June 30, 2009

Armageddon. Apocalypse. Disaster: These are the words being used to describe California's staggering $24 billion budget deficit. With a midnight deadline to balance the budget, state lawmakers are facing a daunting task: Find a way to bridge the gap or start issuing $3 billion in IOUs this week to cover the bills.

Almost every state is suffering from the effects of the recession, but not every state accounts for 12 percent of the national gross domestic product. According to AP, if California goes down, so goes the nation: California's annual $1.7 trillion economy is the world's eighth-largest economy and provides a significant chunk of tax revenue for the government; California alone funds many social programs for the entire nation.

Like the Big Three automakers, California may be "too big to fail." If the state implodes, the ripple effect could slow the entire nation's recovery from the recession. Burt P. Flickinger, a retail consultant, tells AP:

"California is the key catalyst for U.S. retail sales, and if California falls further you will see the U.S. economy suffer significantly."

How did California dig itself such a huge hole? The recession certainly didn't help, but Time's Kevin O'Leary writes that California's financial troubles can be traced back to the passage of Proposition 13 in 1978. An antitax measure, Prop 13 makes it extremely difficult to raise taxes or pass a budget unless a 2/3 majority in both state houses agree — a virtually impossible task. California Rep. Zoe Lofgren tells Politico:

"If we [in Congress] had to do what the California legislature does, we would never send a bill to the president of the United States,” she said.

If the political wrangling over the budget isn't resolved by midnight tonight, Californians will be feeling the pain on every level, big and small. Just a few of the proposed spending cuts:

— State employees will be forced to take another day of unpaid leave a month, in addition to the two days leave they were forced to take starting in December. (NYT)

— Funding for the Bureau of Narcotics Enforcement will be slashed by $20 million. The "little-known unit" has played a key role in several of the state's high-profile cases: The bureau's agents helped arrest Scott Petersen for the murder of his wife and unborn child, and their investigation led to charges in Anna Nicole Smith's overdose death. (AP)

— 80 percent of state parks would be closed, 25 in the Bay Area alone, including several beaches along the peninsula. Park visitors spend an estimated $2.6 billion a year in and near state parks, but closing the parks would save only .26 percent of the $24 billion deficit. (SF Chronicle)

— Education funding would be reduced by $5.3 billion. School districts have already laid off 30,000 employees. Class sizes are expected to surge from 20 to 30 students and many after school programs, arts and music classes will be cut. A national education survey conducted this year ranked California 47th in per-student spending. (AP)

— Gov. Schwarzenegger is proposing to eliminate the state's $1.3 billion welfare program. Frank Mecca, the head of the County Welfare Directors Association of California, tells Time, "California could become the only state in the First World without subsistence benefits for poor children."

So far, the government is using a "wait and see" approach to California, or as a recent Politico headline stated more bluntly — "Washington to California: Drop dead." Earlier this month, White House spokesman Robert Gibbs said that the administration would "monitor" the situation, but that California's "budgetary problem unfortunately is one that they're going to have to solve."

(Think you can do a better job at balancing the state budget than the governor or state lawmakers? The Los Angeles Times is letting the common folk try their hand with a "You balance the budget" interactive.

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Five Banks Are Seized, Raising U.S. Failures This Year to 45

By Margaret Chadbourn

June 27 (Bloomberg) -- Five U.S. banks with total assets of about $1.04 billion were seized by regulators, pushing this year's tally of failures to 45 as a recession drives up unemployment and home foreclosures.

Community Bank of West Georgia, in Villa Rica, Georgia; Neighborhood Community Bank of Newnan, Georgia; Horizon Bank of Pine City, Minnesota; MetroPacific Bank of Irvine, California; and Mirae Bank of Los Angeles were closed yesterday by state regulators, according to statements from the Federal Deposit Insurance Corp. The FDIC was named receiver of the four banks.

Wilshire Bancorp's Wilshire State Bank will take over all of Mirae’s $362 million in deposits, and will purchase $449 million of assets, the FDIC said in a statement.

Sunwest Bank of Tustin, California, acquired most of MetroPacific’s $73 million in deposits and $80 million in assets, this FDIC said. Stearns Bank of St. Cloud, Minnesota, bought Horizon Bank’s $69.4 million of deposits. Stearns will purchase $84.4 million of Horizon’s assets, the FDIC said.

The FDIC didn’t find a buyer for Community Bank of West Georgia, and said it will mail checks to reimburse insured depositors. The bank has deposits of $182.5 million. Charter Financial Corp.'s CharterBank will assume Neighborhood Community Bank’s $191.3 million of deposits and purchased some assets in a loss-share agreement with the FDIC, according to the agency.

“The loss-sharing arrangement is projected to maximize returns on the assets covered by keeping them in the private sector,” the FDIC said. “The agreement also is expected to minimize disruptions for loan customers.”

Regulators have seized the most U.S. banks this year since 1993. The U.S. economy has shed about 6 million jobs since the recession began in December 2007. Foreclosure filings surpassed 300,000 for the third straight month in May, according to RealtyTrac Inc.

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Jun 25 2009 4:00PM

Yesterday the Federal Reserve completed the latest meeting of its Federal Open Market Committee.  It re-affirmed its plan to purchase by the end of the year some $1.8 trillion – yes, $1.8 trillion – of US government paper, comprising of agency debt, agency mortgage-backed securities and US Treasuries.  That’s nearly $6,000 for every man, woman and child in the United States. 

While $1.8 trillion is a gargantuan amount of money, the actual amount is of secondary importance to the essential, piercing question.  Namely, where is this $1.8 trillion going to come from?

