Americans To Fed: Prices Are Too High - Reuter

Americans To Fed: Prices Are Too High - Reuter

By Daniel Trotta

NEW YORK (Reuters) - On the streets of America, the debate over inflation is over. Prices are too high and rising too fast, many people say.

"The government says inflation is low, but that's not what I'm seeing at the grocery story," Jorge Alberto, an 88-year-old retiree in Miami, said walking out of a supermarket. "My pension is being put to the test."

Policy-makers at the U.S. Federal Reserve largely agree that promoting economic growth is still more urgent that constraining a nascent pick-up in consumer prices.

They look beyond the volatile fuel and food prices that have pushed up inflation and focus instead on data showing little if any upward rise in wages, something they would see as the seed of a sustained and broad-based rise in prices.

"I don't think the Federal Reserve has a clue about us little people," said J. McKeever, an instructor at the Montessori Institute of Milwaukee.

"I am very frugal, so I watch what I spend. And what I have noticed in recent months is that I have less money before than I used to, while making the same amount of money and having to pay for health care," she said.

Across the country, Americans tell of a disconnect between the real economy they live in and the macroeconomic picture as described by economic indicators.

Consumer prices rose 0.5 percent in February from January, and 2.1 percent over the previous year but the rates were half that when stripping out food and energy.

"There are no salary increases and you know you have the pressure at work to cut, but on a personal level everything else keeps going up. You never seem to be able to catch up," said Paty Peterson, 50, of suburban San Francisco.

Policy-makers at the Fed must weigh how much the perception of inflation might trigger actual price increases. The worry would be if businesses pushed up prices to cover their rising costs and workers in turn demanded higher wages to cover theirs -- which could spark a self-feeding cycle.

Consumers' inflation expectations rose briskly in March, according to the Thomson Reuters-University of Michigan survey.

U.S. households are facing higher prices for staple products such as Tide laundry detergent and Hershey chocolate bars as cocoa, sugar, oil, wheat, corn and other commodity prices climb.

Major consumer products makers have said in recent weeks that they will be raising prices including Procter & Gamble Co (PG.N), which said it would raise laundry detergent prices 4.5 percent in June. Kimberly-Clark Corp (KMB.N) is raising prices on diapers, baby wipes and toilet paper as much as 7 percent.

"My grocery bill is up 30 percent over last year," said Cheryl Holbrook, 47, who educates her seven children at home in Mobile, Alabama. "We have to pinch every little penny and make it squeak."

The Fed's hawks, who stress the risks of inflation, have stepped up their argument that it may be time to wind down the central bank's $2.3 trillion securities-buying program to stimulate the economy. So far, they have been out-argued by those who see recovery from the Great Recession as fragile and still in need of a boost.

The European Central Bank, by contrast, on Thursday raised interest rates for the first time since 2008 to contain rising prices.

If underlying prices rise, or an inflationary psychology starts to take hold, the Fed could change course.

A recent Reuters poll found long-term expectations for the food and fuel prices that have pushed inflation higher in recent month are on the rise.

Consumers meanwhile complain that food and gasoline consume too much of their income, forcing difficult decisions to stay within budgets.

Eileen Reilly, 72, a retired resident of the Chicago suburb of Geneva, said higher gasoline and food prices have forced her to drive less, buy a cheaper food for her dog Lucky, and stop taking pills for a liver condition she declined to identify.

"My doctor said I could die if I don't take them," Reilly said, rolling her eyes. "I told him that I'm 72 and I'll be dead soon as it is. Besides, it was either the pills or the car and the dog. And I need the car and I love the dog."

(Reporting by Kevin Gray in Miami, Mark Felsenthal in Washington, Verna Gates in Birmingham, Alabama, Nick Carey in Chicago, Brad Dorfman in Chicago, John Rondy in Waukesha, Wisconsin, Peter Henderson in San Francisco)

(Writing by Daniel Trotta)

Source: http://mobile.reuters.com/article/businessNews/idUSTRE7367BZ20110407

Chart Of The The Day: Real Gold Prices, 1970-2011

Record-high gold prices have been in the news lately, here’s an example of a new story today from Bloomberg titled “Gold Advances to Record for Second Day“:

“Gold for immediate delivery in London rose to an all-time high of $1,462.30.“ The chart above displays real, inflation-adjusted gold prices back to 1970 (data are from Global Financial Data, paid subscription required), and shows that the real price of gold peaked on January 21, 1980 at a closing price of $892.10 per ounce in current dollars, but that’s more than $2,500 per ounce in today’s dollars.  Compared to that peak real price, the price of gold today at $1,462.30 per ounce is 42.5% below the 1980 peak.

