19-Apr (USAGOLD) — Gold has been rather choppy again today, initially losing ground as the safe-haven appeal was dulled by decent demand at both the French and Spanish bond auctions. While yields in France remained fairly steady, Spanish refinancing costs rose amid ongoing worries about the countries ability to get its fiscal house in order in the face of mounting growth risks.

It would also seem that much of the demand for Spanish bonds was coming from Spanish commercial banks, whose source of funds is probably the ECB LTROs. So the tottery Spanish banks are attempting to prop up the wobbly Spanish government and visa versa; two drunks holding each other up.

Bond giant PIMCO tweeted the following this morning:

Definition of a Shill: Spanish banks buying Spanish bonds. Come and get ‘em!

The yellow metal then rebounded smartly early in the New York session on resurgent rumors that France is on the verge of a sovereign downgrade, with a secondary rumor that the Netherlands was going to be placed on credit watch negative. French officials were quick to play this down, saying they have not been advised of any pending ratings actions and gold retreated back into the range.

While US initial jobless claims fell by 2,000 last week, the 386,000 claims were above market expectations for a ninth consecutive week. There was also a sizable upward revision to the previous week. I can’t even remember the last time there wasn’t an upward revision to a previous week; higher adjustments are simply expected these days. If the employment picture in the US continues to deteriorate, QE3 talk is likely to return with a vengeance, lifting gold in the process.

While US LEI for March came in a tick higher than expected at +0.3%, existing home sales and the Philly Fed index were negative misses in March. Persistent doubts about the sustainability of the US economic recovery provides additional fodder for the ‘will they, or won’t they?’ QE3 debate.

• US Philly Fed index fell to 8.5 in Apr, below market expectations of 12.0, vs 12.5 in Mar.
• US existing home sales -2.6% to 4.48M in Mar, below market expectations of 4.62M, vs positive revised 4.60M in Feb.
• US leading indicators +0.3% in Mar, above expectations of +0.2% vs +0.7% in Feb.
• US initial jobless claims -2k to 386k for the week ended 14-Apr, above expectations of 370k, vs upward revised 388k in the previous week.
• Italy industrial orders (sa) -2.5% m/m in Feb, vs negative revised -7.7% m/m in Jan; -13.2% y/y, vs -5.6% y/y in Jan.
• Italy industrial sales (sa) +2.3% m/m in Feb, vs -4.9% m/m in Jan; -1.5% y/y, vs -4.4% y/y in Jan.
• Eurozone consumer confidence – Flash fell to -19.8 in Apr, below expectations of -19.2, vs -19.1 in Mar.
• Hong Kong unemployment rate (sa) steady at 3.4% in Mar.

19-April (Reuters) — France and Spain sold all the bonds they wanted at auction on Thursday, though for Spain the cost was rising yields, indicating growing concerns the government will not be able to tame its deficit.

After a brief respite fuelled by a trillion euros of cash the European Central Bank (ECB) lent Europe’s banks in December and February, markets are becoming nervous again about euro zone debt loads, with fears that Spain might follow Greece, Ireland and Portugal in needing a bailout from international lenders.

That has put pressure on bond yields in the region, notably for Spain and Italy.

The Spanish treasury said it sold 2.5 billion euros ($3.3 billion) of two bonds, taking its issuance to half its gross target for the year.

It received bids for 3.3 times the offer on the shorter of the two bonds, and 2.4 times the longer, both up on previous auctions, suggesting Spanish banks were making the most of the ECB’s bounty.

[source]

PG View: Bond giant PIMCO tweeted the following this morning: Definition of a Shill: Spanish banks buying Spanish bonds. Come and get ‘em!

Highlights: First off, there’s the fundamental backdrop that the world is full of accommodating central banks right now, least of which is our own Fed. As Schatz says, “the ECB (European Central Bank) is just getting started.”

Add in super low interest rates and just enough inflation and we find ourselves facing so-called ”negative real rates of returns” and you’ve got an environment where something like gold, that protects purchasing power, should do well.

There’s also a timing and technical component to Schatz’s bullish call on bullion. As much as he thinks it would be ”nice” to see gold bottom out around $1500, he’s counting on a sharp snap-back to the previous high of $1900, that will ultimately break through psychological resistance of $2000 by the end of this year or early 2013.