The answer is not pretty.  These dollars will come from the same place that all other dollars are created these days, namely, out of thin air.  Here’s how Mr. Bernanke explained this monetary sleight-of-hand before he was appointed as chairman of the Federal Reserve.  “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

Like most central banker statements, this one is based on half-truths. How can there possibly be “essentially no cost” to creating all these dollars?  We all know that there is no free lunch in the real world, so there must be some significant cost to creating so many dollars, right?

Please read Mr. Bernanke’s statement again. There may be essentially no cost to the US government, but here is what he doesn’t tell you. There is a very real and huge cost to everyone who ends up holding these dollars that were created ‘out of thin air’.  It is the cost of inflation; it is the onerous cost burden arising from the reality that the purchasing power of the dollar is being continuously eroded. And the more dollars that are created beyond the need for dollars in normal commerce, the worst the inflation becomes. The $1.8 trillion the Federal Reserve will soon be creating should cause those remaining deflationists still arguing their point of view to recognize that they are looking down the wrong road.

They argue that deflation is inevitable because credit is contracting.  However, contracting credit is not deflation. Rather, contracting credit causes wealth destruction, but does not necessarily cause deflation in a fiat currency world. 

Deflation arises when the quantity of dollars contracts, as it did when credit contracted in the Great Depression.  But the quantity of dollars is not contracting today.  It continues to grow, regardless what measure one uses, M1, M2 or M3 (which John Williams of http://www.shadowstats.com estimates to have grown +7.3% over the past 12 months).

Percent change at seasonally adjusted annual rate	M1	M2
3 Months from Feb 2009 TO May 2009	9.4	4.2
6 Months from Nov 2008 TO May 2009	9.5	9.5
12 Months from May 2008 TO May 2009	16.2	9.0

Source: http://www.federalreserve.gov/releases/h6/current/h6.htm

What’s more, the trillions of dollars created out of thin air for various bailout schemes as well as this latest $1.8 trillion planned purchase by the Federal Reserve will make sure that the quantity of dollars continues to grow.  The result will be that the purchasing power of the dollar will continue to be inflated away.

It has become increasingly apparent that the US dollar has caught the fiat currency disease, where too many units of account are created.  This disease is fatal, and hundreds of fiat currencies buried in the fiat currency graveyard throughout history have succumbed to it. 

By creating too many units of account out of thin air, the Federal Reserve has sealed the dollar’s inflationary fate.  Own gold and/or silver to protect yourself and your family from this inevitable outcome.

by James Turk

www.kitco.com

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By Moming Zhou, MarketWatch

NEW YORK (MarketWatch) -- Gold futures rose Friday, heading for their first weekly gain in four as a weaker U.S. dollar and record-low interest rates boosted the metal's investment appeal.

The dollar was under renewed pressure Friday after China's central bank reiterated a veiled call to lessen the currency's role as the world's reserve currency. The Federal Reserve said Wednesday its key interest rate will remain near zero "for an extended period."

August gold rose $8.30, or 0.9%, to $947.80 an ounce on the Comex division of the New York Mercantile Exchange. The June contract, which expires at the end of Friday's trading, gained $6.20, or 0.7%, to $945.30.

Gold prices, as gauged by front-month contracts, are set to end the week up about 1%. For the month, it's still down 4%.

"The precious metals complex has trading modestly higher as the dollar lost ground after the Fed announced it would keep rates low," said James Moore, a precious metals analyst at TheBullionDesk.com, in a note

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Longer term charts tell the tale and block out daily trading noise. This weekly chart with a hugely bullish, inverted head and shoulders forecasts a major gold buying event later this year. This would be consistent with our forecasts of smashed stock markets after Labor Day 2009. We cannot tell for certain how high the Dow and the S&P 500 might recover between now and September 15th. We do know this: Numerous information, technical interpretations, and other data signal a largely broken fall, 2009 stock market and a corresponding rally in precious metals. This is our prediction.

We’ve all been patiently waiting for gold to breakout through strong resistance levels between  $1,007 and $1,032. When the price has closed firmly and decisively over $1,032.50, we should expect $1,050, $1,150, $1,250-$1,260 and a potential for $1,375. These have been our previous gold price support and resistance forecasts expected for the December, 2009 futures contract highs.

It is very important to understand that once these higher numbers are achieved it is not the end of this gold rally.

Rather, once new loftier highs are posted and reasonably held, we should see a new and higher sequence of buying. Our very old gold high forecast of years ago was $2,960. As of today, we hold on that forecast for a minimum but are in fact expecting prices way beyond this figure.

As markets move forward and post higher highs in certain commodities and especially gold and silver, we can technically determine what’s next. Somewhere along the trading trail in the next few months, precious metals shares will breakaway from the influence and attachment of other stock markets. We are not there yet but we have seen some tiny signals telling us this is coming.

Should gold be inflation adjusted today to its proper price, gold would exceed $2,250 in our view. If we say our minimum is $2,960, these two correlated prices are not all that far apart. What I want to figure out next is; where is gold going after $2,960? This can be determined when other related new market prices and techncials are established in crude oil, credit, silver, and grains.

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Gold climbed on Thursday, rising above $939 (U.S.) per ounce as investors found support from indications by the U.S. Federal Reserve that it was in no hurry to raise borrowing costs from ultra-low levels.

Spot gold stood at $934 per ounce at 1248 GMT, up from $931.10 quoted late in New York on Wednesday. The metal briefly hit a high of $939.05 earlier in the session.

The precious metal, viewed as a hedge against risk, has moved some way off Monday's low of $912.90, garnering support above $930 per ounce as long-term expectations of a slow economic recovery were mostly unchanged after the Fed's remarks.

