Friday, 23 August 2013

Secretary Lew Calls On Congress To Avoid Self-Inflicted Economic Wounds By Honoring Previous Spending Commitments

Treasury Secretary Jacob J. Lew today urged Congress again to honor its previous spending commitments by raising the statutory debt limit. In remarks to the Commonwealth Club of California, Secretary Lew discussed the need for Congress to act as soon as possible to avoid jeopardizing the full faith and credit of the United States and to avoid the economically harmful consequences of a U.S. default or threat of default. He also cautioned that tax revenues and expenditures are inherently unpredictable, making it impossible for Treasury to predict with precision when the government will exhaust extraordinary measures.

“It is important to note that the debt limit has nothing to do with new spending. It has to do with spending that Congress has already approved and bills that have already been incurred. Failing to raise the debt limit would not make these bills go away. It would, though, have disastrous effects for our nation,” Secretary Lew said in prepared remarks. “We cannot afford for Congress to wait until some unknowable last minute to resolve this matter on the eve of a deadline. We cannot afford another unnecessary self-inflicted wound.”

No rush to taper

The last minutes from the Federal Open Market Committee shows that the Federal Reserve’s interest-setting body has not lost its equanimity over the market turmoil it unleashed in June, when it said it may soon slow down, or “taper”, its asset purchases. It would not hurt to be slightly more concerned.

Fed chairman Ben Bernanke and his colleagues probably did not expect bond yields and other market prices to react as strongly as they did when they sought to prepare the ground for the taper. They had reason on their side: the Fed’s policy is explicitly contingent on the state of the economy, and the central bank has given clear guidance that the taper will only take place if the economy continues to improve as forecast.

So far, that is the case, as the end of July minutes underlined. Besides, the Fed has made clear in the past that even a taper does not constitute a tightening of policy. As long as it continues to accumulate Treasuries and other securities, the Fed in effect keeps adding to the stimulus it already has in place. To taper the purchases is to slow the monetary loosening.

…The Fed should not hurry to launch the taper as soon as September; it can wait until it better understands how the economy is reacting to market developments. Given how much of monetary policy action now lies in managing expectations, the Fed should signal more clearly that it will counter any unwanted tightening caused by markets.

The Daily Market Report

Gold Remains Firm Near 9-Week Highs

Gold continues to pressure the upside, undeterred by a firmer dollar. The yellow metal retest the nine-week high from Monday at 1384.50, although this level has contained the upside thus far.

Today’s gains come on the heels of yesterday’s much anticipated release of the minutes from the July FOMC meeting. While members of the committee expressed that they were “broadly comfortable” with the taper scenario laid out by Chairman Bernanke back in June, there was no further clarification as to a likely timeline.

While the stock market and Treasuries were ‘broadly uncomfortable’ with the comfort level of the FOMC, dropping sharply intraday, gold recovered quickly from a modest drop to set new highs for the day in late trading. Today’s follow-on gains, largely on strong physical interest, offer further encouragement to bulls.

The debate over the scaling back of Fed QE will seemingly continue until the next FOMC meeting on September 17-18, which will include economic projections and a Bernanke presser. Just maybe the clarity that wasn’t provided yesterday will be revealed at that time.

Over on the other side of the pond, even BoE MPC member Martin Weale says he could “certainly envisage circumstances in which it would be sensible to undertake further asset purchases.” In other words, if the “economy needs further support,” even a hawk like Weale would be on-board for further asset purchases.

In making a generally favorable case for QE, Weale also commented on the unevenness of the recovery. “[A]nyone who thinks the future will unfold smoothly is not taking account of everything that has happened in the past five years,” he said.

That my friends is the tacit case for gold as well. Nobody truly knows what the future holds, so having a portion of your portfolio dedicated to the truest of safe-haven assets is just plain sound investment strategy. With gold still in the lower half of the 1920.84/1179.83 range, now is good time to start building — or adding to — your strategic hedges.

