Gold World News Flash

Bernanke’s Bind: One Chart Reveals Gold’s Next Move
Gold Going to Parabolic Top of $10,000 by 2012 – For Good Reasons
Seventy Years of Gold Shares, Part 1
Bear Market Race Week 139: Foreign Sovereign Bonds: 1993-2010
Got Gold Report - COT Flash June 12
To Be Or Not To Be...In The Markets
Is there really a debt crisis?
Daily Dispatch: Weekend Edition - June 12, 2010
Has BP Summoned the Fires of Hell?
SP500, Oil and Gold Trading at Resistance Levels
China Downplays Role of Gold in its Forex Holdings
Investor Options in an Uncertain World
US "Discovers" Nearly $1 Trillion In Mineral Deposits In Afghanistan
Deflation? Try a Tale of Two Inflations
William Pesek: Gold’s rise puzzles Bernanke but not this fund manager
William Pesek: Gold's rise puzzles Bernanke but not this fund manager
Gene Arensberg: Something unusual is afoot in gold and silver
Banks set new store on building gold vaults
Are Interest Rates a Better Trade Than Gold?
Gold: Where to From Here?
George Soros: "We Have Just Entered Act II Of The Drama" - Full Speech
Market Update: Dow Jones, Crude Oil, Euro, Sterling and GOLD
On Last Week's Underreported Failed Hungarian Auction
FT Reports Blanche Lincoln Proposal For CDS Spinoff Set To Pass
Quote Of The Year
Decoupling Spread Closed, Or 6/6/6.5
Cheeky's Futures Charts - Jun 13
Gold, Oil and SPX Trading at Key Pivot Points
Borrowing from the World's Biggest Borrower
Is Martial Law Coming For Gulf Coast?
Gold $10,000
William Pesek: Gold's rise puzzles Bernanke but not this fund manager
Obama Begins "Lifestyle Health Modification" Program, Mandating Behavioural Changes Within US Society
Gold, Oil & SPX Trading at Key Pivot Points
Is The Market Correction Over?
PGM vs. Gold/Silver: "The Precious and the Not So Precious"
World Spotlight on South Africa
European Weekly Digest, Straight From Chiswick

Bernanke’s Bind: One Chart Reveals Gold’s Next Move

Posted: 13 Jun 2010 06:09 PM PDT

"I don't fully understand movements in the gold price…" That's what Fed Chairman Ben Bernanke admitted this week. But if he were to look at what's actually going on and every move he has made since 2008, he would understand the price of gold and see where it's going next.

Gold Going to Parabolic Top of $10,000 by 2012 – For Good Reasons

Posted: 13 Jun 2010 06:05 PM PDT

No wishful thinking here! As I see it gold is going to a parabolic top of $10,000 by 2012 for very good reasons - sovereign debt defaults, bankruptcies of "too big to fail" banks and other financial entities, currency inflation and devaluations - which will all contribute to rampant price inflation.

Seventy Years of Gold Shares, Part 1

Posted: 13 Jun 2010 03:55 PM PDT

The Day the World Changed The Impact 14 March 1968 had on Money, Gold & Mining Shares Part 1 Mark J. Lundeen Article Archive [EMAIL="mlundeen2@comcast.net"]mlundeen2@comcast.net[/EMAIL] 14 February 2006[INDENT]Part 1 of this article will examine the significance of the London Gold Pool and the global monetary regime from the Bretton Wood's Accords, to the present time. It also examines the shallowness of the digital financial archives. In the age of information, investors, economists and makers of "policy," may not have the necessary information to properly examine our current age of inflation. Part 2 of this article will examine the effects of monetary inflation on the seven decades of recorded price history found in the Barron's Gold Mining Index (BGMI). Gold mining shares have proven to be a powerful indicator of future financial trends that everyone with money in the markets should be aware of. [/INDENT]Part 1 The current bull markets in precious metals and...

Bear Market Race Week 139: Foreign Sovereign Bonds: 1993-2010

Posted: 13 Jun 2010 03:55 PM PDT

The 1929 & 2007 Bear Market Race to The Bottom Week 139 of 149 Precious Metals, the DJIA & NASDAQ’s Performance Purchasing Gold & Silver at Wholesale Prices Foreign Sovereign Bonds: 1993-2010 Mark J. Lundeen [EMAIL="mlundeen2@Comcast.net"]mlundeen2@Comcast.net[/EMAIL] 11 June 2010 Color Key to text below Boiler Plate in Blue Grey New Weekly Commentary in Black Below is my BEV chart for the Bear Race. This Chart uses Weekly Closing Data, so there are only 10 Weeks to go before we match the 149 Wks of the Great Depression Bear Market. But before 1955 or so, the NYSE had a 6 Day Trading Week. Hard to believe it, but people (everyone) used to work 6 Days a Week. Unfortunately, this puts a monkey wrench in the works when we compare my Daily to my Weekly Basis Charts. In 10 Weeks, our Bear Market will have lasted as many Weeks as the Great Depression’s Bear, but on a Daily Basis, we’ll still have 149 Days (30-5 Day Weeks) to go at Wk 149. Since t...

Got Gold Report - COT Flash June 12

Posted: 13 Jun 2010 03:55 PM PDT

Bottom line: COT report reveals huge divergence between classes of COMEX commercial traders. Producer/Merchants near record net short gold while Swap Dealers unwilling to add to net short positioning. Gold +1.2% and the gold LCNS +2.2%. Silver -0.8% and the silver LCNS near flat at +0.2%. Details just below. HOUSTON – If, like us, you blinked last Monday (June 7), you missed the entry opportunity of the week for silver. We personally missed by just a few ticks and then decided the Gods were giving us a sign that this was not yet our entry point in the $17.50s then. (Silver turned northward from around $17.20, depending on which screen was in view, near-futures or the cash market.) Our notes that day remarked on the sudden surge of buying pressure with three question marks. Silver blasted higher nearly 80-cents on quite high volume only to turn more or less sideways for the rest of the week. Other than physical take-down rumors, which are questi...

To Be Or Not To Be...In The Markets

Posted: 13 Jun 2010 03:55 PM PDT

www.preciousmetalstockreview.com June 12, 2010 Markets rallied in the US late into the week with most gains coming on Thursday. With options expiry coming in the week ahead we have be aware and not read too much into the moves. Option writers are notorious for keeping prices in a range that will maximize their returns. That sounds like manipulation. Yes it is! But it occurs every single month in equities, commodities and everything really. For now the S&P and Dow remain below their 200 day moving averages which is not good. Any way you look at it, the markets are not safe these days. They move up big one day, down big the next. There is no discernible pattern really, and cash may just be the best place to be for a while. Get out and golf, or do something fun, anything other than be tortured by the markets on a daily basis! Metals review Gold slid up 0.53% for the week after giving a near breakout signal. Actually, that morning that gold crested above the b...

Is there really a debt crisis?

Posted: 13 Jun 2010 03:55 PM PDT

One of the most debated topics today concerns the level of debt as it concerns consumers, corporations and governments. Government debt has commanded a particularly large share of the limelight in recent weeks. Among those who are concerned that debt levels have reached "crisis" proportions, there's seems to be a consensus that the debt balloon has reached well night the bursting point, and further, we have reached the point of no return when it comes to the servicing of the debt. In this installment we'll examine the issue of debt and will address the particular issue of whether in fact we've reached the "point of no return" in terms of being able to pay off the debt. From the standpoint of arithmetic, one could easily construct a one-sided case against today's high levels ever being paid off. The mathematical approach, however, is too narrowly hyper-literal to be admitted to any reasonable assessment of the debt situation. For a true picture of how the pres...

Daily Dispatch: Weekend Edition - June 12, 2010

Posted: 13 Jun 2010 03:55 PM PDT

June 12, 2010 | www.CaseyResearch.com It’s Not Temporary Dear Reader, One of the prevailing fictions of the moment is that the soaring deficit and knock-on debt load of these United States – among other prominent nation-states – is but a temporary necessity that, as soon as the crisis is resolved, will recede like a gentle evening tide. Sticking one’s nose above the westerly horizon, however, provides a dose of reality on the lingering long-term effect of an unresolved sovereign debt crisis. The chart just below paints a crystal-clear portrait of a desperately sick economy, bedeviled by persistent debt caused by stubborn levels of elevated government spending against a steady downtrend in revenue. The economies of Japan and the U.S. are quite similar in one important way. And that is that they both enjoy considerable international demand for their respective currencies. In the case of Japan, this...

Has BP Summoned the Fires of Hell?

Posted: 13 Jun 2010 02:34 PM PDT

By Rick Ackerman, Rick's Picks

We've railed at traders and speculators recently for their arrogant and sometimes breathtaking stupidity in failing to discount an onslaught of world-shattering news. If the dolts, rubes, bozos and mountebanks who have kept stocks afloat even remotely understood what has been going on in this world, we wrote here recently, the Dow Industrials would plummet 6000 points in mere days. And the news has been grave, indeed. America's wholly imagined economic recovery died for good on Friday with the release of shocking retail figures for May. Household incomes have been falling, consumer credit imploding, M3 plummeting, and now it turns out that corporations have allowed $1.8 trillion to sit idle in low-yielding bank accounts, hastening the economy's deflationary collapse and the onset of a Second Great Depression. We face the impossible task of getting out from beneath $130 Trillion of debt and liabilities amassed by government at all levels. The nation is adrift under a weak president whose radical politics have sharply divided the voters. Iran and Turkey (a NATO member!) have declared war on Israel, sending warships to run the Gaza blockade. Europe's financial house of cards is within months, or even weeks, of total collapse. The jihadists may be turning the tide against U.S. and British forces in Afghanistan.

Vision of Hell

Unfortunately the list does not end there. For in fact, there is one crisis that greatly overshadows all of them: the seabed irruption in the Gulf of Mexico. We won't even pretend any longer that there is a market "angle" to this story. In fact, the markets are a side show, and politics a droll burlesque, in comparison to the geophysical dreadnought taking shape in the Gulf. Because it could eventually threaten all life on this planet, there may be no "investable issues" here.

Seabed Fissures

The problem is no longer a leak or a spill, you see, but a volcanic gusher – one that appears to be defeating the efforts of the most capable petroleum engineers in the world. More and more, it is looking like a sci-fi disaster film with no hero and an unhappy ending. Even our supposed best hope for containing the gusher – a second well that would intersect and plug the leak by sometime in August – may be doomed to failure, since the well casing itself may be too damaged to seal off. But the scariest story currently making the rounds is that there are fissures springing up all over the seabed, and that if the weak bedrock that holds the oil gives way, it will release a quantity of hydrocarbons greater in volume than the Gulf itself.