The Fed's statement, released late on Wednesday, painted a cautiously favourable picture of the U.S. economy but offered no hint of changes to its programme of quantitative easing.

“The fact that going forward (the Fed) is keeping rates as they are and sticking with quantitative easing is supportive for gold,” said James Moore, an analyst at the TheBullionDesk.com.

“But physical demand is still very slow and there are still quite a lot of speculative longs in the market and we are in a position where we need to flush some of those out,” he added.

Low U.S. interest rates are seen as bearish for the dollar from a yield perspective, raising the appeal of dollar-denominated gold for non-U.S. investors.

Gold pared gains briefly, while the dollar strengthened, after data showed the U.S. economy shrank slightly less in early 2009 than previously thought.

But bullion resumed earlier gains, with other more bearish economic data showing the number of U.S. workers filing new claims for jobless benefits unexpectedly rose last week.

Analysts said gold was testing higher levels after bouncing off a low near $915 earlier in the week, with higher oil prices, currently nearing $70 a barrel, giving support to long-term inflation expectations.

“Technically speaking (gold) looks a little better than it has in the last few days -- it's trying to break upward now out of a downward trending channel,” said Tom Kendall, an analyst at Mitsubishi. “If we close above $940, gold would look positive in terms of breaking out of this general downward formation.”

U.S. gold futures for August delivery slipped slightly to $933.50 an ounce.

Earlier on Thursday the head of the economic department of the Communist Party policy research office in China said the country should buy more gold, and that purchasing land in the United States was a better option for China than buying U.S. treasuries.

“The market is already pricing in Chinese demand,” said Jesper Dannesboe, analyst at Societe Generale.

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ChartingStocks.net
Tuesday, February 17, 2009 11:17

The Russian stock market collapsed today [June 17], causing the RTS and the Micex stock exchanges to suspend trading for one hour at 4:05 p.m. Moscow time.  The RTS stock index, which is denominated in US dollar,  plunged 9.4%, while the ruble-denominated Micex stock index fell 9.6%. The decline in Russia followed a tumble in oil prices, which accounts for the bulk of the Russian economy,  and declines on global stock markets.

The chart below shows the relationship between the Russian stock market and oil prices. Notice they rise and fall together. You can also see that the Russian stock market peaked a few months before oil peaked. It is common to see the stock react before the commodity or economic news. Stocks are leading indicators.

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June 23, 2009

The FDIC failed bank list is reporting 40 bank failures so far in 2009.

To review the entire list, please click on this link:

http://www.fdic.gov/bank/individual/failed/banklist.html

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Gold rallied from a six-week low hit earlier in the global session, rising above $923 (U.S.) per ounce with currency fundamentals proving the dominant factor as the dollar got stung by concerns over U.S. indebtedness.

Spot gold stood at $923.40 per ounce by 1132 GMT, having earlier hit a six-week low at $912.90 in Asian trade. That compared with $921.90 quoted late in New York on Monday.

Traders said that bullion prices, having hit three-month highs recently just shy of $1,000 an ounce, were ripe for the falls seen over the past few days with speculators looking to clear out stale long positions.

But the metal's traditional role as a hedge against jittery sentiment in other asset classes was also kicking in as investors, spooked by doubts about growth prospects for leading economies, shift into risk-averse gear.

Concerns about reserve diversification away from U.S. assets caused the dollar to turn lower against the euro ahead of the Federal Reserve's monthly meeting, after Moody's said one risk to the U.S.' triple-A rating is if the dollar is challenged as the main reserve currency..

“Gold is tracking the dollar closely today, but we'll have to wait for the FOMC statement tomorrow night for the market to choose to move clearly in one direction or another,” said David Thurtell, analyst at Citigroup.

A weaker dollar makes metals and other commodities priced in the U.S. unit cheaper for non-U.S. investors.

Crude oil prices rallied to $68 a barrel on Tuesday ahead of data expected to show a fall in U.S. oil stocks, reversing losses and renewing the appeal of gold as a potential inflation hedge.

“The key driver here is basically crude oil, the dollar and inflation expectations, and I think gold at the moment is pricing in a huge amount of inflation expectations,” said Jesper Dannesboe, an analyst at Societe Generale.

U.S. gold futures for August delivery rose nearly half a per cent to $924.80 per ounce on Monday on the COMEX division of the New York Mercantile Exchange.

Overall investor caution was stirred by the World Bank on Monday, which said prospects for the global economy remained “unusually uncertain” as it cut 2009 growth forecasts for most economies.

“Investor risk appetite has lost forward momentum as the market begins to question the extent to which the green shoots of the financial risk rally have roots in the real economy,” Tullet Prebon said in a note to clients.

“There is nothing like a 3.1 per cent drop in the S&P on a day to get the bears out of the woods..., but the joke aside, it is beginning to look like those who hoped for a V-shaped recovery will find that we are looking at the tail end of it.”

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June 23 (Bloomberg) -- Bank of Canada Governor Mark Carney said his country’s recession is now as deep as in the U.S., according to a person who heard his remarks today in Washington.

Carney, 44, spoke at the Woodrow Wilson International Center for Scholars. No cameras or recording devices were allowed at the event, according to organizers.

Carney left the bank’s benchmark rate at a record 0.25 percent on June 4, and pledged to keep it there until June 2010 unless the inflation outlook changes, because of a buildup of spare capacity in the economy. Carney said today financial market yields reflect the bank’s commitment.

