Euro bail-out in doubt as ‘hysteria’ sweeps Germany

Mrs Merkel has cancelled a high-profile trip to Russia on September 7, the crucial day when the package goes to the Bundestag and the country’s constitutional court rules on the legality of the EU’s bail-out machinery.

If the court rules that the €440bn rescue fund (EFSF) breaches Treaty law or undermines German fiscal sovereignty, it risks setting off an instant brushfire across monetary union.

The seething discontent in Germany over Europe’s debt crisis has spread to all the key institutions of the state. “Hysteria is sweeping Germany ” said Klaus Regling, the EFSF’s director.

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I have observed over years that during certain time windows (see 9am to 10am New York time) gold takes a hammering. This has happened with such commonality that you can *almost* set your watch by it. When I say almost what I mean is that in the last year or so the pattern has been intermittent, yet this morning it has come back with a vengeance.

This is the hardest smash down of the gold price within 10 minutes that I have ever seen in several years of watching how it behaves every single day. $42 in the space of 10 minutes is pretty impressive. I will not be surprised to find another margin rate hike by CME has been announced by end of day.

This was the same tactics used when silver took its 30+% hit in May.

Once margin requirements are set to 100%, there are no more tools in the chest to use for this type of thing. No doubt we will see that in time, both in gold and silver.

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Temporary bottom is in as of last Thursday 25th with gold hitting $1703.40.

Gold could retest the 50DMA at or near $1638.92, but I wouldnt count on it. I remember having a discourse with some of my colleagues regarding when silver took its 30+% whack back in May when it hit $34 – some were thinking it was going to go lower and said as much. I didnt think so. I am getting the same signals re gold this time.

VIX came down on Friday after the Jackson Hole but is still above 35.

For the last month silver has performed with very little strength compared to how it usually behaves when gold moves. Silver is still extremely undervalued today and its fundamentals are excellent for the long term.

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After Jon Stewart’s recent hammering of the general media over Ron Paul’s “blackout’ – it looks like the kind Doctor is finally getting some love:

Obama in Close Race Against Romney, Perry, Bachmann, Paul

Romney has slight edge over Obama, Bachmann slightly lags

by Frank Newport
PRINCETON, NJ — President Barack Obama is closely matched against each of four possible Republican opponents when registered voters are asked whom they would support if the 2012 presidential election were held today. Mitt Romney leads Obama by two percentage points, 48% to 46%, Rick Perry and Obama are tied at 47%, and Obama edges out Ron Paul and Michele Bachmann by two and four points, respectively.

Oh my, did they actually say his name?

Full article here

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A little over one year ago AFE sent out our June 2010 edition of the Global Insider in which we discussed the gold supply demand equation and pointed out that the only thing that made up for the gaping 500 ton deficit in gold supply that central banks were no longer selling was the scrap gold supply which had made huge increases, up to 1600+ tonnes per annum.

The 2010 supply demand situation is as follows:
Mine supply of ~2500 tonne
Scrap supply of ~1650 tonne
Total:                    ~4150 tonne

When you subtract the 76 tonnes bought by Central Banks, you end up with about 4074 tonnes supply for the year.

Global Demand for 2010 was ~4000 tonne

When we published our newsletter we pointed out that at some point the scrap supply of “Grandmas Gold” would run out – this appears to have started. If this continues on this trajectory we are looking at a MAJOR portion of global annual gold supply drying up, right when demand is skyrocketing. The potential effect on price moving forward should be obvious.

Article from Reuters 8/12:

http://www.reuters.com/article/2011/08/12/us-global-gold-scrap-idUSTRE77B0HO20110812?feedType=RSS&feedName=businessNews&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+reuters%2FbusinessNews+%28News+%2F+US+%2F+Business+News%29

(Reuters) – Handing out flyers at the corner of 47th Street and Fifth Avenue in New York City’s Diamond District, Mariabi Peenya is having trouble finding passersby eager to sell their gold jewelry for cash.

In Mexico City, Paulino Luna says fewer customers are coming to his small storefront in a colonial-era building, where he’s been buying bullion for 25 years. And in Chennai, India, Daman Prakash Rathod finds the once-heaving crowd of local gold scrap sellers have all but disappeared.

Across the globe, the latest surge in gold prices — up as much as 20 percent since June as investors seek refuge from stock market turmoil and sovereign debt crises — is failing to lure as many people into selling their gilt mementos, heirlooms and dusty family jewels as during the 2008 financial crisis.