How the Fed could cause another 1987 crash

“I sat down this week with one of the most experienced bond market gurus I know. When I asked him for his advice, he first suggested — only half jokingly — ‘panic.’ His second bit of advice? Keep calm and carry on. His wife just bought him a large ‘Keep Calm and Carry On’ poster and had it framed. He’s going to take it into his office and hang it ‘where all the traders on our bond desk can see it.’ We are, he believes, in an era of rising interest rates, and they’ll continue to rise much further than most people realize.”

MK note: Above and beyond what the market delivers in terms of higher interest rates, let’s not forget that we are bumping up against another fiscal showdown in Congress — a confrontation that could further roil interest rates. In the last go-around (August, 2011), the end result was a Standard & Poor’s sovereign debt downgrade. Today the ten year treasury went to 2.90% — up 55% year to date. There is much to be concerned about as we head out of the summer doldrums and into the beginning of the fall investment season.

US Leading Indicators +0.6% in Jul, above expectations of +0.5%, vs unch in Jun.

US Markit PMI (prelim) rose to 53.9 in Aug, vs 53.7 in Jul.

India gripped by mood of crisis as rupee falls again

The Indian rupee fell to a new low against the dollar on Wednesday and stocks declined after a central bank promise to inject liquidity into the country’s financial markets provided only temporary relief from a deepening sense of crisis.

Bank shares and bond prices had jumped in the morning after the Reserve Bank of India’s latest intervention, but the euphoria quickly evaporated.

At one point the rupee was down over 2 per cent and hit a record low of Rs 64.55 to the dollar amid investor scepticism about the policies of the RBI and the Indian government. The Sensex stock index fell nearly 2 per cent to close at 17,905.91, the lowest in nearly a year.

More QE could be needed, says MPC ‘hawk’ Martin Weale

In an interview with The Daily Telegraph, Martin Weale, one of four external members of the committee, said he could “certainly envisage circumstances in which it would be sensible to undertake further asset purchases” on top of the Bank’s recently announced policy of “forward guidance”.

These circumstances might include further shocks from the eurozone or, with fresh turmoil in emerging markets, from the developing world. It was also “perfectly possible consumers will start paying more attention to saving again”, thereby snuffing out the recent recovery in consumption.

“As far as I am concerned, asset purchases remain a tool available to the committee if it feels the economy needs further support”, he said. “I would hope the recovery is well entrenched, but anyone who thinks the future will unfold smoothly is not taking account of everything that has happened in the past five years.”

Monday, 19 August 2013

Gold rallies on haven demand; silver up 5%

Gold futures rallied on Thursday as steep losses for U.S. stocks and a decline in the U.S. dollar lured investors into the perceived safety of the precious metal.

… “Pundits out there are touting safe haven demand, and I can’t argue with that,” said Brien Lundin, editor of Gold Newsletter. “The deteriorating situation in Egypt and the selloff in U.S. equities are undoubtedly having an effect.”

“But that effect is being exacerbated by the extreme tightness in the physical gold market,” he said. “As the recent filings have highlighted, western speculators sold their gold this spring, and it’s been shipped to China and elsewhere in Asia. The Asian markets are still buying, and if western traders want to buy gold now, they’re going to have to fight these Eastern savers for every last ounce.”

Ron Paul: Why the Economy is in Trouble

Wisdom is a deep understanding and realization of people, things, events or situations, resulting in the ability to apply perceptions, judgements and actions in keeping with this understanding. It often requires control of one’s emotional reactions (the “passions”) so that universal principles, reason and knowledge prevail to determine one’s actions. Wisdom is also the comprehension of what is true coupled with optimum judgement as to action.

Deficit Disorder Needs Prudent Attention

Is the U.S government budget deficit (a) shrinking rapidly and no longer an urgent problem or (b) a looming threat to American prosperity that Congress is neglecting?

Answer: Yes.

(a): The Treasury reported this week that the deficit for the first 10 months of the fiscal year was $607.4 billion, far smaller the $973.8 billion in the same period a year earlier. Revenues are running 14% ahead of last year and spending 3% below, the result of the tax increase that took effect in January, the spending restraint of the so-called sequester and a slowly improving economy.

 (b): Federal debt is stabilizing at a very high level, around 73% of GDP. That’s higher than any time since the end of World War II and about 30 percentage points higher (about $5 trillion) than it was before the financial crisis and recession.