Gold Gains Strength As The Dollar Grows Weak

Elizabeth Kraus While silver continues its meteoric rise, investors often wonder what exactly drives the movement of such an important and financially sensitive commodity, and how bullion trade impacts the mid-term outlook for the U.S. dollar. As gold prices respond to inflation expectations, and central banks being the largest holders of gold, the biggest players in the market impacting gold, a correspondent on Bill Murphy’s LeMetropleCafe site snarled: “The Gold Cartel showed up, and punished both gold and silver in the past four days, and gold was bombed going into an option expiry on Monday … same tricks (tactics) time and time again.” (It is a fact that CME gold-option expiries seem to attract heavy selling pressure.) “Enter the Fed officials today and yesterday. Apparently the strategy was to get several of the FOMC governors to hit the airwaves talking about ending the QE program. … Result? Up goes the dollar and down goes the precious metals market. Coincidence? I hardly think so.” The specter of a determined official-sector effort to cap the gold price is alarming for the gold bulls — especially as a credible rumor of it is likely to attract opportunistic profit-motivated sellers and be self-fulfilling. But this time the fear may be overblown.
For another thing, physical-market premiums as tracked on Le Metropole Café have improved lately. Partly this stems from the U.S. dollar decline, and partly from the recent start of a rally in emerging-market equities. This is firming up such currencies as the Indian rupee, and consequently strengthening their bid to the global gold market. Consequently, the assessment posted Friday on the Jesse’s Café American website deserves attention: “I suspect strongly that when gold breaks out, we will see another fast move higher, because so many in the markets are not positioned for it. After at least one serious ‘gut check’ on the longs, gold will most likely move fairly quickly to $1,590. Depending on what happens, I will not be surprised to see gold hitting $2,000 by year end.”
With dollar decline, add to that, gas prices at two-year highs, and food prices at record levels, the value of a dollar just does not go as far today as it did a decade ago. “Get used to it,” says Peter Schiff, CEO of Euro Pacific Capital. “If people think that gas prices are high now and that food prices are high now, just wait for another couple years,” he tells Henry Blodget. “Prices are going to be up in the stratosphere.” Schiff blames the Federal Reserve’s loose monetary policy for the debasing of the U.S. dollar, rock-bottom interest rates coupled with QE1 and then QE2. If the Fed keeps this up, and continues to print money, he says the U.S. dollar could be worth less than toilet paper…and moving there already.
Last week Federal Reserve Bank President Dennis Lockhart echoed Ben Bernanke’s call to end quantitative easing this summer and said he would “support a change of policy if evidence accumulates that the low and stable inflation objective is at risk.” Schiff is calling both Bernanke’s and Lockhart’s bluff. Without question, the Fed will undergo QE3 and will keep interest rates low for fear of killing the U.S. recovery, he says. If the debt ceiling is hit it could prove disastrous for the U.S. economy. The bottom line, expect the dollar to continue losing value while the price of food, gas and other commodities continue to rise. A longtime dollar bear and gold bull, Schiff foresees gold hitting $5000 per ounce “in the next couple of years.” Schiff’s forecast is based on his view the U.S. dollar is going to collapse under the weight of our massive deficit and reckless policies of the Obama administration, which he compares to the massive spending programs of the 1960s, which paved the way for gold’s ascent in the 1970s. “Obama is making the same mistakes as Bush, but he’s doing them on a grander scale,” says Schiff. In addition to gold, Schiff remains bullish, most notably on China. Regal Assets top analyst says “There is bound to be a QE3 in the near future this tactic has been employed since 2008 and there is no letting up in sight”.
Source: http://goldcoinblogger.com/gold-gains-strength-as-the-dollar-grows-weak/#more-2937

Why gold prices and US interest rates move in tandem

Why gold prices and US interest rates move in tandem
Shanmuganathan N.