The success of massive cash-for-gold industry over the past three years, urging people to sell their gold, means there are fewer and fewer people with any “old gold” left.

Anyone who cashed out when gold prices spiked in 2008 missed a three-year bullion boom in which prices doubled. Now with the U.S. Federal Reserve having pledged two years of near-zero interest rates, the rally in gold prices shows no sign of slowing. But it seems those people who still have gold may be holding out for even higher prices.

“It’s nothing like it was in 2008,” says Peenya as he flagged passing New Yorkers, promising his price was best. “Either people are waiting till the price hits $2,000, or they are running out.”

The implications of a dwindling supply of “scrap” gold, that which isn’t mined, may hit the global bullion market even harder than it hits local pawn shops. Worldwide, recycled gold usually meets 40 percent of demand. But that share is now declining just as demand for physical bullion surges anew from investors and central banks. That may be yet another reason to expect gold prices to rise even further.

“The fact that scrap is not reacting as strongly as one might have expected to the stimulus of higher prices suggests those higher prices are more sustainable and price growth is easier,” says Philip Klapwijk, executive chairman of respected metals analytics firm GFMS Ltd, a unit of Thomson Reuters.

Gold prices breached $1,800 an ounce for the first time this week, having almost tripled from its 2008 lows of $680.

“The easier-to-let-go stuff has been let go, so it gets progressively more difficult given the move in the price to stimulate the same growth in scrap,” Klapwijk said.

In 2009, scrap supply surged by 30 percent to a record as consumers rushed to sell anything they had, both to turn a fast buck on a booming market and to cushion the blow of recession.

In the years since then, large amounts of recycled gold flooded the physical market. But growth has slowed sharply as people either run out of things to sell, or wait for higher prices. Klapwijk expects recycled gold to grow by only about 5 percent this year.

CASH-FOR-GOLD PART OF U.S. CULTURE

The trend is perhaps most notable in the United States, which contributes about 10 percent of global scrap supply. Last year scrap supply was 143 tonnes — equivalent to more than 10 million wedding bands. Some of that recycled gold also comes from industrial sources such as computer motherboards.

Unlike some nations such as Turkey and India, where recycling jewelry has been commonplace for decades, most Americans had been unaccustomed to the idea of selling off old jewelry. Then a network of cash-for-gold businesses popped up after 2008, thanks to the almost constant television and radio advertisements by pioneers such as Cash4Gold.com.

Now, “We Buy Gold” signs are commonplace in windows of American main street stores.

Gold recycling in the United States reached its climax when a Cash4Gold ad featuring rapper MC Hammer aired during the 2009 Super Bowl, said Michael Toback, a board member of the 47th Street Business Improvement District in New York, who also owns jewelry refiner Myron Toback.

In Manhattan’s bustling Diamond District, many jewelry vendors say Americans may sell their remaining gold if economic conditions worsen. But many interviewed by Reuters agree that business has slowed by as much as a third from past year.

EMERGING ECONOMIES SLOW DOWN TOO

The change in psychology is evident elsewhere too.

“I think everybody is still bullish about the market. They don’t want to sell for the time being,” says Hong Kong-based Dick Poon, manager at Heraeus Precious Metals, a German company that is a leading global metals dealer and refiner.

In the historic center of Mexico City, several streets are crowded with kiosks where people line up to sell gold chains, medallions, earrings or bracelets for cash. Vendors weigh it all on simple scales. But Luna says business is drying up.

“People don’t have their parents’ or grandparents’ gold anymore, they’ve sold it,” said Luna. “We are not seeing the same amount of volume that we saw before, every day there is less, of both gold and silver.”

And in the country which consumes more gold than any other, India, where gold jewelry is a central part of the culture from weddings to holidays, reselling gold has become a rarity.

“The selling crowd has disappeared,” Daman Prakash Rathod of gold wholesaler MNC Bullion said by telephone from Chennai.

Watching friends and neighbors rue their decisions to sell at $1,000 or $1,200 or even $1,500 an ounce, he reckons other Indians have learned a lesson.

“The excessive scrap that used to come a few years ago has stopped, and people who have sold must be cursing themselves for doing so at lower prices.”