Carney said as recently as June 18 the bank could still create dollars and buy assets such as government bonds to stimulate the economy if needed, a situation it doesn’t anticipate. Carney reiterated that comment today.

The world’s eighth largest economy shrank at a 5.4 percent annualized pace in the first quarter, Statistics Canada said June 1, the most since 1991. Gross domestic product will shrink 3 percent this year, the central bank predicts. That would be the biggest drop since 1933, according to Statistics Canada.

The U.S. economy shrank at a 5.7 percent annual pace in the first quarter.

Carney told the audience of about 100 people that the Canadian economy may grow twice as quickly as the U.S. economy in 2010.

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By Joe McDonald, AP Business Writer
On Monday June 22, 2009, 6:36 am EDT

BEIJING (AP) -- The World Bank has cut its 2009 global growth forecast, saying the world economy will shrink by 2.9 percent and warning that a drop in investment in developing countries will increase poverty.

"The global recession has deepened," the Washington-based multilateral lender said in a report.

Global trade is expected to plunge by 9.7 percent this year, while total gross domestic product for high-income countries contracts by 4.2 percent, the bank said. It said economic growth in developing countries should slow to 1.2 percent -- but excluding relatively strong China and India, developing economies will contract by 1.6 percent.

The bank's latest forecast is a sharp reduction from its March prediction of a 1.7 percent global contraction, which it said then would be the worst on record.

Economic damage to developing countries "has been much deeper and broader than previous crises," warned the report, issued Sunday in Washington.

"Unemployment is on the rise, and poverty is set to increase in developing economies," it said.

The global economy should start to grow again in late 2009, but "the expected recovery is projected to be much less vigorous than normal," the report said. It said banks' ability to finance investment and consumer spending would be hampered by the overhang of unpaid loans and devalued assets.

"To break the cycle and revive lending and growth, bold policy measures, along with substantial international coordination, are needed," the World Bank said.

Investment and other financial flows to developing countries plunged by an estimated 39 percent in 2008 to $707 billion, the World Bank said. It said foreign direct investment in developing countries is projected to drop by 30 percent this year to $385 billion.

Eastern Europe and Central Asia have been hit hardest and the region's gross domestic product is expected to plunge by 4.7 percent this year, the bank said. It said growth should recover next year to 1.6 percent.

GDP in Latin America and the Caribbean should shrink by 2.3 percent this year before rebounding to expand by 2 percent in 2010, the report said.

In the Middle East and North Africa, growth is expected to fall by half this year to 3.1 percent, while that of sub-Saharan Africa will drop to 1 percent from an annual average of 5.7 percent over the past three years, the bank said.

East Asia should post a 5 percent expansion, supported in part by China's stimulus-fueled growth, the bank said.

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By Halia Pavliva and Nicholas Larkin

June 19, 2009 (Bloomberg) -- Gold rose in New York as the dollar weakened, boosting demand for precious metals as alternative investments.

The U.S. Dollar Index, a six-currency gauge of the greenback’s value, fell as much as 0.8 percent. Gold, which typically moves inversely to the U.S. currency, has risen 5.9 percent this year as the dollar index fell 1.3 percent.

“Gold is following the moves up and down in the U.S. dollar,” Peter Fertig, the owner of Quantitative Commodity Research Ltd. in Hainburg, Germany, said today by telephone. “That’s currently the major driver.”

June 17, 2009
Tony Halpin in Yekaterinburg

With public hugs and backslaps among its leaders, a new political bloc was formed yesterday to challenge the global dominance of the United States.

The first summit of heads of state of the BRIC countries — Brazil, Russia, India and China — ended with a declaration calling for a “multipolar world order”, diplomatic code for a rejection of America’s position as the sole global superpower.

President Medvedev of Russia went further in a statement with his fellow leaders after the summit, saying that the BRIC countries wanted to “create the conditions for a fairer world order”. He described the meeting with President Lula da Silva of Brazil, the Indian Prime Minister, Manmohan Singh, and the Chinese President, Hu Jintao, as “an historic event”.

The BRIC bloc brings together four of the world’s largest emerging economies, representing 40 per cent of the world’s population and 15 per cent of global GDP. The leaders set out plans to co-operate on policies for tackling the global economic crisis at the next G20 summit in the US in September.

“We are committed to advance the reform of international financial institutions so as to reflect changes in the world economy. The emerging and developing economies must have a greater voice,” they said.

The BRIC states also pledged to work together on political and economic issues such as energy and food security. Co-operation in science and education would promote “fundamental research and the development of advanced techologies”.

The declaration also satisfied a key Kremlin demand by calling for a “more diversified international monetary system”. President Medvedev is seeking to break the dominance of the US dollar in financial markets as the world’s leading reserve currency.

He favours the establishment of more regional reserve currencies, including the Russian rouble and the Chinese yuan, to prevent economic shocks. Mr Medvedev said: “The existing set of reserve currencies, including the US dollar, have failed to perform their functions.”

The declaration made no specific mention of the dollar, an indication of China’s reservations about the Russian idea. Beijing holds almost $2 trillion in foreign currency reserves and a large portion of US debt.

The BRIC summit coincided with a two-day meeting of the Shanghai Co-operation Organisation (SCO) in Yekaterinburg, which further underlined the determination of Moscow and Beijing to assert themselves against the West.

The SCO comprises Russia, China and the Central Asian states of Kazakhstan, Uzbekistan, Tajikistan and Kyrgyzstan. Iran, Pakistan, India and Mongolia have observer status and President Karzai of Afghanistan attended the summit as a guest.

