By Shobhana Chandra and Timothy R. Homan

Aug. 19 (Bloomberg) -- U.S. builders broke ground on the fewest new homes in 17 years and producer prices climbed the most since 1981, providing no sign of an economic recovery or easing inflation.

Housing starts fell 11 percent in July to an annual rate of 965,000, the Commerce Department said today in Washington. The Labor Department reported the producer price index jumped 9.8 percent from a year before.

``There's no doubt we're in a period of stagflation now,'' said Peter Kretzmer, a senior economist at Bank of America Corp. in New York who formerly worked at both the Federal Reserve Bank of New York and the Fed Board in Washington.

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Aug. 19 (Bloomberg) -- Credit market turmoil has driven the U.S. into a recession and may topple some of the nation's biggest banks, said Kenneth Rogoff, former chief economist at the International Monetary Fund.

``The worst is yet to come in the U.S.,'' Rogoff, a Harvard University professor of economics, said in an interview in Singapore today. ``The financial sector needs to shrink; I don't think simply having a couple of medium-sized banks and a couple of small banks going under is going to do the job.''

The U.S. housing slump has triggered about $500 billion in credit market losses for banks globally and led to the collapse and sale of Bear Stearns Cos., the fifth-largest U.S. securities firm. Bonds of regional banks such as National City Corp. and Keycorp are under pressure on expectations of more fallout. Rogoff, 55, said the government should nationalize Fannie Mae and Freddie Mac, the nation's biggest mortgage-finance firms.

Freddie Mac and Fannie Mae ``should have been closed down 10 years ago,'' he said. ``They need to be nationalized, the equity holders should lose all their money. Probably we need to guarantee the bonds, simply because the U.S. has led everyone into believing they would guarantee the bonds.''

Last month, President George W. Bush signed into law a housing bill that provides Treasury Secretary Henry Paulson the power to make equity purchases in Fannie Mae and Freddie Mac. Paulson asked for the authority July 13 after the shares of the firms, which own or guarantee almost half of the $12 trillion of U.S. mortgages, slid to the lowest level in more than 17 years.

Shares Slump

The mortgage lenders have been battered by record delinquencies and rising losses. Fannie Mae fell 30 cents to $5.85 at 12:55 p.m. in New York Stock Exchange composite trading, its lowest level since May 1989 amid concern the government-chartered companies will fail to raise the capital they need to offset losses. Freddie Mac declined 8 percent to the lowest since January 1991.

Banks repossessed almost three times as many U.S. homes in July as a year earlier and the number of properties at risk of foreclosure jumped 55 percent, according to RealtyTrac Inc., an Irvine, California-based seller of foreclosure data. U.S. builders broke ground on the fewest houses in 17 years last month, according to a Bloomberg News survey.

Rogoff told a conference in Singapore today that the credit crisis is likely to worsen and a large bank may fail, Reuters reported earlier. He was the IMF's chief economist from August 2001 to September 2003.

``Like any shrinking industries, we are going to see the exit of some major players,'' Rogoff told Bloomberg, declining to name the banks he expects to fail. ``We're really going to see a consolidation even among the major investment banks.''

IndyMac Bancorp

IndyMac Bancorp Inc., once the second-largest U.S. independent mortgage lender, filed for bankruptcy protection Aug. 1, three weeks after it was taken over by the Federal Deposit Insurance Corp. amid a run by depositors that left it strapped for cash. Bear Stearns collapsed in March and sold itself to JPMorgan Chase & Co. for $10 a share.

``The only way to put discipline into the system is to allow some companies to go bust,'' Rogoff said. ``You can't just have an industry where they make giant profits or they get bailed out.''

Federal Reserve Chairman Ben S. Bernanke, seeking to allay renewed concerns over the health of the nation's financial system, said on July 8 that the central bank may extend its emergency-loan program for investment banks into next year.

