic might.

[source]

16-Mar (Financial Times) — A sharp fall in gold prices has triggered large purchases of bullion by central banks in recent weeks, according to several traders with knowledge of the transactions.

The buying activity highlights the trend among central banks in emerging economies to buy gold, even as some western investors are losing patience with the metal. Gold prices have dropped 13.8 per cent from a nominal record high of $1,920 a troy ounce reached in September, and on Friday were trading at $1,655.60.
More

The Bank for International Settlements, which acts on behalf of central banks, has been buying significant quantities of gold on the international market amid falling prices, traders said.

[source]

16-Mar (Reuters) — An apparent economic recovery and a recent tumble in the price of gold has investors wondering if the precious metal has lost its place in a portfolio.

Gold, having soared higher since the onset of the financial crisis, is down about 17 percent from its September peak, and has fallen 7.5 percent in less than a month. In large part, gold’s comeuppance is attributable to improving economic data and a sense that – terrible as things may be in Europe – the banking system will not implode.

So, then, if the world’s not ending why own gold?

…Gold, Buffett correctly points out, has benefited first from a fear trade, bought up by investors who worry that central banks and governments will engineer a raging inflation in order to erode away the debts they struggle under.

…Gold is a kind of anti-investment, an insurance policy against the bad actions of other people.

…But it is important to remember that the impact of QE isn’t over simply if the Fed no longer prints money. There is still the issue of how to retract the huge amount of liquidity from a recovering economy.

…the correct comparison is not between stocks and gold but between cash and gold.

[source]

19-Mar (Bloomberg) — Sellers of credit-default swaps on Greece may have to pay 78.25 cents on the euro to settle contracts triggered by the nation’s debt restructuring.

Dealers set an initial value of 21.75 percent at an auction for Greek bonds today, according to administrators Markit Group Ltd. and Creditex Group Inc., in line with where the notes have been trading. The auction is being held under the rules of the International Swaps & Derivatives Association and a final rate will be determined at 3:30 p.m. in London.

[source]

By Martin Wolf
19-Mar (Financial Times) — The real interest rate on US and UK government debt is currently near to zero (see chart 1). This is a remarkable fact. True, real interest rates were negative in the 1970s. But it is extremely unlikely that anybody bought bonds expecting this to be the case.

Now, however, the position is quite different. Both of these governments sell index-linked debt that delivers zero real returns. That is a demonstration of the fact that the world has a huge “savings glut”. Indeed, since savings must equal investment at the global level, it is only by its price – the rate of interest – that one can assess whether such a glut exists.

…When will we know that the world economy has recovered from the extraordinary conditions of today. My answer would be that this will be when the real rate of interest on safe securities (if any are indeed left by then) is around 3 per cent. Until that happens, policy is trying to stave off disaster.

[source]

PG View: We have maintained that gold will remain a solid investment as long as real rates remain negative. Wolf asserts that the global economy remains on shaky ground as long as real rates are below 3%. I think it’s going to be many years before we see anything close to 3% real rates.

18-Mar (Bloomberg) — There was disheartening news last week regarding the way the U.S. financial system operates. I’m not referring to the opinion piece by a departing Goldman Sachs Group Inc. employee, which suggested that the company has little respect for its customers.

If you have a complex derivatives transaction in place with Goldman — or any other big Wall Street firm — and you didn’t know they thought of you as a malleable “muppet,” it may be time to replace your chief financial officer.

…The truly dreadful news last week was conveyed in the results of the Federal Reserve’s latest bank stress tests. As presented by the Fed, most of the news was good.

…But there’s a problem, and it’s not a small one. If you buy the Fed’s view of what is likely to constitute stress, there is some justification for its action. Even then, you should ask the question that Anat Admati, a Stanford University finance professor, has been pressing: Why would we let banks reduce their capital in the face of so much financial and economic uncertainty around the world? If you leave shareholder equity on bank balance sheets, it still belongs to shareholders. Let it stay there as loss-absorbing capital in case the world turns nasty again.

