Money and Metals

The Street.com reports on golds break-out Friday. "Gold and other metals were sharply higher Friday amid a dollar selloff after the Federal Reserve gave a benign outlook about future hikes in interest rates. Gold for August delivery surged above the $600 mark, and was recently gaining $23.60, or 4%, to $612.50. Among other metals, silver for July delivery was adding 59 cents, or 5.7%, to $11.01 an ounce."

"The metals market, which was closed Thursday by the time the Fed delivered a quarter-point rate hike and made conditional comments about future policy, rallied overseas and at the opening of trading Friday."

"Commodities have sold off over the past month and a half amid worries that the Fed might lift interest rates too much, hurting a U.S. economy that is already showing signs of slowing. This, commodities bulls feared, would curb global growth and demand for raw materials. The dollar had also began rallying since mid-May on the prospect of further rate hikes."

"But the dollar plunged following the Fed's comments, and it continued to slide on Friday. The Dollar Index, which tracks the value of the dollar against a basket of key currencies, was recently down 0.7%."

"A report on personal income showing that the Fed's favorite inflation indicator, the personal consumption expenditures index, rose 4.1% in May failed to revive the dollar. In addition, a survey showing weakness in manufacturing activity in the Chicago economy in June reinforced expectations of a declining trend."

"Gold and metals had already began showing signs of recovery earlier this week. According to Michael Jalonen, metals analyst with Merrill Lynch, gold made a bottom when it closed at $560 on June 14, representing a 23% drop from its May highs. Since then, gold has benefited from safe-haven bids amid rising crude oil prices and tensions between the U.S. and Iran over Tehran's nuclear program."

"'If this is the case and the Fed does pause in raising U.S. interest rates, this would be a favorable development for bullion,' writes Jalonen. 'Given the plethora of favorable factors impacting bullion (Merrill Lynch's forecast for further weakness in the dollar, renewed fabrication demand in the fall and geopolitical tensions, to name a few), we believe bullion should rise back to the $650/oz level by early fall.'"

To be updated later today if additional news breaks.

Bloomberg looks at the market reaction to the Fed decision. "The dollar fell by the most in two months against the yen after the Federal Reserve raised the overnight lending rate between banks a quarter-percentage point and suggested it may pause in its rate boosts. 'An August rate hike is in question now,' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York. 'Reduced expectations for further rate increases brought down the dollar.'"

"The dollar dropped 1.2 percent to 115.07 yen at 4:01 p.m. in New York, and is down from a two-month high of 116.70 on June 27. The dollar weakened to $1.2648 per euro, from $1.2557 yesterday, the biggest drop since June 2. It has fallen from a two-month high of $1.2479 on June 23. The dollar also sank against the British pound and Canadian dollar."

"'We have the Federal Reserve talking down growth whereas in other economies they have said very different things,' said Peter Frank, senior currency strategist at ABN Amro Inc. in Chicago. 'That's very negative for the U.S. dollar.'"

"Gold futures climbed back above $600 an ounce in electronic trade Thursday, after the Federal Reserve raised interest rates by a quarter percentage point as expected and came across as less hawkish than anticipated, sending the dollar sharply lower."

"Gold for August delivery touched a high of $602.90 an ounce in late afternoon trade, breaking through $600 for the first time since June. Earlier, it had closed official trade up $7.90 at $588.90 on the New York Mercantile Exchange. Other metals prices were mixed. Silver closed up 17.8 cents at $10.333 an ounce, platinum closed up $27.50 at $1,205.7 an ounce and palladium ended up 60 cents at $313.40 an ounce."

"'The quarter-point interest rate raise by the Fed and its softer-tone policy statement have removed any fears that gold would be strangled by sharply higher interest rates and the U.S. dollar,' said Peter Grandich."

"With Tuesday's $599 price now breached, 'there's a decent chance that the rally can continue right up to major resistance at 609.40, which is the 100-day moving average,' said Dale F. Doelling, market technician. However, 'if gold is going to test that resistance level, it will take some serious fund buying along with continued dollar weakness, which just hasn't been evident of late.'"

"In another development that strengthened gold, crude oil futures hit a three-week high above $73 a barrel Thursday after Energy Department data indicated the largest weekly drop in crude supplies since last November. Crude for August delivery was last trading up $1.16, or 1.6%, at $73.35 a barrel."

The Daily FX has this early update. "The FX markets remained motionless overnight, all but ignoring all of the economic data from Asia andEurope as dealing desks around the world prepared for the FOMC decision at 18:15 GMT today."

"The FX market the focus remains squarely on the Fed with the market keen to know if the Fed intends to move rates to 5.50% or even possibly 5.75% level as early as August. Despite dollar bears’ predictions of imminent doom once rates crossed the 5% threshold, the US economy has remained remarkably resilient in the face of higher rates and persistently higher oil prices. However, greenback shorts may not have been wrong, just early."

"The US housing bubble, like all bubbles before it refuses to pop quickly as buying momentum persists beyond all reason. However, the weekly MBA data clearly shows that this key sector of the economy is experiencing serious problems. Yesterday’s data revealed that both the Market Index and Purchase Index are at new lows for the last 3 years. Another 50 basis points rate increase in the Fed funds rate is likely to drive up the cost of adjustable rate mortgages even higher, making housing less and less affordable for the majority of the US population."

"For now the Fed has been able to tighten monetary policy without any detrimental effects to the US economy, but as it continues to ratchet rates higher, it raises the probability of a sharp contraction in housing, which in turn would lead to a significant slowdown in the overall economy."

"Traders like the ever increasing yield on USD assets but worry that these increases could trigger a US recession. This conflicting sentiment explains the lack of dollar strength versus the euro, given the unit’s substantial interest rate advantage."

"Nevertheless, should the Fed statement strike a hawkish note today, it may well push the EUR/USD below the 1.2500 level and possibly even towards the 1.2400 figure as momentum traders test the resolve of euro bulls. Any hint of hesitation, however, and the euro could see a rally on a classic 'sell the news' dynamic."

Reuters looks at the market mood before the Fed decision. "The Canadian dollar barely budged versus the greenback for a third straight day on Wednesday, while bonds edged lower as a nervous market continued to sit on its hand ahead of Thursday's U.S. Federal Reserve interest rate announcement. The currency has traded sluggishly all week as market players ponder whether the Fed will raise rates by a quarter or half percentage point, and to what extent inflation fears will prompt it to issue a hawkish statement."

"'We haven't gone anywhere of any significance since last Friday. The market's basically trapped in this trading range, and I don't think it's going to be any more exciting until tomorrow, when we get some direction from the Fed,' said George Davis, chief technical strategist at RBC Capital Markets."

The Associated Press. "Slight moves in the U.S. dollar and euro lead to a lower close Wednesday for gold and silver. The benchmark August gold contract settled $3.40 lower at $581 a troy ounce. During the session, the contract moved to a $589.40 an ounce session high but was unable to hold that level as the dollar rose against the euro. August gold later dipped to a $579.10 an ounce low."

"July silver backed off of earlier gains to settle at $10.155 an ounce, down 4 cents on the day. July platinum settled $10.10 lower at $1,178.20 an ounce while September palladium settled down $1.40 at $312.80 an ounce."

From Bloomberg. "'I'm looking for gold to take a dip after the Fed raises rates,' said Mike Sander, a commodity broker. 'The Fed is most likely to increase the value of the dollar.'"

"Interest-rate futures indicate an 83 percent chance of another quarter-point increase in rate in early August. That was up from zero percent at the start of the month."

"'A lot depends on market perception,' said Jim Pogoda, an investor and a former precious-metals trader for Mitsubishi Ltd. 'If the markets feel the Fed has or will overdo rate rises, then the dollar should rise and pressure gold lower. If the markets feel the Fed is behind the curve and losing credibility to contain inflation, then gold should benefit.'"

The China Daily website has this report on central banking. "A leading Chinese central bank official said that countries around the world should gradually rely less on the U.S. dollar for trade and their foreign exchange reserves. The remark comes after the repeated suggestions by former U.S. Treasury secretary Lawrence H. Summers, that the world's biggest holders of U.S. Treasury bonds ought to find better ways to invest their hard-earned money."

"'Internationally speaking, the situation of over-reliance on a certain country's currency for international trade, settlements and reserve assets should be gradually changed,' Wu Xiaoling, deputy governor of the People's Bank of China, said. Wu did not specifically refer to the dollar by name, but it is the world's main reserve currency and the one in which the bulk of trade is conducted."

"Summers contends, the central banks of those countries invest their hoards of foreign securities, totaling several trillion dollars, in safe but low-yielding U.S. T-bonds, the Washington Post reported on June 22. The return 'will be zero' on those bonds after inflation and currency changes are factored in, Summers said."