“Once we exceed the old highs in the $1900s, we certainly go to $2000 and that sets the stage for the next run” he says, pondering the next high-water mark, “Is it $2200? $2300?”

“I don’t think the secular bull market in gold is over,” Schatz concludes. “I think you have years left in it.”

18-Apr (MarketWatch) — Gold declined Tuesday, tracking losses in the broader market on disappointment with recent U.S. earnings and as the dollar traded higher than most of its currency rivals, pressuring the metal.

Lack of physical demand for gold, particularly in India, and dashed hopes of more quantitative easing in the U.K. also conspired to keep prices lower.

…Gold lately has tracked U.S. equities and other commodities such as oil, as the dollar and U.S. bonds have been the only asset classes able to attract significant safe-haven flows.

[source]

PG View: Despite the recent correlation between gold and equities, take note of of the WGC’s comment (previous post) that the long-term correlation remains “statistically insignificant”.

18-Apr (WGC) — This brief commentary summarises gold’s price performance in various currencies, its volatility statistics and correlation to other assets in the quarter. It provides context to the investment statistics files published at the end of each quarter.

The primary macroeconomic events that shaped Q1 2012 for gold were broad-based US economic data strength, China slowdown concerns, ECB (European Central Bank) bank loans and future European bailout potential. In an eventful quarter for the global economy that saw increased volatility in capital markets, gold finished the quarter materially higher despite a number of headwinds.

The key themes for gold during Q1 2012 were:

Rising price in all major currencies with yen investors benefiting most: Gold prices climbed 8.6% QoQ in US$/oz on the London PM fix, despite a number of headwinds. Though the quarterly return was almost twice the ten-year average of 4.5%, similar gains in gold were seen across all major currencies with yen investors seeing a gain of 16.1% in local currency terms.

Positive volatility for gold in stark contrast to negative volatility for commodities: While gold’s price volatility was elevated, it continued to exhibit a positive (upside) skew. Gold’s annualised volatility measured 20.4% during Q1, registering 21.8% on the upside and only 16.4% on the downside.

Long-term correlation of gold to equities remains statistically insignificant: Despite higher than average short-term correlations to equities and other risk assets during the quarter, gold’s performance remains independent of risk asset performance. Regression analysis shows that gold may, at times, move in the same direction as equities, but these moves are almost always related to other macro factors, such as, gold’s negative correlation to the US dollar.

[source]

17-Apr (BusinessWeek) — India’s central bank cut its key interest rate by a bigger-than-expected half percentage point Tuesday, the first cut in three years as it tries to shore up flagging growth even as inflation remains high.

The Reserve Bank of India cut its short term lending rate — the repo rate — to 8.0 percent from 8.5 percent. Many economists had expected a quarter point cut.

The bank said it decided to cut the rate because economic growth has slowed to below what it believes is its long-term trend rate, which in turn is contributing to a moderation in core inflation.

[source]

18-Apr (USAGOLD) — Gold is back under pressure within the recent range, weighed by a firmer dollar. The euro is lower amid nervousness surrounding tomorrow’s €1.5-€2.5 bln Spanish bond auction. Additional weight is being applied to the euro by a stronger pound, which got a boost when the BoE minutes from the April MPC meeting revealed arch-dove Adam Posen dropped his call for additional asset purchases, leaving just David Miles in ‘more-QE’ camp.

As we noted yesterday, there has been a significant retreat from periphery bond markets over the last couple years. While more than €1 trillion in 3-year financing operations calmed the bond market briefly, central bank data reveals that large funds took advantage of that relief to unload more PIIGS debt. With Spain on the front burner of a resurgent European debt crisis, the aforementioned nervousness would seem to be well-founded.

As worries that Spain will need to tap the eurozone bailout facility have mounted in recent weeks. While not directed specifically as Spain, the IMF warned yesterday in its World Economic Outlook about the implications of a disorderly default:

The potential consequences of a disorderly default and exit by a euro area member are unpredictable and thus not possible to map into a specific scenario. If such an event occurs, it is possible that other euro area economies perceived to have similar risk characteristics would come under severe pressure as well, with a full-blown panic in financial markets and depositor flight from several banking systems.