Every time the Fed announces a decision on the US interest rates, gold prices also react. If interest rates are increased, gold prices go down, and vice-versa, indicating a negative correlation. The explanation offered is that when interest rates rise, the higher returns attract foreign capital and demand for dollars. The higher demand for dollars raises the US dollar-exchange rate. This increased return on the dollar makes gold less attractive and, hence, the gold price falls.
This theory is what is put forward by television channels and economics courses around the world. For lack of a better phrase, one may refer to the above as the "Maggi Theory of Gold", that is, the theory is valid for the first two minutes of trading after announcement of an interest rate decision. Beyond that initial speculative sentiment, the historical evidence has been quite contrary to what is suggested by the above theory.
The Evidence

1971 was when the US went off the gold standard and thus, that would be a good starting point for this analysis. In January 1971, gold prices averaged $37/ounce and interest rates were 6.24 per cent. For the next 12 years, both increased gradually. Gold averaged $673 by September 1980, while interest rates peaked a year later, at 15.32 per cent.
For the next two decades, there was a bear market in the precious metal, in conjunction with declining interest rates. Gold prices bottomed by April 2001, at $260, and interest rates bottomed out by June 2003, at 3.33 per cent. From the bottom, both have been increasing steadily and, by June 2006, gold averaged $600, and the interest rate was 5.11 per cent
Indeed, barring very short-term time-frames, the correlation is actually a strongly positive one — higher interest rates mean higher gold prices. But why is this so?
"Real" Theory of Gold

For one, gold is not an interest-bearing instrument. So "other things being equal", any interest-bearing instrument should be preferable. It does not matter whether the interest rate is 0.5 per cent or 50 per cent — one would be worse off holding gold. So it is not the interest rate that influences gold prices, but the "other things" that is assumed to be equal.
So what are the "other things"? Let us get to the basics of investing to answer that. According to Benjamin Graham, "an investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return". Most people would agree that it should at least be equal to the risk-free interest rate and a risk premium for holding a risky asset class.



But what happens when real rates of interest are negative? Then, an investment operation, even when it fits in with the above definition, would fail to maintain the purchasing power. So a more appropriate definition would be as follows: "An investment operation is one which, upon thorough analysis, promises safety of principal and a return that at least ensures maintenance of purchasing power over the period invested". Consequently, when expectations of inflation are high, investors prefer gold as a mechanism for protecting their purchasing power. Thus, when confidence in a currency is high (low inflation), then gold prices would be low and, for the same reason, interest rates also would be low. The best explanation for the gold standard was, ironically, given by the former US Fed chief, Mr Alan Greenspan, in his speech "Gold and Economic Freedom" in 1966:
"Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset... The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which the banks accept in place of tangible assets and treat as if they were an actual deposit, that is, as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets."
Of course, the Maestro managed to unlearn this virtue by the time he reached the Fed, where he began the biggest money printing exercise ever witnessed. He did exactly what he had said would happen in the absence of a gold standard.



The effects of that can be observed in the Graph that shows how chocolate prices moved before and after the era of easy money. Chocolate is just an example, but it's true of almost every other consumer good. The Fed-doctored CPI or core rate will never tell you the true story.
Gold as leading indicator

While the positive correlation between gold and interest rates is obvious, the peaks and troughs do not exactly coincide.
If we plot gold vs 18-month future interest rates (that is, gold of January 1970, matched with the interest rate of July 1971), then the lines coincide almost exactly as shown in the Graph.
What this means is that the yellow metal has been a very good indicator of interest rates. Given the fact that gold has been going up sharply in the recent past, one can expect the interest rates to follow soon.
In an earlier article titled "The Inflation Game" (Business Line, July 21, 2006), this writer had explained why interest rates are set to increase. The current surge in gold just goes to confirm that.
The Golden Future