"Analysts say China has been gradually diversifying away from holding predominantly dollar assets in its foreign exchange reserves, the world's largest, ever since or even before the central bank's decision to scrap its decades-old RMB peg with the U.S. dollar, and the phase-in of a new exchange rate regime which is linked to a basket of foreign currencies in July 2005."

"But the upshot, in Summers's view, is 'the central, global financial irony of our times': Countries that need capital to finance rapid development are shipping more money to the United States than is flowing in the opposite direction, the Washington Post reported."

"The Sino-U.S. trade gap was the result of global resource allocation by multinational companies and needed to be addressed through the combined efforts of the United States and Asian countries, Wu said. 'Such trade imbalances cannot be resolved simply by adjusting the exchange rate. It should be mainly resolved by adjusting the economic structure,' she was quoted as saying."

The Street.com has the Tuesday metals numbers. "Gold and metals finished lower Tuesday, as crude oil prices reversed early gains and the dollar erased some of its earlier losses. Gold for June delivery dropped $3.30, or 0.6%, to close at $584.40. The precious metal earlier reached a high of $599 before falling back."

"Among other metals, silver for July delivery also reversed early gains, losing 4 cents, or 0.4%, to close at $10.29 an ounce."

"News that U.S. existing home sales declined in May fueled hope that the Federal Reserve will sound less hawkish when it announces its decision on interest rates Thursday. However, the housing data also reinforced concerns about the outlook for growth and demand for commodities, pressuring shares on Wall Street and, ultimately, metals themselves."

"Meanwhile, shares of metal-mining companies were lower, tracking a selling trend for stocks on Wall Street. Both The Philadelphia Gold and Silver index and the CBOE Gold index were down 1.7% recently, while the Amex Gold Bugs index was down 2.3%."

From Bloomberg. "Taiwan's central bank will probably raise its benchmark interest rate for the eighth straight time tomorrow to an almost five-year high after inflation picked up. 'Inflation is only part of the issue right now,' said Joseph Lau, an economist at Credit Suisse Group in Hong Kong. 'With U.S. interest rates set to climb further, the rate differential with the U.S. remains very wide and the central bank would like to close that.'"

"Central Bank of China, the island's central bank, may increase the discount rate on 10-day loans to banks by an eighth of a percentage point to 2.5 percent, according to 16 of 18 economists surveyed by Bloomberg News. Two forecast no change. A decision is expected after 5 p.m. local time tomorrow in Taipei."

"The world's major central banks are simultaneously raising borrowing costs for the first time since 2000 to keep rising oil costs from spilling into inflation. central bank Governor Perng Fai-nan is trying to bring rates closer to U.S. levels to keep the currency stable."

"Central banks across Asia have raised rates this year to ward against faster inflation. Bank of Thailand on June 7 increased its key rate for a ninth straight time. A day later, the Bank of Korea unexpectedly lifted its benchmark interest rate to a three-year high of 4.25 percent."

The Associated Press has some currency numbers. "The dollar fell against most major currencies Monday, even as U.S. data showed sales of new homes rising in May. The euro bought $1.2580 in afternoon New York trading, up from $1.2515 in New York late Friday. The British pound rose to $1.8234 from $1.8188."

"In other trading, the dollar bought 1.2422 Swiss francs, down from 1.2479 late Friday, and 1.1221 Canadian dollar, down from 1.1241.'

"The dollar slipped against the Japanese currency, dipping to 116.28 yen from 116.49 yen. The dollar has been helped recently by expectations that the U.S. Federal Reserve will raise rates when it meets again on Thursday."

From Bloomberg. "'This is very much a pivot point for the dollar,' said Steven Saywell, chief currency strategist in London at Citigroup Inc., the third-biggest foreign exchange trader according to Euromoney magazine. 'A lot of short dollar positions have been unwound,' meaning traders have exited bets on dollar losses, he said. 'The rally is nearly over.'"

"'The U.S. rates advantage story is the only game in town,' said Armin Mekelburg, a currency strategist in Germany's second-largest bank. 'Markets are saying there's less risk to buy dollars. If the Fed either raises rates by 50 basis points or delivers 25 basis points but keeps its options open, the dollar will go higher.'"

"The dollar was modestly lower against major foreign-exchange counterparts Monday, weighed down by news that the United Arab Emirates would shift its foreign-exchange reserves away from the U.S. currency. The central bank of U.A.E. said it would shift 10% of its reserves from dollars to euros. The country's reserves stood at around $23 billion at the end of 2005. It did not say when it would do it."

"'It seems unreasonable to expect the market to react every time this [reserve] talk surfaces, which it has on more than one occasion over the past few months. However, it does play on concerns that with other current account deficit countries under pressure, the US imbalance, and how it is financed, make the dollar vulnerable,' said Marc Chandler, senior currency strategist at Brown Brothers Harriman."

"In Japan, the yen remained under pressure as traders scaled back expectations the Bank of Japan would start raising interest rates soon and on concerns that its chief Toshihiko Fukui would resign after coming under scrutiny for his 1999 investment in a scandal-tainted fund. Japan's four opposition parties called on Fukui to step down on Saturday. Kaoru Yosano, Japan's economic and fiscal policy minister, said on Sunday that Fukui's 'credibility over monetary policy is unshaken.'"

"Meanwhile, a report in the Financial Times quoting the Belgian European Central Bank member, Guy Quaden, saying there are 'no taboos' was considered hawkish, though Quaden said the ECB was monitoring rates 'very closely' and not with vigilance."

"Gold futures closed slightly lower Monday, finding little support in a weaker dollar as investors kept to the sidelines ahead of a widely expected interest-rate increase at the Federal Open Market Committee meeting this week. Gold for August delivery closed down 30 cents at $587.70 an ounce on the New York Mercantile Exchange."

"'Gold is starting the final week of June on a mostly neutral note, drifting slightly higher but not making any true attempts at piercing the $600 mark that lies just above,' said Jon Nadler, analyst at Kitco.com. 'For the moment, traders appear satisfied to await the FOMC meeting and the results thereof.'"

"Other metals prices finished mixed. Platinum added $14.40 at $1,181.30 an ounce and palladium rose $10.75 at $320.55 an ounce. Silver finished down 4.5 cents at $10.24 an ounce and copper added 8.4 cents at $3.324 a pound."

Forex News reports on the latest BIS statement. "Central banks need to continue raising interest rates to deal with rising inflation pressures and threats from global current account imbalances, but their task will be much easier if governments also tighten fiscal policy, the Bank for International Settlements said."

"'The appropriate path for global monetary policy in the current circumstances should...be towards tightening,' the BIS said in its annual report."

"But it said this will have to be done 'in a careful and measured way.' Central banks also need to take account of financial imbalances when setting interest rates, and focus more on the long-term impact of their decisions, it said. 'A much richer set of indicators is now needed to guide the setting of interest rates, in particular indicators of financial imbalances,' it said."

"'Over longer time periods, such imbalances can pose an even greater and more dangerous threat to price stability, on the downside, than shorter-term and more conventional inflationary 'pressures, such as output gaps,' it said."

"Central banks therefore should lengthen the period over which they assess the success of their monetary policy in stabilising prices, it said. Monetary policy has had to keep inflation down and support growth almost single-handed in recent years, because of failures in fiscal policy, the BIS said."

"Central banks have kept interest rates low to support spending whenever there has been a threat to growth, but this has also led to a build-up of debt which will make their job more difficult in future, it said. 'The successful counter-cyclical use of monetary policy in each instance has made subsequent tightening more risky, and subsequent easing less likely to work,' it said."

"'Fiscal policy should be generally tightened in both the industrialised countries and the emerging markets,' it said. 'Such support would also help reduce the risk of disorderly exchange rate movements,' it said."

"Structural reforms are also needed, the BIS said. In the US, tax subsidies which stimulate activity in the housing market should be reduced and some form of consumption tax could be introduced to increase savings."

"'In many countries, most strikingly China but also Germany and Japan, there remains too great a reliance on export-led growth,' it said. There is still a risk that the unwinding of current account imbalances could lead to disorderly exchange rate movements, but this would be reduced if countries with surpluses allowed their currencies to appreciate against the dollar, it said."

"'This implies that Asian currencies must appreciate further. Fortunately there are some signs that Asian central banks recognise this, not least the fact that many of them have scaled back their interventions in the foreign exchange markets. China, however, remains an important exception,' it said."

"The BIS said many of the major economies are still focused on domestic priorities instead of playing their part in the correction of global current account imbalances, but they now need to deliver on promises made at G7 and IMF meetings. 'The ultimate costs of inaction are likely to be much greater than the costs of a cooperative solution,' it said. 'A sharply lower dollar could raise inflation in the US and threaten the balance sheets and growth prospects of European and Asian creditors.'"