Regulatory Gap

His comments followed calls by Paulson for regulatory changes that would allow financial firms to fail without threatening market stability.

Paulson has identified a legal gap that leaves unspecified how to deal with failures of companies that don't take deposits, such as investment banks. He proposed tightening supervisors' oversight of lenders and dealers while at the same time discourage companies from depending on a government rescue if their bets go wrong.

``We need to create a resolution process that ensures the financial system can withstand the failure of a large complex financial firm,'' Paulson said in a speech in London on July 2.

In the case of commercial banks, the use of taxpayer funds in an emergency requires the approval of two-thirds majorities of the FDIC and Federal Reserve boards, and of the Treasury secretary in consultation with the president.

U.S. Recession

The world's largest economy is already in a recession, and the housing market will continue to deteriorate, Rogoff said. The U.S. slowdown will last into the second half of next year, he said, predicting a faster recovery in Europe and Asia.

The Federal Reserve, which has left its key interest rate at 2 percent after the most aggressive series of rate reductions in two decades, risks raising inflationary pressures, he said.

``Rates are too low,'' Rogoff said. ``They must realize we're going to get inflation if things stay where they are. They need to raise rates but I don't think they are going to because they're way too nervous.''

The Labor Department reports that its Producer Price Index increased by 1.2% in July and by 9.8% in the past year.

NEW YORK (CNNMoney.com) -- In another indication of growing inflation, wholesale prices increased in July to the highest annual rate in 27 years, according to a government report released Tuesday.

The annual Producer Price Index for finished goods rose 9.8% in the 12 months that ended in July.

The jump in wholesale prices is the fastest rate of increase since a 10.4% bump-up in June 1981, according to Joseph Kowal, economist at the Bureau of Labor Statistics.

The Labor Department also reported that PPI rose 1.2% in July, after increasing 1.8% in June. Analysts polled by Briefing.com had expected an increase of only 0.6%.

The surge in producer prices is in large part due to higher energy prices, said Doug Roberts, chief investment strategist for ChannelCapitalResearch.com.

Crude oil prices doubled in the 12 months through July, but have since fallen nearly 24% from their peak hit last month.

The latest PPI report doesn't reflect the recent drop in crude prices, but Roberts expects future readings to ease.

"The topline is a bit behind the curve - that will fall in the future," he said. "Right now, it has not really taken into account the recent decrease in energy prices."

Core inflation: The so so-called core PPI number, which excludes food and energy prices, rose by 0.7% - more than the 0.2% increase analysts had expected.

The core inflation index is "the more long term rate" because it indicates how much inflation "is seeping into the economy" beyond the volatile energy prices, said Roberts.

The index for finished goods other than foods and energy has advanced by 3.5% in the past year, according to the report.

Food and energy: The indexes that measure producers' food and energy prices increased in July, but at a more moderate pace than in the previous two months.

Energy prices rose by 3.1%, after a 6.0% jump in energy prices in June and a 4.9% jump in May. In the 12 months through July, prices for finished energy goods have surged 28%.

Food prices rose by only 0.3% in July, after increasing by 1.5% in June and 0.8% in May. In a year-over-year comparison, prices for finished consumer foods have increased by 8.7%, according to the report.

The much more moderate increase in food prices in July compared with June is the one bright spot in the otherwise glum inflation report, according to Roberts.

Even though energy prices in July were still on the rise last month, "if you are seeing the other big component of inflation go down a bit, that could indicate a positive for the future," he said.

The government reported last week that the the Consumer Price Index jumped by 0.8% in July, which was twice the increase that economists had expected. 

Gold price fall seen set to revive Indian imports

Tue Aug 19, 2008 4:01pm IST

By Biman Mukherji and Arpan Mukherjee

NEW DELHI/MUMBAI, Aug 19 (Reuters) - Indian jewellers are paying gold importers more than double last month's premiums as they scramble to meet a resurgence in demand stoked by a steep fall in global prices and the approach of the Diwali festive season.