Paulson and gold

Reports late yesterday and this morning that John Paulson liquidated one half his ETF holdings raise as many questions for me as they do answers. Let’s approach the subject logically:

1. We know that Paulson believes in gold as a long-term portfolio hedge.

2. We know that he was under heavy public pressure primarily from the financial press to sell his gold.

3. We know that most of his selling must have occurred in May and June (after the meltdown) because he made public statements in April that he was holding onto his gold.

4. The choice to sell post-April is uncharacteristic of a successful hedge fund manager in that the liquidation would have been into weakness — weakness that many gold advocates held suspect.

Something doesn’t add up here. One can assume from all this that Paulson either had a complete change of heart on gold ownership, or something else happened.

Indian and Chinese “strong hands” continue to boost gold demand – WGC

Gold demand in India and China is expected to account for close to 45 to 50% of the total gold market by year end, the World Gold Council says, as consumer demand for gold continues to ratchet higher.

Speaking to Mineweb on the launch of the group’s Gold Demand Trend report for the second quarter, MD for investments, Marcus Grub, explained that based on the figures for the year so far, the council has moved its range for total demand to roughly the same level – 900 – 1000 tonnes each.

Both markets are up roughly 45 to 50% for the year to date and “they are remarkably close together; they are still within about 35 tonnes of each other, which is very similar to where they were in the first half of last year (about 30 tonnes apart) in spite of being 50% larger this year.”

Grub points out that this forecast implies a new all time high total demand figure for China, comfortably higher than the previous record of 776 tonnes.

Gold Investors Seek Alpine Haven in Swiss Army Bunkers

The week after Cyprus said in March it would impose a levy on bank deposits of more than 100,000 euros ($132,000) amid Europe’s debt crisis, Rene Buchwalder’s business boomed.

“This bar is one of the best sellers,” said the former UBS AG (UBSN) banker, standing in the vault of his Swiss gold and silver trading company Pro Aurum as he reached into a stone-grey safe holding neatly stacked coins and selected a 100 gram tablet. “You can break it into individual pieces and use it as money in case the European Union goes under.”

As the euro-area went through a record-long recession, and only edged back to growth last quarter, demand for storing gold bars and coins in Swiss vaults has been rising. Even as the price of the metal has declined more than 20 percent this year, some investors see gold as less risky than other assets such as bonds, where debtors may not be able to pay, or equity in a company that may go out of business.

“High-net-worth individuals are dependent on the health of the financial system,” said Ole Hansen, head of commodity strategy as Saxo Bank A/S in Copenhagen. “If you take some of your investments out and put it in the vault, then you can reduce your exposure.”

Treasury Ran $98 Billion Deficit in July–But Debt Stayed Exactly $16,699,396,000,000

The Treasury Department’s Financial Management Service (FMS), which publishes both the federal government’s official Daily Treasury Statement and its official Monthly Treasury Statement, is reporting that in July the federal government ran a deficit of $98 billion but that the federal government’s debt remained exactly $16,699,396,000,000 for the entire month.”

Below-target inflation poses QE tapering risks for Fed

A decision by the Federal Reserve to start scaling back its asset purchases next month is heavily dependent on confidence among US central bankers that inflation will gradually pick up and move closer to 2 per cent.

But data released on Wednesday by the labour department offered no such assurance. The producer price index (PPI), which measures inflation for businesses excluding volatile food and energy costs, edged up by only 0.1 per cent in July, and has increased by a modest 1.2 per cent over the past year – well below the Fed’s target.

Fed officials have always banked on soft inflation as a temporary phenomenon that will gradually revert towards normal levels. But the longer it continues, the more concerned they might become about the dangers of disinflation – a slowdown in price rises – or even a slide towards deflation.

Berlin and Brussels credit fiscal discipline and reform for eurozone recovery

Policymakers in Brussels have trumpeted a return to growth in the eurozone as proof that a combination of fiscal discipline and economic reform is starting to bear fruit.

The eurozone emerged from an 18-month recession in the second quarter thanks to rebounding economies in Germany and France, ending the longest contraction since the euro area’s creation in 1999.

