Gold Underpinned as Inflation Concerns Mount

27-Mar (USAGOLD) — Gold started out the week with a positive showing, regaining the 200-day moving average on Monday. The yellow metal was underpinned by comments from Fed chief Ben Bernanke before the NABE that certainly favored the central bank’s current über-easy policy stance, but the market interpreted his speech as a very strong hint at QE3. Not surprisingly, in the face of the recent retreat in the stock market, investors are very eager to jump on anything that smacks even remotely of further Fed accommodations. And true to form, the stock market — along with gold — rallied smartly on Monday.

While gold remains generally well bid today, some less than encouraging economic data has sapped a bit of the euphoria from shares. The Case-Shiller home price index posted its ninth consecutive monthly decline, returning the average home to a valuation not seen since early-2003. Additionally, the recent rise in consumer confidence faltered in March, suggesting that just maybe Americans are beginning to realize that every confidence inspiring gain in their stock portfolio is being offset by another decline in their home’s value.

In my opinion, the recent string of disappointing housing market data are probably more likely to result in further Fed asset purchases (in the form of mortgage backed securities) than any modest retreat in stocks. Nonetheless, the decline in consumer confidence is partially attributable to rising inflation expectations, which reached their highest level since May of last year. The Conference Board reported that 12-month inflation expectations jumped from 5.5% in February to 6.3% in March.

So even as talk of QE3 is escalating once again, so are inflation fears. Yet, inflation is exactly what the Fed tells us we need, because they view deflation as a far greater risk. So if it’s inflation the Fed wants…inflation we shall have…

In PIMCO’s April Investment Outlook released today, entitled The Great Escape: Delivering in a Delevering World, bond guru Bill Gross once again took note of inflation’s bite into the real returns of the more traditional asset classes. Gross pointed out that, “Unless you want to earn an inflation adjusted return of minus 2-3% as offered by Treasury bills, then you must take risk in some form.”

As we’ve pointed out on numerous occasions, as long as real interest rates remain negative, the outlook for gold will remain positive. Among Gross’ favored asset classes for a “delevering world” are “inflation sensitive, supply constrained products.” There aren’t too many assets more “inflation sensitive” than gold.

• US Richmond Fed Index tumbles to 7 in Mar, well below market expectations of 18, vs 20 in Feb.
• US consumer confidence fell to 70.2 in Mar, just above market expectations of 70.0, vs upward revised 71.6 in Feb.
• US S&P/Case-Shiller home prices -0.8% (nsa) in Jan for 20-cities, 9th consecutive monthly decline.
• Germany GfK consumer confidence ticks lower to 5.9 in Apr, below expectations of 6.1, vs 6.0 in Mar.
• Germany import price index +1.0% m/m in Feb, in-line with expectations, vs +1.3% in Jan; +3.5% y/y, also in-line.
• Taiwan LEI +0.9% m/m in Feb, vs negative revised +0.8% in Jan.
• Hong Kong trade balance -HK$45.8 bln in Feb, vs -HK$8.9 bln in Jan.

27-Mar (Dow Jones) — Turkey’s central bank Tuesday doubled the amount of lira reserve requirements lenders could hold in gold, in a technical move that could give breathing space to banks as Ankara moved to tighten rates to shore up the lira.

In a statement accompanying the bank’s move to hold its key policy rates steady, the monetary policy committee said banks would now be allowed to hold up to 20% of lira deposits in gold. Banks would no longer need to keep any foreign currency deposits in gold, the lender said, abandoning a previous 10% limit.

…Tuesday’s move also tallies with recent efforts by the Turkish government to persuade Turks to transfer their vast personal holdings of gold into the country’s banking system.

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Turkey Once Again Proves That Gold Is First And Foremost Money

27-Mar (ZeroHedge) — The Turkish central bank has doubled the amount of gold that lenders can hold in reserves (as opposed to paper money – Lira) as part of their reserve requirement changes. As the WSJ reports, this shift from 10% to 20% means that Turkish banks can use their shiny yellow metal as fungible money reserves against foreign currency deposits.

27-Mar (Reuters) — Consumer confidence dipped in March, while Americans ratcheted up their inflation expectations to the highest level in 10 months, according to a private sector report released on Tuesday.

The Conference Board, an industry group, said its index of consumer attitudes eased to 70.2 from an upwardly revised 71.6 the month before. Economists had expected a reading of 70.3, according to a Reuters poll.

…Expectations for inflation in the coming 12 months jumped to 6.3 percent from 5.5 percent. It was the highest level since May 2011.

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PG View: Because if the Fed says inflation is what we need…inflation is what we shall have…

27-Mar (The Hill) — House Democrats on Monday night introduced their 2013 budget plan to compete with the Republicans’ proposal on the chamber floor this week.

