Capital Gold Group Report: Why Gold Is a Sure Long-Term Bet

by Porter Stansberry

May 25 2010 4:33PM
Daily Wealth

What a spectacle…

In an utter and complete repudiation of its founding principles, the European Union’s central bank (ECB) has decided to copy the U.S. Federal Reserve’s 2008-2009 strategy of “papering over” Europe’s massive debt problems. The ECB will provide nearly unlimited credit to Europe’s sovereign borrowers, while also buying troubled assets from Europe’s largest banks.

This latest development has caused a significant change in what I call “the most important chart in the world.”

Readers of my investment advisory are familiar with the chart by now… as we’ve been publishing it nearly every month… and even more frequently in the daily S&A Digest. It shows the value of U.S. government long bonds (represented by the fund “TLT”), the price of gold (represented by “GLD”), and the price of silver (represented by “SLV”).

This is the battle for monetary supremacy… The market is arguing over a fundamental question: What is money? Dollars? Gold? Or silver?

For more than 60 years, the U.S. dollar has unquestionably been the world’s safest, most liquid form of money – its reserve currency. During times of economic trouble, investors rush to buy U.S. bonds as a safe haven, causing their value to rise sharply.

And that’s what happened – briefly – during the Greek crisis last month. But then, something changed. As soon as the ECB announced its big bailout and established a swap line with the U.S. Treasury (more about this below), investors realized there’s no real difference between the U.S. dollar and the euro. They are simply different names for the same thing: paper money. And investors understand the value of paper money may finally collapse under the weight of these massive sovereign debts.

What did investors buy when they sold the U.S. dollar in this crisis? Where did they run? As you can see, in reaction to the ECB announcement, investors bought gold… and to an increasing degree, silver. I believe this preference for metallic money will continue to strengthen as the financial problems of the U.S. Treasury begin to mount.

If you ignore this trend, you will be financially destroyed over the next several years. If you act now to protect yourself and your family, it will be the greatest single investment decision of your life.

Now… let’s look more closely at what the Europeans have done to stave off the collapse of the European Union…

To maintain a veneer of legality, the ECB will create an off-balance-sheet entity to “borrow” roughly $1 trillion from itself, the U.S. Federal Reserve, and the IMF. Europe’s member states agreed to guarantee these debts, which the ECB claims will be “riskless” because they’re simply loans between central banks.

At the root of every paper currency arrangement is a simple scheme to grant credit where none is due. In this case, the scheme is designed to give credit to bankrupt governments in the European Union, via guarantees from those same bankrupt governments and additional credit from the U.S. Treasury, which is itself a troubled creditor at best.

In short, the ECB is going to print up lots of Euros and give them to the least creditworthy states and the worst bankers in Europe.

The politicians apparently believe this massive infusion of new money and credit will “jumpstart” the European economy, which will then produce enough tax revenue and banking profits to finance these new debts. Don’t laugh…

Meanwhile, to ensure this action doesn’t result in a collapse of the euro currency, the Federal Reserve has agreed to open a “swap” line, which will allow the ECB to fund as much of these news “loans” with dollars as is necessary to prevent a run on their currency.

Will this work? At the risk of dramatic future inflation, will creditors really be willing to accept devalued Euros, which offer investors almost nothing in interest payments? I don’t think there’s a chance in hell.

The reason paper money systems always fail is because they provide no practical limit to credit. New currency reserves can always be printed. Bad debts – credit defaults – can be “papered over” rather than restructured. The stability of paper money systems seems like a virtue. The ability to simply manufacture money – without a deposit or true asset as collateral – is the ultimate financial sinecure. As long as confidence in the system remains, the amount of credit that can be manufactured seems limitless.

Unfortunately, this always leads to more debt. At some point, the whole system simply collapses. The debts become so large, they create an untenable economic imbalance, overwhelming the real economy. And when the credit bubble finally bursts, it doesn’t destroy just one or two banks’ house of cards. It wipes out the entire system, which is linked together by the currency itself.

Remember… this just isn’t about problems in far-off Europe. The U.S. is in the same situation: under huge debts we cannot hope to repay.

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Capital Gold Group Report: Gold Surpasses $1,200 on Global Economic Uncertainty

NEW YORK (The Street) — Gold prices were rising Wednesday as jittery investors continued to buy gold as a safe haven asset to battle global economic uncertainty.

Gold delivery for June was rising $12.50 to $1,210.50 an ounce at the Comex division of the New York Mercantile Exchange. The gold price today has traded as high as $1,215 and as low as $1,201. The U.S. Dollar Index was rising 0.58% to $86.85 while the euro was falling 0.78% to $1.22 against the dollar after hitting a new eight-year low on Tuesday. The spot gold price Wednesday was adding over $9, according to Kitco’s gold index.

Gold prices managed to break and hold the $1,200 area after the metal held up during Tuesday’s options expiration. Typically, investors are forced to sell or cover some short positions on options expiration, which leads to more downside and volatility in gold prices. However, gold prices settled at $1,198 after briefly touching $1,200 on strong investor demand, which set the stage for the next leg higher for prices.

Now the question for investors is if this gold rally is déjà vu or if the metal will be able to break its old high of $1,249 an ounce. The U.S. dollar is curbing some of its recent gains which is helping support higher gold prices in the short term. Profit taking could keep gold prices volatile as investors might need to sell gold to raise cash to cover losses in the short-term.

Although markets seem calm, analysts expect investors to continue to hedge their riskier investments with the safety of gold over the long term. There was no eurozone drama overnight, and many experts seem reassured that China will continue expanding despite previous efforts to curb spending. Federal Reserve Chairman Ben Bernanke also said at a seminar hosted by Bank of Japan that U.S. inflation expectations are “very stable.”

South and North Korean governments pledged to hold conversations to reduce tensions in the region, but political unrest and global financial uncertainty are expected to increase gold’s appeal as a safe haven asset and as a form of money that retains value.

The World Gold Council released its first-quarter Gold Demand Trends report in which it expects gold demand to stay strong during 2010. According to the report, gold prices will be led higher by increasing investment demand and improving jewelry demand from China and India. Price-sensitive Asian countries, especially India, had previously shied away from gold as prices rose. Total identifiable gold demand was down 25% in the first quarter, but consumer demand in India surged 698% to 193.5 tons while demand rose 11% in China.