…Make no mistake: Lower equity at big banks means higher expected losses for taxpayers down the road.

[source]

PG View: The argument is that allowing the banks to distribute capital makes it more likely that those banks will need additional bailouts should thinks turn really bad again. That would make we taxpayers the “muppets” in this scenario.

18-Mar (Bloomberg) — David Waldrop, 59, says he considers himself retired after searching unsuccessfully for work comparable to the job he lost in July 2007 at the U.S. Department of Energy in Atlanta.

“There was certainly nothing in my area at my level,” he said. While the right opening might pull him back to employment, for now he sees his exit from the U.S. labor force as permanent. “I don’t see it happening,” he said. “I don’t see anything offering opportunities.”
Enlarge image Ben S Bernanke

Waldrop is one of millions who have dropped out of the labor market in the aftermath of the deepest recession since the Great Depression, causing the employment-to-population ratio to fall to 58.6 percent from 62.7 percent at the end of 2007. Federal Reserve Chairman Ben S. Bernanke says the decline reflects weakness in the economy that’s causing discouraged Americans to leave the workforce, bolstering his decision to add to his record monetary stimulus in January.

[source]

PG View: The Fed may have to tighten sooner than expected to address inflation risks, even if it worsens the structural unemployment situation.

19-Mar (USAGOLD) — Gold begins the week consolidative to modestly positive in the wake of last week’s retreat. The yellow metal remains resilient — within the confines of its broader range — in the face of recent strength in both the dollar and the stock market.

Firm oil prices continue to stoke worries of inflation and a detrimental impact on growth prospects. The average price for a gallon of gasoline is $3.842, the highest it has ever been at this time of year.

Meanwhile, limiting the upside in gold is ongoing uncertainty about the near term prospects for additional Fed measures. Dallas Fed hawk Fisher suggested this morning that there is plenty of liquidity in the system and no reason to add more. Fisher went on to say, “No one I think presently believes we are going to proceed with QE3.” I suspect that there are a fair number of hawks and perhaps even moderates that would concur, given the recent gains in the stock market and rising energy prices. However, I do recall how quickly the tenor of the QE3 dialogue changed 180 degrees last Tuesday when the stock market dropped by 1.5%.

The doves at the Fed continue to keep the door open. Chicago Fed’s Evans said last week that we should avoid the “siren call of premature rate hikes.” NY Fed’s Dudley acknowledged this morning that while the data are a little more upbeat, he suggested that no decision has been made yet on QE3.

• US NAHB housing market index unch in Mar at 28, below market expectations of 30, vs negative revised 28 in Feb.
• Canada wholesale trade -1.0% in Jan, well below market expectations of +0.3%, vs upward revised +1.0% in Dec.
• UK Rightmove House Prices (nsa) 1.6% m/m in Mar, vs +4.1% in Feb; +2.2 y/y.
• Eurozone Current Account (sa) €4.5 bln in Jan, vs upward revised €3.4 bln in Dec; nsa -€12.3, vs upward revised €18.3 bln in Dec.
• Italy Industrial Orders (sa) -7.4% m/m in Jan, vs negative revised 5.2% in Dec; -5.6% y/y.
• Italy Industrial Sales (sa)-4.9% m/m in Jan, vs negative revised 3.2% in Dec; -4.4% y/y (nsa).
• Hong Kong unemployment rate (sa) rises to 3.4% in Feb, vs 3.2% in Jan.

16-Mar (Politico) — The Congressional Budget Office said Friday that President Barack Obama’s tax and spending policies will yield $6.4 trillion in deficits over the next decade, more than double the shortfall in CBO’s own fiscal baseline — even after taking credit for reduced war costs.

[source]

16-Mar (USAGOLD) — Gold is rebounding from earlier tests of the downside and has recently ticked into positive territory on the day. The yellow metal is now more than $20 off the intraday low, after some disappointing US data sapped dollar strength. The lows in gold set earlier in the week at 1636.00/1634.20 were left well protected

Industrial production came in unchanged for Feb, below market expectations of +0.4%, although the back-month revision paints a more neutral picture. Additionally the University of Michigan consumer sentiment index fell in Mar, when the market was expecting a modest rise.