There are in fact still several candidates for disorderly defaults within the EU, despite some rather extraordinary measures on the part of the troika to hold it all together. The IMF’s recommendations to prevent an unraveling of the eurozone is that the ECB ease further and keep the liquidity spigots wide open. The ECB — and particularly the German contingent within the central bank — on the other hand has been quite adamant since LTRO2 that they’ve done enough and that the fate of the eurozone lies in the hands of the various governments to enact fiscal measures to pull their respective countries further back from the brink.

However, pressing further austerity within the periphery, when the euro block is probably already back in recession is a task that most politicians are reluctant to take on. The belief — much like here in the US — is the central bank will step back up if lawmakers fail to deliver additional fiscal reforms. I think it’s safe to assume that such a failure — again both in Europe and the US — is all-but assured. Our Fed has already acknowledged that further accommodations on their part are “data dependent”. There is a widely held belief that the same is true for the ECB, although they are loathe to admit it at this point as it would likely be viewed as a signal for governmental policymakers to stand down and not make any hard choices.

• US MBA mortgage market index +6.9%; purchases -11.2%, refis +13.5%.
• Riksbank holds steady on repo rate at 1.50%, in-line withe expectations.
• Eurozone current account (sa) FEB -€1.3 bln in Feb’, vs negative revised €3.7 bln in Jan; nsa -€5.9 bln, vs -€10.1 bln.
• UK claimant count change +3.6k in Mar, below expectations of +7.0k, vs negative revised +4.5k in Feb; ILO 3mo unemployment rate ticks lower to 8.3%.
• Japan industrial production – revised (sa) -1.2% in Feb, vs 1.9% previously.
• Japan consumer confidence index (sa) improves to 40.3 in Mar, vs positive revised 39.9 in Feb.
• RBI cuts repo rate 50bp to 8.0%, vs market expectations for a 25bp move.

17-Apr —The euro zone is risking a “prolonged period of deflation” if it doesn’t do more to address the vicious circles that its debt crisis is creating, the International Monetary Fund said Tuesday.
Earlier

In two special chapters in the new edition of its World Economic Outlook, the IMF urged the European Central Bank to cut its main policy rate and maintain its range of nonstandard measures to support the banking sector, and told the region’s governments that they need to accept more direct responsibility for each other’s risks, and for the risks faced by their respective banking systems.

“It is…critical to break the adverse feedback loops between sub-par growth, deteriorating fiscal positions, increasing bank recapitalization needs and deleveraging, which raise the risk of a prolonged period of deflation,” the IMF wrote.

It advocated direct investment in banks by the euro-zone’s rescue vehicles, as well as regionwide mechanisms for deposit insurance and bank resolution.

[source]

PG View: Apparently the IMF is not so keen on the “we’ve done enough” tone recently taken by the ECB, advocating instead that they cut rates and keep the liquidity spigot wide open!

16-Apr (Financial Times) — International investors are withdrawing huge sums of money from the region’s sovereign bond markets, a phenomenon that may lead to the bailout of Spain and a worsening of the eurozone crisis.

Bankers estimate that €100bn has been taken out of the French, Italian and Spanish government debt markets in the past two years as many investors have lost faith in the single currency zone.

There are fears that these investors, among them pension funds and other long-term holders of bonds said to have been scaling back their exposure, could stay clear for years to come as tough austerity measures enacted by the euro area’s indebted governments hit growth, making it even harder to meet debt commitments without outside help.

…Bankers who see government bond flows say this trend of dwindling international investors has continued this year, with many big funds actually using the rally at the start of 2012 following the ECB’s announcement of cheap three-year loans to sell sovereign peripheral debt.

[source]

16-Apr (The Wall Street Journal) — Matthew Bishop, New York bureau chief for The Economist and author of ‘In Gold We Trust,’ stops by Mean Street to discuss gold and the future of money.

Bishop believes governments are in a position where they are going to debase ‘paper dollars’ and ‘paper euros’ in a “big way”, which will push gold higher.