Sponsored by Rep. Chris Van Hollen (Md.), senior Democrat on the House Budget Committee, the $3.6 trillion proposal is not expected to pass, but nonetheless provides the Democrats with a comprehensive plan from which to distinguish their policy priorities from those of Republicans this election year.

The proposal adopts much of President Obama’s job-creation agenda, including tens of billions of dollars for near-term stimulus spending on infrastructure and other federal programs, while keeping Medicare and other entitlement benefits largely intact. The budget adds $6 trillion to deficits over 10 years, compared to $6.4 trillion for the president. It contains $643 billion less in spending, and $219 billion less in revenue.

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27-Mar (The Wall Street Journal) — U.S. home prices fell in January from a month earlier, hitting new lows, with average home prices back to the levels they were nearly a decade ago in early 2003, according to Standard & Poor’s Case-Shiller home-price indexes.

“Despite some positive economic signs, home prices continued to drop,” said David Blitzer, chairman of S&P’s index committee. The Case-Shiller index of 10 major metropolitan areas and the 20-city index now stand roughly 34% below their 2006 peaks, he said.

The U.S. housing market remained sluggish last year, despite some signs of stabilization mid-year. High unemployment rates, abundant foreclosures and tighter mortgage requirements have continued to weigh on the market.

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27-Mar — The European Union must increase its financial firewall to €1 trillion to restore market confidence in the euro zone and prevent the spread of fiscal contagion, the head of the Organization for Economic Cooperation and Development, Angel Gurría, said Tuesday.

Mr. Gurría’s comments came a day after Germany took a big step toward building a bigger financial firewall by dropping its opposition to bringing the Continent’s total bailout capacity to more than €690 billion, or $916 billion. That could help stop the spread of the crisis to major economies like Spain.

“The mother of all firewalls should be in place,” Mr. Gurría told a news conference Tuesday morning in Brussels.

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PG View: You don’t build “the mother of all firewalls” unless you think there is still the risk of the mother of all fires…

25-Mar (Bloomberg) — The Bank of Japan’s decision to expand bond purchases and set a 1 percent inflation goal was a step too far that leaves the monetary authority likely to finance government deficit spending, a former executive said.

“They looked like really desperate measures,” Eiji Hirano, 61, who was a BOJ executive director in charge of international affairs from 2002 to 2006, said in an interview last week in Nagoya, central Japan.
Enlarge image Bank of Japan Governor Masaaki Shirakawa

The yen weakened and stock prices rose in the world’s third-largest economy after Governor Masaaki Shirakawa and his policy board unexpectedly pledged on Feb. 14 to buy 10 trillion yen ($121 billion) in government debt and set the inflation target. That market reaction creates the “illusion” that monetary policy alone can cure Japan’s economic woes and may compel the BOJ to bolster bond purchases further and monetize public debt, Hirano said.

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PG View: As long as stocks rise, it’s all good. Right?

25-Mar (City Press) — South Africa will this week take some initial steps to unseat the US dollar as the preferred worldwide currency for trade and investment in emerging economies.

Thus, the nation is expected to become party to endorsing the Chinese currency, the renminbi, as the currency of trade in emerging markets.

This means getting a renminbi-denominated bank account, in addition to a dollar account, could be an advantage for African businesses that seek to do business in the emerging markets.

The move is set to challenge the supremacy of the US dollar. This, experts say, is the latest salvo in the greatest worldwide currency war since the 1930s.

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26-Mar (USAGOLD) — Gold was underpinned in the wake of Friday’s decent close, but got an additional boost this morning from Fed Chairman Bernanke who spoke on Recent Developments in the Labor Market before the National Association for Business Economics in Washington, DC. Mr. Bernanke expressed concerns that labor market conditions remain “far from normal,” and suggested that accommodative policies on the part of the Fed were a means to improve the unemployment rate.

While Bernanke’s comments clearly support the Fed’s current ultra-accommodative stance, the implication is that if the recent improvements in the jobless rate prove unsustainable, further accommodations might be forthcoming. With the $400 bln Operation Twist scheduled to conclude in just three short months, the market is thinking that the prospects for a QE3 are once again ascendant.

This pushed the dollar to new 3-week lows and boosted stocks, oil and the broader commodities sector…along with gold of course. The yellow metal is attempting to regain the 200-day moving average once again, which stands at 1687.33 today.

Prior to Bernanke speaking in DC, Philly Fed hawk Charles Plosser warned in a speech at the Banque de France in Paris that “the Fed and other central banks have undertaken other actions that have blurred the distinction between monetary policy and fiscal policy.” Mr. Plosser went on to say that, “once a central bank ventures into fiscal policy, it is likely to find itself under increasing pressure from the private sector, financial markets, or the government to use its balance sheet to substitute for other fiscal decisions.”