Aram Shishmanian, CEO of the World Gold Council says, “with the global economic recovery still burdened by high and rising debt levels in Western economies, as well as the renewed threat of recession driving down the US dollar and equities, the outlook for gold as a liquid, reliable asset class and as a store of wealth remains highly favorable.

Silver prices were rising 49 cents to $18.28 while copper was adding 4 cents to $3.09. The industrial metals had been beaten down on fears that China will curb its growth too much, and decreased spending in Europe would wreck demand for silver and copper. These fears have abated somewhat, especially after a Citigroup metals analyst said metal stocks offer good value as the recent selloff presented good buying opportunities.

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Capital Gold Group Report: One false move in Europe could set off global chain reaction

By Howard Schneider and Neil Irwin Washington Post Staff Writer
Monday, May 24, 2010

If the trouble starts — and it remains an “if” — the trigger may well be obscure to the concerns of most Americans: a missed budget projection by the Spanish government, the failure of Greece to hit a deficit-reduction target, a drop in Ireland’s economic output.

But the knife-edge psychology currently governing global markets has put the future of the U.S. economic recovery in the hands of politicians in an assortment of European capitals. If one or more fail to make the expected progress on cutting budgets, restructuring economies or boosting growth, it could drain confidence in a broad and unsettling way. Credit markets worldwide could lock up and throw the global economy back into recession.

For the average American, that seemingly distant sequence of events could translate into another hit on the 401(k) plan, a lost factory shift if exports to Europe decline and another shock to the banking system that might make it harder to borrow.

“If what happened in Greece were to happen in a large country, it could fundamentally mark our times,” Angelos Pangratis, head of the European Union delegation to the United States, said Friday after a panel discussion on the crisis in Greece sponsored by the Greater Washington Board of Trade.

That local economic development boards are sponsoring panels on government debt in Greece is perhaps proof enough that Europe’s problems are the world’s. That the dominoes can tumble fast was shown Thursday when a new and narrowly drawn stock-trading policy in Germany helped trigger a sell-off on Wall Street.

It marks a change, Barclays Capital chief European economist Julian Callow wrote in a Friday analysis, from a situation in which the bonds of European countries were considered to carry virtually zero risk to a “brave new world” where sovereign default in one of the world’s core economic areas is a tangible threat. Bank holdings of European debt are now being studied with the same focus given to holdings of U.S. mortgage-backed securities as the global financial crisis unfolded in 2008 — and with the same suspicion that problems in one part of the world could wreck others.

The most vulnerable European countries — Greece, Spain, Portugal and Ireland — may represent only about 4 percent of world economic activity, but “the debt crisis and its ripple effects are bad news for all corners of the world,” said Cornell University economist Eswar Prasad.

The risk of a worst-case scenario is still considered remote. European countries have pledged hundreds of billions of dollars to aid indebted neighbors that run into trouble, and they say they are committed to fixing the continent’s larger economic problems. The euro and U.S. markets were both higher Friday after the German Parliament approved a key piece of that support program. A renewed effort by the U.S. Federal Reserve to ensure that European banks have adequate access to dollars has generated little demand — a sign that a feared shortage of cash is not in the offing.

U.S. banks are not heavily exposed to the weaker European countries, Fed governor Daniel K. Tarullo said in testimony on Capitol Hill last week. Banks are in better shape overall, after fresh infusions of capital. Meanwhile, the U.S. economic recovery has been strengthening through the year, with jobs added in five of the last six months, and recent consumer spending and industrial output stronger than most forecasts.

But the fallout from Europe could still be widely felt. U.S. trade officials, hoping the country can dramatically boost its exports, are dismayed at the steep drop in the value of the euro — which is around $1.25, down from more than $1.50 in November. The decline makes American goods more expensive compared with those produced in Europe. The slide in the common European currency could also change the way China and a host of Asian countries approach their currency policies, possibly making them less likely to agree with U.S. demands to raise the value of their money. If they raised it, Asian goods would become more expensive in world markets, making it easier for U.S. products to compete.

The connections are being closely watched. Analysts are studying how the involvement of Greek financial institutions in Eastern Europe, or Spanish banks in Latin America, could affect those economies. The International Monetary Fund and E.U. officials are doing biweekly checks on Greece’s progress to ensure its economic reform program stays on track, according to Vassilis Kaskarelis, Greece’s ambassador to the United States.

Inside the euro zone, banks are intimately linked, with a web of investments and cross-country bond holdings that could be a main vector for financial “contagion,” with a default in one country weakening banks elsewhere.

There are some positive impacts in all this for the United States.

For one, uncertainty about European government debt has driven global investors toward U.S. government bonds, which in turn is pushing down long-term interest rates. The 10-year Treasury bond had a rate of 3.2 percent Friday compared with nearly 4 percent last month. Those lower rates should flow through to private borrowing, helping Americans getting mortgages or businesses looking to grow.

The European panic is also lowering the price of oil and other commodities on global markets, potentially making it cheaper for Americans to fuel their cars and heat their homes. A barrel of oil went for about $70 on Friday, down from almost $87 on April 6.

A final positive for the U.S. economy is that the stronger dollar will help keep inflation in check by reducing the cost of imports. That, combined with renewed worry about the strength of the recovery, is likely to give the Fed some leeway to delay raising interest rates above their current extremely low levels longer than it would have otherwise.

The most precise comparison is to the East Asian financial crisis that enveloped Thailand, Indonesia, South Korea and other nations in 1997 and 1998. There were widespread fears that the crisis would damage the U.S. economy, including through a financial contagion effect. The Fed even cut interest rates in the fall of 1998 to try to forestall a weakening in U.S. growth.

But there was little obvious impact on the U.S. economy, which grew 4.5 percent in 1997, 4.4 percent in 1998, and 4.8 percent in 1999.

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Capital Gold Group Report: Gold Rising as Euro Weakens Spurs More Speculation

By Nicholas Larkin, Claudia Carpenter and Millie Munshi

May 24 (Bloomberg) — Speculators are buying gold faster than the world’s biggest producers can mine it as analysts forecast a 27 percent rally that may extend the longest run of annual gains since at least 1920.