"'The consensus expectation for 2006 is for global growth to again exceed 4 pct and for moderate inflation to continue,' it said. But it added: 'There is nothing inconsistent in expecting the best but planning for the worst, particularly if the costs of the unexpected might well be high.'"

The Virginia Pilot has this report on the new gold coin. "It took more than two hours of phone calls on Thursday, but Don Leneski finally placed an order with the U.S. Mint for 10 of its American buffalo gold coins. 'I started calling at five minutes before 12, and I got through at 2 o’clock,' the Virginia Beach resident said. 'I can understand that they were busy, but not that busy.'"

"The Mint, which began selling the gold coin on Thursday, said it has limited production of the 'proof' version to 300,000 coins. These have a finer finish and are aimed at collectors. The Mint is producing another version for investors that will be available through coin dealers, banks, brokerage firms and investment firms."

"The Mint acknowledged Friday that phone orders were especially heavy Thursday but said proof versions of the new coin were still available. The Mint had encouraged prospective buyers to be persistent when placing orders, spokesman Michael White said."

"The coin has attracted attention because of its 99.99 percent purity and its design, which was based on the 1913 buffalo nickel. The price for the proof version is $800. The cost for the version aimed at investors will be pegged to the price of gold and include a service charge."

"Leneski expressed frustration that the Mint’s Web page for ordering coins online wasn’t operating Thursday, a day when demand for the page would be especially heavy. White, the Mint spokesman, said the page for online orders became inoperable because of heavy usage and a technical problem."

"Bill Jones, owner of W.T. Jones Coins & Investments Ltd. in Chesapeake, said he wasn’t surprised that prospective buyers had difficulty placing orders with the Mint on Thursday. 'In my experience, they are pretty well swamped' on the first day that any new coin becomes available, he said."

"Jones said he probably would buy one or two of the coins but planned to wait a few days before placing his order."

Reuters has a currency report. "The Canadian dollar eased versus the U.S. currency on Friday, stretching the lower boundaries of its recent range as expectations of a widening U.S.-Canada interest rate gap drew yield seekers to the greenback. Canadian bonds eased alongside U.S. Treasuries in a quiet, rate-driven session."

"The currency finished at C$1.1236 to the U.S. dollar, or 89.00 U.S. cents, down from C$1.1189 to the U.S. dollar, or 89.37 U.S. cents, at Thursday's close."

"Trading action on Friday was volatile, as it has been all week, as traders mulled shifting interest rate outlooks in both Canada and the United States."

"Gold and metals reversed early losses and finished higher on Friday, overcoming a strong dollar and concerns about economic growth ahead of the Federal Reserve's rate-setting meeting next week. Newfound optimism on Wall Street, rising crude oil prices and a bullish broker note on copper all helped metals erase their morning negative bias."

"Gold for August delivery rose $2.60, or 0.4%, to close at $588 an ounce. Among other metals, silver for July delivery gained 0.1 cents, or 0.7%, to $10.28 an ounce."

"Many observers say the severe corrections experienced by metals and commodities over the past month reflect concerns that rising interest rates the world over will curb growth and subdue inflation, which include surging commodities prices. In the U.S., the Fed is no longer expected to pause its two-year-long campaign to hike rates at the end of June. Meanwhile, the U.S. economy is already expected to decelerate and many worry that the Fed might overshoot, slowing U.S, and global growth too much."

"With the Fed now expected to deliver another quarter-point hike at the end of a two-day meeting next Thursday, 'metals continue to be confused about the direction of the economy and are certainly still somewhat limited by 'fear of the Fed',' writes Nell Sloane, metals analyst."

"The market is currently pricing in 100% odds that the Fed will hike by a 25 basis points next week, and 14% odds that it will hike by 50 basis points, according to Miller Tabak. 'While gold prices (and equity markets) may already have factored in a quarter point adjustment as a certainty, we are not so sure that things will fare equally well in the face of a larger rate increase,' writes Jon Nadler."

The USA Today reports on a new trend in the gold industry. "Surging gold prices the past two years have riveted the financial world, just as they did in the days of the Forty-Niners. But today, the gold market is far more industrialized and complex than it was in 1849. Even prospecting for gold has become rather more civilized than in the rough-and-tumble days of the California gold rush."

"'It's a family-type atmosphere,' says Ken Rucker, general manager of the Gold Prospectors' Association of America in Temecula, Calif. 'My daughter has been panning since she was 5.'"

"Amateur prospectors still find gold in the California gold-mining country, though not in the quantities that the Forty-Niners did. 'They got the easy stuff,' Rucker notes. That hardly stops people from looking: Membership in the GPA, he says, has soared to 40,000, up nearly 25% from last year."

"Most gold is produced in mines. Heap leaching, a commercial process that involves extracting gold from huge piles of low-grade ore with a cyanide solution, has boosted U.S. gold production since the 1970s. Most gold from South Africa, the world's No. 1 gold producer, comes from deep mines. The average cost worldwide to produce gold is about $238 an ounce, according to the World Gold Council."

"The gold market remains small compared with the stock or bond markets. There are about 155,000 metric tons of gold in the world, of which about 53,100 tons are readily available for investment. The rest is used for jewelry, coinage, dentistry and other industrial purposes."

"At current prices, that puts the gold market at nearly $1 trillion. By contrast, the stocks in the Wilshire 5000, a broad stock index, are worth $14.7 trillion."

"The price of gold, as with any commodity, is determined by supply and demand. World gold production was 2,464 tons in 2004, the latest year for which figures are available. That's down about 5% from 2003. Gold-mining companies opened fewer mines when prices were low. And it can take years to open a new gold mine."

"Gold is traded worldwide, in small coin shops and big exchanges. The price changes minute by minute. But most investors check the London A.M. and P.M. gold fixings. Twice a day, five major gold dealers, Bank of Nova Scotia-ScotiaMocatta, Barclays Bank, Deutsche Bank, HSBC Bank USA and Société Générale, consult with their clients and agree via phone on a price for settling trades among themselves."

"You can always invest the old-fashioned way, using a dredge or a pan in a stream. Rob Goreham, a prospector and gold-mining equipment dealer in Columbia, Calif., takes out groups of four to six on charter gold-dredging expeditions. 'I provide all the equipment,' he says."

"But it can be a rugged trip getting to the sites in remote areas. 'It's not for the faint of heart,' Goreham says. If you want to try it on your own, contact the GPA first, he suggests. 'It's the best source for people who don't have a clue about mining.'"

Rumors on Wall Street boosted the US dollar today. "Gold and other metals weakened Thursday, as the dollar rose overnight and market players remained cautious ahead of the Federal Reserve's rate-setting meeting next week."

"Gold for August delivery finished down $5.60, or 1%, to close at $585.40 an ounce. Among other metals, silver for July delivery dropped 21 cents, or 2%, to $10.21 an ounce."

"Jobless claims have been trending lower over the past three weeks, and the next report in a week will coincide with the Fed's decision on rates and its comments about the outlook for monetary policy. 'A fourth low reading could influence the decision to tilt toward a more hawkish policy statement,' writes Crescenzi. It 'would also lead some to speculate that the Fed might deliver a 50-basis-point hike at the meeting,' he adds."

"The Canadian dollar fell hard against a stronger U.S. currency on Thursday, giving back the previous day's gains as market players mulled an uncertain Bank of Canada interest rate outlook. Bond prices retreated roughly in line with U.S. treasuries."

"The currency finished at C$1.1189 to the U.S. dollar, or 89.37 U.S. cents, down from C$1.1092 to the U.S. dollar, or 90.16 U.S. cents, at Wednesday's close."

"Comments on Wednesday by Governor David Dodge, suggesting that an eighth-straight rate hike is not a sure thing, sparked a late day selloff that continued on Thursday. '(The weakness) is on the back of the interpretation of Dodge's comments, which could be taken in a multitude of ways,' said trader Ted Gould."

"The shift in Canadian rate sentiment has come suddenly. Many economists have changed their tune over the past week, with some now expecting two more rate hikes, particularly as U.S. rates seem set to continue rising."

Bloomberg has this editorial. "Former Treasury Secretary Lawrence H. Summers said last week that the $800 billion U.S. current account deficit represents a risk to the global economy and that if its decline isn't carefully managed, it could lead to a world recession. Summers made his remarks at a Boston Federal Reserve Bank conference on global imbalances.'

"In contrast, several of the other conference speakers, including Harvard economist Richard N. Cooper and economist Peter Garber of Deutsche Bank, portrayed the deficits as relatively benign. And a large majority of the roughly 75 economists and academics present indicated by a show of hands that they expect the current account deficit eventually to shrink smoothly to a sustainable level."