An interesting exercise would be to estimate how high the precious metal would go up in the next decade of rising interest rates. In the previous interest rate cycle of 1970 to 1983, prices went from $35 to about $675 (it touched $850 for one minute) — an increase of nearly 20 times. This time around, we started from $260, so will we exceed $5,000?
One could argue that the gold price, as fixed by the US Government in 1970 at $35, was artificially low and, hence, the move appears exaggerated.
On the other hand, one could make a case that in every economic aspect — fiscal deficit, consumer debt, trade deficit, debt-to-GDP, etc — the US is much worse than it was during the 1970s and so gold could be headed for an even greater move.
A more fundamental reasoning would be that the 35-year (or 85-year experiment, as some Austrian Economists could rightfully claim, since we went off the true Gold Standard by 1920) experiment with the ultra loose monetary system with Fiat currencies has to end "eventually".
Subsequently, when we go back to the "Classical Gold Standard", Gold would have to be priced at $30,000 to account for the Dollars in circulation today. Thus, using a Gold standard to define the intrinsic value of Gold, $5000 would indeed be cheap.
(The author is a Director at Benchmark Advisory Services and can be contacted at shanmuganathan.sundaram@gmail.com)

Gold May Go Even Higher on Fed's Stimulus

By Daniel Kruger and Tom Keene - Apr 6, 2011 4:19 AM GMT+0800
 
Gold remains an attractive investment even at record prices, fueled in part by the Federal Reserve’s $600 billion of Treasuries purchases through June, according to Bianco Research LLC in Chicago.
“I think the path of least resistance for gold is higher,” said James Bianco, the firm’s president, in a television interview on “Bloomberg Surveillance” with Tom Keene.
Gold futures for June delivery rose $19.50, or 1.4 percent, to settle at $1,452.50 on the Comex in New York, the highest closing price ever.
“Quantitative easing has been an inspiration for the massive, record speculation that we’ve seen for a lot of these commodities,” Bianco said.
Inflation may return to the economy by the end of the year, Bianco said. An end to the Fed’s asset purchases may lead to a rise in short-term yields relative to longer-term yields, Bianco said.
A difference of less than 1.5 percentage points between Treasuries maturing in two- and 10-years may hurt financial stocks, Bianco said. The gap is 2.66 percentage points, and has not been below 2.5 percentage points since Dec. 6.
“Financials are a large carry trade,” Bianco said. “They borrow at the short end of the curve, they invest at the long end of the curve. As long as it’s very steep they make money.” The yield curve is a measure of the differences between short- and long-term interest rates.
Policy makers should address the growth in the outstanding Treasury debt before it expands further, Bianco said.
“It’s going to be problematic as we move forward from here, especially if we continue to run big budget deficits,” Bianco said.
(In the U.S., hear Bloomberg Radio on satellite radio: Sirius Channel 130 and XM Channel 129. In New York City, tune to WBBR 1130 on the AM dial.)
To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.netThis e-mail address is being protected from spam bots, you need JavaScript enabled to view it ; Tom Keene in New York at tkeene@bloomberg.netThis e-mail address is being protected from spam bots, you need JavaScript enabled to view it
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.netThis e-mail address is being protected from spam bots, you need JavaScript enabled to view it
Source: http://www.bloomberg.com/news/2011-04-05/gold-may-go-even-higher-on-fed-s-stimulus-bianco-research-says-tom-keene.html