Exchange-traded products backed by bullion added 41.7 metric tons in the week to May 14, the most in 14 months, data from UBS AG show. China, Australia and the 15 other largest mining nations averaged weekly output of 41.6 tons last year, researcher GFMS Ltd. estimates. Even though prices have fallen 5.1 percent to $1,185.30 from a record $1,249.40 an ounce May 14, the median in a Bloomberg survey of 23 traders, analysts and investors shows it will reach $1,500 by the end of the year.

Buying accelerated as the MSCI World Index of 23 developed nations’ stocks tumbled as much as 16 percent since mid-April and the euro weakened to a four-year low against the dollar. Holders of ETPs, including George Soros and John Paulson, accumulated a record 1,938 tons by May 21, eclipsing all but four of the biggest central-bank holdings.

“You could see gold go up another $1,000,” said Evan Smith, who helps manage $2 billion at U.S. Global Investors Inc. in San Antonio and in 2006 correctly predicted that gold would reach $700 within two years. “All of the turmoil and problems we’ve seen in Europe is just another reminder that there’s a lot of value in gold as a safe haven.”

The risk to gold bulls lies in economic growth, which should buoy the prospects of metals linked to industrial demand, such as copper and silver. The world economy will expand 4.2 percent this year, the International Monetary Fund said April 21, raising its January projection from 3.9 percent.

Industrial Metals

Astor Asset Management LLC, with $520 million under management, held as much as 10 percent of its assets in the SPDR Gold Trust, the biggest ETP backed by bullion, according to Bryan Novak, managing director of the Chicago-based company. The firm sold the stake in the first quarter.

China, the biggest consumer of industrial metals, will expand 10.1 percent this year, more than three times the pace of the U.S.’s anticipated 3.2 percent gain, according to as many as 77 economists surveyed by Bloomberg.

“The feeling now is as we move into the expansion phase of economic growth, we want to be diversified in economically sensitive metals,” Novak said. “We’re not negative on the economy now.”

‘Afraid of Debasement’

While gold is favored by investors when the dollar weakens and inflation gains, the metal can also advance at other times. Gold rose 5.8 percent in 2008 as U.S. consumer prices gained 0.1 percent. The metal added 18 percent in 2005 when the U.S. Dollar Index, a measure against six counterparts, advanced 13 percent. Gold rose 8 percent this year as the U.S. Dollar Index jumped 11 percent. U.S. consumer prices dropped in April.

“People are afraid of the debasement of all the currencies,” said Peter Schiff, president and chief global strategist for Darien, Connecticut-based Euro Pacific Capital, whose clients have more than $2 billion in assets. “What’s surprising is that gold is still as low as it is,” he said, predicting $5,000 to $10,000 an ounce in the next five to 10 years.

Since the last week of April, ETPs have been adding bullion at a pace not seen since the first quarter of 2009, in the wake of the collapse of Lehman Brothers Holdings Inc. Buying rose as European policymakers agreed on an almost $1 trillion emergency loan package to prevent sovereign defaults.

Half the Peak

Assets in gold-backed products increased 18.3 tons last week, according to UBS data. The bank revised its estimate for the previous week’s holdings.

Gold is still at half the peak set in 1980, after adjusting for inflation. Then, prices rose to $850, equal to $2,266 today, according to a calculator on the website of the Federal Reserve Bank of Minneapolis.

Supply from mines, which peaked in 2001, fell in five of the last eight years, data from London-based GFMS show. Companies are digging deeper to extract dwindling reserves, with mines in South Africa extending as far as 2.35 miles (3.8 kilometers) down.

Investment, including bars and coins, almost doubled to 1,901 tons last year, exceeding jewelry demand for the first time in three decades, according to GFMS. Jewelry will jump 19 percent to 2,100 tons this year and industrial use 8 percent to 398 tons, Sydney-based Macquarie Group Ltd. says.

Central Banks

Muenze Oesterreich AG, the Vienna-based mint that makes the Philharmonic, the best-selling gold coin in Europe and Japan, on May 12 said it had sold 243,500 ounces since April 26, more than the 205,300 ounces sold in the entire first quarter.

Central banks and governments are also buying gold, adding 425.4 tons last year, for a combined 30,116.9 tons, the most since 1964 and the first expansion since 1988, data from the World Gold Council show. Official reserves of central banks and governments may expand by another 192 to 289 tons this year, according to CPM Group, a research and asset-management company in New York.

The net-long position in Comex futures, or bets on higher prices, is within 13 percent of the record reached in November, U.S. Commodity Futures Trading Commission data show. The most widely held option gives owners the right to buy gold at $1,500 an ounce by December, data from the bourse in New York show.

Economists’ outlook may be too rosy, said Michael Pento, chief economist at Delta Global Advisors in Holmdel, New Jersey, who correctly predicted the 2008 commodity collapse. Some investors judge that a debt crisis in Greece may spread elsewhere in the euro zone, including Spain and Portugal.

Billionaire Managers

“The second half of this year will likely show very anemic growth on a global basis,” he said. “The crisis in Greece is going to spread to Spain and it’s going to be very difficult to deal with. They are bailing out debt with more debt and it isn’t sustainable. It’s a wonderful scenario for gold.”

Billionaire John Paulson’s New York-based Paulson & Co. hedge fund is the SPDR gold trust’s biggest investor, with 31.5 million shares, or about 96 tons, a May 17 regulatory filing showed. Kyle Bass, the head of Dallas-based Hayman Advisors LP who made $500 million in 2007 on the U.S. subprime collapse, bought gold this month, according to a letter to clients.

Buying at the start of a bubble is “rational,” Soros said in January. His New York-based Soros Fund Management LLC was the sixth-biggest investor in the SPDR fund in the first quarter, a May 17 filing with the Securities and Exchange Commission shows. He trimmed his holding by 9.6 percent from the previous quarter.

“People still want a store of wealth,” said Andrew Karsh, co-manager of funds for the Credit Suisse Total Commodity Return Strategy team. “A lot of the fundamentals are still in place.”