Whenever we've tried to predict the "black swan" event that might eventually send the U.S. and global economies into deepest coma, we believed in our heart that, no matter what happened, everything would turn out all right. The real estate market might collapse, taking our standard of living with it, but Americans would somehow get through hard times together and emerge better and stronger for it. Even the prospect of a nuclear conflagration in the Middle East implied a beginning and an end — a radioactive half-life, as it were.

Human Error

Who could have imagined that there was an even bigger disaster lurking — or that merehuman error could trigger a cataclysm of seismological proportions? Or will it be of Biblical proportions, with rivers and seas turned into wormwood? Has BP tapped, not an oil well, but a hole into volcanic Hell? While these questions are almost too frightening to contemplate, the answers may be staring us in the face within months or even weeks. For the moment, though, it has become difficult to sort out fact from fiction. Are clean-up workers getting sick from toxic hydrogen sulfide fumes? Is the Obama administration covering up the true magnitude of the crisis to avoid a panic? Why are nearly all of the satellite photos of the spill on the Web a month old? Can BP really handle a crisis whose costs may soon mount into the trillions? Is the problem even solvable?

(If you'd like to have Rick's Picks commentary delivered free each day to your e-mail box, click here.)

SP500, Oil and Gold Trading at Resistance Levels

Posted: 13 Jun 2010 02:17 PM PDT

By Chris Vermeulen, TheGoldAndOilGuy

Last week we saw the financial market including commodities move higher which was great to see. But the recent run up has brought both equities and commodities to their key resistance levels. With Gold, Oil and the SP500 trading near key resistance points we will most likely have some sharp movements this week so buckle up tight!

Gold – Daily Chart

Gold Future Prices continue to form the large cup and handle pattern and is trading near resistance. This week I figure we will see gold make a move up or break the dotted support trend line and drop towards the blue support level. I continue to wait for a low risk setup for gold.

Crude Oil – Daily Chart

Crude oil has been trending down for a couple months and recently rebounded to test its resistance level. It looks as though oil is forming a bear flag which generally means we should see lower prices in the near future. But another $1-2 move up could trigger a surge of buyers if this resistance level is broken which is why this week should be volatile… it's a 50/50 chance for commodities to either rally or sell off.

SP500 – Daily Chart

The SP500 has posted some decent gains the past couple days but it's still no in the clear just yet… Most technicians are looking for a move above 1100-1110 area with heavy volume before they start to commit serious money to the long side.

It looks and feels as though the market could drop or rally very sharply from here and if you are caught on the wrong side of the move then it's going to really hurt the trading account. During times like this when the market is at a critical pivot point with increased volatility levels along with mixed market internals I tend to stay on the side lines until some dust settles.

Weekend Gold, Oil and SPX Trading Conclusion:

In short, everything is trading near key pivot points giving mixed signals for prices to rally or drop. My analysis is pointing to a small move up Monday morning to break Fridays high followed by some selling late Monday or Tuesday. How much of a move down I don't know for sure but there is potential for a 3-4% move. On the flip side if buyers step in pushing the price above 1100 then we could see a surge higher of 3-4%…

Very dicey times right now to be trying to pick a direction, which is why it's best to wait for the risk level to diminish before getting involved or at least trade a small position with a protective stop if you feel confident in a direct.

If you would like to receive my Low Risk ETF Trading Signals be sure to checkout my service at: www.TheGoldAndOilGuy.com

Chris Vermeulen

Get My Technical Charts Emailed To You:

China Downplays Role of Gold in its Forex Holdings

Posted: 13 Jun 2010 02:17 PM PDT

The Daily Reckoning

This past week China's State Administration of Foreign Exchange, or SAFE, indicated that it will "improve its diversification strategy on investing its foreign-exchange reserves–which at nearly $2.5 trillion is the world's largest–but gave no details," according to The Wall Street Journal.

The regulator had earlier indicated that the euro will stay an important part of its mix, despite the region's debt crisis. More recently, though, it has also downplayed the usefulness of gold in particular as an asset class.

This from MarketWatch:

"China's State Administration of Foreign Exchange, the regulator which oversees the nation's nearly $2.5 trillion foreign exchange stockpile, said Thursday that the gold market is too small, illiquid and volatile to be considered suitable for asset allocation, according to a Reuters report…

"Safe did not give an update on its gold holdings, which rose to 1,054 tons last year from 600 tons in 2003, as a result of purchases of local production. Safe also said in the annual report that it plans to improve the diversification strategy for the management of China's reserves, including the range of asset classes it believes are suitable. It did not provide details."

On the one hand, China is seeking to improve the way it manages its foreign exchange reserves. On the other hand, it's denying any speculation of big changes in dollar- or euro-denominated assets. China's also highlighting its disinterest in gold, despite nearly doubling its gold holdings over the past seven years. It all seems a little contradictory… and the statement doesn't really leave much room for new alternatives. It'll be interesting to see how China ends up stashing its huge nest egg.

You can read more details in coverage at The Wall Street Journal and at MarketWatch.

Best,

Rocky Vega,
The Daily Reckoning

China Downplays Role of Gold in its Forex Holdings originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

More articles from The Daily Reckoning….

Investor Options in an Uncertain World

Posted: 13 Jun 2010 02:16 PM PDT

By Jeff Nielson, Bullion Bulls Canada

I had not intended any follow-up to my previous commentary ("Financial Security: Gold or Gambling"). However, when I looked back on it after it was written, I realized I was guilty of sending a "mixed message" to investors – and so I'm going to look ahead, in order to provide a more cohesive picture for readers.

Many mainstream commentators regularly engage in market "predictions". Indeed, some do little other than make "predictions". There are two problems with most of these "expert" forecasters. To begin with, most of the scenarios envisioned by these pundits are based on totally fraudulent "statistics", or completely incompetent analysis – and thus have zero possibility of coming to pass. This matters little to these writers, as they simply come up with a new "prediction" a month later (or even a couple of weeks later), while never acknowledging their previous, erroneous guess.

Sadly, with most investors having an attention-span somewhat shorter than that of the average house-fly, these cheap hucksters can not only avoid having their own reputations destroyed by one wrong guess after another, but can often increase their popularity by simply increasing the frequency of those wrong predictions.

The other primary flaw of these defective visionaries is that they often forcefully advocate a particular scenario, without the slightest caveat concerning alternative outcomes. Indeed, the only "prediction" about markets (and economies) that can be made today with utter certainty is that nothing is certain going forward. Thus, the first clue to investors that a particular pundit cannot be trusted is with respect to any short-term forecast which does not include alternatives to the particular scenario being presented.

I will attempt to engage in my own forecasting by not only offering readers several possibilities to consider, but I will also rule-out possible scenarios which may currently seem plausible to investors. Indeed, it may be simplest to start this analysis by beginning with a scenario which will not occur. In that respect, I will acknowledge a previous error I made in my own analysis – which demonstrates (if nothing else) that I learn from my mistakes.

More articles from Bullion Bulls Canada….

US "Discovers" Nearly $1 Trillion In Mineral Deposits In Afghanistan

Posted: 13 Jun 2010 02:15 PM PDT

And there are those who wonder why the US has spent countless dollars and thousands of dead soldiers protecting a few desolate mountain passes in Afghanistan. And no, it turns out it is not just the opium trade. The NYT reports that "The United States has discovered nearly $1 trillion in untapped mineral deposits in Afghanistan, far beyond any previously known reserves and enough to fundamentally alter the Afghan economy and perhaps the Afghan war itself, according to senior American government officials." The article continues, "The previously unknown deposits — including huge veins of iron, copper, cobalt, gold and critical industrial metals like lithium — are so big and include so many minerals that are essential to modern industry that Afghanistan could eventually be transformed into one of the most important mining centers in the world, the United States officials believe." Ah yes - "previously unknown." Yet the punchline of the piece : "The vast scale of Afghanistan’s mineral wealth was discovered by a small team of Pentagon officials and American geologists." Because $1 trillion worth of minerals just lie there waiting to be discovered almost 10 years after the initial incursion. Next thing you know FCX already had an entire mining infrastructure in place just in case a contingency like this miraculously occurred. In the meantime, look for gold prices to plunge as the newly uncovered gold deposits are rumored to be "large" enough to once again refill Fort Knox and to push the supply curve three miles to the right.

More on this truly "stunning" discovery:

The United States has discovered nearly $1 trillion in untapped mineral deposits in Afghanistan, far beyond any previously known reserves and enough to fundamentally alter the Afghan economy and perhaps the Afghan war itself, according to senior American government officials.

he previously unknown deposits — including huge veins of iron, copper, cobalt, gold and critical industrial metals like lithium — are so big and include so many minerals that are essential to modern industry that Afghanistan could eventually be transformed into one of the most important mining centers in the world, the United States officials believe.

An internal Pentagon memo, for example, states that Afghanistan could become the “Saudi Arabia of lithium,” a key raw material in the manufacture of batteries for laptops and Blackberries.

The vast scale of Afghanistan’s mineral wealth was discovered by a small team of Pentagon officials and American geologists. The Afghan government and President Hamid Karzai were recently briefed, American officials said.

While it could take many years to develop a mining industry, the potential is so great that officials and executives in the industry believe it could attract heavy investment even before mines are profitable, providing the possibility of jobs that could distract from generations of war.

The value of the newly discovered mineral deposits dwarfs the size of Afghanistan’s existing war-bedraggled economy, which is based largely on opium production and narcotics trafficking as well as aid from the United States and other industrialized countries. Afghanistan’s gross domestic product is only about $12 billion.

“This will become the backbone of the Afghan economy,” said Jalil Jumriany, an adviser to the Afghan minister of mines.

Is it time for "Confessions of an Economic Hit Man: Part 2, the 21st Century paradigm"? Yet presumably not all is as expected: "Yet the American officials also recognize that the mineral discoveries will almost certainly have a double-edged impact. Instead of bringing peace, the newfound mineral wealth could lead the Taliban to battle even more fiercely to regain control of the country."

Which is why it will be best to have the US military not only stay in Afghanistan indefinitely but to get a million man reinforcement surge. After all now that it is finally becoming clear that the most recent US state is located somewhere in the middle of Asia, things are about to get a whole lot more interesting.

Deflation? Try a Tale of Two Inflations

Posted: 13 Jun 2010 02:03 PM PDT

By Dian L. Chu, Economic Forecasts & Opinions

The crisis in Europe is causing concerns about deflation in the U.S. and other developed economies after weeks of financial-market turmoil. The fears are most pronounced in Europe, where a combination of spending cuts and tax increases could weigh on economic growth and feed into deflation.