"With no sign of strain from financing the deficit last year, or the cumulative $4 trillion over the past 10 years, there was also broad agreement that the big short-fall in transactions with the rest of the world may continue unabated for years to come."

"In recent years, numerous economists have predicted the foreign investors and central banks who..have financed the current account deficits would become reluctant to continue doing so. That hasn't occurred, of course, and now some of those economists are wondering if it ever will."

"Summers labeled that thinking the 'throw in the towel theory.' 'Since the conventional view hasn't been right, that's evidence that view is wrong,' or so that argument goes, Summers said. To the contrary, there's 'more risk now' than previously that a crisis could erupt, he said."

"On June 15, the Boston Federal Reserve Bank's president, Cathy E. Minehan, asked how many of the participants expected a smooth correction of the deficits at some point. So many hands went up that she didn't ask who disagreed. The next day, the bank's research director, Jeffrey C. Fuhrer asked how many thought there was at least a 10 percent to 20 percent probability that a financial crisis would force the adjustment to occur. A similarly large majority held up their hands to that as well."

"Summers derided as an 'enduring fallacy' the notion that a country can decide to save more, have its current account deficit improve and maintain good economic growth while nothing else happens. 'If the current account deficit falls, something else has to change,' Summers said. Exports have to rise, or imports will have to fall, and if U.S. savings were increasing, 'there would be a decline in global aggregate demand' unless growth increased elsewhere in the world, he said."

"In the late 1980s, the last time the U.S. current account deficit declined notably, consumption was little changed for three years while the value of the dollar fell sharply and more goods and services were sold abroad. Obviously something of that sort will have to happen again, only the current account deficit now, at 6.4 percent of gross domestic product and rising, is twice as big as it was then. And U.S. household saving is much lower than then."

"As Summers put it, 'What happens in the rest of the world is probably more important in the resolution of this than what happens in the U.S.'"

"No one at the conference had a clue as to what might happen to cause the deficit to begin to shrink, which is another reason to wonder whether it may be a financial crisis. In the meantime, the deficit is still headed higher."

Some important moves in money and metals. "The dollar fell to a more than one week low against the euro Wednesday, playing off hawkish comments from the head of the European Central Bank that boosted expectations interest rates in the euro zone will soon rise further. Late in New York, the euro stood at $1.2663, compared with $1.2582 late Tuesday, after touching $1.2676, the highest level since June 9. The dollar changed hands at 114.79 yen, compared with 114.93 yen. The euro traded at 145.34 yen from 144.62 yen."

"The British pound was fetching $1.8448 compared with $1.8426. The dollar was trading at 1.2336 Swiss francs compared with 1.2384 francs. The British pound eased against the dollar before paring losses after the minutes of the latest Bank of England monetary-policy meeting were viewed as less hawkish than expected."

"Marc Chandler, senior currency strategist at Brown Brothers Harriman, said the euro's advance on Wednesday caught the short-term market 'wrong-footed' and "pushed the greenback to the lower end of its recent trading range."

"Currency trading is likely to remain range-bound ahead of next week's Federal Reserve monetary-policy meeting, said Stuart Scrase, a foreign-exchange trader at CMC Markets. Traders are pricing in a 100% chance that the Fed will lift rates by a quarter of a percentage point."

"Looking ahead, 'forecasts are for another [dollar] decline,' said Scrase. However, 'so long as any slowing isn't as marked as last month then there may be limited incentive to start another run of dollar selling.'"

"'We continue to argue that the principal U.S. dollar driver will be such structural factors rather than short-term interest-rate differentials,' analyst Steven Saywell said. 'A number of factors has emerged this week to support this premise, encouraging our confidence in the short dollar recommendation as a strategic macro view.'"

"Overnight, the Chinese yuan closed at 7.9970 against the U.S. dollar, its strongest close since China revalued its currency by 2.1% and abandoned its decade-old yuan/dollar peg last July. The yuan, also known as the renminbi, touched the same level in intraday trading Friday."

"Since the big move last summer, the Chinese currency has appreciated about 1.4% against the U.S. dollar. 'It is important that the PBoC has let dollar/yuan close below the 8.00 level," said Craig Russell, foreign-exchange strategist. 'This is a setup for a move to 7.76 or so over the coming year.'"

"The Canadian dollar rallied against its U.S. counterpart after stronger-than-expected readings on retail sales boosted hopes the Bank of Canada will raise interest rates sooner rather than later. The loonie last traded at C$1.1083, down 0.7%."

"Gold futures closed higher Wednesday, finishing a few dollars short of the psychological barrier of $600 an ounce, as the dollar fell and Iran signaled it's in no hurry to respond to a Western effort to dissuade it from enriching uranium."

"Gold for August delivery ended up $10.50 at $591.0 an ounce on the New York Mercantile Exchange, having earlier traded as low as $573.50. 'A confluence of factors is hitting the market at once,' said Charles Nedoss, a metals analyst at the Peak Trading Group. The latest news from Iran 'makes people a little bit nervous,' Nedoss said. 'A lot of this also has to do with North Korea and the dollar.'"

"James Moore of TheBullionDesk.com said next week's FOMC [Federal Open Market Committee] meeting could also prove pivotal for gold. The FOMC is expected to increase U.S. interest rates again next week. Both Nedoss and Nadler said that the expected rate hike is already priced in the market."

"Other metals also closed higher. Silver added 15 cents at $10.42 an ounce. Platinum added $25.40 at $1,193.90 an ounce, and palladium rose $10.50 at $314.50 an ounce."

Bloomberg reports that a looming economic slowdown is beginning to hurt the US dollar. "The dollar declined for a second day on speculation further interest-rate increases by the Federal Reserve will cool growth in the world's biggest economy. The currency extended its slide this year to 2.6 percent against the yen and 6.1 percent versus the euro before economic reports tomorrow that will probably add to signs of a slow down."

"'Amid growing concern about the slowing U.S. economy, the dollar seems to be losing momentum,' said Saburo Matsumoto, a strategist at Japan's third-biggest lender by assets. 'The interest-rate differential alone isn't enough to push the dollar higher anymore.'"

"The dollar fell to 114.79 yen as of 3:19 p.m. in Tokyo from 114.96 yen late in New York yesterday. It dropped to $1.2619 per euro, from $1.2579, the biggest fluctuation of any currency today. The dollar may reach 110 yen in a month, Matsumoto said."

"The number of Americans filing first-time claims for unemployment benefits probably rose to 305,000 last week, after falling to 295,000 in the week ended June 10, the median forecast of 35 economists in another survey showed. The Labor Department releases the data at 8:30 a.m. tomorrow in Washington."

"'The economy appears to be slowing, and the trend is for dollar weakness,' said Nobuo Ibaraki, deputy general currency manager in Tokyo at Nomura Trust and Banking Co. Ltd., a unit of Japan's largest brokerage. 'The data may be weak.' The currency may fall to $1.2650 against the euro and to 114.20 versus the yen today, Ibaraki said."

"The Conference Board's leading index, which forecasts the economic outlook for the next three to six months, fell 0.5 percent in May after dropping 0.1 percent April, according to the median of 53 estimates in a Bloomberg News survey. The New York-based group releases the data at 10:00 a.m. tomorrow."

"The U.S. economy will expand at an annual 3 percent rate from April through June, down from a 3.5 percent estimate last month, according to the median forecast of 70 economists surveyed from May 30 through June 7."

Bloomberg reports on what moved gold prices today. "Gold rose on concern that North Korea may be preparing to test a long-range ballistic missile, prompting some investors to buy bullion as a haven. A conflict over Iran's nuclear program helped push gold to a 26-year high last month. Since then, prices have dropped 21 percent."

"'The market's gotten enough of a liquidation, it's coming back to looking at core fundamentals,' said metals trader Frank McGhee. 'Gold will start refocusing on North Korea, Iran and the hurricane season.'"

"Gold futures for August delivery rose $8.10, or 1.4 percent, to $580.50 an ounce on the Comex division of the New York Mercantile Exchange. Gold for immediate delivery rose $10.45, or 1.8 percent, to $575.70 an ounce at 7:30 p.m. in London."

"Gold also rose today after the dollar had its biggest decline against the yen in two weeks, making the precious metals cheaper for Japanese buyers. Gold traditionally moves in the opposite direction of the U.S. dollar. The yen rose against the dollar after Bank of Japan Governor Toshihiko Fukui said the central bank needs to adjust interest rates from near zero percent 'without delay.' Some investors buy gold to hedge against the erosion of dollar denominated assets."

"Wide price fluctuations have discouraged some investors from buying or selling the metal, analysts said. Gold's historical volatility, or the rate at which a price moves up and down, is at 45 percent in the past 10 days, compared with 39 percent during the same period a month earlier."