With inflation seemingly in check (at least as evidenced by the headline numbers), perhaps there has been a slight uptick in QE3 expectations. The Fed diminished hopes of additional impending quantitative measures by not really mentioning them at all in Tuesday’s FOMC statement. That, along with a modestly rosier economic assessment, prompted flows out of safe-haven assets and into the stock market. Maybe some are already starting to rethink that move.

• University of Michigan sentiment fell to 74.3 in Mar, below market expectations of 76.0, vs 75.3 in Feb.
• US industrial production unch in Feb, below market expectations of +0.4%, vs upward revised +0.4% in Jan; cap use 78.7%.
• US CPI +0.4% in Feb, in-line with expectations, 2.9% y/y; core +0.1%, on expectations of +0.2%, 2.2% y/y.
• Canada manufacturing shipments -0.9% in Jan, well below market expectations of +0.7%, ex-autos -1.6%.
• Eurozone trade balance (sa) €5.9 bln in Jan, vs negative revised €7.4 bln in Dec; -€7.6 bln nsa.
• Japan Leading Index (revised) 1.1% m/m in Jan, vs 0.3% in Dec.
• Japan Coincident Index (revised) -0.3 m/m in Jan, vs negative revised 2.9% in Dec.

16-Mar (CNBC) — The euro zone may raise the combined lending power of its bailout funds to close to 700 billion euros ($916 billion) from 500 billion in a trade-off between German opposition to committing more money and calming markets, euro zone officials said.

Euro zone finance ministers and central bankers will discuss the size of their bailout funds—the temporary European Financial Stability Facility (EFSF) [cnbc explains] and the permanent European Stability Mechanism (ESM) in Copenhagen on March 30-31.

…Markets have long been pushing for a higher capacity for euro zone lending to make sure the 17-nation bloc has enough money to bail out even its large members like Italy or Spain, should that be necessary, but Germany has been adamantly opposed to such an increase.

[source]

16-Mar (Bloomberg) — India, the world’s biggest bullion buyer, increased the tax on gold imports for the second time this year after record purchases widened the current-account deficit. Gold for immediately delivery fell.

The government will tax gold bars and coins and platinum at 4 percent, Pranab Mukherjee, finance minister, said in his budget speech for the year starting April 1. That’s up from 2 percent set in January. There was no change on the silver tax.

India doubled the tax on gold and silver on Jan. 17 by imposing a levy on imports as a percentage of the price, compared with the previous system of tax by weight. Global bullion prices rallied for an 11th year in 2011 as purchases by India peaked at 969 metric tons. Futures in India gained 32 percent last year, exceeding the 10 percent advance in global prices, as the currency slumped to a record low.

[source]

PG View: Taxing gold at an ever higher rate is certainly a way to tamp down demand in the short-term, but as long as inflation (6.95%) is greater than the tax increases, buying gold still makes sense.

16-Mar (MNI) – The second Greek bailout approved this week may mark a turning point out of the debt crisis as some European leaders claim, but signals from financial markets still point to trouble ahead.

The yield on the new 30-year Greek bond issued as part of the private sector debt swap was quoted at 14.7% on Friday, up 130 basis points from Monday. The new Greek 11-year bond yielded around 18.2%.

Although its debt stock has been cut by more than E100 billion and its interest payments lowered substantially, few analysts or investors believe that Greece’s debt load, even if it reaches the targeted 120% of GDP, is sustainable.

…[A troika] report notes, for example, that the Greek government will have to identify spending cuts equal to 5.5% of GDP, or around E11 billion, in the next few months if it hopes to hit budget targets calling for a primary surplus of at least 1.8% of GDP in 2013 and 4.5% 2014.

[source]

PG View: So in order to hit their numbers, Greece is going to have to cut an additional €11 bln in spending in the midst of an already terrible recession. That’s not going to go over well with the Greek people.

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.

[source]

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.