Financial markets are reflecting a diverging expectation. Gold prices have been soaring—a potential indicator of inflation fears—while many other inflation indicators are going the other way.

In the United States, the loose monetary policy has not resulted in any significant rise at the consumer level or changes in inflation expectations, as evidenced by the sharply slowing Consumer Price Index and plunging M3 money supply.

Biflation... Not Deflation

Despite the seemingly tame headline inflation numbers, consumers never seem to see price declines in certain categories like education and health. For instance, prescription drug inflation escalated to 5% from less than 3% in 2007 and 2008.

So, it is pretty obvious what we have here--biflation--instead of deflation. Biflation is a state of the economy where inflation and deflation occur simultaneously. (Chart 1)

The price increase of commodities is caused by the increased money flow (via loose monetary policy) chasing them. On the other hand, the growth of economy is tempered with high unemployment and decreasing purchasing power. This has resulted in a greater amount of money directed toward essential items (inflation) and away from non-essential items and things required credit to buy such as house and cars (deflation).

Inflation In the Supply Chain

Furthermore, the price at the producer level paints an entirely different picture. Producer Price Index (PPI) for finished goods was up 5.5% year-over-year. Further up the supply chain, signs of inflation are even more worrisome.

The PPI for intermediate goods increased 8.6% year-over-year in April, while core PPI for crude materials, excluding food and energy, shot up 60% year-over-year in April (Chart 2).

Meanwhile, the Purchasing Manager Index (PMI) report shows manufacturing sector expanded in May for the 10th consecutive month, and the overall economy grew for the 13th consecutive month. Backlogs are also increasing which further points to the inflationary pressure in the pipeline. (Chart 3)

A Tale of Two Inflations

While all of that money Federal Reserve pumped into the system could in theory cause inflation, the Fed is counting on weak banks and slack in the economy would weigh against that. Indeed, it is likely that crude material price increases could begin to move down the supply chain; however, end markets are still too weak to allow a full price increase.

So, in the near term, biflation could be around through possibly 2012 with pockets of inflation seen in certain sectors such as energy and feedstock chemicals, and deflation/low inflation in other sectors, netted to a moderate headline inflaion number.

Eventually, as world economy picks up speed, a tale of two inflations would emerge with the very different pace between the developing and advanced economies (Chart 4).

Stagflation--high inflation with slow growth--could manifest in the developed countries like the U.S. and Europe, while the emerging nations such as Chindia would face the challenge of hyperinflation.

Spooked by Europe

At the moment, deflation is still something that cannot be completely ruled out with the private sector deleverages at a faster pace than the Central Banks can fund.

However, I believe the more likely scenario is that the fall of the euro could save Europe from deflation, and the Fed's aggressive money pump, including a possible second stimulation package, will likely keep the U.S. out of it as well.

Sudden Hyperinflation?

Nevertheless, the somewhat overhyped debt crisis in Europe seems to have spooked the market as well as the Fed to grossly miscalculate the risk of inflation vs. deflation. As such, more stimulus and inappropriate timing of monetary and fiscal policies could lead to a sudden hyperinflation.

Invest for Inflation

In that sense, it is advisable to allocate for inflation protection so not to put all the eggs in one direction, in case some investors have positioned largely in anticipation of a deflation.

- Gold and other precious metals via physical holding or ETFs – about 3-5% of portfolio as a severe inflation defense
- TIPS Bond - an indexed portfolio of inflation-protected bonds such as the iShares Barclays TIPS Bond Fund (TIP) is a good place for cash to protect against inflation.
- Hard Assets & Resource Producers – Agriculture sector still seems reasonable enough compared with other “hot” commodities. Indexed ETFs such as MarketVectors Agribusiness ETF (MOO) is one option.
(Also see Crude Oil and Copper: Better Value Than Gold and Commodities: Time to Go Long and Physical.)

Economic Forecasts & Opinions

William Pesek: Gold’s rise puzzles Bernanke but not this fund manager

Posted: 13 Jun 2010 01:49 PM PDT

By William Pesek
Bloomberg News
Monday, June 14, 2010

http://www.bloomberg.com/apps/news?pid=20601039&sid=a4JyC8zMpSVU

TOKYO — Alan Greenspan had his conundrum. Now Ben Bernanke has his enigma.

The behavior of long-term interest rates had the former Federal Reserve chairman scratching his head. It's gold that puzzles the current Fed chief. Damned if Bernanke and his fellow central bankers can explain the surge by a metal John Maynard Keynes once dismissed as a "barbaric relic."

"I don't fully understand movements in the gold price," Bernanke said on Capitol Hill last week.

That shocks gold bulls like Johann Santer, managing director at Superfund Financial in Tokyo. And it may be awful news for the global economy that some investors are surer than ever that the gold rally is just getting started.

It's hard to decide what's more frightening: that investors are losing confidence in paper money or that the shepherds of the world's major currencies don't get what's going on. Gold's climb of almost 30 percent in a year reflects fear, not just market concern over inflation or deflation risks. People have lost trust in the global financial system.

As Lehman Brothers Holdings Inc. was crashing in September 2008, Superfund was loading up on gold. At the time, Santer got his share of giggles and rolled eyeballs for predicting gold would rise to $1,500 an ounce over the next two or three years. With gold around $1,230 an ounce, no one's laughing anymore.

There are many reasons why gold is back in vogue, yet two in particular are worth considering. One is fear about "black swans," unexpected events that have great impact. The second reflects how little gold many central banks in Asia and elsewhere hold on their balance sheets.

A year ago, the idea of gold hoarding struck me as odd. It was hard not to view fans of the precious metal as akin to people standing on street corners with megaphones predicting apocalypse. The world economy seemed to be on the mend, a sense of order was returning to markets and doomsayers like Nouriel Roubini were getting fewer headlines.

Greece's unraveling was a sobering reality check. It wasn't that a fiscally irresponsible economy smaller than Iran's was stumbling. It was how, as in the case of Iceland before it, Greece was cast in the role of canary in the financial coalmine. European banking shares suggest a Greek debt default may be just a matter of time.

It was suddenly clear that the contagion that emanated from the U.S. in 2008 had never really gone away. Greece's troubles cast a huge shadow over far more important economies, like Spain's. The idea that the 10th biggest economy, one bigger than Canada's, might someday renege on debt put an end to hopes for a smooth 2010.

Perhaps the best explanation of these all-too-tangible risks comes from Anthony Crescenzi, a strategist at Pacific Investment Management Co., the world's largest bond-fund manager. The question is this: As the United States is aggressively backing its financial system, who is backing the U.S.?

Thinking back to the darkest days of 2008, few will quibble with government efforts to stave off Armageddon. The promise was that if investors tolerated a surge in debt issuance, capitalism and prosperity would be saved. As fear is returning to the global economy, the worry is that industrialized nations are out of ammunition.

Have nations reached a "Keynesian endpoint" as exhausted balance sheets leave policy makers with few options to bolster growth? We've known for years that the Group of Seven nations were losing their ability to guide markets. Now they're losing hope of shielding economies from them.

As all hell threatens to break lose anew, are you going to buy stocks? Probably not. Bonds at a time when no one trusts credit ratings? Doubtful. Euro? Nope. Yen? Risky. Dollar? For many, the U.S. currency is the least ugly contestant in this financial beauty contest.

A question here is what central banks do. Many are sitting on too many dollars for comfort and upping gold reserves may be the diversification move of choice.

"I believe the biggest customer base will be Asia," says Santer. "And if Ben Bernanke doesn't see why, then we have even more reason to worry about the global economy."

South Korea, for example, is the 15th biggest economy and gold accounts for just 0.2 percent of its total reserves. If markets remain volatile and the dollar gyrates, it may be among the Asian nations that move to buy more of the metal.

In November, India surprised markets with a $6.7 billion purchase from the International Monetary Fund's bullion stash. India's gold grab was the vanguard of central banks more aggressively diversifying reserves away from U.S. assets.

It's not what the Greenspans of the world envisioned 15 years ago. Back then, warehousing gold bars seemed a bit retrograde. Central banks had gotten so good at whipping inflation that paper money was just fine. Fort Knox was no longer needed.

The post-Lehman world is dispelling such notions and we may be on the cusp of history's greatest gold rush. Bernanke and his peers would be wise to contemplate why.

—–

William Pesek is a columnist for Bloomberg News.

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William Pesek: Gold's rise puzzles Bernanke but not this fund manager

Posted: 13 Jun 2010 01:49 PM PDT

By William Pesek
Bloomberg News
Monday, June 14, 2010

http://www.bloomberg.com/apps/news?pid=20601039&sid=a4JyC8zMpSVU

TOKYO — Alan Greenspan had his conundrum. Now Ben Bernanke has his enigma.

"I don't fully understand movements in the gold price," Bernanke said on Capitol Hill last week.

A question here is what central banks do. Many are sitting on too many dollars for comfort and upping gold reserves may be the diversification move of choice.

"I believe the biggest customer base will be Asia," says Santer. "And if Ben Bernanke doesn't see why, then we have even more reason to worry about the global economy."

The post-Lehman world is dispelling such notions and we may be on the cusp of history's greatest gold rush. Bernanke and his peers would be wise to contemplate why.

—–

William Pesek is a columnist for Bloomberg News.

* * *

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Gene Arensberg: Something unusual is afoot in gold and silver

Posted: 13 Jun 2010 01:49 PM PDT

12:40p ET Sunday, June 13, 2010

Dear Friend of GATA and Gold (and Silver):

Gene Arensberg's new "Got Gold Report" examines the latest futures market data on the precious metals and concludes with some ambivalance:

"Having just missed our chance to reenter silver this past Monday, we remain on the lookout for a re-entry signal on both gold and silver, but until we analyze all the charts, ratios, and data this weekend, we won't know if Sunday night or Monday morning will find us on the bid or not. We repeat that our instinct is that something unusual is under way and it could be 'good' unusual or 'bad' unusual, but until which becomes more clear to us the sideline is not such a bad port to anchor off and gauge the weather.

"We have the strange situation where some of the Big Sellers are not — that's NOT — acting in a way that shows they are confident in lower gold and silver prices even though gold is not very far from a new all time high. However, the gold open interest is too high to be aggressive on the long side ourselves unless we become convinced that extraordinary demand is coming in — not just soon, but coming in immediately."