The rise in premiums suggests a jump in imports by the world's top buyer, where stocks had fallen earlier this year after dealers, bankers and jewellers slashed purchases on signs that record-high prices had crimped demand.

Premiums paid to importers have more than doubled to about $1.80 per kilogram from 80-85 cents last month, dealers said.

India imported about 30 tonnes in July, a drop of nearly 56 percent from a year earlier, and imported 24 tonnes in June, data from the Bombay Bullion Association showed. The World Gold Council said India's total gold demand fell 47 percent on the year in Jan-June to 263.5 tonnes.

"Gold imports this month will be close to 50 tonnes," said Harish Galipelli, head of research at brokerage Karvy Comtrade.

But Daman Prakash, a Chennai-based bullion dealer and member of the Tamil Nadu Bullion Forum, was more bullish. He reckons imports could surpass last August's 79 tonnes, the highest for 2007.

International gold prices <XAU=> tumbled by more than a fifth last week to below $800 an ounce, after hitting a four-month high of $987.75 in mid-July and a record $1,030 in March.

Local demand for the precious metal picked up after domestic prices fell below 13,000 rupees ($300) per 10 grams from a record above 13,800 rupees in mid-July. Spot gold INBULL03 was trading at 11,228 rupees per 10 grams on Tuesday, according to Punjab National Bank.

Analysts said wholesale dealers were unlikely to drop their prices significantly as the festival season got under way, but the high premiums were not deterring buyers.

Ranjeet Kumar Chaubey, deputy manager and dealer at state-run Punjab National Bank said the bank had three to four clients with no stock waiting for gold at different locations.

"My clients are ready to pay any premium," Chaubey said.

The premium in the southern city of Chennai has almost quadrupled to 40 rupees per gram from 10 to 12 rupees normally.

"Some jewellers are even willing to pay a premium of up to $2 a kilogram," said a bullion dealer at a leading Indian bank who did not want to be identified. "But we don't have the stocks."

The delivery time for gold jewellery has gone up to a week in many regional markets from just one day last month, and analysts and dealers expect supply to remain tight this week at least and beyond if world prices fall further.

Prakash in Chennai said due to falling demand earlier in the year, refiners had geared down production and were not able to ramp it up rapidly.

"Banks are not in a position to source materials from refiners immediately, which entails a delay of five to six days," he said.

Krishna Kumar Nathani, managing director of consultancy Indiabullion.com, agreed: "There is no ready delivery of gold available, for love or money." 

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“Longer term, we are still [bullish on gold]. One of the things that have happened is that gold broke its support—its 8-month support—at $850. So the possibility of pulling back to the uptrend at around $760 still exists. We have to remember that it’s been 2 years since we had the major corrective pullback, which was also about 25 percent in 2006. So this is all part of the normal consolidation corrective cyclical bear market that occurs within an ongoing bull market environment.”

--Louise Yamada, Managing Director, Louise Yamada Technical Research Advisors

Watch the video at:  http://www.cnbc.com/id/26273937/site/14081545

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August 18, 2008

(RTTNews) - After falling sharply last week, the price of gold regained some ground over the course of the trading session on Monday. The price increase came as traders did some bargain hunting amid a decrease in the value of the U.S. dollar.

While ending the session off its best level of the day, gold for December delivery closed up $13.60 at $805.70 an ounce after falling more than $70 an ounce last week to a multi-month closing low of $792.10 an ounce.

Bargain hunting contributed to the increase by the price of gold, with some traders moving their money out of the U.S. dollar and into the precious metal. The dollar is giving back some ground after moving sharply higher in recent sessions.

Despite the price increase, the price of gold remains well off its recent highs set in mid-July and is down more than $200 from its record high of $1,033.90 an ounce set on March 17.

The U.S. dollar index has risen more than 7 percent since mid-July, making gold more expensive for foreign investors.