Iran’s embattled President, Mahmoud Amadinejad, defied protests at home to attend the conference, where he hit out at the US and declared that the “international capitalist order is retreating”. But he beat a swift retreat from the summit just hours after arriving, cancelling a planned press conference to return to the crisis in his country.

China pledged $10 billion in loans to Central Asian countries struggling in the economic crisis, adding financial muscle to its leading role in the SCO. Russia and China regard the organisation as a means to restrict US influence in their Central Asian “back yard”.

Mr Medvedev held separate meetings about the situation in Afganistan with President Karzai and President Zardari of Pakistan, a clear signal to President Obama not to ignore Russian interests as he presses US policy in the region in the fight against the Taleban.

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By JIM ABRAMS, Associated Press Writer Jim Abrams, Associated Press Writer Tue Jun 16, 7:08 pm ET

WASHINGTON – War-funding legislation survived a fierce partisan battle in the House on Tuesday, a major step in providing commanders in Iraq and Afghanistan the money they would need for military operations in the coming months.

The $106 billion measure, in addition to about $80 billion for military operations, provides for an array of other spending priorities, including $7.7 billion to respond to the flu pandemic and more than $10 billion in development and security aid for Pakistan and Iraq as well as countries such as Mexico and the nation of Georgia.

Democratic leaders pushing the bill on behalf of the Obama administration had to overcome an unusual alliance. Anti-war Democrats opposed continued war spending and Republicans condemned $5 billion in the measure to secure a $108 billion U.S. line of credit to the International Monetary Fund for loans to poor countries.

Rep. Howard "Buck" McKeon, R-Calif., top Republican on the Armed Services Committee, contended that Democrats were endangering troops by shifting money to create room for a "global bailout loan program."

The vote was 226-202, with only five Republicans voting for the bill and 32 Democrats opposing it.

House Majority Leader Steny Hoyer, D-Md., unsuccessfully appealed to Republicans for support, saying 80 percent of the package still went to the troops. "Stand up for them," he said.

The Senate could move as early as this week on the legislation, which includes $1 billion to fund government rebates for consumers who trade in their old vehicles for more fuel-efficient models.

The Pentagon has said that without the bill the Army could start running out of war funds as early as July. President Barack Obama has pushed for the package, arguing that it is crucial to his efforts to wind down operations in Iraq while boosting personnel and fighting power in Afghanistan.

Republicans also objected to a decision by House-Senate negotiators to remove a provision prohibiting the release of photos depicting U.S. troops abusing detainees. It was taken out, "at the demands of the fringe left," said House Republican leader John Boehner, R-Ohio.

Obama, in negotiating the removal of the provision, guaranteed that he would stop the release of photos showing detainee abuse.

Unable to count on Republicans, Democrats had to appeal to some of the 51 anti-war colleagues who opposed the legislation when it was first offered in May. Rep. Dennis Kucinich, D-Ohio, indicated that he wouldn't change his "no" vote. "America has to start taking care of things here at home and we can't do it by continuing to support wars based on lies," he said.

Hoyer said, "One of the problems is we have some very deep-seated philosophical views that pursuing Afghanistan and Iraq with additional funding is not appropriate."

Votes were swayed by other factors, such as the money to fight the flu pandemic and initiate the "cash for clunkers" auto program. Also in the measure is $534 million for 185,000 service members who have had their enlistments involuntarily extended since Sept. 11, 2001. They will receive $500 a month for every month they were held under stop-loss orders.

The measure also had nearly $7 billion in "add-ons," funds not sought by the Pentagon. The Center for Arms Control and Non-Proliferation said those additions include controversial programs that the Pentagon did not want, such as $2.17 billion for eight C-17 transport planes.

Passage of the bill, which provides funds through the end of this fiscal year on Sept. 30, would bring to nearly $1 trillion the amount spent on the wars and other security matters since the Sept. 11 attacks. More than 70 percent of that has gone to Iraq, the Congressional Research Service said in an analysis.

Congress has passed similar war supplementals — meaning the money is not part of the regular Pentagon budget and adds to the federal deficit — every year since 2001. The White House has said that this will be the last war supplemental and that future spending will go through the regular appropriations process.

The administration is seeking $130 billion for war funds in the fiscal year 2010 starting in October, down from about $143 billion this year and $183 billion in fiscal 2008, the CRS said.

Obama's original request last October was for about $83 billion, including $75.5 billion for defense purposes. But as is customary, Congress used the must-pass bill as a vehicle for adding new programs, such as the "cash for clunkers" measure, and for increasing funds. Money for pandemic flu, for example, went up by about $4 billion.

The measure includes $10.4 billion in foreign aid, with $2.4 billion for Pakistan, $1.4 billion for economic development in Afghanistan and $700 million in international food aid.

House-Senate negotiators also reached compromises on several policy controversies: They denied the White House $80 million to close the detention center at Guantanamo Bay, Cuba, but agreed that detainees could be transferred to the United States to face trial. The issue of imprisoning convicted terrorists in the United States was put off for another day.

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INTERNATIONAL. Central banks may be justified in increasing their gold holdings to 40%-50% of their reserves, a senior executive of the industry-funded World Gold Council said on Thursday.

'Central banks are justified in having high gold weightings. They are justified in having a 40%-50% weighting in gold,' Marcus Grubb, WGC's managing director of investment, research and marketing told delegates today at a conference organised by ETF Securities.

He said the current macroeconomic environment supported gold buying: 'It is not only about the dollar, not only about diversification, but also about future inflation,' he said.

There were signs that a number of Asian central banks were adding to their gold reserves, he added.

In 2008, Gold Investment demand accounted for 30% of overall gold demand, while jewellery demand contributed approximately 58% of the total.