You can find the "Got Gold Report" here:

http://treo.typepad.com/got_gold_report/2010/06/20100612COTflash.pdf

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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Banks set new store on building gold vaults

Posted: 13 Jun 2010 01:49 PM PDT

By Javier Blas
Financial Times
Friday, June 11, 2010

http://www.ft.com/cms/s/0/53163d56-7584-11df-86c4-00144feabdc0.html

Some of the world's biggest banks and security companies are building vaults to store gold bars and coins worth tens of billions of dollars, cashing in on resurgent demand and record prices.

The growing interest in gold among investors worried about the global economy and Europe's sovereign debt crisis has led to a shortage of long-term storage space.

Bankers said that vaulting had become highly profitable. Rising bullion prices translate into higher storage fees, which are usually calculated as a percentage of the gold price. Gold prices this week rose to a nominal record of $1,251.20 a troy ounce, up 14.5 per cent since January. On Friday bullion traded at $1,226.

ADVERTISEMENT

Prophecy to Become Coal Producer This Year
with 1.5 Billion Tonnes of Resource

Prophecy Resource Corp. (TSX.V: PCY) announced on May 11 that it has entered into a mine services agreement with Leighton Asia Ltd. to begin coal production this year. Production will begin with a 250,000-tonne starter pit as planned in August, with production advancing to 2 million tonnes per year in 2011. Prophecy is fully funded to production and its management team includes John Morganti, Arnold Armstrong, and Rob McEwen.

For Prophecy's complete press release about its production plans, please visit:

http://www.prophecyresource.com/news_2010_may11.php

"Physical gold is being sought more than ever and that is causing all sorts of strains," said Peter Hambro, chairman of Petropavlovsk, the gold miner.

Much of the increased demand comes from exchange-traded funds. The world's largest, the SPDR Gold Trust, was on Friday holding a record 42 million ounces of gold worth $51.5 billion at current prices.

While some banks said they had space, others said their vaults were nearly full. Several said they were building or planning new vaults. JPMorgan recently opened a new gold vault in Singapore and Via Mat International, the Swiss-based security company, has just opened a silver safe warehouse in west London. Deutsche Bank is mulling a new vault, bankers said.

Frank Ziegler, head of precious metals at BayernLB in Germany, said its vault was full. "We are discussing increasing the size. We are just at the planning phase," he said. Roger Jones, global head of commodities at Barclays Capital in London, said the bank was "actively looking at the precious metal vaulting business."

While the traditional image of a bank vault is a basement deep underground, modern vaults are purpose-built warehouses, above ground and surrounded by high security. The trend to build new vaults reverses the dismantling in the early 1990s of the elaborate — and expensive — infrastructure of vaults put in place during the last gold boom of the late 1970s.

Philip Klapwijk of GFMS, the precious metals consultancy, said the move to build vaults reflected the "new nature" of the gold market. Investors hoping to benefit from a rising gold price and who are driving demand want long-term storage. Jewellery makers deposit gold for short periods.

* * *

Support GATA by purchasing a colorful GATA T-shirt:

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Or a colorful poster of GATA's full-page ad in The Wall Street Journal on January 31, 2009:

http://gata.org/node/wallstreetjournal

Or a video disc of GATA's 2005 Gold Rush 21 conference in the Yukon:

http://www.goldrush21.com/

* * *

Help keep GATA going

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at:

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Are Interest Rates a Better Trade Than Gold?

Posted: 13 Jun 2010 01:49 PM PDT

Larry MacDonald submits:

Interest rates are the trade of the decade, says Bud Conrad in his new book, Profiting from the World’s Economic Crisis: Finding Investment Opportunities by Tracking Global Market Trends (2010). They are at 50-year lows, currently, but with governments so heavily indebted, they will be going on a multi-year rise. Cover image for product 0470460350

Gold: Where to From Here?

Posted: 13 Jun 2010 01:49 PM PDT

Christopher Galakoutis submits:

The focus of this month’s post will be about gold and gold shares. Will the price of gold record 10 straight years of gains, or might it be in for a correction? A good starting point might be to understand what happened to gold and the gold stocks in the 1920’s & 1930’s, and why.

For the most part, gold’s price was fixed at $20.67 per ounce from 1792 through 1933, when the US government confiscated the gold of its citizens and revalued it at $35 per ounce, reaping the benefits. The point to remember here is that a gold price fixed to the dollar during that time meant there were no gains to be made in dollar terms by holding gold. Peace of mind, but no nominal gains.

George Soros: "We Have Just Entered Act II Of The Drama" - Full Speech

Posted: 13 Jun 2010 01:15 PM PDT

Three days ago we brought attention to Soros' most recent outburst of negativity in a speech presented during a conference in Vienna, in which he said that "The collapse of the financial system as we know it is real, and the crisis is far from over. Indeed, we have just entered Act II of the drama." Below is the full text of Soros' speech.

In the week following the bankruptcy of Lehman Brothers on September 15, 2008 – global financial markets actually broke down and by the end of the week they had to be put on artificial life support. The life support consisted of substituting sovereign credit for the credit of financial institutions which ceased to be acceptable to counter parties.

As Mervyn King of the Bank of England brilliantly explained, the authorities had to do in the short-term the exact opposite of what was needed in the long-term: they had to pump in a lot of credit to make up for the credit that disappeared and thereby reinforce the excess credit and leverage that had caused the crisis in the first place. Only in the longer term, when the crisis had subsided, could they drain the credit and reestablish macro-economic balance. This required a delicate two phase maneuver just as when a car is skidding, first you have to turn the car into the direction of the skid and only when you have regained control can you correct course.

The first phase of the maneuver has been successfully accomplished – a collapse has been averted. In retrospect, the temporary breakdown of the financial system seems like a bad dream. There are people in the financial institutions that survived who would like nothing better than to forget it and carry on with business as usual. This was evident in their massive lobbying effort to protect their interests in the Financial Reform Act that just came out of Congress. But the collapse of the financial system as we know it is real and the crisis is far from over.

Indeed, we have just entered Act II of the drama, when financial markets started losing confidence in the credibility of sovereign debt. Greece and the euro have taken center stage but the effects are liable to be felt worldwide. Doubts about sovereign credit are forcing reductions in budget deficits at a time when the banks and the economy may not be strong enough to permit the pursuit of fiscal rectitude. We find ourselves in a situation eerily reminiscent of the 1930’s. Keynes has taught us that budget deficits are essential for counter cyclical policies yet many governments have to reduce them under pressure from financial markets. This is liable to push the global economy into a double dip.

It is important to realize that the crisis in which we find ourselves is not just a market failure but also a regulatory failure and even more importantly a failure of the prevailing dogma about financial markets. I have in mind the Efficient Market Hypothesis and Rational Expectation Theory. These economic theories guided, or more exactly misguided, both the regulators and the financial engineers who designed the derivatives and other synthetic financial instruments and quantitative risk management systems which have played such an important part in the collapse. To gain a proper understanding of the current situation and how we got to where we are, we need to go back to basics and reexamine the foundation of economic theory.

I have developed an alternative theory about financial markets which asserts that financial markets do not necessarily tend towards equilibrium; they can just as easily produce asset bubbles. Nor are markets capable of correcting their own excesses. Keeping asset bubbles within bounds have to be an objective of public policy. I propounded this theory in my first book, The Alchemy of Finance, in 1987. It was generally dismissed at the time but the current financial crisis has proven, not necessarily its validity, but certainly its superiority to the prevailing dogma.

Let me briefly recapitulate my theory for those who are not familiar with it. It can be summed up in two propositions. First, financial markets, far from accurately reflecting all the available knowledge, always provide a distorted view of reality. This is the principle of fallibility. The degree of distortion may vary from time to time. Sometimes it’s quite insignificant, at other times it is quite pronounced. When there is a significant divergence between market prices and the underlying reality I speak of far from equilibrium conditions. That is where we are now.

Second, financial markets do not play a purely passive role; they can also affect the so called fundamentals they are supposed to reflect. These two functions that financial markets perform work in opposite directions. In the passive or cognitive function the fundamentals are supposed to determine market prices. In the active or manipulative function market prices find ways of influencing the fundamentals. When both functions operate at the same time they interfere with each other. The supposedly independent variable of one function is the dependent variable of the other so that neither function has a truly independent variable. As a result neither market prices nor the underlying reality is fully determined. Both suffer from an element of uncertainty that cannot be quantified. I call the interaction between the two functions reflexivity. Frank Knight recognized and explicated this element of unquantifiable uncertainty in a book published in 1921 but the Efficient Market Hypothesis and Rational Expectation Theory have deliberately ignored it. That is what made them so misleading.

Reflexivity sets up a feedback loop between market valuations and the so-called fundamentals which are being valued. The feedback can be either positive or negative. Negative feedback brings market prices and the underlying reality closer together. In other words, negative feedback is self-correcting. It can go on forever and if the underlying reality remains unchanged it may eventually lead to an equilibrium in which market prices accurately reflect the fundamentals. By contrast, a positive feedback is self-reinforcing. It cannot go on forever because eventually market prices would become so far removed from reality that market participants would have to recognize them as unrealistic. When that tipping point is reached, the process becomes self-reinforcing in the opposite direction. That is how financial markets produce boom-bust phenomena or bubbles. Bubbles are not the only manifestations of reflexivity but they are the most spectacular.

In my interpretation equilibrium, which is the central case in economic theory, turns out to be a limiting case where negative feedback is carried to its ultimate limit. Positive feedback has been largely assumed away by the prevailing dogma and it deserves a lot more attention.

I have developed a rudimentary theory of bubbles along these lines. Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend. When a positive feedback develops between the trend and the misconception a boom-bust process is set in motion. The process is liable to be tested by negative feedback along the way and if it is strong enough to survive these tests, both the trend and the misconception will be reinforced. Eventually, market expectations become so far removed from reality that people are forced to recognize that a misconception is involved. A twilight period ensues during which doubts grow and more and more people lose faith but the prevailing trend is sustained by inertia. As Chuck Prince former head of Citigroup said, “As long as the music is playing you’ve got to get up and dance. We are still dancing.” Eventually a tipping point is reached when the trend is reversed; it then becomes self-reinforcing in the opposite direction.

Typically bubbles have an asymmetric shape. The boom is long and slow to start. It accelerates gradually until it flattens out again during the twilight period. The bust is short and steep because it involves the forced liquidation of unsound positions. Disillusionment turns into panic, reaching its climax in a financial crisis.

The simplest case of a purely financial bubble can be found in real estate. The trend that precipitates it is the availability of credit; the misconception that continues to recur in various forms is that the value of the collateral is independent of the availability of credit. As a matter of fact, the relationship is reflexive. When credit becomes cheaper activity picks up and real estate values rise. There are fewer defaults, credit performance improves, and lending standards are relaxed. So at the height of the boom, the amount of credit outstanding is at its peak and a reversal precipitates false liquidation, depressing real estate values.

