by James G. Rickards
23-Apr (USNews) — The International Monetary Fund completed their spring meetings last weekend amid communiqués and good feelings about what had been accomplished. There was optimism about improvement in the global economy albeit tempered by warnings that risks remained. Christine Lagarde, the organization’s managing director, was upbeat about new financing pledges to help build an IMF firewall to prevent contagion from countries in financial distress.

Yet, behind this facade of goodwill were stresses between the rising economic powers, notably Brazil, China, and India, and developed economies in Europe. In the middle of these stresses is the United States, which is the only country in the world with veto power over IMF decisions.

…This highlights the most interesting but least discussed aspect of the international monetary system—the hidden role of gold. The organization itself has the third largest gold hoard in the world, over 2,800 tons, just behind the United States and Germany.

…Paper currencies issued by Brazil and China that are backed by scant gold reserves are just paper. But currencies such as the dollar and the euro that are potentially backed by huge gold reserves are something more.

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PG View: While central banks are always quick to dismiss the importance of gold; the truth is, that he with the most gold gets to make the rules.

23-Apr (The Wall Street Journal) — Dutch Prime Minister Mark Rutte and his cabinet resigned Monday after his ruling coalition lost support of a populist party on disagreements over new measures to shrink the budget.

Queen Beatrix of the Netherlands will take the tendered resignations into consideration and has asked the cabinet to continue to work “in the interest of the kingdom.”

Mr. Rutte is scheduled to address the Dutch Parliament on Tuesday.

The widely expected step, which marks an end to the center-right minority government after just one and a half years, comes after weeks-long talks over measures to slash the Dutch government’s budget deficit.

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PG View: Eurozone debt crisis claims yet another government…

23-Apr(MNI) – ECB Governing Council member Jens Weidmann on Monday suggested the central bank would tighten monetary policy once inflation risks in the Eurozone increase, even if this could hurt peripheral countries.

“After all, monetary policy must not lose sight of its primary objective: to maintain price stability in the euro area as a whole,” the president of the Bundesbank said in a speech to be delivered at the Economic Club of New York.

“Let us say that monetary policy becomes too expansionary for Germany, for instance. If this happens, Germany has to deal with this using other, national instruments,” the central banker elaborated.

“But by the same token, we could say this: even if we are concerned about the impact on the peripheral countries, monetary policy-makers must do what is necessary once upside risks for euro area inflation increase,” he stressed.

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Vice Chairman Janet Yellen says the end of the Federal Reserve’s so-called Operation Twist won’t amount to a tightening of monetary policy. Whether investors agree may help determine the central bank’s next steps.

The Fed’s program to swap $400 billion of short-term securities in its portfolio for longer-term debt is scheduled to be completed in June, and Yellen, 65, doesn’t see the need for additional stimulus purely to blunt the impact. That’s because the measure eases policy by expanding the Fed’s balance sheet, not through the flow of purchases, she said April 11.

…Still, [NY Fed's William Dudley] and Yellen endorsed the central bank’s plan to keep borrowing costs low through late 2014, again giving no sign the Fed is ready to withdraw any of its stimulus. Yellen, who has spent most of her career teaching economics and researching labor markets, said she considers “a highly accommodative policy stance to be appropriate,” given unemployment will decline “only gradually.”

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22-Apr (Forbes) — Beijing is planning to avoid U.S. financial sanctions on Iran by paying for oil with gold. China’s imports of the metal are already large, and you can guess what additional purchases are going to do to prices.

…Tehran, out of apparent desperation, in February said it would also accept local currencies, thereby avoiding the U.S. financial system. As a result, the Indians announced in January that they would not request a waiver from the Obama administration, and they began opening rupee accounts to pay for as much as 45% of their oil purchases with their currency. In 2011, India exported only $2.7 billion to Iran while buying $9.5 billion in oil. Similarly, the Chinese, smelling blood in the water, will surely press the Iranians to accept the non-convertible renminbi.

…But nothing shines like gold. And there is one other reason to be bullish on the yellow metal. “This isn’t the end of the road,” noted an unnamed senior administration official to the Wall Street Journal days after the enactment of the NDAA. “There are many other sanctions we can put in place and that our multilateral partners around the world can put in place and will be.” As Washington tightens financial measures against Iran, the mullahs will have less access to hard currency and therefore more need for gold.

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PG View: This story is important on a couple of levels; not only is there the expectation of heightened gold demand, but the likelihood of oil deals being transacted in currencies other than dollars, further erodes the greenback’s standing as the global reserve currency.

23-Apr (Bloomberg) — Czech Prime Minister Petr Necas is seeking supporters to avoid snap elections and push through deficit cuts after the breakup of his coalition.

The three ruling parties agreed yesterday to dissolve the coalition as of April 27, while pledging to back bills in parliament that the Cabinet approved through April 11. Necas gave Deputy Premier Karolina Peake, who left the Public Affairs party last week, until today to secure the support of at least 10 lawmakers who defected with her to guarantee a majority for the Cabinet or he will initiate snap elections in June.

“While we do expect Peake to generate sufficient support for a new coalition-supporting faction and thus avoid elections in June, failure to do so could negatively impact the koruna,” Royal Bank of Scotland Group Plc analysts David Petitcolin and Imran Zaheer Ahmad said in an April 20 report.