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Capital Gold Group Report: A Billionaire Goes All-In on Gold

By Liam Pleven and Carolyn Cui, May 22, 2010

Michael Rubenstein for The Wall Street JournalTigris Financial’s Thomas Kaplan, in his New York office this past week, on his investment focus: ‘I feel the only asset I have confidence in is gold.’

Gold is setting records again, boosting the holdings of central banks, Armageddon worrywarts, and ordinary people who own gold bars, coins and jewelry.

But few individuals stand to benefit as much as low-profile billionaire Thomas Kaplan. A New York-born commodities magnate who earned a doctorate in British colonial history at Oxford, Mr. Kaplan oversees an empire devoted largely to gold.

Many fund managers and high-rollers have allocated small percentages of their portfolios to gold as a hedge against inflation. But Mr. Kaplan is the bull of bullion. He has gone further than perhaps any other major investor, betting the majority of his wealth on gold and other precious metals. And it reflects his deeply held conviction that global economic instability could bring rising demand for gold.

Through his firm, Tigris Financial Group, and affiliates, Mr. Kaplan has loaded up on bullion and bought up properties in 17 countries on five continents, where geologists are exploring for more. Tigris subsidiaries have taken stakes in mining companies, including tiny firms that have yet to produce an ounce.

Though he won’t disclose how much physical gold he owns, Mr. Kaplan, who is 47 years old, controls up to 30% of the shares in some so-called junior miners. Together, his holdings amount to a nearly $2 billion bet on gold, more than the Brazilian central bank’s bullion is currently worth.

“I’ve reached a point where I feel the only asset I have confidence in is gold,” Mr. Kaplan said in an interview at Tigris’s midtown Manhattan headquarters.

Mr. Kaplan’s views are shaped by a concern, shared by many investors, that heavy government spending hasn’t contained the woes facing the financial system. Gold hit an exchange record of $1,242.70 a troy ounce at the Comex division of the New York Mercantile Exchange on May 12, days after euro-zone leaders announced a nearly $1 trillion bailout for ailing member states.

He has experience with how supply and demand can drive the price of raw materials. His doctoral thesis studied Britain’s involvement after World War II in Malaya, home to prized rubber and tin. That taught him how far people and governments will go to secure natural resources.

Wanting to apply his insights, he went to Israel to advise hedge funds. His nose for finding valuable resources was developed at firms he started that explored for silver and natural gas, which helped him make his fortune.

On Demand and Supply

Gold miners are struggling to make major discoveries and it takes years to bring new finds into production. If people want to stock up on gold in a hurry, it will be hard to ramp up production enough to satisfy them, Mr. Kaplan believes.

“You’ve got a perfect storm with no apparent solution,” he said. “If the world does well, gold will be fine. If the world doesn’t do well, gold will also do fine … but a lot of other things could collapse.”

Mr. Kaplan is known in the mining industry for his all-in approach. “When he likes something, he dives in with both feet,” Egizio Bianchini, a banker at BMO Capital Markets in Toronto, said of Mr. Kaplan, whom he has worked with in the past.

In his charitable endeavors, Mr. Kaplan works similarly. In 2006, he co-founded Panthera Corp., whose “single-minded pursuit” is preserving the world’s endangered wild cats, he wrote in an open letter on the group’s site in which he cited inspirational quotes by Winston Churchill, Edward R. Murrow and Marcus Aurelius.

Mr. Kaplan is also president of the board of directors at New York’s 92nd Street Y, a prominent cultural organization that is a magnet for New York’s elite. And he is a benefactor of Eternal Jewish Family, a group dedicated to uniform rules governing conversions to Judaism whose leader resigned last year amid an alleged sex scandal.

In some cases, Mr. Kaplan has invested in gold miners that have also attracted the attention of fellow billionaires, such as George Soros and John Paulson.

Mr. Kaplan put money into one firm, Gabriel Resources Ltd., in late 2007 after Mr. Paulson, who made billions of dollars betting against housing markets, mentioned how low the stock had fallen while they attended “The Nutcracker” at the New York City Ballet.

“I’m there,” Mr. Kaplan recalls was his response.

In early March, Mr. Paulson’s firm, Paulson & Co., and Quantum Partners, Ltd., an investment fund run by Soros Fund Management, invested $100 million and $75 million, respectively, in NovaGold Resources Inc., a Canadian miner, paying $5.50 a share. Their move came a year after Mr. Kaplan, who has $69 million invested in the company, acquired 30% of the firm for $1.30 a share.

Gold prices are up 7.4% this year, after rising 24% last year, which was the ninth straight up year for bullion. Mr. Kaplan thinks that greater gains are coming. “I wouldn’t even say we’re in a bull market yet,” he said.

But Mr. Kaplan has concentrated risk in a volatile sector, and he knows the potential pitfalls better than most.

In 2008, for instance, a company that Mr. Kaplan founded, Apex Silver Mines Ltd., went bankrupt, felled by the terms of a loan made after Mr. Kaplan left the company in 2004. The company emerged from bankruptcy last year, and now operates as Golden Minerals Co.

In January 2009, Mr. Kaplan received a so-called Wells notice from the Securities and Exchange Commission related to what the company said were “impermissible payments” of $125,000 to government officials by executives at a South American subsidiary.

The SEC delivers Wells notices to inform recipients that it may bring an enforcement action, providing an opportunity for the recipient to persuade the agency not to pursue charges. No charges have been filed against Mr. Kaplan. An SEC spokesman declined to comment.

Concentrated Risk

Mr. Kaplan’s current investments also carry risk. Gabriel Resources owns Europe’s biggest undeveloped gold deposit, in Romania, but has been waiting for government approval for years. He has $100 million at stake in the company.

Mr. Kaplan acknowledges the dangers involved in investing in small mining companies. “It’s not the kind of thing I would suggest for widows and orphans,” he said.

And, he added, he isn’t in a rush to cash in on his gold investments. “If I am right about the big picture,” he said, “I will be rewarded for my patience.”

Thomas S. Kaplan – Chairman and chief investment officer of Tigris Financial Group

47 years old

Doctorate in philosophy from Oxford University

Doctoral Thesis Title: ‘In the Front Line of the Cold War’: Britain Malaya and South-East Asian Security 1948-1955

Gold Holdings: nearly $2 billion

Family: married, with two children

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Capital Gold Group Report: Senate Passes Financial Overhaul Bill

Biggest Regulatory Overhaul of Wall Street Since Depression Moves Closer to Law

WASHINGTON—The Senate on Thursday approved the most extensive overhaul of financial-sector regulation since the 1930s, hoping to avoid a repeat of the financial crisis that hit the U.S. economy starting in 2007.