Video streaming by Ustream

PG View: At the end of the interview Bishop predicts that gold will be higher than present levels at the end of this year and at the end of 5-years.

17-Apr (Dow Jones) — There is no immediate need for the European Central Bank to provide further long-term refinancing operations, said ECB Governing Council Member Ewald Nowotny Monday evening.

“We can never exclude anything, but I do not see any immediate need for further action in this sense,” said Nowotny.

The ECB’s liquidity provision had been very important, said Nowotny, as no single country could have provided liquidity on such a large scale. While the ECB’s liquidity provisions have different effects on different countries, Nowotny said it is the ECB’s job to deal with the euro zone region as a whole.

[source]

PG View: The IMF seems to think otherwise… (see previous story)

17-Apr (Financial Times) — The International Monetary Fund has urged the eurozone to step up efforts to recapitalise its banks, using the bloc’s rescue fund to ward off another financial crisis.

The fund said the eurozone needed to do more to boost growth, warning that the region’s economy is poised to shrink this year.

…The IMF praised the European Central Bank’s three-year longer-term refinancing operation (LTRO), and credited officials for strengthening the region’s firewall. However, it warned that “there can be no pause”. The warning follows the re-emergence of tensions in eurozone financial markets, with yields on Spanish 10-year government bonds edging above 6 per cent on Monday, after a period of relative calm following the ECB’s offer of cheap three-year loans.

[source]

PG View: Because more than €1 trillion in liquidity added via two LTROs just isn’t enough?

17-Apr (Bloomberg) — Builders began work on fewer homes than forecast in March, signaling a sustained industry recovery will take time to get underway.

Housing starts dropped 5.8 percent to a 654,000 annual rate, less than the lowest estimate of economists surveyed by Bloomberg News and the least since October, Commerce Department figures showed today in Washington. The slump was led by the volatile multifamily category, which at the same time showed a jump in permits, a proxy for future construction.

While warmer weather may have spurred home construction at the beginning of 2012, a competing supply of cheap existing properties may be steering potential buyers away from purchasing a new home. That means home construction may not help boost the economy in 2012.

[source]

16-Apr (Reuters) — Argentina’s planned takeover of oil and gas company YPF is a desperation move aimed at boosting investment in oil and gas production while avoiding policy shifts that might have otherwise made the sector more attractive to private capital.

The country’s oil and gas reserves have tumbled in recent years as heavy-handed regulation has made the sector unattractive to many private investors.

The partial renationalization is effectively an effort to maintain those policies, including bans on exports of hydrocarbons and price controls that keep both oil and gas prices below international levels.

[source]

PG View: Nationalization of private companies is always an ominous harbinger. Rumors of Spanish employees being kicked out of company headquarters. This along with surging inflation and CDS premiums suggest the wheels may be coming off in Argentina once again…

16-Apr (USAGOLD) — Gold starts the week on defensive footing, after a disappointing close on Friday. Risk aversion remains the overriding theme as concerns about Spain continue to mount.

Yields on Spanish 10-year bonds have pushed convincingly back above 6% today after probing above this level late last week. The ECB revealed today that they didn’t settle any SMP bond purchases last week, despite upward pressure on rates. Perhaps the ECB has decided to make an example of Spain and Prime Minister Mariano Rajoy, who famously rejected an agreed to deficit reduction target without first consulting with the ECB.

While I think the ECB would like Rajoy to pay a political price for his defiance, I don’t think they want to drive Spain to the point of tapping the EFSF/ESM for fear of triggering contagion. They are probably simply looking to send a message to the rest of the periphery: You shirk your fiscal responsibilities at your own peril.

ECB policymakers have been quite adamant recently, stated that the central bank has done enough and now the responsibilities lie with the individual governments. The most recent comments coming from the ECB’s Joerg Asmussen (Germany) who told The Wall Street Journal over the weekend, “The ball is with governments, they have to act.” The ECB can now stand firm and not offer any additional bond buying or liquidity measures, or they can cave once again because governments are loathe to make additional cuts that negatively impact growth and employment.