In my opinion, that Rubicon has already been crossed. The inability of Congress to pass any kind of meaningful fiscal reform in recent years has foisted the responsibility onto the Fed, which only has monetary tools at its disposal. Every time there is a downtick in the stock market or an uptick in unemployment — or any other form economic-ill for that matter — pressure on the Fed to do something will intensify.

Another housing market data miss this morning is a prime example: The NAB’s existing home sales index fell 0.5% in February to 96.5, well below market expectations of +1.0%. On Tuesday the Case-Shiller Home Price Index for January is scheduled to be released; yet another monthly decline is widely anticipated. Some recent speculation about QE3 has centered on support for the moribund housing market in the form of additional MBS purchases. See once again the words of Charles Plosser that the Fed may be under increasing pressure “to use its balance sheet to substitute for other fiscal decisions.”

• Dallas Fed Index tumbled to 10.8 in Mar, below market expectations, vs 17.8 in Feb.
• US NAR pending home sales index – 0.5% to 96.5 in Feb, well below market expectations of +1.0%, vs 97.0 in Jan.
• Italy consumer confidence (sa) improved to 96.8 in Mar, above expectations of 94.0, vs 94.2 in Feb.
• Germany Ifo business climate ticked higher to 109.8 in Mar, above expectations of 109.6, vs revised 109.7 in Feb.
• Germany Ifo expectations rises to 102.7 in Mar, in-line with expectations, vs revised 102.4 in Feb; current assessment unch at 117.4.
• New Zealand merchandise trade balance NZ$161M in Feb, vs positive revised -NZ$159M in Jan.
• Singapore manufacturing production 12.1% y/y in Feb, vs negative revised -9.6% in Jan.
• Taiwan M2 moderates to +4.92% y/y in Feb, vs +5.22% in Jan.

26-Mar (MarketWatch) — Gold futures rose $15 an ounce Monday, gaining traction amid comments from Federal Reserve Chairman Ben Bernanke that positive recent trends in the U.S. labor market may not last.

Moving inversely to the U.S. dollar, gold for April delivery rose $15.70 to $1,677.50 an ounce in European trading hours.

Bernanke said in a speech to a gathering of business economists that the gains in the labor market since last fall could be due to large layoffs from earlier in the recession reversing and that faster economic growth may be the key to further improvements. “We cannot yet be sure that the recent pace of improvement in the labor market will be sustained,” Bernanke said.

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26-Mar (The Wall Street Journal) — Arguing that high long-term unemployment is likely caused more by cyclical rather than structural factors, Federal Reserve Chairman Ben Bernanke said Monday that ultra-low interest rates should continue to bring down the jobless rate.

Mr. Bernanke pointed to a wide range of indicators indicating a “notable” drop in unemployment. But the Fed chief cautioned that conditions remain “far from normal,” with uncertainty lingering about whether the relatively rapid improvement over the past year is sustainable.

“Further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies,” Mr. Bernanke said in prepared remarks to the annual conference of the National Association for Business Economics.

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Fed Chairman Ben S. Bernanke
At the National Association for Business Economics Annual Conference, Washington, D.C.

26-Mar (FRB) — My remarks today will focus on recent and prospective developments in the labor market. We have seen some positive signs on the jobs front recently, including a pickup in monthly payroll gains and a notable decline in the unemployment rate. That is good news. At the same time, some key questions are unresolved. For example, the better jobs numbers seem somewhat out of sync with the overall pace of economic expansion. What explains this apparent discrepancy and what implications does it have for the future course of the labor market and the economy?

…further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies.

I also discussed long-term unemployment today, arguing that cyclical rather than structural factors are likely the primary source of its substantial increase during the recession. If this assessment is correct, then accommodative policies to support the economic recovery will help address this problem as well.

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23-Mar (MarketWatch) — Gains in U.S. stocks and oil futures Friday failed to reverse weekly losses, but still managed to soften the blow. Gold did recoup the whole week’s move in the final session of the week, while Treasury bonds gained for a fourth straight session but have only retraced a small portion of the big selloff that started two weeks ago.

The dollar added to the week’s losses, moving along with those Treasury yields.

U.S. stocks rose Friday as a jump in oil prices supported rising energy shares.

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23-Mar (Reuters) — The Hong Kong Mercantile Exchange (HKMEx) plans to launch yuan-settled gold and copper futures by July, its president said on Friday, as it looks to tap growing interest in commodities from Chinese investors.

Albert Helmig also told reporters in Shanghai that the bourse would offer yuan-denominated contracts for other industrial metals in the next 12 months.

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PG View: This is interesting because not only do we get yet another gold derivative product (paper gold), but the contract is settled in yuan, further diminishing the dollar as the global reserve currency.