The legislation passed the Senate 59 to 39 and must now be reconciled with a similar bill passed by the House of Representatives in December, before it can be sent to President Barack Obama to be signed into law.

The controversial measure, supported by the Obama administration, sets up new regulatory bodies and restricts the actions of banks and other financial firms. It is designed to try to make order of the cascading regulatory chaos that ensued in 2008 when mammoth banks and some unregulated financial firms collapsed, and public funds were used to save them. Among other things, the legislation would:

• Establish a new council of “systemic risk” regulators to monitor growing risks in the financial system, with the goal of preventing companies from becoming too big to fail and stopping asset bubbles from forming, such as the one that led to the housing crisis.

• Create a new consumer protection division within the Federal Reserve charged with writing and enforcing new rules that target abusive practices in businesses such as mortgage lending and credit-card issuance.

• Empower the Federal Reserve to supervise the largest, most complex financial companies to ensure that the government understands the risks and complexities of firms that could pose a risk to the broader economy.

• Allow the government in extreme cases to seize and liquidate a failing financial company in a way that protects taxpayers from future bailouts.

• Give regulators new powers to oversee the giant derivatives market, increasing transparency by forcing most contracts to be traded through third-parties instead of only between banks and their customers. Derivatives, which are complex financial instruments, are often used to hedge risk. Speculative trading in the contracts led to losses at many banks in the 2008 crisis.

“Simply, the American people are saying, ‘you’ve got to protect us,’ and we didn’t back down from that,” said Senate Majority Leader Harry Reid (D., Nev.). “When this bill becomes law, the joyride on Wall Street will come to a screeching halt.”

Opponents of the bill worry that the government is overreacting, and over-regulating the financial industry. They worry the measures will crimp the free flow of capital in the U.S. economy.

“It will inevitably contract credit,” said Sen. Judd Gregg (R., N.H.), who says the Senate bill “is probably undermining the system…probably making for a weaker system.”

Sen. Gregg was one of 37 Republicans to vote against the 1,500-page bill. But the legislation ultimately passed with a narrow bipartisan majority. Four Republicans joined with 53 Democrats and the Senate’s two independents in support of the package. Two Democrats voted against the bill, and two senators weren’t present for the vote.

Now Congress will need to reconcile the Senate bill with a companion House package adopted in December on a 223-202 vote, with 27 Democrats joining unanimous Republican opposition.

The outlines of the two bills are largely the same. But there are more than a dozen notable differences that will need to be reconciled during negotiations that are expected to start within days. Despite the differences, the Senate passage virtually ensures that some type of financial regulatory reform will be finalized by this summer.

Leading the negotiations will be House Financial Services Chairman Barney Frank (D., Mass.), who has said he would like to have a compromise package by the end of June.

One flashpoint will be over the Federal Reserve. The House bill includes a provision that would allow the Government Accountability Office, the investigative arm of Congress, to audit emergency lending and some monetary policy decisions made by the Fed. The Senate bill would allow the GAO to study the emergency lending that occurred during the financial crisis, but it would not be authorized to audit decisions made in the future.

Another area of conflict is how to regulate trading of derivatives. Both bills require most derivatives to be traded through third parties, with the intent of increasing transparency. But the Senate bill goes farther by making it more difficult for companies to be exempt from the new rules. There’s also a provision in the Senate bill that could force big banks to spin off their derivatives operations.

Both bills would create a new council of federal regulators with broad authority to protect the financial system from the sort of “systemic” risk that spread rapidly through the economy in 2008. The House bill would let the council impose several forms of restriction, including requiring companies to set aside additional capital, if the council believes a firm has taken on too much risk. The Senate bill leaves that power to the Federal Reserve.

The House bill also includes a provision that would empower the government to force any bank to stop certain practices, or even divest certain operations, if regulators fear there is a risk posed to the broader economy.

The Senate bill, meanwhile, includes a provision that would essentially force banks to stop “proprietary trading,” or making market bets with their own capital. It would also make it more difficult for big banks to grow, by setting new limits on the amount of liabilities they can control.

If a bank does fail, both bills would give the government more power—and resources—to break up the collapsing companies. Among other things, the House bill would create a $150 billion fund, financed by big financial companies, which would be used to unwind failed firms. The intent is to prevent taxpayers from having to pay the tab.

But opponents of the measure worry that regulators might be tempted to use the fund to prop up a failing firm. So the Senate bill has provisions under which a company would be liquidated and the bill for the work would be subsequently paid by a levy on large financial companies.

The Senate bill would also try to force almost all failing financial companies through a bankruptcy-type process, while the House bill would make it easier for regulators to take over and bust up a failing firm without going through the courts.

For consumers, the House and Senate bills would expand protections, creating a new regulator with the autonomy to oversee a range of financial companies, from federally regulated banks to small finance companies. Under the House bill, the agency would be independent, while the Senate bill would place the consumer agency within the Federal Reserve.

What’s in the Fine Print

Key parts of the Senate bill and where it differs from the House version

Consumers

Senate version

• Consolidates responsibilities from seven agencies into a Bureau of Consumer Financial Protection within the Federal Reserve system to oversee products made available to consumers
• Limits ability of mortgage lenders to assess penalities on borrowers who pay off the loan early
• Prohibits paying brokers and loan officers more to steer borrowers to higher interest rates or certain risky features; commissions would be based on the size or number of loans originated

How House bill differs

• Oversight would be independent of the Fed and exclude insurance companies, auto dealers and accountants, among others

Investors

Senate version

• Creates Investment Advisory Committee within Securities and Exchange Commission
• Creates Office of Investor Advocate within SEC to identify problems in dealing with SEC and provide assistance
• Gives SEC the authority to grant shareholders proxy access to nominate directors
• Requires directors to win by majority vote in uncontested elections
• Gives shareholders the right to nonbinding vote on executive pay, excluding golden parachutes