Grubb explained that concerns over the global economy and a desire to diversify look set to reverse that trend.

Speaking last month at another ETF securities seminar in London, he said: "The structure of the gold market is changing. In the first quarter I think investment demand could be higher than 30%."

"ETF investment is in its infancy, and so is gold investment," he said. "Most allocations of gold are zero."

"You would only need a small shift in allocations to gold in segments of private and institutional wealth where they're not currently invested to have a major impact, when mining supply is only 2,400 tonnes a year."

"People are worried about the financial system, they're worried about credit, the issuance of paper, the bailouts... Many investors we talk to think that is going to create inflationary pressure in the world economy in the future," he said.

"You need an inflation hedge in your portfolio, and that is causing people to buy gold."

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By Andrew Frye

June 1 (Bloomberg) -- Northwestern Mutual Life Insurance Co., the third-largest U.S. life insurer by 2008 sales, has bought gold for the first time the company’s 152-year history to hedge against further asset declines.

“Gold just seems to make sense; it’s a store of value,” Chief Executive Officer Edward Zore said in an interview following his comments at a conference hosted by Standard & Poor’s in Brooklyn. “In the Depression, gold did very, very well.”

Northwestern Mutual has accumulated about $400 million in gold, and Zore said the price could double or even rise fivefold if the economy continues to weaken. Gold gained 10 percent last month, the most since November. The commodity has more than tripled since 2000, rising for eight straight years. Gold futures for August delivery slipped $4.80 to $975.50 at 4:03 p.m. in New York.

“The downside risk is limited, but the upside is large,” Zore said. “We have stocks in our portfolio that lost 95 percent.” Gold “is not going down to $90.”

Policyholder-owned Northwestern Mutual, based in Milwaukee, ranks third by 2008 life insurance premiums according to data from the National Association of Insurance Commissioners. The data excludes annuities

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BLOOMBERG ARTICLE
By Claudia Carpenter
June 4

Berkshire Hathaway Inc. Chairman Warren Buffett is getting his “comeuppance” after rejecting gold as an investment four years ago, according to Marc Westlake, head of wealth management at Dublin-based bullion brokerage Gold &  Silver Investments Ltd. 

The chart of the day shows gold more than doubled since May 2005, while Berkshire Hathaway’s Class A shares gained 6.8 percent. Buffett said at the company’s annual meeting in May 2005 that he wouldn’t get rid of assets for “a hunk of metal which had no real utility other than to people that are fleeing the dollar.”

“The point is gold has preserved a chunk of wealth that would have been otherwise taken down with other financial instruments,” Westlake said by phone from Cork, Ireland, on June 1.  Maybe what were seeing is Warren Buffett’s comeuppance.”

Buffett didn’t respond to a request for comment left with his assistant, Carrie Kizer.

Gold has climbed 9.4 percent this year as investors sought a haven from declines in the stock market and, more recently, the dollar. The Standard & Poor’s 500 Index of shares has climbed 2.6 percent this year.

Buffett transformed Berkshire Hathaway over four decades from a once-failing textile manufacturer into a $139 billion investment and holding company. While gold has doubled since 1988, shareholders in the company have seen the value of their investment surge almost 25-fold.

Graph of Berkshire Hathaway (A Shares) compared to spot price gold May 1999 to May 2009

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Krugman Says No Signs of ‘V-Shaped’ Economic Recovery

By Dara Doyle and Louisa Nesbitt

June 5 (Bloomberg) -- Nobel Prize-winning economist Paul Krugman said the world’s economy is showing “not a hint” of a “V-shaped” recovery marked by a swift decline and revival.

The economy is “stabilizing, not recovering,” Krugman, an economics professor at Princeton University in New Jersey, said today at a conference in Dublin. “Things are getting worse more slowly.”

Data this month showed that the contraction in Europe’s manufacturing and service industries is easing and confidence in the economic outlook is rising. The U.S. lost fewer jobs in May than forecast, a report today showed. The International Monetary Fund says its forecast for global growth of 1.9 percent next year is based on the premise of a healthy financial system.

“We have made the transition from sheer panic to chronic anxiety,” Krugman said, adding he’s has a “hard time” seeing what might drive a “full” economic recovery.

U.S. payrolls fell by 345,000 in May, the smallest decrease in eight months, after a revised 504,000 loss in April, the Labor Department said today in Washington.

The U.S. policy response to the economic crisis has been “extraordinarily aggressive,” Krugman said. “Unfortunately, it hasn’t been enough.” The country will need “some form of new taxes” to bring down its deficit, he added.

Service industries in the U.S. shrank at a slower pace in May while job losses mounted, indicating that any economic recovery will be slow to develop.

“The euro zone, like the United States, I fear, could be facing kind of a lost decade,” Krugman said.

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The metal gains ground as the dollar slumps and investors bet inflation will rebound. Analysts see $1,000 an ounce on the horizon.

Rising Global Buying and Inflation Fears Make a Mockery of Analysts' Forecasts; an End in Sight?

By Carolyn Cui

Gold is reaping the benefits of both sides of the debate over whether the world's central banks can stimulate the global economy without sparking a surge in inflation.

On Tuesday, gold settled at $983.20 a troy ounce, up 0.5%, and is now just 2% shy of its all-time high of $1,003.20 scored in March 2008.

Among the main drivers is the decline in the U.S. dollar -- a result, many analysts say, of a conviction that the global economy is on the path to recovery, thanks to central banks' stimulus efforts. Dollar-denominated commodities like gold typically rise when the dollar falls, as producers ask for higher prices and consumers outside the U.S. buy more. While the dollar has dropped 9% since mid-April, gold has gained 13%.