The bubble that led to the current financial crisis is much more complicated. The collapse of the sub-prime bubble in 2007 set off a chain reaction, much as an ordinary bomb sets off a nuclear explosion. I call it a super-bubble. It has developed over a longer period of time and it is composed of a number of simpler bubbles. What makes the super-bubble so interesting is the role that the smaller bubbles have played in its development.

The prevailing trend in the super-bubble was the ever increasing use of credit and leverage. The prevailing misconception was the believe that financial markets are self-correcting and should be left to their own devices. President Reagan called it the “magic of the marketplace” and I call it market fundamentalism. It became the dominant creed in the 1980s. Since market fundamentalism was based on false premises its adoption led to a series of financial crises. Each time, the authorities intervened, merged away, or otherwise took care of the failing financial institutions, and applied monetary and fiscal stimuli to protect the economy. These measures reinforced the prevailing trend of ever increasing credit and leverage and as long as they worked they also reinforced the prevailing misconception that markets can be safely left to their own devices. The intervention of the authorities is generally recognized as creating amoral hazard; more accurately it served as a successful test of a false belief, thereby inflating the super-bubble even further.

It should be emphasized that my theories of bubbles cannot predict whether a test will be successful or not. This holds for ordinary bubbles as well as the super-bubble. For instance I thought the emerging market crisis of 1997-1998 would constitute the tipping point for the super-bubble, but I was wrong. The authorities managed to save the system and the super-bubble continued growing. That made the bust that eventually came in 2007-2008 all the more devastating.

What are the implications of my theory for the regulation of the financial system?

First and foremost, since markets are bubble-prone, the financial authorities have to accept responsibility for preventing bubbles from growing too big. Alan Greenspan and other regulators have expressly refused to accept that responsibility. If markets can’t recognize bubbles, Greenspan argued, neither can regulators—and he was right. Nevertheless, the financial authorities have to accept the assignment, knowing full well that they will not be able to meet it without making mistakes. They will, however, have the benefit of receiving feedback from the markets, which will tell them whether they have done too much or too little. They can then correct their mistakes.

Second, in order to control asset bubbles it is not enough to control the money supply; you must also control the availability of credit. This cannot be done by using only monetary tools; you must also use credit controls. The best-known tools are margin requirements and minimum capital requirements. Currently they are fixed irrespective of the market’s mood, because markets are not supposed to have moods. Yet they do, and the financial authorities need to vary margin and minimum capital requirements in order to control asset bubbles.

Regulators may also have to invent new tools or revive others that have fallen into disuse. For instance, in my early days in finance, many years ago, central banks used to instruct commercial banks to limit their lending to a particular sector of the economy, such as real estate or consumer loans, because they felt that the sector was overheating. Market fundamentalists consider that kind of intervention unacceptable but they are wrong. When our central banks used to do it we had no financial crises to speak of. The Chinese authorities do it today, and they have much better control over their banking system. The deposits that Chinese commercial banks have to maintain at the People’s Bank of China were increased seventeen times during the boom, and when the authorities reversed course the banks obeyed them with alacrity.

Third, since markets are potentially unstable, there are systemic risks in addition to the risks affecting individual market participants. Participants may ignore these systemic risks in the belief that they can always dispose of their positions, but regulators cannot ignore them because if too many participants are on the same side, positions cannot be liquidated without causing a discontinuity or a collapse. They have to monitor the positions of participants in order to detect potential imbalances. That means that the positions of all major market participants, including hedge funds and sovereign wealth funds, need to be monitored. The drafters of the Basel Accords made a mistake when they gave securities held by banks substantially lower risk ratings than regular loans: they ignored the systemic risks attached to concentrated positions in securities. This was an important factor aggravating the crisis. It has to be corrected by raising the risk ratings of securities held by banks. That will probably discourage loans, which is not such a bad thing.

Fourth, derivatives and synthetic financial instruments perform many useful functions but they also carry hidden dangers. For instance, the securitization of mortgages was supposed to reduce risk thru geographical diversification. In fact it introduced a new risk by separating the interest of the agents from the interest of the owners. Regulators need to fully understand how these instruments work before they allow them to be used and they ought to impose restrictions guard against those hidden dangers. For instance, agents packaging mortgages into securities ought to be obliged to retain sufficient ownership to guard against the agency problem.

Credit default swaps (CDS) are particularly dangerous they allow people to buy insurance on the survival of a company or a country while handing them a license to kill. CDS ought to be available to buyers only to the extent that they have a legitimate insurable interest. Generally speaking, derivatives ought to be registered with a regulatory agency just as regular securities have to be registered with the SEC or its equivalent. Derivatives traded on exchanges would be registered as a class; those traded over-the-counter would have to be registered individually. This would provide a powerful inducement to use exchange traded derivatives whenever possible.

Finally, we must recognize that financial markets evolve in a one-directional, nonreversible manner. The financial authorities, in carrying out their duty of preventing the system from collapsing, have extended an implicit guarantee to all institutions that are “too big to fail.” Now they cannot credibly withdraw that guarantee. Therefore, they must impose regulations that will ensure that the guarantee will not be invoked. Too-big-to-fail banks must use less leverage and accept various restrictions on how they invest the depositors’ money. Deposits should not be used to finance proprietary trading. But regulators have to go even further. They must regulate the compensation packages of proprietary traders to ensure that risks and rewards are properly aligned. This may push proprietary traders out of banks into hedge funds where they properly belong. Just as oil tankers are compartmentalized in order to keep them stable, there ought to be firewalls between different markets. It is probably impractical to separate investment banking from commercial banking as the Glass-Steagall Act of 1933 did. But there have to be internal compartments keeping proprietary trading in various markets separate from each other. Some banks that have come to occupy quasi-monopolistic positions may have to be broken up.

While I have a high degree of conviction on these five points, there are many questions to which my theory does not provide an unequivocal answer. For instance, is a high degree of liquidity always desirable? To what extent should securities be marked to market? Many answers that followed automatically from the Efficient Market Hypothesis need to be reexamined.

It is clear that the reforms currently under consideration do not fully satisfy the five points I have made but I want to emphasize that these five points apply only in the long run. As Mervyn King explained the authorities had to do in the short run the exact opposite of what was required in the long run. And as I said earlier the financial crisis is far from over. We have just ended Act Two. The euro has taken center stage and Germany has become the lead actor. The European authorities face a daunting task: they must help the countries that have fallen far behind the Maastricht criteria to regain their equilibrium while they must also correct the deficinies of the Maastricht Treaty which have allowed the imbalances to develop. The euro is in what I call a far-from-equilibrium situation. But I prefer to discuss this subject in Germany, which is the lead actor, and I plan to do so at the Humboldt University in Berlin on June 23^rd. I hope you will forgive me if I avoid the subject until then.

Via George Soros.com, h/t My Investing Notebook

Market Update: Dow Jones, Crude Oil, Euro, Sterling and GOLD

Posted: 13 Jun 2010 01:06 PM PDT

When you're trading short term timeframes it's important to have a check of what the long term timeframes are doing as somewhere along the line they interlink with one another providing critical levels and trading triggers.

Posted: 13 Jun 2010 08:46 AM PDT

By William Pesek
Bloomberg News
Monday, June 14, 2010

http://www.bloomberg.com/apps/news?pid=20601039&sid=a4JyC8zMpSVU

TOKYO -- Alan Greenspan had his conundrum. Now Ben Bernanke has his enigma.

"I don't fully understand movements in the gold price," Bernanke said on Capitol Hill last week.

ADVERTISEMENT

Prophecy to Become Coal Producer This Year
with 1.5 Billion Tonnes of Resource

Prophecy Resource Corp. (TSX.V: PCY) announced on May 11 that it has entered into a mine services agreement with Leighton Asia Ltd. to begin coal production this year. Production will begin with a 250,000-tonne starter pit as planned in August, with production advancing to 2 million tonnes per year in 2011. Prophecy is fully funded to production and its management team includes John Morganti, Arnold Armstrong, and Rob McEwen.

For Prophecy's complete press release about its production plans, please visit:

http://www.prophecyresource.com/news_2010_may11.php

It's hard to decide what's more frightening: that investors are losing confidence in paper money or that the shepherds of the world's major currencies don't get what's going on. Gold's climb of almost 30 percent in a year reflects fear, not just market concern over inflation or deflation risks. People have lost trust in the global financial system.

A question here is what central banks do. Many are sitting on too many dollars for comfort and upping gold reserves may be the diversification move of choice.

"I believe the biggest customer base will be Asia," says Santer. "And if Ben Bernanke doesn't see why, then we have even more reason to worry about the global economy."

The post-Lehman world is dispelling such notions and we may be on the cusp of history's greatest gold rush. Bernanke and his peers would be wise to contemplate why.

-----

William Pesek is a columnist for Bloomberg News.

* * *

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Or a colorful poster of GATA's full-page ad in The Wall Street Journal on January 31, 2009:

http://gata.org/node/wallstreetjournal

Or a video disc of GATA's 2005 Gold Rush 21 conference in the Yukon:

http://www.goldrush21.com/

* * *

Help keep GATA going

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at:

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To contribute to GATA, please visit:

http://www.gata.org/node/16

Obama Begins "Lifestyle Health Modification" Program, Mandating Behavioural Changes Within US Society

Posted: 13 Jun 2010 07:30 AM PDT

Last week, with little fanfare, among the ever deteriorating oil spill crisis, the White House quietly noted the issuance of an executive order "Establishing the National Prevention, Health Promotion, and Public Health Council", in which the president, citing the “authority vested in me as President by the Constitution and the laws of the United States of America” is now actively engaging in "lifestyle behavior modification" for American citizens that do not exhibit "healthy behavior." At least initially, the 8 main verticals of focus will include: smoking cessation; proper nutrition; appropriate exercise; mental health; behavioral health; sedentary behavior; substance-use disorder; and domestic violence screenings. Eventually we fully anticipate that the program will also target such wholesome activities as screening for precious metal holdings, monthly minimum usage of available revolving credit (and a minimum threshold thereto) and the susceptibility of an individual to stay current on one's mortgage. Additionally, the president will establish yet another Advisory Group, composed of "experts" picked from the public health field, and one which tracks the successful uptake by the US population of the precepts for a better functioning society that the president deems important. Cosmo culture has just been adopted by the White House, where Big Brother is now in the business of counting calories, and soon, your bars of gold.