How the house bill differs

• Would require institutions with assets of at least $1 billion to disclose to regulators the structures of all incentive-based compensation

Banks

Senate version

• Eliminates Office of Thrift Supervision
• Federal Reserve Board would keep oversight of largest bank holding companies
• State banks and holding companies would either be regulated by the Fed or FDIC
• National banks with less than $50 billion in assets would be under Office of the Comptroller of the Currency
• Banks would be generally barred from using their own capital to engage in speculative trades

How the house bill differs

• Preserves the Fed’s and FDIC’s bank-supervision roles; calls for OTS to be absorbed by the OCC

Markets

Senate version

• Hedge Funds: Requires investment advisers of hedge funds with $100 million or more in assets to register with the SEC
• Derivatives: Requires that many derivatives and overthe- counter financial products be traded on regulated platforms
• Securitizations : Requires companies that package loans into marketable securities to hold at least 5% of the credit risk
• Requires issuers to disclose more information about and analyze the quality of underlying assets

How the house bill differs

• Applies to funds with assets of $150 million or more; exempts venture-capital funds
• Exempts many end users from mandatory central clearing
• Exempts education, agriculture, veterans and small-business loans

Insurers

Senate version

• Creates Office of National Insurance within Treasury to monitor industry, recommending to the systemic-risk council insurers that should be treated as systemically important
• Office would recommend ways to modernize insurance regulation, but it is explicitly not a new regulator

How the house bill differs

• Proposes creation of a Federal Insurance Office with similar characteristics

Other Elements

Senate version

• Creates office at SEC to administer credit rating agencies’ rules and practices
• Creates Financial Stability Oversight Council, led by Treasury secretary, with nine voting members. Agency would identify systemic risks to the economy, promote market discipline and respond to emerging risks. It would also write regulations for risk-based capital, leverage and liquidity requirements

How the house bill differs

• Also creates seven-member advisory board for credit raters
• Large firms would pay into a $150 billion fund to manage the dissolution of failing firms considered systemically significant

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Capital Gold Group Report: U.S. Stocks Plunge Most in Year; DOW drops 376.36 (3.6%)

By Whitney Kisling and Elizabeth Stanton

May 20 (Bloomberg) — A weeklong rout in stocks deepened, with U.S. benchmark indexes losing the most in more than a year, as reports cast doubts about the strength of the economic recovery and European leaders struggled to contain the region’s debt crisis. Commodities plunged and Treasuries soared.

The Standard & Poor’s 500 index plunged 3.9 percent to 1,071.59 at 4 p.m. in New York, its biggest drop since April 2009. The Stoxx Europe 600 Index lost 2.2 percent and the S&P GSCI Index of commodities tumbled to the lowest since October. The losses accelerated even as the euro rallied as much as 1.5 percent to $1.2598 after earlier flirting with a four-year low. Ten-year Treasury yields sank to the lowest level of the year, down 15 basis points at 3.22 percent. The yen rallied against all 16 major counterparts.

Tomorrow’s expiration of U.S. stock options and progress on a financial-reform bill may have added to volatility after U.S. jobless claims unexpectedly increased to 471,000 last week and the Conference Board’s index of leading economic indicators posted a surprise drop of 0.1 percent. The slide came a day before the German parliament votes on the country’s share of a $1 trillion bailout to halt a worsening sovereign debt crisis.

“Put your helmets on if you are long risk here,” Nicolas Lenoir, chief market strategist at ICAP Futures LLC in Jersey City, New Jersey, said in a note to clients before markets opened today. “A lot of stops have been triggered when the S&P future crossed 1,100 and anybody still long will probably have to bail out and head for cover.”

S&P 500 Correction

Gauges of financial, industrial and commodity companies tumbled more than 4.4 percent each to lead declines in all 10 of the S&P 500’s main industry groups. Bank of America Corp., Alcoa Inc. and General Electric Co. dropped more than 5.7 percent as all 30 stocks in the Dow Jones Industrial Average fell, dragging the gauge down 376.36 points, or 3.6 percent, to 10,068.01 for its biggest tumble since March 5, 2009. Both the S&P 500 and Dow closed at their lowest levels since Feb. 10.

Today’s plunge in stocks came as the Securities and Exchange Commission continues its autopsy of the chain reaction of selling that briefly erased $1 trillion in stock value on May 6. Kentucky Republican Senator Jim Bunning and Virginia Democrat Mark Warner today said at a committee hearing that they were concerned the so-called flash crash could be repeated.

‘Question of Confidence’

“It’s a question of confidence,” said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, which oversees $55 billion. The almost 1000-point decline in the Dow average on May 6 “not only rattled the confidence of investors, but everyday policymakers are digging in and not giving us answers as to what’s causing this problem.”

At 1,071.59, the S&P 500 is 24 percent below its level 10 years ago, just after the peak of the Internet bubble. The index is 17 percent below its level on May 18, 2001, and 3 percent above its closing price on the first trading day after the Sept. 11, 2001, terrorism attacks.

Stock futures extended declines before exchanges opened in New York after the S&P 500’s June futures contract slipped below its average price over the past 200 days, a level watched by technical analysts as an inflection point that may trigger deeper losses. The S&P 500 itself closed below its 200-day moving average today for the first time since July 2009.

The drop below the level may not necessarily signal more losses to come, according to Harrison, New York-based Bespoke Investment Group LLC. On the previous occasions when it closed below the 200-day moving average after having stayed above it for at least 100 days on a closing basis, the S&P 500 “has actually done well” in the following months, according to a Bespoke note yesterday, with positive returns one, three and six months later.

Economy Watch

Today’s rout came as initial jobless claims rose by 25,000 to 471,000 in the week ended May 15, exceeding the median forecast of economists surveyed by Bloomberg News and the highest level in a month, Labor Department figures showed. Losses accelerated in the regular session after the Conference Board’s index of leading economic indicators unexpectedly slumped 0.1 percent.

The S&P 500 has plunged about 12 percent from a 19-month high on April 23, a retreat surpassing 10 percent typically known as a correction. The index has pared its rally from a 12- year low in March 2009 to 59 percent. The Nasdaq Composite Index today joined the Dow Jones Industrial Average and S&P 500 in erasing its 2010 advance.