"'There are people standing aside,' said Jeffrey Christian, managing director a New-York based metals research firm. 'The market has not been able to firmly move above $570 for the past few trading days, so there are people who think it's vulnerable to another leg down. We could spike down to $540 and move up to $580.'"

Some interest rate news from Canada. "The Canadian two-year note's yield rose to the highest in more than four years and the nation's currency strengthened as a government report showed consumer prices last month increased more than forecast. The report added to speculation that the Bank of Canada will raise borrowing costs once more this year."

"'There is a bit of shock for bond investors who were complacent that the Bank of Canada is done with its rate increases,' said Sheldon Dong, a fixed-income analyst."

"The inflation report 'calls into question the assumption that the Bank of Canada is on hold,' said Edward Devlin, a portfolio manager of Canadian bonds at PIMCO, which manages the world's largest bond fund. 'Now there may be a need to reposition the portfolio as I see the risk of more rate increases.' The central bank has lifted its benchmark interest rate seven straight times since September to 4.25 percent to keep inflation in check."

"The Bank of Canada's target for annualized core inflation is an average of 1.8 percent in the second quarter. The CPI advanced 0.5 percent compared with the previous month. The overall year-over-year inflation rate was 2.8 percent in May after a 2.4 percent increase in April, Statistics Canada said in Ottawa today."

"Canada's dollar rose to 89.55 U.S. cents from 89.29 U.S. cents yesterday. One U.S. dollar buys C$1.1168."

More news on the end of Japans' zero interest-rate policy. "The yen gained against the dollar after Bank of Japan Governor Toshihiko Fukui said policy makers need to adjust interest rates from near zero percent 'without delay.' Inflation-adjusted interest rates are extremely low and could risk stimulating growth excessively, Fukui said. The yen later pared its advance after Fukui said he hadn't intended to give a specific timeframe for lifting borrowing costs."

"'With Fukui stating clearly that the BOJ will move forward, it raised expectations of interest-rate increases,' said Robert Sinche, head of global currency strategy at Bank of America Corp. 'You are seeing the yen rebound substantially.'"

"Japan's currency advanced to 114.87 per dollar at 9:38 a.m. in New York, from 115.54 late yesterday, and earlier rose to 114.63. The yen rebounded to 144.34 per euro after sliding to a record low of 145.84 yen yesterday on reports North Korea was preparing to fire a long-range missile."

"The yen fell back a bit after Fukui said he's not in a rush to raise rates,'' said Lee Ferridge, a proprietary trader in London. 'People thought a rate hike in July was a done deal, and now Fukui's thrown some uncertainty into that.'"

"The yen has risen 1.4 percent since finance ministers from the Group of Seven industrialized nations said April 21 it's 'critical' for China and other Asian nations to allow their currencies to gain. As 'the market starts to realize how serious the Bank of Japan is about wanting to renormalize rates we are going to see both dollar-yen move lower and euro-yen as well,' said Lara Rhame, a senior currency strategist at Credit Suisse."

"The dollar was little changed at $1.2562 per euro from $1.2575 after a government report showed U.S. housing starts rose a greater-than-expected 5 percent in May to an annual rate of 1.957 million, rebounding from a 13-month low. Building permits, a sign of future construction, fell 2.1 percent to an annual rate of 1.932 million, the Commerce Department said."

"'There has been concern the housing market may be the first to falter as the economy slows,' said Grant Wilson, a currency trader with Mellon Bank in Pittsburgh. 'This is providing a little bit of support for the dollar.'"

"The dollar has gained 2.7 percent against the euro since reaching a 13-month low on June 5 as traders have added to bets the Fed will lift rates at least twice more this year to contain inflation. Policy makers meet again on June 28-29, and interest-rate futures show odds of 100 percent the central bank will lift rates to 5.25 percent. The odds of a move to 5.5 percent at its next meeting on Aug. 8 have climbed to 72 percent, from zero percent at the end of May."

"'The market feels that the Fed has put more emphasis on inflation risks than on growth risks,' said David Powell, a currency strategist at IDEAglobal in New York. 'The increased inflation pressures have certainly helped the dollar.'"

Some money and metals news for this Monday. "The yen stabilized across the board on profit-taking following the damage sustained in the Asian & European sessions resulting from reports that North Korea was preparing to test a long-range missiles. The yen sell-off was triggered by Japanese PM Koizumi’s remarks threatening 'severe action' in the event that North Korea went ahead with its tests as that would mean the world’s second biggest economy would be dragged into the nuclear standoff."

"The yen hit all time lows against the euro, 8-year lows against the sterling and 2 ½ monh lows vs the US dollar."

"The (US) dollar rallied across the board on a combination of expectations of a August Fed hike, merging from last week’s stronger than expected economic reports. The boost to the dollar also resulted from further credit tightening steps by China to cool its economy as the measure could cool Beijing’s demand for commodities, thus impacting the commodity currencies against the dollar."

"The People’s Bank of China announced last week it will raise the reserve ratio for commercial banks to 8.00% from 7.50%, effective next week. The move is estimatd to lock away as much as reduce 150 billion yuan ($18.7 billion) out of the money system."

From Reuters. "Gold prices fell 2 percent on Monday as the dollar's rise and weaker oil triggered selling by investors wary of taking large positions after a recent selloff, dealers said. 'You have to expect gold to move in quite volatile ranges, between $550 (an ounce) and $600, until it finds that physical demand has adjusted to more stable prices,' said analyst Matthew Turner."

"Early buying faded fast after spot gold rose as high as $580.10 an ounce as investors were cautious to add new positions. Gold fetched $568.80/569.50 an ounce in the New York afternoon, after falling as low as $565.70, compared with $578.00/8.70 late on Friday."

"One New York dealer said a reason for the sell-off in metals starting overnight was a report that China will move to tighten credit lending by lifting banks' reserve requirements, which analysts say should decrease demand for commodities. 'That's an indication that they (China) are going to slow their growth, and that is going to hurt the metals,' a precious metals trader in New York said."

"A European trader said: 'There's some support at $566, and there are offers around $573 and $574, so I expect it to be range-bound for the time being.'"

"Despite gold being off last week's three-month low of $543, traders said renewed dollar strength undermined sentiment. The dollar struck an eight-week high against the yen and rose across the board, boosted by expectations the U.S. Federal Reserve will raise short-term interest rates perhaps two more times in coming months."

"A weaker oil price was another factor weighing on gold. U.S. crude futures fell toward $69 a barrel after major oil exporter Iran said there was a positive atmosphere in the dispute over its atomic work, easing concern about threats to oil supply."

"James Moore, an analyst with TheBullionDesk, said spot gold was looking set to spend more time trading between $580 and $550, with the $548-$550 region being where technical and physical buying probably would provide good support."

"In other precious metals, silver fell as low as $9.83 an ounce before rising to $9.97/10.07, against $10.13/10.23 late Friday. Platinum drifted down to $1,138/1,144 an ounce from $1,147/1,155 previously, while palladium edged down to $290/295 an ounce from $300/305."

Marc Faber looks at the commodity cycle. "The recent plunge in commodities prices has investors wondering whether a major bubble has burst. But was there really ever a bubble? It is true that since their lows between 1998 and 2001, commodities and especially industrial commodities have been on a tear."

"Between 1998 and early 2006, crude oil rose from $11 per barrel to over $70, copper from 60 cents per pound to over $4, nickel from $5,000 per tonne to over $20,000, while gold went from $255 an ounce to over $700."

"But before deciding that the commodities bull market is over, investors should consider the following: commodity-price cycles—also called Kondratieff Waves, named after an influential early 20th century Russian economist—play out over decades. From peak to peak or trough to trough they last 45 to 60 years, and within that span there are also up and down cycles lasting 22 to 30 years. The last up cycle peaked in 1974; the last downward wave lasted for more than 20 years."

"While it's true that commodity prices have soared since 2001, the rise may have only just begun. That's because real commodity prices (adjusted for inflation) were, in the 1999-2001 period, at the lowest level in 200 years. Today, commodities (with the exception of copper) still sell in real terms for about one-third their 1970s peak."

"It's no secret why prices are rising. The rapid industrialization of China (and increasingly India) has shifted the demand curve, leading to permanently higher equilibrium prices."

"Commodities have also been boosted by the ultra-expansionary monetary policies pursued by the U.S. and Japan. Since 2002 excess liquidity has driven up prices for all kinds of assets, including real estate, stocks, art and collectibles, leading to a huge amount of leveraged speculation."

"However, most recently, global liquidity, while still expanding, is doing so at decelerating rates; that has led to a sell-off in equities and commodities. I would expect this correction to last another few months—until central banks around the world embark once again on monetary expansion."