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Dear reader, we have said in the past that before China would be agreeable to a new version of the SDR, they would probably want a more important seat at the IMF table.

It looks like this may be indeed happening. The newly appointed head of the IMF has recently announced that a new position of Deputy Managing Director of the IMF is being created, and will be held by a former Peoples Republic of China Deputy Governor.

While not conclusive, these moves signal a changing of the guard so to speak, that may make China more agreeable to participate in a future SDR to add liquidity and perhaps provide an alternative to the USD as reserve currency.

http://www.reuters.com/video/2011/07/07/china-to-get-senior-imf-job-sources?videoId=216827266

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Modern economics is run by men who have learned from John Maynard Keynes.

A famous quote of Keynes follows:

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

I note that there is no mention whatsoever of monetary inflation in the entire article below. History does repeat.

As with other societies going through similar circumstances, the call of the people is to the government to “do something” about the prices continually rising. There is no mention of that something including stop printing money, but rather regulate prices, somehow. Enter price controls, which lead to nothing more than long lines and bare shelves.

Government faces call for action on food prices
Johann Tasker
Tuesday 05 July 2011 09:19
The government is facing increasing calls to curb spiraling food prices.

Farm minister Jim Paice is being urged to put in place a coherent set of policies that address food inflation and food security.

Laura Sandys, Conservative MP for South Thanet and Sandwich, will make the call in an adjournment debate on Tuesday (5 July).

“We need to take the 4.9% food inflation rate seriously as it is impacting all of our household budgets,” she said.

“If left unaddressed, it will also have a detrimental effect on the UK’s growth targets and will hamper consumer spending.

“I am urging government to look at food with the same intensity it has afforded to energy security.”

Food security and food price inflation had hardly ever been debated in the House of Commons, said Ms Sandys.

“It is high time we grappled with the complexities of this issue, as there is nothing that impacts our constituents more than the prices on our local shop’s shelves.

“Food inflation lies at the heart of political and economic instability internationally – we must not let it destabilise our ambition for growth.”

The call comes amid new findings that consumers want government action to curb food price inflation.

Rising food prices are driving a major shift in the way UK shoppers buy and think about food, according to research.

Consumers are changing their weekly shopping habits in response to inflation-busting increases in food prices, it found.

Shoppers are also more concerned about the global factors affecting food prices and the security of food supply for future generations.

More than half of shoppers were worried about the impact of climate change, population growth, water and energy supplies on food availability and affordability.

The independent survey was carried out by Network Research on behalf of the Crop Protection Association.

Most shoppers agreed that the era of cheap food has come to an end, and want the UK to become more self-sufficient in food production. Three-quarters of respondents said the government should do more to prevent further increases in the cost of food.

“For many people, increases in the cost of food are hitting other areas of household expenditure,” said CPA chief executive Dominic Dyer.

“There is an overwhelming view among respondents that the government should be doing more to keep food prices down.”

The survey findings were a wake-up call to policy-makers and regulators that a global food security crisis was urgent and immediate, said Mr Dyer.

Advances in plant science and crop protection would be critical to meeting future food needs, Mr Dyer added.

They should be matched by science-based EU policies that supported, rather than stifled, investment and innovation in agricultural science.

A Defra spokesperson said:

“The impact of food price inflation, and especially spikes in commodity prices, are a real cause for concern.

“We’re leading internationally and at home to feed a rapidly expanding global population in a sustainable way.

“That means we need to increase food production in a way that reduces the impact on the environment, as well as opening up global markets, boosting trade and making reforms that help the poorest.

“Important steps were taken at the recent G20 meeting, but there’s much more work to be done.”

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A gold exchange center has been established in Kunming on March 31st, which means the city has moved one step forward towards target: becoming an important financial center in Pan-Asia Free Trade Area.

Cultural collections, gold, silver and mines are traded in the center. Precious metals are main products, such as gold. Information consultation and other services will also be provided for traders in the center.

Mayor of Kunming, Zhang Zulin (张祖林) attended the unveiling ceremony of the center.

Pilots for RMB cross-border trade settlement and related financial service centers have been established in Yunnan. Yunnan’s finance has increasingly promoted.

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“Currency Wars” is the term widely used to explain the fact that global currencies, floating versus the US Dollar, are forced to devalue over time to retain the ability for its host country to compete in foreign trade. If a country’s currency becomes to valuable versus others, then the export sector suffers as goods become to expensive for other countries in their own currencies. One way to visualize it is that if the worlds currencies were an atom, the USD would be the nucleus and the other various currencies are electrons orbiting it. As the US goes down in value, the other currencies follow it.