‘Corrective Territory’

“We are clearly in corrective territory,” Robert Doll, who helps oversee $3.36 trillion as vice chairman and chief equity strategist at New York-based BlackRock Inc., said in a Bloomberg Television interview. “Europe has to stabilize, we need further evidence of cyclical improvement here in the U.S. and a little less volatility. When we get those things, we believe the cyclical bull market will resume.”

The Chicago Board Options Exchange Volatility Index, the benchmark gauge of U.S. stock options known as the VIX, jumped 30 percent to 45.79, its highest level since March 20, 2009. The gauge usually goes up as stocks fall on rising demand for options to protect against further losses. U.S. May options expire tomorrow.

“It adds to the pressure,” Stephen Lieber, chief investment officer of Alpine Woods Capital Investors LLC, which manages more than $7 billion from Purchase, New York, said of options expiration. “People are particularly nervous about the outlook of Europe.”

Naked-Short Ban

Stocks plunged yesterday as German Chancellor Angela Merkel’s unilateral effort to control what she called “destructive” markets rattled investors. The German ban on some bearish bets against financial companies and government bonds wasn’t replicated in other European states and European Central Bank council member Nout Wellink said Germany should have consulted other countries before introducing the ban.

The S&P 500 Financials Index tumbled 4.7 percent today, with Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. pacing declines among all 79 companies.

President Barack Obama said the financial regulation overhaul moving through Congress will help the economy and protect consumers by bringing greater accountability to Wall Street.

The “hordes of lobbyists” from financial firms have failed to block the legislation, which will bring “sensible” rules to the market place, Obama said at the White House after the Senate voted 60-40 to clear the way for a final vote on the legislation. The measure would create a consumer financial- protection bureau at the Federal Reserve, overhaul rules for hedge funds and derivatives, and create a mechanism for dissolving failed firms whose collapse would roil the economy.

‘Unchartered Waters’

The global slide in equities may worsen and inflows to Treasuries will increase amid concern that Europe’s debt crisis will derail global growth, said Mohamed A. El-erian, chief executive officer of Pacific Investment Management Co.

“This is not a typical retracement,” El-Erian, 51, whose firm runs the world’s biggest bond fund, wrote in an e-mail. “We are in uncharted waters on account of several issues, including what is going on in Europe and other important structural regime changes. In economic terms, European developments are unambiguously bad for global growth.”

The 10-year Treasury yield touched 3.2 percent today, the lowest level since Dec. 1. Yields on British, French and German 10-year bonds lost at least eight basis points, while Italy’s and Spain’s rose at least five basis points.

The benchmark U.S. Treasury note’s yield may drop to 2.5 percent as investors lose confidence in some European nations’ ability to repay their debts, Royal Bank of Scotland Group Plc said.

‘Political Risk’

“It’s difficult trading Treasuries right now because we are trading almost solely on European political risk,” said Donald Ellenberger, who oversees about $6 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh. “I do think that it’s safe to say that a lot of people have underestimated how far down yields could fall from a problem that started in a relatively tiny country.”

The euro erased earlier losses against the dollar amid speculation the Swiss National Bank sought to support the franc drove traders to theorize that the European Central Bank may do the same for the shared currency. The euro rose against all 16 major counterparts except the yen, gaining more than 3 percent against the Canadian dollar, the South Korean won, Brazil’s real and the Australian dollar.

Germany Vote on Bailout

Volker Kauder,  who heads Chancellor Angela Merkel’s Christian Democratic alliance in parliament, said the almost $1 trillion emergency lending package for indebted European nations should be approved when it goes to a vote tomorrow. The three parties in Merkel’s coalition, which together have 332 of the 622 seats in the lower house of parliament, conducted a trial vote today, Kauder told reporters in Berlin. Seven lawmakers voted against and two abstained, giving the required majority to approve the bill, he said.

Crude oil tumbled 2.7 percent to $68.01 a barrel in New York and touched $64.24, the lowest level since July, as stocks fell and the euro weakened.

The cost to protect against defaults on U.S. corporate bonds rose to the highest since May 6, trading in a benchmark credit derivatives index shows. The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, increased 11 basis points to a mid-price of 124.5 basis points.

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Capital Gold Group Report: Gold Prices Curb Meltdown

by Alix Steel
05/20/10 – 10:20 AM EDT

NEW YORK (TheStreet ) — Gold prices were reversing double-digit losses Thursday as bargain hunters beat out investors’ need for cash for protection against global uncertainty.

Gold for June delivery was rising 10 cents to $1,193.20 an ounce at the Comex division of the New York Mercantile Exchange. The gold price today has traded as high as $1,198.20 and as low as $1,175. The U.S. dollar index was rising 0.38% to $86.56 while the euro was falling 0.55% to $1.23 against the dollar. The gold spot price Thursday was rising over $1, according to Kitco’s gold index.

Bargain hunters were lifting the gold price as they bought the metal at a “discount.” In early trading, investors had been opting for cash and U.S treasuries instead of stocks and precious metals. Gold prices have fallen more than 4% this week as eurozone debt issues spooked investors.

The fear that the European Union nations would not be saved by the $1 trillion financial aid package was aggravated after Germany announced a ban on naked short-selling of some stocks and euro bonds. Reports out Thursday indicated that EU officials have agreed to a unilateral ban on short-selling. Many analysts say this panic reaction indicates some kind of impending disaster.

The euro resumed its fall towards its four-year low as Greece prepared for more protests and strikes. Investors first instinct was to flee to the perceived safety of the U.S. dollar.

“Some have [also] used this as an excuse to take profits,” says Jon Nadler, senior analyst at Kitco.com. “The prospect of dipping to the $1,150 area has now been opened and if that were to be breached then I think we have a game changer.” For now strong buying has appeared around the $1,175 level as trader again eye the new $1,250 resistance area.

Another factor subduing the gold price is reduced risk of inflation. The minutes from the Federal Open market Committee’s meeting at the end of April revealed that the Fed believes long term inflation expectations are stable and that “core inflation would remain subdued through 2012.”