However, it is worth noting that the dollar's recent strength is due more to indications of weak economic conditions in other countries rather than a notable improvement in the economic situation in the U.S.

Some economists have also pointed out that the recent strength in the value of the U.S. dollar could lead to a reduction in demand for U.S. exports, which has been a key driver of economic growth in the past two quarters.

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13 August 2008 @ 02:13 am EST

Citigroup's Australian metal analysts Tuesday urged investors and mining companies to look through the current "haze of negativity" and expect to "see a strong rebound" in metals prices and mining stock in the fourth-quarter 2008 and 2009.

"A friendless mining sector is in need of a lifeline having pulled back 25% from the May peak, Citigroup analysts Clarke Wilkins and Matthew Hope admitted, adding that global growth is "undeniably slowing."

Noting that the gold price is only down 7% in Australian dollar terms, the analysts declared, "We remain bullish on gold with a 2009 price forecast of US$950/oz driven by a return of fabrication demand after the price correction, wealth effects in developing nations and negative real interest rates."

Meanwhile, the analysts advised that "the underlying driver of commodity intensive infrastructure investment in developing countries remains unchanged. Short-term risks remain, but the opportunities are there for investors/corporates that can look through the haze of negativity."

In their research, Wilkins and Hope noted that "the Super Cycle bull market for commodity stocks that has been underway since early this decade has not been a one way street, with a number of meaningful corrections that have tested the resolve of the market. "

"Trading these spikes and troughs in the mining stocks is not without risks, but is undeniably a highly rewarding strategy for those that are nimble enough and have the courage to look through the current negative haze surrounding the sector."

The analysts suggested that "the only reason for not stepping up and buying the sector after this [recent] correction is a belief that the cycle is not well and truly over and commodity prices will fall further." Citigroup believes growth in China is still the nation's number one priority. "This point is critical as China is after all the key driver of the commodity Super Cycle."

Citigroup suggests that the Olympic Games now ongoing in Beijing are confusing China's economic picture due to curtailments of manufacturing, transport congestion, steps to ensure no interruption of power and clear skies, which in turn, distort short-term economic data. "Economic policy post the Olympics will be key. It seems likely that the government will continue to selectively stimulate," the analysts advised.

"With a number of commodities entering price levels where China has traditionally restocked, particularly copper, we expect to see a strong rebound in prices and stocks in 4Q08 and 2009."

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But the most interesting question is whether the White House is propping up banks that should fail so that it can push the biggest part of the cleanup into the lap of the next President. It is certainly bringing out all the biggest economic guns to delay the inevitable reckoning from the $8 trillion credit collapse. It spent $29 billion bailing out Bear Stearns, sent $160 billion worth of checks to taxpayers, cut interest rates from 5.25% to 2%, and seems belatedly to be enforcing regulations against manipulation of oil trading.

The Post quotes industry experts who think that the FDIC is propping up many banks. For instance, Bert Ely of Ely & Co., a bank consulting firm in Alexandria, VA, told the Post, "They are dragging their feet in forcing these banks to reserve realistically. Some of these banks could have been closed two or three quarters earlier." And Ken Thomas, a lecturer in finance at the Wharton School at the University of Pennsylvania, told the Post that the FDIC's foot dragging would only cost taxpayers more in the long run. Thomas said, "In some of these cases, I believe regulators should act sooner than later to prevent future losses to the fund."

With record bank losses possible this year, the FDIC's fund could drain to a dangerously low level. The Post reports that "The failures so far this year will drain the FDIC's insurance fund by an estimated $9.2 billion." And this year's losses could hit the inflation-adjusted record of "$12.8 billion set in 1988."

The drain on the FDIC's fund could happen fast. Losses so far this year will cut 17% from its record high balance of $52.8 billion at the end of the first quarter. That could drop the fund below its minimum requirement of 1.15% of all U.S. insured deposits. The reason? The number of problem banks is likely to rise from 90 to 300 in the next three years according to Gerard Cassidy, an analyst with RBC Capital Markets. The Post reports that historically, regulators end up closing "about 13 percent of the institutions" on the problem bank list.