MONETARY DISASTER is around the corner

Geithner warns U.S. to hit debt ceiling by May 16 - Reuter 
 
WASHINGTON (Reuters) - The United States will hit the legal limit on its ability to borrow no later than May 16, Treasury Secretary Timothy Geithner said on Monday, ramping up pressure on Congress to act to avoid a debt default.
"The longer Congress fails to act, the more we risk that investors here and around the world will lose confidence in our ability to meet our commitments and our obligations," Geithner said in a letter to congressional leaders.
"Default by the United States is unthinkable."
Previously, the Treasury had forecast that the $14.3 trillion statutory debt limit would be reached between April 15 and May 31. As of Friday, Treasury borrowing stood just $95 billion from the ceiling.
Some Republican lawmakers have sought to use the need to raise the debt limit as a lever to pressure the Obama administration into agreeing on large-scale budget cuts.
The debt-limit showdown comes as Congress struggles to complete a spending package that would keep the government operating beyond Friday.
Republicans are seeking to use that bill to enact deep spending cuts and lawmakers are focusing on a proposal to trim this year's budget by $33 billion, a relatively small amount compared with a projected $1.4 trillion deficit.
Geithner said a failure to raise the debt ceiling in a timely way would push interest rates higher and spark "a financial crisis potentially more severe than the crisis from which we are only starting to recover."
Both Geithner and Federal Reserve Chairman Ben Bernanke have said a failure to raise the ceiling could have "catastrophic consequences."
BUYING TIME
As the government nears the debt ceiling, the Treasury has authority to take certain extraordinary measures to postpone the date the United States would default on its obligations.
However, those actions would be exhausted after about eight weeks and there would be "no headroom" to borrow after July 8, Geithner said.
Some lawmakers have called for legislation to force the Treasury to first pay interest on U.S. bonds before other obligations, such as unemployment benefits and Social Security and Medicare payments, as a way to stave off a debt default.
They have also asked Treasury whether financial assets such as the country's gold reserves or the government's portfolio of student loans could be sold to avoid raising the debt ceiling.
Treasury has rejected the proposals as unworkable.
"To attempt a fire sale of financial assets in an effort to buy time for Congress to act would be damaging to financial markets and the economy and would undermine confidence in the United States," Geithner said.
Based on estimates last year from the International Monetary Fund, U.S. debt as measured against the size of the economy is higher than in France, Canada and Germany, but less than in Italy and Japan
Geithner said that while the debt ceiling projections could change, the Obama administration does not believe they could change in a way that would give Congress more time to raise the debt ceiling. He said Treasury would provide updated projections in early May.
(Editing by James Dalgleish and Jan Paschal)
Source: http://mobile.reuters.com/article/topNews/idUSTRE7335BY20110404

USD disaster sign

Gold will achieve new record highs this year - Blanchard

Blanchard and Company's research analysts see gold achieving further new highs in 2011 as little has changed in the drivers which have brought gold to its current levels.

Author: Lawrence Williams
LONDON - 
According to coin and precious metals dealer Blanchard and Company's research arm, the continuation of gold's strong bull run through during Q1 2011, with the metal hitting a new nominal high above $1,440 last week, will see more new record highs likely to be achieved this year despite some analysts' predictions that gold will plateau.

"After the economic implosion in 2008, investors are fatigued by negative indicators that show more financial weakness on the horizon and naturally gravitate toward signs they see as positive, but right now that's just not an accurate reflection of reality," says David Beahm, Blanchard's Vice President of Marketing and Economic Research. "In the first three months of 2011, the Fed has printed about half as much money as it did in all of 2008. That's not a sign that QE2 is coming to a halt sooner rather than later because the chart is parabolic."  A graphic of the money supply increase is shown below courtesy of the St. Louis Fed, indicating the huge and steep rise seen in the past two years of ‘Quantitative Easing'



Beahm reckons that much liquidity will continue to dilute the dollar's value, keep interest rates near historic lows, and contribute to a financial mess that has buoyed gold investment demand and prices to levels that have not been realized before. He also says there are other factors that will push gold higher, and most of them are likely not going to change in the foreseeable future.

"When you hear economists say they see European rate hikes on the horizon when three EU countries are on the verge of defaulting on their debt with no lenders in sight, that makes me question the accuracy of those predictions," Beahm says. "The U.S. faces a similar problem, but there's an exception - it just borrows money from itself. This will ultimately create a hyperinflation scenario that is extremely bullish for gold."
The parlous financial situation of some of the U.S.'s largest states and municipalities almost parallels the European situation although little is mentioned about this in the financial press.

Add the expansive and expanding tensions in the Middle East and Northern Africa, and the crisis at Japan's Fukushima Nuclear Plant to the mix, and Beahm sees a scenario where gold's status as the ultimate financial safe haven will be reconfirmed.

"At this point, as in the past, investors will continue to look to gold as one of the best vehicles to both protect and grow their wealth," Beahm says.
Beahm's opinion is shared by some other specialist gold analysts who have been pointing out that the financial and political problems which have brought precious metals to the levels they have reached so far are virtually all still in place.  The apparent recovery in the U.S. remains a little precarious and it may only take some other major unforeseen event to give gold another sharp upwards kick.
Source: http://www.mineweb.com/mineweb/view/mineweb/en/page33?oid=124229&sn=Detail&pid=102055