From the Executive Order, defining the duties of the Council:
Sec. 3. Purposes and Duties. The Council shall:

(a) provide coordination and leadership at the Federal level, and among all executive departments and agencies, with respect to prevention, wellness, and health promotion practices, the public health system, and integrative health care in the United States;

(b) develop, after obtaining input from relevant stakeholders, a national prevention, health promotion, public health, and integrative health-care strategy that incorporates the most effective and achievable means of improving the health status of Americans and reducing the incidence of preventable illness and disability in the United States, as further described in section 5 of this order;

(c) provide recommendations to the President and the Congress concerning the most pressing health issues confronting the United States and changes in Federal policy to achieve national wellness, health promotion, and public health goals, including the reduction of tobacco use, sedentary behavior, and poor nutrition;

(d) consider and propose evidence-based models, policies, and innovative approaches for the promotion of transformative models of prevention, integrative health, and public health on individual and community levels across the United States;

(e) establish processes for continual public input, including input from State, regional, and local leadership communities and other relevant stakeholders, including Indian tribes and tribal organizations;

(f) submit the reports required by section 6 of this order; and

(g) carry out such other activities as are determined appropriate by the President.

For some reason item (g) seems supiciously similar to the Goldman Sachs ethics waiver.

For a slightly less politically correct and slightly truthier interpretation of this latest invasion into individual privacy, Nanny State has the following opinion:

Whether you are a child, a parent, a worker, or retired, the President’s approximately 25-member “Advisory Group” will soon be present in every aspect of Americans’ lives, as the Executive Order prescribes. Specifically, our new so-called lifestyle behavior modification advisors will be actively carrying out the President’s orders in:
worksite health promotion;
community services, including community health centers;
preventive medicine;
health coaching;
public health education;
geriatrics; and
rehabilitation medicine.
President Obama’s sweeping plan to enforce “lifestyle behavior modification” is chock full of open-ended target areas, especially when it comes to issues of “mental” and “behavioral” health, “proper nutrition,” “sedentary behavior,” and “appropriate exercise.” The President’s Executive Order is a blatant and forceful attempt to adjust the way Americans young and old think, behave, eat, drink and whatever else free will used to entitle our nation’s citizens to enjoy as prescribed by the Founding Fathers.

If you are feeling stressed-out, sad, confused, hungry, thirsty, bored, or tired, do you honestly trust President Obama and his “Advisory Group” to act in your best interests?

Way to go Rahm: yet another unprecedented ecological crisis used skillfully by the administration to pass a covert and some would say unconstitutional executive order. On the other hand, we asked some time ago just what is the constitution to a constitutional law professor? Gradually every person in America is starting to understand the very unpleasant answer to that question.

h/t John

Gold, Oil & SPX Trading at Key Pivot Points

Posted: 13 Jun 2010 07:16 AM PDT

Gold – Daily Chart

The price of gold continues to form the large cup and handle pattern and is trading near resistance. This week I figure we will see gold make a move up or break the dotted support trend line and drop towards the blue support level. I continue to wait for a low risk setup for gold.

Crude Oil – Daily Chart

SP500 – Daily Chart

Weekend Gold, Oil and SPX Trading Conclusion:

If you would like to receive my Low Risk ETF Trading Signals be sure to checkout my service at: www.TheGoldAndOilGuy.com

Chris Vermeulen

Is The Market Correction Over?

Posted: 13 Jun 2010 06:21 AM PDT

Now that the market has decisively entered into correction territory, two of the most bullish investment banks around, Goldman and Deutsche Bank, are long overdue for reports that describe just how this event was dully expected and in fact, priced in, and that investors should in now way draw and conclusions about a potential recession emerging from something as innocuous as a recession. Furthermore, the 10%+ pullback is "perfectly normal", and has no impact on either Goldman's 1,250 or DB's 1,375 end of year target for the S&P. And yet, there is a 'but' - both firms now sound far less confident than they did a few short months ago, and the hedging of year end targets has begun (more so at GS than DB). And while Goldman's report is more focused on the European context, and is thus appreciably more bearish, Goldman's tone is far more subdued than Deutsche's, which is understandable: with assets at two thirds of German GDP, and with a government dead set on minimizing bank bailouts for the foreseeable future, the German bank has far less margin for reality than the primary recipient of Hank Paulson's bailout generosity.

First, we present the opinion of Goldman's Sharon Bell, who most certainly is neither David Kostin nor A. Joseph Cohen.

The pace of global economic growth is showing signs of slowing, although the level itself remains high. It is frequently the case that markets suffer a setback when growth indicators turn down – even if other factors such as strong earnings growth and loose monetary policy remain in place. We analyze market corrections in previous similar periods and argue that much of the slowdown in growth is already now discounted.

In addition, the European market is facing other headwinds, namely sovereign debt risks, bank funding issues and concerns over fiscal tightening. We acknowledge that these concerns are likely to mean the risk premium stays higher for longer, and as such reduce our year-end target for the STOXX Europe (SXXP) to 280 from 300.

The primary client concern that Goldman attempts to address is the slowing momentum in various macro economic indicators. This is particularly relevant now that the ECRI leading economic index posted its 44th sequential weekly decline this Friday, and has for the first time plunged to an annualized negative rate. As Bell says:

The correction in the market can be attributed to a number of factors, including sovereign debt concerns, fiscal tightening, bank funding and the possibility of greater regulation from policymakers. All of these have contributed to the rise in risk perception and concerns over the medium-term outlook for growth. But fears have also started to accumulate about a slowdown in the current momentum of economic growth. In the US, there have been some weak payroll numbers, in Europe, the PMIs have come off their highs, and our proprietary global lead indicator (GLI) has started to show signs of slowing momentum (although the headline numbers are still very strong).
This point in the cycle, when growth has picked up from the trough but momentum is starting to show signs of peaking, is often a soft period for equity markets. We alluded to this at the end of last year in our 2010 outlook piece, Europe: Portfolio Strategy: Outlook 2010, December 2, 2010. We didn’t expect the falls that we have seen, but we did see the period when growth momentum started to slow as a trigger for a more subdued period of equity market returns, and discussed the risks of a temporary setback in equities (although this was not our core view).

This risk has now become a reality and it is useful to compare the falls seen in this current correction with those of previous similar periods. In Europe, there have been four correction periods that in our view are most comparable to today: 1976, 1984, 1994/95 and 2004. In each of these periods, there was a correction in the equity market that coincided with (or was very close to) a slowdown in the main lead indicators, the ISM, GLI, and the German IFO.

Goldman's empirical study indicates that in the US, of the five "corrections" which commenced at around the time the "growth" phase of the economy was ending, and was being supplanted by the "optimism" phase (toward the end of the economic expansion, when markets rise faster than earnings growth and hence multiples rise rapidly), on average record a 14% real correction for the S&P 500. On the other hand the 12 month pre correction rise in the market was 25%, not nearly the double seen from March 2009 to 12 month later, this begging the question just how relevant, if at all, any empirical studies on this matter are at a time of unprecedented monetary and fiscal stimulus. Additionally, as Rosenberg will point out, none of the prior discussed recessions were both a manufacturing and a credit crunch. This in itself renders Goldman's entire study worthless.

Goldman summarizes these results as follows:

There are a number of observations worth making:
On average, the market fell by 13% during these corrections, 15% in real terms.
So far, Europe has fallen by 15% and the US by 14% from the mid-April peaks.
The duration of these corrections has averaged 150 days, or five months.
So far, the current correction has lasted just under two months; if it should last a similar time to previous corrections, then October would mark a turning point.
The rise in the market this time in the 12 months prior to the correction was 43% versus an average rise of 24% prior to historical corrections. However, there is no obvious relationship between the size or duration of these corrections and the rise in the market in the previous 12-month period.
On average, the corrections do coincide with the peak in the survey data, but the market sometimes leads by a few months and sometimes lags.
Given that these corrections lasted only 4-5 months, a key question is what the catalyst was for markets eventually turning again.

A good question, and those interested can read up on it in the attached full presentation, which however as we pointed out in our opinion is fatally flawed, as there is no direct connection between a correction seen in the current environment in which the very survival of stimulus driven intervention is at stake, and prior plain vanilla recessions driven by economic overcapacity. The fact that Goldman even consider comparing such apples and organes is indicative of the naievete of some of the firm's economists (or their outright disdain for the intellectual capacity of their clients).

It is no surprise that based on the presented cherry picked data, Goldman says:

"We would not recommend a short position on European equities from this point; we continue to believe the valuation case is strong, that policymakers are ultimately doing the right thing in reducing fiscal spending and that this will not have a huge detrimental impact on growth (indeed, we believe quite the opposite)."

But, here is the but part:

But there are clear hurdles for the market; our economists expect growth in the US economy to slow to 1.5% qoq annualized in 3Q and 4Q of this year before the economy rebounds again from 1Q2011. At the same time, China’s economy is likely to gradually slow as tighter monetary conditions impact on growth. Finally, the concerns about the policy framework in Europe are unlikely to be fully addressed over the next few months.

Given this, we acknowledge that the risk premium is likely to stay higher for longer. We therefore lower our year-end target for the STOXX Europe to 280 from 300 and now expect the STOXX Europe to reach 300 only in 12 months’ time. On a threemonth basis, we move our SXXP target down to 250 from 270 and on a six-month view, we move it down to 280 from 290.

However, these targets still represent reasonable returns on the year. Our new year-end target implies a nominal price return of 10.3% for 2010, roughly in line with the historical average real price return in the Growth phase of 10.9%.

And while Goldman's attempted defense of the status quo comes off as marginally credible if rather disingenuous, DB's analysis of why the correction is unlikely to be disruptive is a work of art. The ever optimistic Binky Chadha leads of with the following:

Equity market corrections outside of recessionary periods have typically not derailed economic recoveries. Out of the 14 such post-war episodes, only 3 eventually slowed payrolls growth. Common to all 3 of these episodes were equity market declines of more than 20% and sell downs lasting more than 7 months. These were joint necessary conditions. In the current context, this would imply the S&P falling below 975 and the correction dragging on till mid-November. But fundamental initial conditions are also important and, in our view, the main cyclical driver of the current recovery, the large gap between final demand and corporate activity levels, remains and will continue to drive corporate spend and hiring.

The full-on assault against any bearishness continues:

Historically, episodes of risk aversion have lasted an average of 2 months, which translates to mid-July for the current episode. As to fundamental catalysts, first, we see mutual funds and long short equity funds as defensively positioned, while non-dedicated equity investors are short equities and record short the euro. A positioning squeeze is possible at any point, but to sustain will likely require other catalysts. Second, a heavy calendar of Euro-periphery debt rollovers in July argues risk aversion will persist through then. Third, Q2 earnings reporting season begins mid-July. Investors have covered underweights going into recent earnings seasons. This time, concerns about euro appreciation and slowing growth may make them slower to cover, but with many companies noting limited impacts, it remains a distinct and likely possibility. Fourth, we view last week’s payrolls as leaving the labor market recovery trend intact. Labor income, the driver of consumer spending, grew at a healthy 7% annual rate. The trend in payrolls also indicates the recovery in the labor market is on track though jobs growth in earnest will begin only in July, reported in the first week of August.