Gold is not really rising on speculation, what its doing is signaling a problem in the global system of exchange, which demands a stable currency for use in international trade.

Brazil is preparing a range of additional measures to stem the damaging rise of the real as the global currency war shows no signs of ending, according to Guido Mantega, the country’s finance minister.

Speaking to the Financial Times in London, Mr Mantega said the Group of 20 leading economies was still a long way from achieving its goal of agreeing new guidelines for managing currencies, there were “struggles between countries” such as the US and China, and the global currency war was “absolutely not over”.

Slow growth and low interest rates in advanced economies continued to put upward pressure on Brazil’s currency, Mr Mantega said, forcing the authorities to consider further intervention in currency and derivatives markets to limit overshooting.

“We always have new measures to take,” he told the FT, indicating on the sidelines of an investor conference that these would not be pre-announced, but would include market intervention. On Tuesday, the Brazilian central bank also announced a spot auction to buy US dollars in another move to boost foreign exchange reserves and stem the upward pressure on the real.

The Brazilian currency has been close to 12-year highs against the dollar in recent weeks, but fell by 0.7 per cent on Tuesday.
Brazil’s actions to limit currency appreciation highlight the dilemma faced by many fast-growing economies – including Turkey, Chile, Colombia, and Russia – since allowing currency appreciation limits domestic overheating, but also undermines the competitiveness of domestic industry.

“I gave a speech to investors and I hope they did not receive it too enthusiastically,” Mr Mantega joked, “ because there is a tendency for too much capital to enter”.

Brazil had to take other actions, he added, because domestic interest rates were already high, so as to curb inflation, and further rate rises alone tended to encourage further capital inflows. Brazil has already instituted a number of measures, including taxing bond portfolio inflows, to try and curb the real’s appreciation.

“Monetary policy is very tight in Brazil and the level [of interest rates] in real terms is higher than in other [emerging] countries,” Mr Mantega insisted.

With the main policy rate at 12.25 per cent, he rejected the notion that Brazil was overheating, saying the economic growth rates were sustainable, inflation was falling and the fiscal deficit was coming down. The economy is forecast to grow by 4 per cent this year after expanding 7.5 per cent in 2010.

Credit growth – at 15 per cent this year – was lower than the 22 per cent rate in 2010, he added, partly as a result of government restrictions on banks borrowing cheaply at low interest rates from the US, but he looked forward to the day when lower inflation allowed “monetary policy more flexibility”.

Mr Mantega’s comments highlight the low-level currency war between emerging and advanced economies that has unsettled global financial markets. This will be one of the issues facing Christine Lagarde, who started work as managing director of the International Monetary Fund on Tuesday.

Brazil supported the new French managing director over her Mexican rival, Agustín Carstens, but Mr Mantega insisted there was no “regional rivalry” between Latin America’s two biggest economies. Mr Mantega said he felt Ms Lagarde would be more effective at advancing the cause of developing nations.

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It is interesting to note the timing here – QE2 is scheduled to end and just as Libya oil is off market for at least all of 2011, and the combined force of less oil and more paper money in the economy has caused the price of food to skyrocket, causing addition social unrest. These oil stocks are being sold off and are hard assets belonging to US Citizens, at prices that will never be seen again and the reserves will likely never be replenished.

The International Energy Agency announced it would inject 60 million barrels of government-held stocks in the global market, immediately increasing world supply by some 2.5 percent for the next month and sending prices spiraling, with U.S. crude prices erasing all of the year’s gains.

“This supply disruption has been underway for some time and its effect has become more pronounced as it has continued,” said the IEA. It said expectations were that Libyan production would remain off the market for the rest of 2011.

“Greater tightness in the oil market threatens to undermine the fragile global economic recovery,” it said.

The IEA release, at 2 million barrels per day (bpd) over the next 30 days, is more than the daily loss of Libya’s 1.2 million bpd exports and comes despite a broad view that the world is not now short of crude — although many analysts and agencies also agree that markets will tighten later this year.

The release includes 30 million barrels of light, sweet crude from the U.S. Strategic Petroleum Reserve — the same quality that markets have lost due to the Libya disruption.

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