23-Mar (ZeroHedge) — In part driven by the ‘regime uncertainty’ of “authorities having dispensed with the rulebook in trying to shore up the tottering edifice of Western finance” and in part “a defensive response” to the crushing liquidity suck out of the credit crisis, as Sean Corrigan notes this week, money is distinct by virtue of the fact that ‘it flows’ and this transmission mechanism is clearly broken. US non-financial corporates hoarding of a $630bn mountain of money in 2.5 years (or 85% of retained earnings) have retarded the most incendiary effects of the Fed’s extraordinary actions. The key issues will be whether these same corporates will begin to spend this cash, or whether they will simply rediscover an appetite for alternative, non-money assets (and the Fed should certainly take the opportunity to trim its swollen security portfolio by helping satisfy this reawakened urge, should it arise) and then, if they do, what those to whom they redirect the funds will do with them in their place. If the upshot is that there is a sizable remobilization of this money, things could quickly get very hot on the inflationary front if the transition is not managed well.

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23-Mar (Reuters) — Investors keen on gold showed frustration at underperforming funds that invest in mining firms as liquidations extended for more than four straight months, while money flowed into funds that invest in the underlying metal, data from Lipper showed.

Gold mining stocks have underperformed the metal over the last several years as companies struggled with rising costs and operational problems in far-flung locations, but the figures show an accelerating trend.

…Over the past 12 months, precious metals equity funds shed 12.1 percent while underlying metal funds gained 6.8 percent.

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PG View: The going price for an ounce of gold is just one of many factors that determine the price of a mining share. If exposure to the metal is what you want, buying that metal in its physical form is the most prudent path in most circumstances.

23-Mar (USAGOLD) — Gold is rebounding after slipping to a new 10-week low on Thursday, continuing the string of generally positive price action we’ve seen on recent Fridays. The yellow metal has traded within striking distance of the high for the week established Monday at 1669.45.

The return of the ECB to the eurozone periphery bond market after a 2-week hiatus seems to be inspiring risk appetite. The euro has rebounded modestly, weighing on the dollar. The softer dollar tone is offering support to the metals market.

While US stocks have rebounded from earlier losses, more disappointing housing market data adds general growth concerns. US new home sales fell by 1.6% in February to 313k, significantly below market expectations, versus a negative revised 318k in Jan. A lackluster housing market is seen as a considerable impediment to recovery and just may prove to be the eventual catalyst to additional Fed accommodations. Of course more easing raises the risk of inflation, which in turn would tend to support the gold market.

• US new home sales -1.6% to 313k in Feb, well below market expectations of 325k, vs negative revised 318k in Jan.
• Canada CPI ticked higher to +2.6% y/y in Feb, on expectations of +2.7%, vs +2.5% in Jan; core +2.3%, just above expectations of +2.2%.
• France business confidence improves to 96 in Mar, above expectations of 93, vs 92 in Feb.
• France Q4 Wages – Final confirmed at +0.3% q/q.
• Italy retail sales (sa) +0.7% m/m in Jan, vs positive revised -0.8% in Dec; -0.8% y/y.
• Singapore CPI moderates to 4.6% y/y in Feb, vs 4.8% in Jan.
• Taiwan industrial output rebounds to 8.4% y/y in Feb, vs negative revised -16.75% in Jan.
• Malaysia CPI moderates to 2.2% y/y in Feb, vs 2.7% in Jan.

23-Mar (Bloomberg) — Federal Reserve Bank of St. Louis President James Bullard said the U.S. and world economies risk elevated inflation that persists for years should developed nations mistime their exits from easy monetary policies.

“Once inflation gets out of control, it takes a long, long time to fix it,” Bullard said in a Bloomberg Television interview in Hong Kong today. “Ultra-easy” policies across the Group of Seven nations, which include the U.S. and Germany, may be retained for too long, he said.

…Over the decades, central banks are “known for overstaying their welcome on policies” and the hardest thing for policy makers is picking turning points, he said in the interview at a Credit Suisse Group AG investment conference. “There’s some risk that you lock in this policy for too long a period.” Bullard cited a protracted fight with inflation by Paul Volcker, Fed chairman from 1979 to 1987.

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22-Mar (Bloomberg) — U.S. student-loan debt reached the $1 trillion mark, as young borrowers struggle to keep up with soaring tuition costs, according to the initial findings of a government study.

The figure, which is higher than the country’s credit-card debt, was probably reached “several months ago,” Rohit Chopra of the Consumer Financial Protection Bureau, said in a posting yesterday, excerpted from a speech he made at the Consumer Bankers Association meeting in Austin, Texas.

…The New York Fed also said this month about 10 percent of the outstanding student loan balance was delinquent in the third quarter.

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PG View: More current data suggest the delinquency rate on student loans is now over 20%.