How naive of us to think that Mr. Chadha would mention even one of the relevant economic statistics this time around, such that the labor market is now completely distorted courtesy of the millions of transient workers entering and leaving thanks to the census. But yes, pointing out that companies see limited impact of a historic move in the FX scene, with the dollar now back to post-Lehman highs, is truly value added. Maybe next Binky can deconstruct the great foresight the Fed's Chairman had in 2006 when he said the subprime crisis was contained, and when in 2007 all major IB economicsts saw an S&P north of 1,600 by the end of the following year.

Just in case the DB spin is not quite heard, Binky continues:

Our baseline remains that the economic recovery will continue, driven as it has been so far by the large sales-production gap which remains sizable. On this baseline view and the implied path of corporate earnings, equities are inexpensive (S&P 500 trading today at 12.7x 2010, 12.3x normalized and 11.3x 2011 earnings) and will likely correct up as they have in past episodes when corrections did not disrupt the economic recovery. We therefore maintain our year-end target of 1375 (16.4x $84.6) on the S&P 500. But the rally in equities reconnecting to the economic recovery will likely take time. Both history and a variety of fundamental catalysts suggest risk aversion will persist through July and this is our baseline view. The persistence of risk aversion or vol by definition of course means that the range for the S&P can and likely will be large. Indeed a narrowing of trading ranges would be a sign that the episode of risk aversion was coming to an end. Key levels in the S&P 500 to note are (i) 975 which would mark 20% down and what history suggests is a necessary condition for disrupting the recovery; and (ii) 915 which would mark 25% down, which is the average recession decline from the recent 1217 peak, i.e., the market would have completely priced in another average recession. On the duration of risk aversion, we see the risks from the fundamental catalysts on net as being tilted to risk aversion ending earlier than in our baseline of end July, either on a positive surprise in June payrolls or an unwind of defensive positioning as Q2 earnings deliver or provide the sixth surprise in a row. We stay fully allocated to equities.

Well, of course you do. And we would venture to guess that the stock of DB is one of the main equities you stay allocated to, as the last thing a bank as massively undercapitalized as DB needs is for the economic reality to catch up with those firms levered to the gills to an economic upturn.

Yet DB does point out one useful data point, namely that cross asset, sector and stock correlations have now spiked to 20 year highs, as the only thing driving the market are daily shifts of risk perception, and the resultant signal execution by the few computers left trading the market amongst each other. At this point, we are confident that should the current pace of market structure deterioration continue, coupled with ongoing sovereign liquidity and solvency risks, that within a few months cross correlations will finally hit 100% and all alpha-hunting hedge and mutual funds can dissolve as the only variable in stock returns will be pure beta, thus making any relative outperformance in the market impossible by definition:

Cross asset class correlations, measured by the proportion of variation in returns across equities, bonds, credit, oil and FX that is explained by the first principal component, reached a new high of 65%--above late 2008 post-Lehman peaks. Across S&P 500 sectors (93%) and stocks (75%) it also reached late 2008 peaks. While vol rose sharply, the move has been below the average of past risk aversion episodes. We interpret the high cross-asset, sector and stock correlations as indicative of investors in less liquid asset classes hedging in more liquid equity and FX markets, using the indexes to do so.

Below are some of the more interesting charts from DB on market technicals and cross-correlations:

Notably, the S&P 500 has seen a very minor % change in EPS estimates since May 20, 2010, even as companies continue to pump up earning beat after earning beat, as more and more people continue being let go, and capex plans are reduced.

And specifically on the topic of corrections, here is the chart that allegedly demonstrates that while of the past 14 corrections, only 3 have resulted in payroll slowdown, and thus the ongoing "correctional" situation should be considered safe.

In other words, to DB the critical low in the S&P, which has likely been telegraphed to the relevant market supporters, is 975. Should that level be taken out, even DB would be forced to admit that the economic double-dip has arrived. As expected, there is little mention of previous observations by both David Rosenberg and Shiller, both of whom repeatedly point out that at current levels the market is approximately 30% overvalued, based on a bottoms-up analysis. In summary, both firms are right in noting that the economic-market disconnect is starting to shift to the economy proper, as the variation between macro and micro economic indicators is starting to flash red warning light. Should the relative strength of corporate bottom line metrics, which we believe has been driven almost exclusively by ongoing years of mass layoffs and retrenchment, leading to SG&A and CapEx reduction, thus sacrificing future revenue potential, invert, then even this last bastion of economic bulls will be abandoned. It is our belief that corporations, especially multi-national exporters, will increasingly indicate future top line weakness as a result of unhedged FX losses leading to end market weakness. This will likely be the next catalyst to push the corporate micro picture to recouple with increasingly weaker macro readings.

Full DB presentation.

Attachment	Size
Correction Length.pdf	375.23 KB
DB US Equity Strategy.pdf	1.01 MB

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PGM vs. Gold/Silver: "The Precious and the Not So Precious"

Posted: 13 Jun 2010 06:08 AM PDT

Article from Seeking Alpha.

(Another meditation on the difference between the platinum & palladium on the one hand, and gold & silver on the other.

I don't believe that the end of the tailpipe will be unaccompanied by the birth of other sources of demand for PGMs, but this is interesting stuff to read, anyway. -D&F)

The bounce continues today in commodities. One interesting aspect of this April blowout, and subsequent bounce, is that precious metals have gone from all looking the same to all looking inverse. They tend to move with pretty tight correlation, being seen as inflation hedges. However, when things get frightening, the platinum group metals (PGMs – Platinum, Palladium and Rhodium) tend to get puked out, since they are seen as an inflation hedge but not a viable unit of currency.

The whole "you gotta be long gold innit" hypothesis rests on the view that people believe currencies will be debased and that the next unit of value we will settle on will be gold, as opposed to beanie babies, copper, or anything else. You begin to wonder what's so precious about PGMs if they fail this test of being the last thing you bid before you take the shotgun, baked beans and smokin' Camaro and live out the zombie survivalist fantasy of your choice. Notice the fat tail on the correlation between palladium and gold – it doesn't do what it is meant to do when you most need it to.

Chart

Team Macro Man has never entirely understood why PGMs are considered precious despite their use in jewelry, as they really are pretty industrial – autocatalysts, dental fillings, oil refineries and other very non-sexy stuff make up more than 60% of demand. Rhodium can't even be traded in ETF or futures format and looks very industrial.

To make matters worse for people of a macro trading bent, these metals as a trade have gotten pretty crowded recently. Places like Brazil, China and India are actually starting to put vehicle emissions standards in place, which has led to a lot of funds being long a lot PGMs, expecting that those standards + growth = a lot more demand for catalysts and PGMs. How is emerging market growth, an inflation hedge and government policy for an added boost? Throw in this employee of Chase Manhattan, and it would unequivocally be the hottest thing on the street. What could possibly go wrong?

The problem with this trade is that longer-term this whole electric car thing is going to crash the party in big way. No internal combustion engine means no fumes means that no autocatalyst is required. The faster that happens, the faster this story looks way out of line. Having spent some time going through all these emissions standards, you note the below: it's a great story until 2015 or so when the demand starts to flat line in the developed world and looks saggy in developing markets – and that's assuming the usual 10-12% growth rate in vehicle demand in China. Any less, and expectations in this market are getting ahead of themselves.

Chart

But that's ok, because the supply side looks dire in the short-term, as the biggest producer is South Africa with its not-so-under-control wage inflation and issues with infrastructure (especially Eskom). Even assuming a bunch of project expansions and the like come online, the picture looks like this:

Chart

Which, when you discount for various screw-ups that happen in the mining sector (especially in Zimbabwe), the market does look tight. A few hundred thousand ounces here and there, and you might get a shortage. That's great until you realize that by 2016 the market will supposedly have just shy of ten million ounces in stockpiled PGMs largely held by people looking to hedge inflation and who will be looking to sell all at once, since the rationale for stockpiling this stuff breaks down once you realize that 2020's Camaro is probably going to have engine specs measured in Watts and not Liters. What's worse, is that by that time every marginal car on the road will be replacing some other car that (before being crushed into a cube of steel) will have its catalytic converter removed to be reprocessed and – you guessed it – pushed back into supply. Negative feedback is a bitch ain't it?

George Soros has recently described gold as the ultimate bubble, but gold isn't facing some looming technical threat that is likely to do really bad things to its demand. So long as people are hoarding shotguns and baked beans, they will probably be hoarding gold too. For PGMs, that's a much harder case to make, since anyone who sees this as a long-term inflation hedge, is smoking some pretty strong stuff. For those looking to play the short-term supply squeeze in the market ,which is likely to be a feature of the next few years at least, team MM has one thing to say – watch the gap.

World Spotlight on South Africa

Posted: 13 Jun 2010 05:00 AM PDT

South Africa takes to the world stage today as it hosts the first World Cup to be played on the African continent. For the next 30 days, the eyes of the globe will be watching Rooney, Cristiano Ronaldo, Maicon and Messi battle it out for world soccer supremacy.

South Africa's $287 billion economy is already the largest in Africa and it's estimated that the World Cup will generate 400,000 jobs and contribute $7.3 billion to the country's GDP, according to research firm Grant Thornton. It estimates 450,000 tourists will visit the country spending a total of $1.1 billion.

In preparation for this event, South Africa has given itself quite the makeover. This infographic from MENA Infrastructure details how South Africa has made substantial upgrades in its infrastructure (click to visit larger version).

A reported $2.2 billion was spent on 10 stadiums that will host the matches. Some of these, like the 46,000 seat Nelson Mandela Bay stadium in Port Elizabeth, the first stadium in the world to be completely powered by green energy, were new construction while others, like the 95,000 Soccer City stadium in Johannesburg, received major upgrades.

Another $9.1 billion was invested in the country's road systems, $2.4 billion in airports and $2 billion on a new commuter rail. In all, the World Cup infrastructure program is estimated to have brought $52 billion in investment.

Once the games are over, the South African government hopes the investment will continue to pay dividends. World Cup hosts have experienced increased economic growth in the two years following the event. Analysis from Credit Suisse shows the host countries experienced 2.7 percent and 2.6 percent growth, respectively, in the years leading up to the World Cup but saw 3.2 percent and 3.7 percent economic growth in the two years after.