Also fueling the rally has been the fear that the Federal Reserve and others won't be able to control inflation once those stimulus efforts kick in. Hard assets like gold are seen as a good hedge against rising prices as they tend to retain their value.

The rally has caught many in the market off guard. Gold has averaged $910 this year, surpassing analysts' forecast of $881, as calculated by the London Bullion Market Association.

HSBC in May raised its 2009 gold forecast by $50 to $875 an ounce; French investment bank Natixis recently said it expected gold to average $885 this year.

Though many believe the momentum will take gold across the $1,000 mark again, even the most bullish investors are predicting a pause in the metal's ascent.

"I think we are getting into the final part of this particular rally," said Philip Klapwijk, executive chairman of GFMS Ltd., a London metals-research house. His forecast for gold's average price is $970, one of the highest among 24 analysts LBMA polled.

The higher price will further encourage scrap sales and depress jewelry demand, "which is not a good combination for gold," he said. In the first quarter, jewelry demand for gold declined 25% and scrap supply rose 55%, according to the World Gold Council.

UBS AG's metal strategist John Reade has a three-month target at $1,000, but warned of a short-term retrenchment.

"It's all about dollar weakness," he said.

Speculative positions in Comex gold reached the highest level in a year, indicating that gold is vulnerable to a change of sentiment, he said. At UBS, a major bullion bank, "physical buying of bars and coins has been quiet in the last month or so," he added.

Another overhang is on the horizon. Congress is soon expected to approve the sales of 403.3 tons of gold by the International Monetary Fund to help the world's poorest countries. The plan was announced in April and tanked the gold market, despite the fund's pledge to sell over years and not to disrupt the market.

Big holders of U.S. debt, such as China and Russia, as well as oil exporter Venezuela, reported increases in their gold holdings. These countries are likely to buy more gold to further diversify their foreign-exchange reserves and hedge the exposure to the dollar. Individual investors have piled billions of dollars into gold exchange-traded funds, which command thousands of tons of the metal.

James Steel, chief commodities analyst at HSBC, said it normally takes a year for the effects of stimulus packages to show. "But," he said, "I think the market may not be that patient."

 

Coeur d'Alene Mines CEO, Dennis Wheeler, expects the silver price to maintain its upward path in 2009 on investor interest, recovering industrial demand and static output.

Author: Frank Tang
Posted:  Tuesday , 02 Jun 2009

NEW YORK, (Reuters)  - 

The price of silver will rise further in 2009 following a sharp rally in May, fueled by a combination of rising investor interest, recovering industrial demand and flat industry output, the chief executive of Coeur d'Alene Mines Corp said on Monday.

"Silver is now being looked at as a separate asset class and as a safe haven, and some sense that the economy may be bottoming," CEO Dennis Wheeler of the Idaho-based silver producer told Reuters in an interview.

"Silver is demonstrating its advantage both for investors and as a leading industrial metal," Wheeler said.

In May, spot silver rose nearly 30 percent to over $15 an ounce, its biggest monthly gain in at least 10 years, thanks to the dollar's weakness and gold's rise. It was at about $15.60 on Monday.

Wheeler said that strong investment demand, reflected by the growth of silver-backed, exchange-traded funds, would further boost silver prices.

U.S.-based iShares Silver Trust and London-based ETF Securities currently hold a combined total of more than 310 million ounces of silver bullion, equivalent to nearly half of the annual industry output last year.

Industrial demand accounted for about half of the total fabrication in 2008, and silver investment was at just 7 percent, according to research firm GFMS.

Year to date, silver has risen about 40 percent, outperforming gold's 11 percent gain during the same period.

"Silver has a stronger base because of its industrial demand feature. So, I am not surprised that we have seen this price performance for silver compared to gold," Wheeler said.

SILVER TO RISE, VOLATILITY HIGH

Wheeler forecasts silver to rise to a range between $16 and $18 an ounce for the rest of 2009, with a degree of price volatility.

"This is an uncertain world that we are living in. Who knows what may trigger more investment into silver and gold as inflation hedges or secured asset buys," Wheeler said. "You will undoubtedly see some price swings from time to time."

Wheeler expected that both silver and gold to be supported by similar factors such as declining supply, very few new discoveries and shrinking reserves.

"Nothing on the horizon is going to change that (flat supply), so we are going to have silver deficits over the long term by a considerable margin," he said.

The worst economic crisis since the Great Depression has forced many silver mines to shut due to falling demand and lower metal prices. Silver output is expected to drop further because of the loss as a by-product from base metal mines.

Mining analysts said the higher price of silver should help producers, which had overspent on expanding mines when silver hit a peak of over $21 an ounce in March 2008.

Asked if Coeur's Palmarejo mine operation in Mexico was affected by the swine flu, Wheeler said "I think that issue is largely behind Mexico."

Wheeler says he still expects the Palmarejo mine at full capacity to produce 120,000 to 125,000 ounces of gold, and 9 million to 10 million ounces of silver annually. (Editing by Christian Wiessner)

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By Nicholas Larkin

June 2 (Bloomberg) -- Gold rose in New York and London as a decline by the dollar increased the metal’s appeal as an alternative investment. Silver also advanced.

The U.S. Dollar Index, a gauge of the currency’s value versus six counterparts, fell as much as 0.8 percent to the lowest since Dec. 18. Gold, which typically gains when the dollar weakens, touched a 14-week peak before closing yesterday and silver reached its highest in almost 10 months. 