This news along with data from the Labor Department that the consumer price index fell 0.1% in April took the inflation fear off the table, for now. Many investors had been buying gold in anticipation of inflation as they expected the dollar to lose value while gold retained its worth.

espite the respite in gold frenzy buying, the popular gold ETF, SPDR Gold Trust(GLD), added another 3 tons Wednesday. The GLD is physically backed, which means for every share investors buy , they own 1/10 an ounce of gold. Since its inception five years ago, the ETF, along with its peers iShares Comex Gold Trust(IAU) and ETFS Physical Swiss Gold Shares(SGOL), have become a popular way to buy gold but have also created a vehicle to speculate on physical gold, which can move gold prices depending on inflows and outflows.

Nader says, “the fact that these funds control sizable proportions of annual metal supply … if and when significant wave of redemptions come out of that fund, the effect cannot be ignored.”

Silver prices were slipping 44 cents to $17.67 while copper was down 1 cent at $2.94.

Platinum and palladium were plummeting down $88 and $37, respectively. Part of the massive decline in platinum and palladium was due to flows out of the physically backed ETFs ETFS Physical Platinum (PPLT) and ETFS Physical Palladium(PALL). Shares were falling 5.65% and 8.10%, respectively.

Gold mining stocks, a more risky but more profitable way to invest in gold, were sinking. Barrick Gold(ABX) was trading down 2.83% to $41.55 while Newmont Mining(NEM) was lower at $53.60. Other large gold companies Kinross Gold(KGC) and Goldcorp(GG) were trading at $16.80 and $41.42, respectively. Goldcorp was falling over 1% despite that fact its CEO intimated that the company could raise its dividend by 2011.

Shares of Freeport McMoRan Copper & Gold(FCX) were sinking 4.99% to $64.31 while AngloGold Ashanti(AU) was down over 2% to $39.66.

The SPDR Gold Trust(GLD) was slipping slightly to $116.50.

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Capital Gold Group Report: Germany Prohibits Naked Short-selling of Euro

Bloomberg.com

By Rita Nazareth and David Merritt

May 19 (Bloomberg) — Stocks and commodities slid and Treasury 10-year note yields neared the lowest level of the year after Germany banned some bearish bets against government bonds and banks. The euro rose from a four-year low on speculation European leaders will take steps to support the currency.

The MSCI World Index slumped 1.5 percent at 1:05 p.m. in New York for a fifth-straight drop, the longest streak since January. The Standard & Poor’s 500 Index fell 0.6 percent and the S&P GSCI Index of 24 commodities tumbled 1.4 percent, with both near their lowest levels since February. The euro rallied 1.1 percent to $1.2339, helping to send gold down 2.8 percent. The 10-year Treasury yield lost one basis point to 3.33 percent.

Germany’s ban of naked short-sales spurred concern investors will lose options for hedging against losses on risky assets. U.S. equities also tumbled after the Mortgage Bankers Association said a record share of U.S. mortgages were in foreclosure and the Senate moved closer to voting on a bill to strengthen regulation of Wall Street.

“It’s like seeing a movie you’ve seen before and which doesn’t end that well,” said E. William Stone, who oversees $104 billion as chief investment strategist at PNC Wealth Management in Philadelphia. “There’s concern that the European situation may spread and we can see a repeat of the financial crisis of 2008. The German ban is the same kind of game plan and it didn’t necessarily work at that point either.”

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Capital Gold Group Report: David Rosenberg: Gold is Breaking Out Against all Major Currencies

In an important post today, former chief Merrill Lynch economist David Rosenberg writes:

When we had the post-Lehman collapse, gold fell from $900 to $720 an ounce but it still managed to outperform other commodities and rise in many other currencies, outside the U.S. dollar. That post-Lehman collapse phase was a giant margin call where investors sold their winners, like precious metals, and on top that, there was insatiable appetite for dollars from the global banking system caught short of greenbacks.

What is happening today is truly fascinating. Gold has broken out to the upside even as the U.S. dollar has done likewise on the back of a renewed flight-to-safety bid. What this means, of course, is that gold has managed to hit new highs even as, (i) the U.S. dollar has risen, which means gold is breaking out against all major currencies; and, (ii) other industrial commodities, such as oil and copper, have slumped from their recent highs. So what this all means is that gold is no longer being considered as part of a resource complex that is outperforming the segment but is increasingly being viewed as a currency of its own.

Here are some charts for perspective (courtesy of Galmarley):

Price of Gold in Euro

5 Year Euro Gold Price Chart

Price of Gold in Pound Sterling

5 Year Pound Gold Price Chart

Price of Gold in Swiss Franc

5 Year Franc Gold Price Chart

Price of Gold in U.S. Dollars

5 Year US Dollar Gold Price Chart

Price of Gold in Canadian Dollars

5 Year C.Dollar Gold Price Chart

Price of Gold in Australian Dollars

5 Year Aus.Dollar Gold Price Chart

Price of Gold in Japanese Yen

5 Year Yen Gold Price Chart
Rosenberg also confirms that we’ve reached “peak gold”, where all most the cheaply-extracted gold has been removed from the ground. See this and this. Specifically, Rosenberg says:

The one thing we do know about gold is that most of it is already above ground and that production peaked a decade ago. In other words, investors have more faith in what the shape and direction of the supply curve for bullion looks like relative to individual country money supply growth.

In other words, all of the countries of the world are printing money like its going out of style, but the supply of gold is relatively fixed, thus driving up gold prices as against paper money.

Rosenberg also confirms our previous arguments that expansion of the money supply in the latter stages of deflation is bullish for gold:

This is why deflation is good for gold — the reflationary efforts provide a big boost.

Rosenberg further confirms our statements about gold and instability:

Gold is a hedge against instability of all kinds — don’t think for a second that deflation does not engender instability whether it be financial, economic or political.

Rosenberg also makes an interesting point about the upside for gold, by showing that gold has rallied far less to date than other asset classes climbed during their big rallies (spruced up version of Rosenberg’s chart courtesy of Clusterstock):

Finally, Rosenberg says that gold is currently overbought, and may well correct downward, but that the long-term trend is much higher:

While I am concerned near-term that gold is overbought and could be ripe for a setback; however, unlike the equity market, bullion is in a secular bull market, which means dips, when they occur, are to be bought. Gold can trade down to $1,130 an ounce and none of the trendlines would be broken.

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