Only time will tell if this scenario plays out. Luckily we have the world's best tournament to keep us entertained in the meantime. Enjoy the Cup!

Regards,

Frank Holmes,
for The Daily Reckoning

P.S. You can visit my blog, Frank Talk, for more daily commentary.

[Editor's Note: Frank Holmes will be offering insight like the above, and more, at July's Agora Financial Investment Symposium, along with Marc Faber, Bill Bonner, and Doug Casey and many others. You can register for the event here.]

World Spotlight on South Africa originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

European Weekly Digest, Straight From Chiswick

Posted: 13 Jun 2010 04:39 AM PDT

Chiswick's (and, of course, Goldman's) very own European permabull, Erik Nielsen, who just like his other N-11 permabullish colleague is sorely lamenting the Hand of Clod, is back to discuss the merits of flying transatlantic coach, the wonderfully sound economic edifice that is Europe, and the "overblown" concerns over the Swiss National Bank building up an FX reserve position that is approaching one half of Swiss GDP. As Erik observes: "now there is someone – appropriately – not worrying about their balance sheet!" - indeed, why worry. When the time to really worry comes, it will be far too late.

Europe this week

Happy Sunday,

I am just back from a fabulous week in the US (more below), and completely jetlagged; that’s what happens when you sit right in front of a lovely, but very noisy, baby on the flight home, preventing you from getting any sleep. So with the risk of seeing everything in a somewhat hazy light, here’s my view of Europe on “father’s day”:
In the ongoing battle between the economic recovery and markets, the former is up another set; good macro numbers this past week and markets are starting to respond.
Loads of other events last week that might have contributed to the better markets.
US investors who I met with last week are starting - on balance – to turn slightly less bearish on everything European – long way still to go, for sure!
The highlight of this coming week will be the European Summit on Thursday-Friday; future policy coordination (and the SPV) will be on the agenda (along with many other things).
The summit will also be a de facto hand-over of the EU presidency from Spain to Belgium; the latter without a government and rising debt and debt service ratios – needs to be watched carefully.
Spain is expected to decree labour market reforms on Wednesday; good news although there is a risk that they wont go far enough at this stage.
The Euro-zone will print good IP numbers for April, and further (slightly) deteriorating labour markets.
The UK is set this week to print inflation (slightly lower), housing data, and much better retail numbers.
&iddot;In Switzerland the SNB’s quarterly Monetary Policy Assessment is on Thursday; interesting following their explosive FX-interventions.
1            As I have discussed on several occasions since the Greek package was approved, its like a huge battle has emerged between, on the one side, the Euro-zone’s real economy’s still somewhat fragile recovery, and on the other side, financial markets gripped by all sorts of anxieties; some of them real, many of them exaggerated, and some bordering (in my opinion) on unrealistic assumptions married with insufficient understanding of European policy determination and abilities.   In this battle, the real economy got the upper hand in recent days: Industrial production rose handsomely throughout most of the Euro-zone in April, and real numbers right outside the Euro-zone periphery – from Scandinavia to Central Europe to Switzerland – continue to print even better growth numbers; a phenomenon highly unlikely to square with an imminent collapse of the Euro-zone economy. (That said I was a bit disappointed with the composition of Q1 GDP which had more inventory build-up than we had expected.) Meanwhile, markets started responding around mid-week; led by Spanish banks, the FTSE Eurofirst ended the week up 2%, EUR/USD was up 1.2% on the week and sovereign spreads stabilised. The interbank market still looks deeply stressed, of course.

2            Apart from the pretty good macro numbers, there were several other things last week that might have helped calm markets: (a) The IMF published a well-balanced “Concluding Statement” for the Euro-zone on Monday; (b) in spite of the general nervousness, Spain delivered a decent auction on Wednesday; (c) we held our big annual equity conference in Madrid, providing an important platform for many companies to tell their story to an important audience (when I asked investors in the US what drove the equity market stronger Wednesday and Thursday, the conference was mentioned several times, particularly with respect to the Spanish banks); (d) the ECB’s press conference on Thursday was uplifting, particularly compared with the previous one; it was good to see Trichet back on the high road after recent mud-fights with some of the journalists; (e) the German Constitutional Court’s decision later on Thursday not to impose an injunction on Germany’s participation in the SPV was good news; and (f) Moody’s own stress test of 30 (unnamed) banks in ten Euro-zone countries on Friday concluded that the banks can handle losses even under some pretty severe economic circumstances. Incidentally, on the stress tests: So obvious that it should be done, and yet so practically and politically complicated. But it was good to see Spanish finance minister Salgado promising in today’s El Pais that the restructuring of Spain’s financial system will be complete by the end of the June, and then “all the remaining entities are sufficiently solvent, they meet all the criteria, they face a relaxed situation in terms of capital, and so that’s done;” she might have gotten a little carried away there, but no doubt in my mind that they are aggressively pursuing their bank work-out now.

3            In spite of it all, it is of course still too early to declare victory for the real sector and conclude that the financial stress is subsiding, but I do think the pendulum may have started to swing back towards some (new) level of normality. Specifically, last week in the US I had a very large number of meetings with (traditionally) wonderfully Europe-sceptical investors on the East Coast, and while there definitely is still a lot of scepticism out there – including outright hostility – towards European assets in general, I also met an increasing number of people (compared with my last trip a month ago) who took a more balanced view of the European future; be it in terms of the positive growth effects of the weaker Euro, a better appreciation of the adjustment process already under way, and/or of the policy determination to fight back. It’s fair to say that the “decisively Europe-negative investors” (for lack of a better term) still form a majority of those I met with last week, but the proportion was clearly smaller than a month ago. Maybe we could even get to break-even between the two categories before the summer break!

Turning to this coming week:

4            The most important event of this coming week will be the European Summit on Thursday-Friday in Brussels. Merkel and Sarkozy meet tomorrow, Monday, in Berlin in their usual attempt to coordinate their positions ahead of summits. There are a host of items on the agenda, including formal approval of Estonia’s accession to the Euro-zone from January, discussion of regulation of derivative markets, preparation for G20 on June 26-27 and the crisis between Israel ands Turkey. But the key item on the agenda will be “economic governance”, i.e. the future policy coordination, not only among the 16 (soon to be 17) Euro-zone members, but for all 27 EU members. The Commission has already outlined the framework for the coordination, so now it’ll be about the tough part of enforcement. A group of countries, led by Germany, will be calling for ways to take enforcement beyond peer pressure and name-and-shame, to include, for example, the temporary loss of voting rights and/or loss of transfers and subsidies. I suspect that legal experts are busy right now deciding how far you can push this envelop within the existing treaty (in spite of the many interesting proposals out there, there is no appetite for a new treaty.) The Summit is also likely to approve the SPV (next will then be the appointment of a CEO; the press has suggested that Klaus Regling is the leading candidate – excellent choice, if confirmed.)

5            The Summit will be the last under the Spanish presidency after which it’ll be handed over to Belgium. However, if history is any guide then Belgium (and hence the EU) will be run by a caretaker government for possibly several months, following today’s national elections in Belgium. Because of the great degree of de-centralised decision making, it almost feels like Belgians don’t really care that much about their national government. And this time there is additional uncertainty because of the strong showing in the opinion polls by the separatist New Flemish Alliance. For us in the market, this is an increasing concern that needs to be watched carefully. Belgium’s public net debt is likely to go through 100% of GDP within the next year or so, and their financing requirements are among the largest in Europe this year and next.

6            On the more uplifting side, Wednesday will see labour markets reforms in Spain. Trade unions and employers failed to reach agreement by the deadline of last Friday, so the government will now introduce a series of changes by degree. As Javier Perez de Azpillaga has argued, the reforms are likely to include lower dismissal costs, the promotion of permanent (vs. temporary) jobs, flexibility (reduction of working hours instead of outright dismissal), some elements of Scandinavia’s “flexicurity” system (for example, companies would pay only part of the dismissal costs) and a more flexible collective agreement framework in which individual firms can opt out more easily from geographic/sector agreements. The issue of a more flexible collective bargaining system is crucial, in our view.

7            On the data front, we’ll get Euro-zone industrial production for April tomorrow, Monday, (EMEA-MAP 5). Based on the individual country numbers so far, we estimate that IP in the Euro-zone as a whole was up by a robust +0.6%mom non-annualised (after 1.5% in March). Then on Tuesday we’ll get the Q1 employment report. Although various countries have already reported their labour market numbers based on their national methodologies, the harmonised statistics will provide a unified picture of employment developments in the early part of this year. Employment in the Euro-zone contracted 0.3%qoq in Q4, and thus far, only the German labour market has shown any significant signs of improvement. We therefore expect employment to have fallen a further 0.3% in Q1. Also, the full CPI breakdown is out on Wednesday. Headline CPI ticked up from 1.5%yoy to 1.6% in May according to the flash estimate released last week. This increase mainly reflected a small energy-related base effect, and country data suggests core inflation continued to ease. The full breakdown on Wednesday should provide further insight into the key drivers of these recent developments. Finally, the ECB’s bulletin for June will be released on Thursday; always a good read.

8            In the UK a pretty long list of data releases starts on Tuesday with May inflation releases; we expect CPI to ease marginally to 3.6%yoy and RPI to ease to 5.1% (from 5.3%). Tuesday will also see the RICS housing market survey for May and DCLG house prices for April. On Wednesday we’ll get important unemployment numbers (- ILO definition, 3-months to April; EMEA-Map relevance 4 where we expect unchanged unemployment at 8.0%, and claimants for May unchanged at 4.7%. Before Wednesday is over we also have earnings numbers, and then on Thursday it is the pretty important retail numbers for May (EMEA-Map 3); we expect an acceleration to 0.3%mom (from 0.1% in April); 3.8%yoy. Finally Friday morning we’ll get PSNB and PSNCR for May; we see both broadly doubling from April to &ound;19bn and &ound;22bn, respectively.

9            The highlight of this coming week in Switzerland will be the SNB’s quarterly Monetary Policy Assessment on Thursday. We expect no change in rates and also no change in the language on FX interventions (recent months’ intervention has boosted fx-reserves to some CHF 232bn from their usual level of around CHF 60bn; now there is someone – appropriately – not worrying about their balance sheet!)

… and that’s the way Europe looks right now from beautiful Chiswick. Off to the High Street for a caffeine infusion so I can stay awake for a few more hours.

Tomorrow, the Red and Whites are expected to demolish the Orange …. If only.

Best

Erik F. Nielsen

Save Your ASSets First

Monday, June 14, 2010