The former would likely lead to Spain requiring a bailout and certainly igniting contagion fears, if not actual contagion. Or, perhaps worse yet, force Spain out of the EMU. The latter would be just another kick of the can, buying — Spain in this case — a little more time, but doing nothing to resolve the underlying fiscal issues. It would also assuredly further anger the Germans, eroding market confidence in the ECB itself. The central bank is playing a dangerous game here.

This is the same thing we said about Greece. And while the Greeks are undoubtedly thankful that Spain has pushed them from the headlines, Greece remains a train-wreck as austerity measures continue to undermine an economy on life-support courtesy of their second bailout.

The euro briefly probed below 1.3000 in overseas trading, its lowest level in 9-weeks. The corresponding rise in the dollar is keeping the yellow metal from mounting a rebound at this point. However, as the European debt crisis returns to center stage with the deck chairs only slightly reshuffled, the safe-haven properties of gold may well prove attractive once again.

• US TIC net capital inflows +$107.7 bln in Feb, vs +$3.1 bln in Jan, which was revised down sharply from $18.8 bln originally.
• US NAHB homebuilder sentiment fell to 25 in Apr, vs 28 in Mar.
• US business inventories +0.6% in Feb, above expectations of +0.5%, vs upward revised +0.8% in Jan; sales +0.7%.
• US retail sales +0.8% in Mar, above market expectations of +0.5%, vs negative revised +1.0% in Feb; ex-auto +0.8% on expectations of +0.6%.
• NY Empire State index fell to 6.56 in Apr, well below market expectations of 18.0, vs 20.2 in Mar.
• Eurozone trade balance (sa) €3.7 bln in Feb, vs negative revised €5.3 bln in Jan; (nsa) €2.8 bln.
• Turkey unemployment rate (sa) rises to 10.2% in Mar, vs 9.8% in Feb.
• Italy trade balance (total) -€1.1 bln in Feb, vs -€4.4 bln in Jan.
• India monthly WPI +6.9% y/y in Mar, vs +7.0% y/y in Feb.

by Wolfgang Münchau
15-Apr (Financial Times) — Are the markets panicking because Spain may fail to hit its deficit targets, or are they panicking at the thought that Spain may succeed? That, to me at least, is the key question facing eurozone policy makers. The ultimate outcome of the eurozone crisis will depend to a large extent on how that question is answered.

News coverage seems to suggest that the markets are panicking about the deficits themselves. I think this is wrong. The investors I know are worried that austerity may destroy the Spanish economy, and that it will drive Spain either out of the euro or into the arms of the European Stability Mechanism.

…The Spanish economist Luis Garicano made a calculation, as reported in El País, in which the reduction in the deficit from 8.5 per cent of GDP to 5.3 per cent would require not a €32bn deficit reduction programme (which is what a correction of 3.2 per cent would nominally imply for a country with a GDP of roughly €1tn), but one of between €53bn and €64bn. So to achieve a fiscal correction of 3.2 per cent, you must plan for one almost twice as large.

Spain’s effort at deficit reduction is not just bad economics, it is physically impossible, so something else will have to give. Either Spain will miss the target, or the Spanish government will have to fire so many nurses and teachers that the result will be a political insurrection.

[source]

Britain’s exchange rate is “crippling” the economic recovery, and devaluing the pound by as much as 25 percent could push growth back to an annual 4 percent, research group Civitas said.

The pound’s “significant” drop since 2008 hasn’t been enough to make U.K. exports competitive on world markets, and a future decline in the currency is inevitable, according to John Mills, the author of the Civitas report published in London today. A devaluation of as much as 15 percent would balance the U.K.’s trade deficit, he said.

[source]

PG View: Currency war saber rattling…

16-Apr (Washington Post) — Spain’s cost of borrowing on the international debt markets rose sharply again Monday, increasing concern that the country may become the latest member of the eurozone to seek a financial bailout.

The yield — the interest rate Spain would have to pay to raise money on the debt markets — on the country’s 10-year government bonds jumped to 6.10 percent on the secondary market, according to financial data provider FactSet. It had closed at 5.93 percent Friday after a week of persistent market tension.

Monday’s yield is the highest since the country’s new conservative government under Prime Minister Mariano Rajoy took office in December.

[source]