"We've seen this happen before. During the last great commodity bull market, gold declined from $195 an ounce to $103 between December 1974 and August 1976—and then rose by 800% to reach a peak in 1980. Long-term bull markets are characterized by intermediate sharp corrections, and I have little doubt that the commodities bull market will, following the current correction, reassert itself, although price leadership may change from industrial commodities to precious metals and grains."

"One lesson from history is worth bearing in mind. Rising commodity prices have historically led to an increase in international tensions, as countries become concerned about reliable supplies of raw materials. If those tensions lead to war, commodity prices can go ballistic. All major modern industrial-commodity price peaks were reached during wartime—whether it be the Napoleonic Wars, the U.S. Civil War, World War I, or the Vietnam War. So celebrate rising commodity prices if you must; but remember where they sometimes lead."

The big news today was a move by China. "The Canadian dollar fell sharply against the U.S. currency on Friday on rising concerns about future demand for commodities, after China's central bank decided to increase its reserve requirement. Much of the currency's fall came after China decided to curb the rapid credit growth that Beijing fears could cause the red-hot economy to overheat."

"China raised the proportion of money banks must keep in their reserves by half a percentage point, effective July 5. 'That's one of the reasons for the Canadian dollar weakness,' said Carolyn Kwan, markets economist at Scotia Capital. 'It is one of the weakest, if not the weakest of all the major currencies today.'"

"China's move is 'signaling their concerns that the economy is operating really too strongly,' Kwan said. There has been a lot of loans made by Chinese banks and I think that it has grown at such a pace that the authorities feel that there is a need to really contain that somewhat."

"Raising the reserve requirements will take money out of China's economy and could have an impact on its huge appetite for commodities, she said."

"The Canadian dollar was also hit by the U.S. dollar's momentum after data pointed to an unexpected rise in U.S. consumer sentiment this month. The University of Michigan survey showed consumer sentiment rose in early June, beating expectations for an unchanged reading."

"The US dollar traded mixed against other major currencies Friday after new data showed the trade deficit narrowing in the first three months of this year. The euro bought $1.2635 in afternoon New York trading, up from $1.2609 in New York late Thursday. The British pound also rose to $1.8503 from $1.8472."

"The dollar edged up against the Japanese currency, rising to 115.09 yen from 115.00 in New York. In other trading, the dollar bought 1.2313 Swiss francs, down from 1.2326 late Thursday."

"The Commerce Department reported Friday that America's current account trade deficit fell to $208.7 billion in the January-March quarter, down 6.5 percent from a record $223.1 billion deficit set in the final three months of last year. Although the improvement exceeded expectations, the quarterly deficit still remains at the second highest level on record."

"Analysts also predict rising oil prices to send the deficit in the current quarter to a new high, and they forecast that the imbalance for all of 2006 is on track to set a record for a fifth straight year."

"Gold surged 3.3 percent on Friday on dollar weakness and firm oil prices, but pared gains in the afternoon trade as some investors sold their positions ahead of the weekend. Gold remained under threat and may slip, as people were not yet convinced the recent downtrend is over, analysts said."

"'The majority of trading has been done this week. I think we will have a quiet close to the week,' said a precious metals trader in London."

"Gold rose as high as $585.00 an ounce before easing to $574.30/575.00 by 1352 GMT, against $566.50/$567.50 in late New York on Thursday, when it jumped as much as three percent."

"Traders said there was no impact of China news on precious metal prices. 'Overall, I see precious metals to remain vulnerable in the short-term. however, I don't expect it to test new lows since physical demand and bargain-hunting should provide some support,' said another European dealer."

"In other precious metals, silver advanced as high as $10.35 an ounce before falling to $10.05/$10.15, compared with $10.00/10.10 late in New York. Platinum fell to $1,157/1,163 an ounce from $1,160/1,170, while palladium rose to $301/309, compared with $295/$300 in the U.S. market."

Daily FX looks at what is moving the currency markets of late. "Whenever we look at economic data, we use the information to extrapolate what the Federal Reserve will do with interest rates. However in recent weeks, the extrapolation has become far more difficult since US data has been telling us one thing while the Federal Reserve has been telling us another."

"So far, there have been signs that the US economy is weakening and that the odds are building against the dollar while at the same time the Federal Reserve has been telling us that inflation has become so problematic that they have to keep on raising interest rates. Today’s batch of economic data makes figuring out whom to believe even more difficult. Jobless claims and the Empire State manufacturing survey both came out strongly, but the report on net foreign purchases of US securities (also known as the TIC report), industrial production and Philly Fed surveys all showed weakness."

"Since the TIC report was the day’s most important release, the market tried to send the dollar lower, but traders were fearful of shorting the dollar too significantly in an environment where the Fed fund probability for a June rate hike is at 100 percent. The Treasury International capital report was extremely disappointing today, coming out at $46.7 billion compared to a forecast of $60 billion."

"The report indicated that foreign investors did not buy enough US dollar denominated investments to plug the April trade deficit of $63.4 billion. The weakness of the dollar and central bank reserve diversification into Euros has played a big role in the weaker demand. The biggest selling was from the UK which is frequently thought to include investments from the Middle East."

"For now, this may be written off as a one off phenomenon, but if weak demand persists for another month, it will become a far more pressing concern. The market currently has its focus centered on what the Fed will do at the end of the month, but once that passes and we see the next TIC report the following month, then another weak number will be met by a larger reaction in the US dollar."

Some market numbers for Thursday. "After seven straight days of losses, gold futures closed higher Thursday, bolstering confidence in the metals sector, as the dollar faltered. Gold for August delivery closed up $3.80 at $570.30 an ounce on the New York Mercantile Exchange, having earlier touched a high of $579.50."

'Analysts said the move is the start of a rebound, after a healthy period of correction. 'I feel much better with gold at $570 rather than $750,' said Amaury Conti, at investment advisor Austin Calvert-Flavin. 'The drop was a correction in a bullish market. Now that the price of gold has gone down to a more reasonable level, people are seeing the opportunity to get involved again.'"

"Silver ended up 23.5 cents at $9.97 an ounce. Platinum finished up $22 at $1,160.90 an ounce and palladium added $13.15 to $305.80 an ounce."

"Ned Schmidt, editor of The Value View Gold Report, said the dollar is in a long-term bear market against other major currencies. Schmidt pointed to the rally of the Chinese yuan in the past few sessions as an indication that the dollar will continue to weaken, which would be good news for gold. 'Investors should be buying gold and silver this summer at bargain prices,' Schmidt said."

"'Thanks to the aggressive quest for profits by hedge funds, gold was being 'pushed' along for the last six or nine months,' said Jon Nadler, at bullion dealers Kitco.com. 'The past month has also witnessed the opposite effect taking place, as the exit from gold (by the opportunity-driven funds) has brought down values to a level that almost has the staunchest of its supporters spooked.'"

This jewelry site has a report on demand. "Jewelry demand in the U.S. softened dramatically in April due in part to a late Mothers Day selling period in May. Several jewelers commented that the timing of Mothers Day hurt April sales by several percentage points."

"April’s disappointing performance came after an unusually strong March as well as a six-month run of accelerating monthly sales gains. From a cyclical point of view, it was inevitable that jewelry sales would slow, but April’s decline year-over-year came as a surprise."

"Among the negative factors constraining U.S. retail sales are the following: High energy prices, the consumer debt burden is near record levels, and will increase as interest rates continue to climb. Negative vibes from the Fed, lack of home equity extraction. Slowdown in home price appreciation (and) rising health care costs."

The New York Times has this opinion piece titled, 'The Mark of the Bust.' "What may be the most important number in the American panoply of economic statistics appears every Thursday night as an appendix to the weekly statement of the condition of the Federal Reserve System. This generally ignored number, few, if any, newspapers cover its release, has the unusual virtue of accuracy, for it is a simple financial statement derived from an adding machine, not from a computer or a formula."

"What the number announces is the quantity of government and agency securities held 'for foreign official and international accounts', that is, for foreign central banks and finance ministries, by the federal reserve banks. It is important because over time it measures the demand for American assets by private enterprise in the world's creditor nations. It is important also because it is very large, last week, about $1.63 trillion. Three years ago it was about $900 billion. The week George W. Bush took office, it was $693 billion."

"Our appetite for imported goods throws some $600 billion to $700 billion a year into the hands of foreign suppliers. The businesses that receive these dollars have two fundamental choices about what to do with them: spend or invest them in the United States, or convert them into their own local currency. Exporters to America who keep the dollars and use them for American purchases and investments create what economists call an autonomous flow of funds back to the United States, financing the American trade deficit with an American investment surplus."

"This produces the argument most closely associated with the new Federal Reserve chairman, Ben Bernanke (though Alan Greenspan believed it, too), that our trade deficit is caused by a surplus of savings that can't be profitably invested in the home countries of our trading partners. Financing for our trade deficit comes before, and actually causes, the deficit itself."