Governments across Europe have lost power in the past two years as German Chancellor Angela Merkel pushes for austerity to prevent the euro area from breaking up.

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PG View: The koruna is already at a 2-month low.

23-Apr (USAGOLD) — European Central Bank officials led by President Mario Draghi resisted calls from the International Monetary Fund and U.S. Treasury to do more to stem the debt crisis roiling the euro-area economy.

As talks of global finance chiefs ended yesterday in Washington, euro-area central bankers from Draghi to Bundesbank President Jens Weidmann argued they have done enough by cutting interest rates and issuing more long-term bank loans.

“None of the advice that the IMF is offering has been discussed by the Governing Council, in recent times at least,” Draghi said on April 20 while attending IMF meetings in Washington. Weidmann said in an interview that “the problems in Europe can’t be solved by monetary policy measures.”

…Weidmann of the Bundesbank indicated the ECB may welcome higher borrowing costs as a way of forcing governments not to backpedal.

“Higher interest rates are also a spur toward reforms,” he said.

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22-Apr (Reuters) — The Netherlands, a core euro zone member, was drawn into Europe’s debt crisis at the weekend when the government failed to agree on budget cuts, making elections almost unavoidable and casting doubt on its support for future euro zone measures.

Prime Minister Mark Rutte, whose centre-right coalition has been in power since October 2010, said on Saturday that crucial talks on budget cuts had collapsed after his ally Geert Wilders refused to do a deal, and that new elections were inevitable.

In the short term, the government must seek support for budget cuts from the opposition parties.

But uncertainty over the makeup of a new government, and waning voter support for bailouts and austerity measures, raised questions over Dutch backing for a fiscal responsibility pact seen as crucial to helping Europe cope with its debt crisis.

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23-Apr (Financial Times) — Markets reacted nervously on Monday to the socialists’ first-round victory in France’s presidential election, as the eurozone crisis claimed another victim on Monday with the collapse of the Dutch government.

Analysis of François Hollande’s early lead – and the strategy he and Nicolas Sarkozy might adopt towards the far-right National Front’s unexpectedly large support – came amid a flood of statistical data underlining the tenacity of the eurozone’s problems.

The European Union’s statistics office said that although the 17 member states of the eurozone had reduced their deficits from 6.2 per cent of gross domestic product in 2010 to 4.1 per cent in 2011, overall debt still rose 1.9 percentage points to 87.2 per cent of GDP – the highest since the euro was created in 1999.

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Spain on the Precipice

20-Apr (USAGOLD) — Gold is narrowly confined, despite a softer dollar tone. The euro was boosted by a German Ifo beat and the likely misplaced hope that the latest G20 meeting, commencing today, will provide some sort of global solution to the resurgent eurozone debt crisis.

Along similar lines, the IMF seems confident it will receive a $400 bln boost to its firepower, based on commitments from more than a dozen countries. The US, already the biggest contributor to the IMF, remains reluctant to pledge more.

However, it’s now Spain that is on the front-burner of the European sovereign debt crisis, the fifth largest economy on the Continent. Spain is clearly too big to fail, yet perhaps just as clearly, it’s too big to save. Despite all the extraordinary measures already employed to stabilize Europe, Spain appears on the brink of implosion.

This series of MoneyGame charts from earlier in the week pretty clearly illustrate the severity of the problems in Spain:

The percentage of bad loans at Spanish banks continue to rise. Note that while the pace slowed during last year’s tepid economic recovery, the trend remained disturbingly positive.

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Exacerbating problems for the Spanish banks is the good old fashion bank run reflected in this chart. Depositors are fleeing in droves, forcing the banks to borrow from the Eurosystem to maintain solvency. It is becoming increasingly clear, that even in the wake of the massive ECB liquidity operations, Spanish banks may well need to be bailed out.

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Spain’s IBEX35 stock index is down nearly 20% this year alone and even with today’s rebound, off about 56% since the 15,945.70 peak from late-2007. Ouch.

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So what’s the G20 to do? Well the first thing they’re going to do apparently is to echo the sentiments of the ECB and tell the European politicians that the responsibility for the debt crisis lies with them. Not exactly the initial confidence builder the market was hoping for, and Spanish and Italian bonds in particular are back under pressure.

With Spain’s economy already getting crushed by austerity, unemployment on the rise, the banks under severe duress and its stock market plummeting, I’m wondering what exactly the G20 and the ECB see as the options available to the Spanish government. Perhaps this is just further retribution for Prime Minister Mariano Rajoy’s rejection of the agreed to deficit reduction target. Maybe the not so subtle message here is get back on the more severe austerity track, or we’ll let you wither on the vine.

However, as we discussed in commentary earlier in the week, this is a dangerous game to be playing, as austerity measures have a tendency to insight civil unrest and the downfall of governments. On the other hand, Spain could conceivably opt to exit the EMU, go back on the peseta and repudiate all or a portion of its euro denominated debt.

Such a decision would unquestionably come with its own form of pain, and not necessarily just for Spain. The IMF warned this week in its World Economic Outlook that a “disorderly default and exit by a euro area member” could lead to “a full-blown panic in financial markets“.

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.

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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.

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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.

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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.

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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.

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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.

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