I spent the summer of  1982 working with the FDIC's liquidation division which was in charge of selling off the assets from failed banks. And it looks like that division will be very busy in the next few years. It would not surprise me if that spurt in activity begins after the November elections.

Peter Cohan is President of Peter S. Cohan & Associates.

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Gold demand by value rose to record in Q2

 

Published August 14, 2008 

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Aug. 12 (Bloomberg) -- India, the world's biggest buyer of bullion, may increase imports for the first time in 11 months as the lowest price this year lures buyers.

Purchases may rise as jewelers rebuild inventories before the festival season starts later this month, said Suresh Hundia, president of the Bombay Bullion Association, Ltd.  Imports fell by more than half in the 10 months ended July 31 from a year ago as record prices cooled jewelry demand, he said.

``Demand has been so much in the last couple of days that banks and other importers have run out of supplies,'' said Hundia in a phone interview in Mumbai, where the grouping of 230 trading companies is based. ``If the price keeps falling, there's no reason why people won't continue to buy.''

A recovery in Indian demand may help stem a drop in gold, which led other precious metals including platinum and silver into a bear market after falling 22 percent from its March 17 peak of $1,032.70 an ounce. Increased consumption may benefit retailers including Rajesh Exports Ltd., the nation's biggest jewelry producer, whose stock has plummeted 65 percent this year as record prices cooled sales.

Imports by the South Asian nation in the three months ended July likely fell by as much as 35 percent from a year ago after a 50 percent slump in the previous three months, said Ajay Mitra, managing director of the producer-funded World Gold Council. 

Jewelry demand fell 21 percent to 445.4 tons in the quarter ended June from a year earlier, the lowest quarterly consumption since 1993, the Press Trust of India said last month, citing data from the council.

Retail Buyers

That trend may reverse as consumers advance their festival and marriage gold purchases to benefit from lower prices. Demand traditionally picks up in the second half of the year, spurred by the wedding season and Diwali,  the Festival of Light.

``Buyers, who have been pushing back purchases for too long, will relish current prices,'' Mitra said. ``Retail buyers, with festivals around the corner, will lap up gold at these prices.''

India imported 722 tons of bullion in 2007, less than the 1,000 tons forecast by the Council at the beginning of the year.

Gold for immediate delivery declined as much as 2.6 percent to $802.34 an ounce and traded at $815.34 at 9:23 p.m. in Mumbai. Platinum lost as much as 3.7 percent and silver 4.5 percent. The dollar traded near a 5 1/2-month high against the euro today and close to a seven-month high against the yen.

Bullion may rebound after the summer months in the Northern hemisphere because of demand for jewelry, Frederic Lasserre and Stephanie Aymes, analysts at Societe Generale, wrote in an e- mailed report today.

`Strong Revival'

``There is evidence of a strong revival in physical interest in the Middle East and Indian jewelers are restocking,'' Paris- based Lasserre and Aymes in London, said. ``This is an important early sign that gold, which is now relatively free from weak `professional' holders, may be preparing for a bounce as we approach the autumn.''

Commodities, as measured by the Standard & Poor's GSCI index, have fallen 21 percent from a July 3 record, slipping into a bear market on signs a U.S. economic slump will extend into 2009. Gold has tumbled 22 percent from its record, while platinum and silver are down 36 percent and 33 percent from their peaks.

A bigger harvest, which leaves more money in the hands of India's 235 million farmers, may also boost demand for bullion, said Daman Prakash, director of MNC Bullion, which sells to jewelers in the southern states of Karnataka and Tamil Nadu.

``One cannot forget that agriculture is the backbone of the economy, so if there's good harvest we're going to see a rise in purchases,'' he said.

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