Overall, the 17 nations that make up the euro area grew by 0.3 per cent from April to June. Germany, which holds federal elections on September 22, grew by 0.7 per cent on the back of robust manfucturing output and consumer spending, while France beat expectations with 0.5 per cent growth, ending its double dip recession. Portugal emerged from a severe contraction, with growth of 1.1 per cent.

Sunday, 18 August 2013

Is This Why Gold Is Spiking?

That JPMorgan has been scrambling day after day in the past week to meet gold delivery requests directed to its vault located deep under 1 CMP is no secret, at least not to our frequent readers. This peaked on Monday when, courtesy of a color-coded Comex scheme, we showed how panicked the lateral moves between various Comex gold vaults had become to preserve the illusion of physical availability.

However, as yesterday’s Comex report showed, instead of tapering, JPM was just slammed with yet another 70K delivery (registered to eligible warrant detachment), which will likely appear on either today’s or tomorrow’s settlement. And since the other gold vaults appear to have no more freely transferable gold to hand over to JPM as everyone is now scrutinizing their every move under a microscope, JPM may no longer have the option of ignoring the mess its vault is in. Which means it has one option: to start buying the metal in the open market.

The Daily Market Report

Gold Firms, but Upside Limited by Taper Expectations

Gold has firmed modestly, underpinned by a softer dollar following the latest indication of still tepid inflationary pressures. Silver remains well bid near eight-week highs.

U.S. PPI for July came in unchanged, below expectations of +0.3%. That brought the annual figure down to 2.1% y/y, versus 2.5% y/y in June. Core PPI also missed expectations, resulting in a 1.2% y/y print, down from 1.7% y/y in June.

Atlanta Fed President Dennis Lockhart expressed some concern yesterday about tapering, saying he wants to make sure disinflation pressures are not building. St. Louis Fed President James Bullard has also been troubled of late by below target inflation. Today’s PPI data won’t do anything to ameliorate those worries.

In a Bloomberg article today, Adrian Day of Adrian Day Asset Management targets gold back to $1600 by year end. Day makes a point that we’ve made many times since the tape- talk first commenced: “All the Federal Reserve is talking about is cutting back on the additional stimulus put in place,” Day said. “No one is talking of tightening or reducing the Fed’s balance sheet.”

The yield on the U.S. 10-year note back on the rise and threatening the recent two-year highs ahead. With Congress girding for a contentious debate on the federal budget and the need to raise the debt ceiling yet again, I remain skeptical that the central bank will throw gas on the fire by starting to remove accommodations.

If they do, it would likely be a small symbolic gesture, a little dose of tough love directed at our fiscal policymakers. The message being: The Fed has been doing all the heavy lifting for the past several years with little to show for it, beyond re-inflation of a couple asset bubbles. It’s time for Congress to make some much needed changes on the fiscal side of the equation. The chances our sharply divided Congress can reconcile their differences and agree to any meaningful changes, remain dubious at best.

Bear in mind that this all corresponds with the likely nomination process for a new Fed President. If Bernanke is indeed on his way out the door at year-end, he is unlikely to risk his legacy as the savior of the U.S. and global economies this late in the game with a bold move.

Gold Rebound to $1,600 Seen by Fund Manager Day on Bank Stimulus

Gold will rebound to $1,600 an ounce by the end of this year as governments maintain efforts to boost economic growth for the next few years, according to Adrian Day, president of Adrian Day Asset Management.
Investors have “grossly overreacted” to speculation that the Federal Reserve will begin trimming its monthly bond purchases, Day said an in an interview yesterday. Bullion is down 21 percent this year as Fed policy makers debated the pace of asset purchases.

“All the Federal Reserve is talking about is cutting back on the additional stimulus put in place,” Day said. “No one is talking of tightening or reducing the Fed’s balance sheet.

Gold inches up after drop, Fed stimulus fears fester

 Gold edged up on Wednesday, after dropping 1 percent the previous session, but a steady dollar and stronger U.S. Treasury yields, coupled with worries the U.S. Federal Reserve may start tapering its monetary stimulus soon capped further upside.
A pullback in the the Fed’s $85 billion monthly bond purchases would support a higher interest rate environment that diminishes gold’s attractiveness.
Uncertainty over the timing of the roll back has already pushed the metal down 21 percent this year, after 12 consecutive years of gains.