"If instead of investing their dollars in the United States, foreign exporters want to take the proceeds of their sales in their own currency, their central banks will in effect sell them that currency for their dollars. Back in the late 1960's, when Great Society deficits and the Vietnam War prompted the first serious sell-off of dollars (and forced the United States to abandon the gold standard because too many holders of dollars, led by President Charles de Gaulle of France, wanted gold), those central banks lent those dollars into the new Eurodollar market, where they traded somewhat separately from domestic dollars."

"This created a nightmarish prospect of the United States losing control of its own currency, and in 1971 the Fed chairman, Arthur Burns, negotiated a deal with the European and Japanese central banks. The deal was that they would return to America the dollars they acquired in their own economies, and the Fed would invest the money on their behalf, in absolutely safe government securities, without charge and at the best rates."

"Today, the Fed continues as custodian of the 'foreign official holdings' of such government obligations. During the Clinton administration, the Fed agreed to invest in federally guaranteed housing securities for those foreign central banks that wanted a better yield on their dollar reserves than they would get from government bonds, and now more than half a trillion dollars of the total official holdings are invested in agency paper."

"Foreign official holdings of government paper is a miner's canary number. It tells you if there is big trouble ahead. The most common worry is that the number will shrink suddenly, with foreign governments dumping their dollar holdings, driving down the dollar's value and driving up American interest rates, but that's not a real danger."

"What we have to watch out for is a sudden and drastic increase in foreign official holdings. Rapid growth in this number in the late 1960's and 1970's forecast the recessions of the early 1970's and 1980's, and it could happen again."

"Recent large increases in foreign official holdings indicate that foreign private investors see fewer attractive places to put their money in the American economy. They could presage a significant fall in the price of American assets, stocks (witness the recent drops in American stock markets) and bonds and real estate and all, and a hard landing for a world economy still floating on the crest of cheap credit."

MarketWatch has the days trading numbers. "Gold futures closed lower Wednesday, failing to hold earlier gains despite weakness in the U.S. dollar, to tally a seven-session loss of more than $82 an ounce. At the same time, however, silver and copper prices gained, helping key metals-mining indexes post their first session climb since June 2."

"Gold traders are 'awaiting a confirmation that gold is able to part ways with commodities and reassert its role as a liquid, capital-preserving, trans-national currency,' said Jon Nadler, at bullion dealers Kitco.com. 'Until such a de-coupling takes place, or until gold stops being so dangerously close to its 200-day moving average the prudent buyers may stand aside, leaving the floor open to seasoned pros who live for their daily adrenaline rush,' he said."

"Gold for August delivery fell 30 cents to close at $566.50 an ounce on the New York Mercantile Exchange, reversing course late in the session to retreat from an intraday high of $575.50. In electronic trading Wednesday evening, the contract traded as low as $557.10. Gold's slight decline Wednesday came even though the dollar fell against the euro and yen."

"The May consumer-inflation data was viewed as key for the Federal Reserve as it decides whether to lift interest rates at its June 28-29 meeting. The consumer-price index increased 0.4% in May, led by higher energy and shelter costs, the Labor Department said Wednesday. Federal Reserve member Richard Fisher said Wednesday that inflation expectations have risen to unacceptable levels, fueling gold's late session fall, according to John Person, president of National Futures Advisory Service."

"The comments were was 'sent over the newswires as gold was closing, sending metals and stock markets lower as they now fear the Fed will raise rates for the 17th time by another [quarter-percentage point] to 5.25% on June 29th,' he said."

"Elsewhere in the metals sector Wednesday, July silver futures closed up 11 cents, or 1.1%, at $9.735 an ounce after dropping 13% in the previous session. July platinum rose $20.40 to end at $1,138.90 an ounce and Sept. palladium finished up $15.95 at $292.65 an ounce after closing Tuesday at its lowest level since January."

The Financial Times. "The sharp slide in metal prices from their record highs last month may not be over, if mining equities are any guide. On the other hand, mining shares may be undervalued relative to underlying metal prices."

"Take gold for instance. Bullion has fallen 22 per cent from its 25-year high of $730 a troy ounce reached a little more than a month ago, but it is still about $60 or 12 per cent above its level at the start of the year. By contrast, the FT Gold Mines index is now back to its level at the start of the year, which suggests that either the gold price has further to fall, as equities have traditionally moved ahead of the physical price, or the recent sell-off in mining shares is overdone."

"The gold price rally saw the metal rise about 190 per cent from its trough of $253 in February 2001, whereas the FT Gold Mines index, which is based on the share prices of 19 of the world’s biggest gold mining groups, rose almost fourfold over the same period. The index has fallen more than 28 per cent from its peak on May 10."

"Analysts say that the outperformance of gold shares reflects the leverage that gold equities have compared with the physical market, simply because most of their costs are fixed so they benefit handsomely when prices rise."

"Stephen Walker, managing director global mining research at RBC Capital Markets, said he expected gold equities to rise, rather than gold prices to fall further."

"Wednesday’s price moves backed his theory. The physical gold price was $3 higher at $565 a troy ounce on Wednesday, having dropped more than 6 per cent in the previous session, whereas large gold miners performed better. Newmont Mining climbed more than 3.5 per cent to $49.42 and AngloGold Ashanti more than 6 per cent in Johannesburg."

"Wiktor Bielski, managing director mining at Morgan Stanley in London, said the relationship between metal prices and mining shares broke down during the metal price boom. 'Traditionally mining shares led metal prices by six to nine months. That is no longer the case and we have also seen the physical metals outperform the shares, which could mean that metal prices have further to fall,' he said."

Some reports on money and metals from this mornings markets. "Comex gold and silver have managed a bounce so far, but metals remain vulnerable after Tuesday's $44.50 sell-off in August gold. This is particularly true with expectations for another Fed rate hike later this month, suggests Leonard Kaplan, president of Prospector Asset Management."

"'Everybody is shell-shocked,' he says. 'We did go lower overnight and have come
back. But a $2 rally in gold is not really impressive after a $44 drop,' says
Kaplan. August gold is up $2.20 to $569 and July silver is up 20.5 cents to
$9.83."

"Shares of silver miners rose Wednesday amid price increases for the precious metal, as investors looked past worries of higher inflation and interest rates, which usually hurt metals prices by increasing costs for miners to expand production."

"Among big silver miners, Coeur d'Alene Mines Corp.'s stock rose 17 cents, or 4 percent, to $4.12 in morning trading on the New York Stock Exchange. The Idaho-based company's stock has traded between $3.30 and $7.37 over the past year, reaching its peak in April."

"Silver Wheaton Corp. shares gained 33 cents, or nearly 5 percent, to $7.15, after trading between $3.07 and $11.75 over the past year. Apex Silver Mines Ltd. added 1 cents to $12.86 on the American Stock Exchange. Meanwhile, shares of Canada-based Silver Standard Resources Inc. rose 36 cents, or 2.2 percent, to $16.71 on the Nasdaq. The stock has traded between $11.05 and $24.12 over the past 52 weeks."

"The US dollar is off its lows for the year but is likely to depreciate further to the point where it tests critical technical support levels, Louise Yamada, founder and managing director of Technical Research Advisors, said on Tuesday. 'The dollar is very distressing because it has been testing a 28-year support level,' Yamada said at the Reuters investment summit in New York."

"The dollar has fallen more than 5 percent this year against an index of major currencies, to 86.2. Indeed, were it not for a sharp rebound since the start of the month, the dollar index would likely be back below 84, at the one-year lows plumbed recently and much closer to the critical 80 level, Yamada said."

"'Eighty is really a critical support that goes all the way back through the history of the dollar,' Yamada said. 'I suspect it's not going to go through immediately but..the dollar is set to become less valuable.'"

"The greenback has rebounded a bit, last week registering its best gain in the past year as investors shed risk by parking money in cash. But the dollar faces significant pressure and competition from other currencies, which could turn it around again. 'What has happened since 2002 is what I've been calling the laissez-faire devaluation of the dollar,' Yamada said."

"She said the dollar is also poised to see far more competition from rivals such as the euro and China's yuan. 'You've got Venezuela that won't accept dollars for oil, you've got Iran that is going to have a euro board for energy, Russia is starting to consider only accepting euros for oil, and it is happening in a very slow fashion so that people are not putting together the negative effect this can have.'"

"'One of the things that bothers me the most is I think the dollar is starting to lose its reserve status,' Yamada said.".

"Central banks are planning to diversify foreign exchange reserves away from U.S. government debt into higher-yielding assets, including mortgage bonds, through 2007, according to a UBS Securities survey."

