By Matthew Lynn
28-Mar (MarketWatch) — Has the great bull run in gold run its course?

On the surface it looks as if it might have. After running up close to $2,000 an ounce during the market panic of last autumn, it has slipped below $1,700. And it shows little sign of reclaiming its highs.

But here’s one reason why it could have a lot further to go.

The big, developed world central banks will start buying again. And if they do, it would put real rocket fuel into the price of the precious metal.

…foreign exchange reserves are critical if you face a financial crisis. If the banking system needs to be propped up, then you need some assets to play with. Of course, the central bank can always print some money. But in a crisis, the markets may demand something more solid – and that means having reserves.

…[Reserves] give you the ability to intervene in the currency markets…But you can’t manipulate the markets without anything to sell, and that means holding reserves.

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29-Mar (USAGOLD) — Gold has slipped to a new low for the week, weighed by a firmer dollar, softer oil prices and further evidence that the Chinese government is worried about an economic slowdown. More than 61.8% of the recent rebound has been retraced.

The Chinese government raised its long-term foreign-debt quota amid rising concerns about the pace of foreign capital outflows. Speculative capital is retreating from China on heightened growth concerns. A slow down in China could have significant global implications, but the gold market is particularly worried about the economy contracting and sapping the countries voracious appetite for the yellow metal.

Subtle policy changes in China such as looser reserve requirements and boosting the amount of borrowed foreign money allowed into the country are reflective of the Chinese governments efforts to orchestrate a soft landing. However, I would surmise that more overt and expansive policy accommodations would be forthcoming if the threat of a hard landing becomes more pronounced. Such measures would actually be positive for gold.

US Q4 GDP was confirmed at 3.0%, in-line with expectations, but some analysts were expecting an upside surprise. They were disappointed.

While initial jobless claims fell in the week ended 25-Mar, they fell from a big upward revised 364k in the previous week, vs 348k initially. In other words, while claims fell 5k last week, the previous week was revised +16k. Not exactly a positive turn of events.

• US initial jobless claims -5k to 359k for the week ended 25-Mar, above expectations of 350k, vs upward revised 364k (frm 348k) in prev week.
• US Q4 final GDP confirmed at 3.0%, in-line with expectations.
• Canada industrial product prices +0.2% in Feb, below expectations of +0.4%; RMPI -0.5%.
• UK Nationwide House Prices (sa) -1.0% m/m in Mar, vs negative revised +0.4% in Feb; -0.9% y/y (nsa), vs +0.9% y/y in Feb.
• Germany unemployment change (sa) -18k in Mar, well below market expectations of -10k, vs unch in Feb; rate falls to 6.7%.
• Eurozone economic confidence ticks lower to 94.4 in Mar, below expectations of 94.6, vs upward revised 94.5 in Feb.
• Eurozone consumer confidence edged lower in Mar to -19.1, industrial confidence erodes to -7.2, services better at -0.3.
• South Korea current account (nsa) $4.10 bln in Feb, vs downward revised $1.59 bln in Jan.
• Japan total retail sales +3.5% y/y in Feb, vs +1.9% in Jan; large retailers +0.2%.
• Japan trade balance 1st 10 (nsa) ¥53.8 bln in Mar, vs ¥7.6 bln in Feb.

29-Mar (The Wall Street Journal) — China will allow foreign banks this year to bring in a total of $24 billion in foreign borrowed funds—a sharp increase from last year’s limit, bankers say—in an apparent effort to usher in more foreign investment as a slowing economy prompts capital outflows.

Inbound foreign direct investment declined for the fourth consecutive month in February, and a recent bout of yuan-selling indicates accelerating capital flight amid concerns about China’s slowing economic growth.

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By John B. Taylor
29-Mar (The Wall Street Journal) — America has now had nearly a century of decision-making experience under the Federal Reserve Act, first passed in 1913. Thanks to careful empirical research by Milton Friedman, Anna Schwartz and Allan Meltzer, we have plenty of evidence that rules-based monetary policies work and unpredictable discretionary policies don’t. Now is the time to act on that evidence.

…It is difficult to overstate the extraordinary nature of the recent interventions, even if you ignore actions during the 2008 panic, including the Bear Stearns and AIG bailouts, and consider only the subsequent two rounds of “quantitative easing” (QE1 and QE2)—the large-scale purchases of mortgage-backed securities and longer-term Treasurys.

The Fed’s discretion is now virtually unlimited.

…Before the 2008 panic, reserve balances were about $10 billion. By the end of 2011 they were about $1,600 billion.

…This large expansion of bank money creates risks. If it is not undone, then the bank money will eventually pour out into the economy, causing inflation.

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28-Mar (USAGOLD) — Gold is modestly defensive after regaining the 200-day moving average earlier in the week, but failing to regain $1700. However, momentum on this downtick is lackluster and the 1669.45/00 zone now offering support.

The dollar seems to have found a little support as well, curtailing the greenbacks’s recent slide. Yet the dovish tenor of Fed chairman Bernanke this week, if nothing else is likely to limit the dollar’s upside. Of course a weaker dollar is going to net the Fed the inflation that it longs for. Unfortunately, that is already resulting in ever-higher energy prices. The AAA’s daily survey now shows the average price of a gallon of gasoline in the US reached $3.911 and is on track to exceed $4.00 well before cyclical pressures associated with the peak summer driving season (and the need for multiple summer blends) kick in.

Higher inflation expectations weighed on the March consumer confidence number released yesterday and price risks in general seem to be creeping back into the consciousness of our client base. If inflation does indeed take root, gold should shine as the classic hedge against a debased currency and the higher prices for goods and services that result.

• US durable goods orders +2.2% in Feb, below market expectations of +2.7%, vs -3.6% in Jan.
• France Q4 GDP – Final confirmed at +0.2%; y/y pace revised lower to 1.3%.
• Eurozone M3 (sa) growth accelerated to +2.8% y/y in Feb, above market expectations of +2.3%, vs +2.5% in Jan.
• Italy business confidence rose to 92.1 in Mar, vs upward revised 91.7 in Feb.
• UK Q4 GDP (3rd Release) revised lower to -0.3% q/q, vs -0.2% previously; y/y pace revised lower to 0.5% from 0.7%.
• UK current account -£8.45 bln in Q4, near expectations, vs -£10.51 bln in Q3.
• Germany CPI (preliminary) moderates to 0.3% m/m in Mar, below expectations of 0.4%, vs 0.7% in Feb; 2.1% y/y, vs 2.3% in Feb.
• Thailand manufacturing production -3.4% y/y in Feb, vs -15.03 y/y in Jan.

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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