Investors continue “to track moves in the dollar, the key factor driving gold,” Pradeep Unni, an analyst at Richcomm Global Services in Dubai, said in a note. “As optimism grows that the worst of the economic downturn is over,” the correlation between gold and the dollar has returned, he said.

Gold futures for August delivery rose $1.90, or 0.2 percent, to $981.90 an ounce on the New York Mercantile Exchange’s Comex division at 8:43 a.m. local time. The contract earlier fell as much as 1 percent. Bullion for immediate delivery in London gained $5.16, or 0.5 percent, to $980.43.

The metal slipped to $973.50 an ounce in the morning "fixing" in London, used by some mining companies to sell production, from $981.75 at yesterday’s afternoon fixing. Gold briefly traded above $1,000 in the U.K. capital on Feb. 20, the first time the metal had breached that price since March 2008, when it climbed to a record $1,032.70.

“The week is likely to be dominated by further developments on the currency market, with the rally possibly slowing down if the dollar holds above 79-78.5” as tracked by the index, Andrey Kryuchenkov, an analyst at VTB Capital in London, said in a note. The index fell as low as 78.524 today.

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"China is aware that it must become independent from the dollar at some point. . . . When that happens, the dollar will collapse."

By Andy Xie

Published: May 4 2009 19:28 | Last updated: May 4 2009 19:28

Emerging economies such as China and Russia are calling for alternatives to the dollar as a reserve currency. The trigger is the Federal Reserve’s liberal policy of expanding the money supply to prop up America’s banking system and its over-indebted households. Because the magnitude of the bad assets within the banking system and the excess leverage of its households are potentially huge, the Fed may be forced into printing dollars massively, which would eventually trigger high inflation or even hyper-inflation and cause great damage to countries that hold dollar assets in their foreign exchange reserves.

The chatter over alternatives to the dollar mainly reflects the unhappiness with US monetary policy among the emerging economies that have amassed nearly $10,000bn (€7,552bn, £6,721bn) in foreign exchange reserves, mostly in dollar assets. Any other country with America’s problems would need the Paris Club of creditor nations to negotiate with its lenders on its monetary and fiscal policies to protect their interests. But the US situation is unique: it borrows in its own currency, and the dollar is the world’s dominant reserve currency. The US can disregard its creditors’ concerns for the time being without worrying about a dollar collapse.

The faith of the Chinese in America’s power and responsibility, and the petrodollar holdings of the gulf countries that depend on US military protection, are the twin props for the dollar’s global status. Ethnic Chinese, including those in the mainland, Hong Kong, Taiwan and overseas, may account for half of the foreign holdings of dollar assets. You have to check the asset allocations of wealthy ethnic Chinese to understand the dollar’s unique status.

The Chinese love affair with the dollar began in the 1940s when it held its value while the Chinese currency depreciated massively. Memory is long when it comes to currency credibility. The Chinese renminbi remains a closed currency and is not yet a credible vehicle for wealth storage. Also, wealthy ethnic Chinese tend to send their children to the US for education. They treat the dollar as their primary currency.

The US could repair its balance sheet through asset sales and fiscal transfers instead of just printing money. The $2,000bn fiscal deficit, for example, could have gone to over-indebted households for paying down debts rather than on dubious spending to prop up the economy. When property and stock prices decline sufficiently, foreign demand, especially from ethnic Chinese, will come in volume. The country’s vast and unexplored natural resource holdings could be auctioned off. Americans may view these ideas as unthinkable. It is hard to imagine that a superpower needs to sell the family silver to stay solvent. Hence, printing money seems a less painful way out.

The global environment is extremely negative for savers. The prices of property and shares, though having declined substantially, are not good value yet and may decline further. Interest rates are near zero. The Fed is printing money, which will eventually inflate away the value of dollar holdings. Other currencies are not safe havens either. As the Fed expands the money supply, it puts pressure on other currencies to appreciate. This will force other central banks to expand their own money supplies to depress their currencies. Hence, major currencies may take turns devaluing. The end result is inflation and negative real interest rates everywhere. Central banks are punishing savers to redeem the sins of debtors and speculators. Unfortunately, ethnic Chinese are the biggest savers.

Diluting Chinese savings to bail out America’s failing banks and bankrupt households, though highly beneficial to the US national interest in the short term, will destroy the dollar’s global status. Ethnic Chinese demand for the dollar has been waning already. China’s bulging foreign exchange reserves reflect the lack of private demand for dollars, which was driven by the renminbi’s appreciation. Though this was speculative in nature, it shows the renminbi’s rising credibility and its potential to replace the dollar as the main vehicle of wealth storage for ethnic Chinese.

America’s policy is pushing China towards developing an alternative financial system. For the past two decades China’s entry into the global economy rested on making cheap labour available to multi-nationals and pegging the renminbi to the dollar. The dollar peg allowed China to leverage the US financial system for its international needs, while domestic finance remained state-controlled to redistribute prosperity from the coast to interior provinces. This dual approach has worked remarkably well. China could have its cake and eat it too. Of course, the global credit bubble was what allowed China’s dual approach to be effective; its inefficiency was masked by bubble-generated global demand.

China is aware that it must become independent from the dollar at some point. Its recent decision to turn Shanghai into a financial centre by 2020 reflects China’s anxiety over relying on the dollar system. The year 2020 seems remote, and the US will not pay attention to something so distant. However, if global stagflation takes hold, as I expect it to, it will force China to accelerate its reforms to float its currency and create a single, independent and market-based financial system. When that happens, the dollar will collapse.

The writer is an independent economist based in Shanghai and former chief economist for Asia Pacific at Morgan Stanley.  He encourages people to buy gold to hedge risk.

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