Gold below 2-month high, set for best week in a month

 Gold dipped below an earlier two-month high on Friday as the dollar firmed, but the metal was still heading for its biggest weekly gain in a month as investors continued to cover short positions and on strong physical appetite from China.
Traders added that the crossing of a technical resistance level was also adding to buying, although the move upwards seen in the past week looked to have lost some momentum.
“After such a strong move up there is always the risk of a retracement… however after gold broke through its resistance at $1,350 last night things are looking somewhat more encouraging,” Heraeus trader Alexander Zumpfe said.

Gold goes East as consumers hoard bullion and jewellery

Ownership of the world’s gold shifted further East during the first half of 2013, as Westerners dumped their exchange–traded holdings and, on the other side of the globe, Asian consumers responded to lower prices by adding to their hoards of jewellery and bullion.
This was the picture painted by the latest data from The World Gold Council, the mining industry trade body and research organisation, which reported overall demand for gold 12pc lower in the three months to the end of June than in the comparable period for 2012. Demand for the metal is currently running at 83pc of its five–year average.
The WGC attributed the slump to the massive sale by western investors, mostly in the US, who own gold through exchange–traded funds (ETFs). These vehicles work by linking reserves of gold – secured in bank vaults in or around Western capitals – to shares freely traded on the world’s major exchanges.

US Michigan consumer sentiment (prelim) fell to 80.0 in Aug, below expectations of 85.0, vs 85.1 in Jul.

One option for the Fed: Taper, but tiny

16-Aug (Washington Post) — There has been an abundance of handwringing on Wall Street over when the Federal Reserve will begin scaling back the monthly bond purchases that have boosted the stock market and tamped down interest rates. Embedded in the anxiety is the assumption that the taper will be a Very Big Deal, one that signals the central bank’s plans for the remainder of its quantitative easing program, the path of interest rates and for when it believes the panda at the National Zoo will have a cub.
But what if those fears are unfounded? What if the taper is … tiny?
…One potential compromise would be a tiny taper. What is tiny? The Fed is currently buying $85 billion a month in Treasurys and mortgage-backed securities. Wall Street expects the central bank to cut that amount by $20 billion to $25 billion, likely starting with Treasurys. A tiny taper would be anything smaller, though a figure less than $10 billion could just look silly. In other words, in September the Fed could reduce purchases to $75 billion a month instead of the $60 billion or so Fed watchers have been expecting, and then assess the impact on the markets before deciding its next move.

Gold Up About 4% on the Week

16-Aug (USAGOLD) — Gold remains well bid in the wake of solid gains on Thursday. The
yellow metal eked out new eight-week highs in early New York trading, following another round of mixed economic data., and appears poised to post about a 4% gain on the week.
U.S. productivity beat expectations, rising 0.9% in Q2. However, there was a big offsetting negative revision to the Q1 figure from +0.5% to -1.7%. Housing starts rose 5.9% in July, but missed expectations. The Michigan consumer sentiment index (preliminary) dropped to 80.0 in August, on expectations of 85.0.
Most analyst continue to believe the Fed will begin tapering asset purchase next month, but Thursday’s sharp retreat in U.S. equities apparently sowed some seeds of doubt. Gold benefited on two separate fronts, rising on diminished taper expectations and a softer dollar, as well as safe-haven interest as the stock market looks increasingly vulnerable.
The NY Fed reported on Wednesday that total household debt fell by $78 billion in Q2 to $11.15 trillion, the lowest level since 2006. Clearly the great deleveraging of household balance sheets continues. While this is generally good news for most households, the Fed itself is likely nonplussed.
After all, the U.S. economy is driven by consumption. The whole purpose of the central bank’s ├╝ber-accommodative monetary policy is to discourage saving and encourage the borrow-and-spend mindset. However, the fact that households continue to delever suggests to me that a new-found prudence prevails in the wake of the financial crisis. Additionally, the American household likely still has some doubts as to the sustainability of the so-called “recovery”; something that may be reflected in today’s confidence miss.