"Almost all of the 90 central banks polled by the unit of the world's biggest wealth manager now have the authority to spend reserves on bonds other than Treasury debt, the poll found. Just 3 percent said they only invest in Treasuries, down from 31 percent four years ago, it said."

"The month-long slide in global stocks has wiped out at least $2 trillion in wealth, leaving investors few alternatives to preserve their holdings aside from bonds and money markets. Investors have been dumping stocks, commodities and emerging market assets on growing concerns that economic growth will suffer from higher inflation and interest rates."

"'It is essentially one consistent story worldwide, starting here in the U.S. There is a fear that the Fed's repeated commitment to limiting inflation demonstrates a willingness to risk economic activity,' said Christopher Low, chief economist at FTN Financial in New York."

Some reports on the wild sell-off for precious metals. "Gold and other metals suffered their biggest meltdown since the early 1990s Tuesday, as concerns over the impact of rising interest rates on global growth continued to rock speculative markets."

"'We are witnessing another great transfer of wealth in progress, and the process has just begun,' writes Jack Chan, trader and founder of Traderscorporation.com. 'We can debate over China, India and a whole lot of reasons why metals should go to the moon sooner or later, but the fact is, a lot of hot money was required to propel these markets to the current great heights.'"

"Gold for August delivery plunged $44.50, or 7.28%, to close at $566.90 an ounce. It was the worst single-day percentage decline for gold since January 1991, according to brokerage Miller Tabak."

"The selloff was even more pronounced for silver, with the July contract losing $1.44, or 13%, to $9.62 an ounce."

"'Gold now stands at a point where the $300 move it had achieved over the past year has been reversed by 50%, and questions are being raised about its ability to sustain much more damage before the bull cycle is declared as being on a permanent summer vacation,' said Jon Nadler, at bullion dealers Kitco.com."

"'Gold will have to await (patiently) the return, in earnest, of its formerly loyal physical buyers before one can declare this correction over and not start calling it a bear market,' said Nadler, adding that he sees no signs yet that this reversal of sentiment has taken hold."

"Despite the severe losses Tuesday, Peter Grandich said he believes 'the current correction is going to end up [as] the last great buying opportunity in what ... remains the greatest secular bull market in gold's history.' He points out that the risk in gold prices is $25-$50 lower, while the reward is $200-$500 to the upside."

"The plummeting silver price has 'nothing to do with a bubble or related driver,' according to Paul Mladjenovic, a silver analyst at PM Financial Services. 'There are some very large traders [who are] massively shorting silver, causing an artificial plunge in the silver price,' he said, adding that 'the situation is great need of scrutiny and enforcement by the CFTC [Commodity Futures Trading Commission].'"

"Palladium was also a big decliner, with its September contract down $39.05, or 12.4%, to end at $276.70 an ounce. It touched $274.10 earlier, its lowest level since January. Sister metal platinum saw its July contract fall $52.90, or 4.5%, to close at $1,118.50 an ounce after a seven-week low of $1,117.50."

"Stop-loss selling hammered gold after the market retreated below first $600 and then $590, which were recent trend-line support levels, said trading sources. 'It was all margin selling and liquidation by the funds,' said George Gero, VP at RBC Capital Markets Global Futures. 'No buyers appeared until the market was $40 down.'"

"'Fund dealer and investors liquidation' intensified after the New York open, said James Moore, analyst with TheBullionDesk. Gold 'needs to stabilize in order to renew investor confidence in the market or else run the risk of free-fall back to the $500 to $480 area,' he said."

"'We believe that investors are showing signs that they are most concerned about over-aggressive central bank rate hikes triggering a growth slowdown," said UBS analyst John Reade in a daily note. 'Fears of a growth shock has knocked equities, emerging markets and commodities, including gold ... With a heavy data and comment calendar out of the U.S. this week, we expect further volatility and likely further near term declines in precious and base metals prices,' Reade said."

"The dollar hit new one-month highs against the euro and yen Tuesday. Gold has a tight inverse relationship with the U.S. currency as investors often use the metal as a dollar alternative."

"Oil fell sharply, echoing similar moves across commodities and stocks. The fact that Tropical Storm Alberto, the first of the U.S. hurricane season, was forecast to miss oil and gas infrastructure, also pressured prices."

The Financial Times on the equity markets. "The sell-off in global equity markets gathered pace on Tuesday, as European bourses suffered sharp losses following overnight falls on Wall Street and declines across Asia amid fears about the effect of tighter monetary policy on global growth. In London, the FTSE 100 sank below 5,500, fallling 126.7 points or 2.2 per cent to 5,494.2. The FTSE is now 10.7 per cent below its 2006 high, reached in April, and down 4.4 per cent for the year to date."

"Mervyn King, the governor of the Bank of England warned on Monday that there are signs signs of inflationary pressures in the main industrialsed economies, echoing comments from US policymakers. King, in a speech yesterday in Edinburgh, said global rates may have been too low for too long, fanning the inflation now feeding into the U.K. economy."

"In Tokyo, the Nikkei 225 Average endured its largest one day fall for two years, plunging 4.1 per cent to 14,218.60, its lowest level since November. The Nikkei's weakness contributed to severe pressure across Asian markets amid persistent concerns about the prospects for the US economy, a vital export market for the region. The Korean market fell 2.9 per cent to 1,203.86, a seven-month low."

From Bloomberg. "'There is fear that more rate increases are to come than previously expected,' said Matthias Fankhauser, a fund manager in Zurich, which oversees the equivalent of $18 billion. 'We are seeing signs of growing inflation coupled with slowing growth. That is what the market is bracing itself for.'"

"Concern about the effects of accelerating inflation and rising interest rates on the global economy has wiped out some $1.85 trillion in market value worldwide this month. Increases in borrowing costs leave consumers with less to spend on goods such as cars, televisions and mobile phones, and reduce demand for mortgages and loans."

"Anglo American Plc and Rio Tinto Group, the world's second- and third-largest mining companies, led the decline in Europe as metals prices fell. Honda Motor Co. and Samsung Electronics Co. paced a drop by exporters in Asia. Emerging markets tumbled, especially in Russia and Eastern Europe."

"Commodity producers were the worst performers among the Stoxx 600's 18 industry groups. Anglo American fell 5.2 percent to 1842 pence. Rio Tinto slipped 3 percent to 2556 pence. Gold prices fell below $600 an ounce for the first time in almost two months. Gold for immediate delivery declined as much as $15.65 an ounce, or 2.6 percent, to $588.60 an ounce."

"The global economy faces increasing 'downside risks,' including rising oil prices, falling stock markets and trade imbalances, said Rodrigo de Rato, managing director of the International Monetary Fund."

"'There are other risks, what we could call global imbalances,' de Rato said. 'The most obvious sign of that is certainly the large current account deficit in the U.S.' The U.S. current account deficit widened to a record $224.9 billion in the fourth quarter. Americans' appetite for goods made in China and other Asian countries is stoking the deficit."

"'The IMF has been advising China to move to a more flexible exchange rate,' de Rato said. 'A flexible exchange rate would make the Chinese economy more resilient.'"

"Surprise interest rate increases in South Korea and India last week were reminders of an inconvenient truth: The era of easy money in Asia is over. In recent years, the policies of regional central banks have provided generous doses of liquidity, keeping borrowing costs low and putting a floor below stock prices. Until now, loose monetary policy worked marvelously."

"The strategy may have run its course now that inflation is accelerating. On top of pressures on wages and property values, Asia is grappling with the fallout from high oil prices. More and more, their effects are seeping into consumer prices."

"What-if scenarios abound. Amid such uncertainty, Asia's central banks must act prudently to extend the region's expansion. Even if it means slightly slower growth, the outlook will be brighter if Asia avoids the booms and busts of the past."

"It's a seemingly impossible balancing act. After all, central bank officials in India, Indonesia and the Philippines may face a public backlash if their actions reduce GDP. What they have in common is crushing poverty, which adds an element of caution that the Fed and ECB don't need to consider."

"It may be a necessary evil given how quickly inflation slams living standards at the lowest end of the economic food chain. Asia's central banks may have a busy year on their hands."

MarketWatch has the trading numbers. "Gold futures fell Monday to mark a five-session losing streak and close at a two-month low with U.S. inflation data due this week expected to support the case for the Federal Reserve to continue raising interest rates. The gold market shows a weak tone as traders 'await the publication of a key series of health readings on the state of the U.S. economy,' said Jon Nadler of bullion dealers Kitco.com."

"The likelihood of a 'sub-$600 dip this week remains very much in place, and some nerves may be tested before Friday rolls around,' he warned."

"For now, support for gold will likely be strong around $600, with technical support between $585-$578 'likely to hold, barring any extremely bearish news,' analyst James Moore said."

"Gold for August delivery closed down $1.50 at $611.30 an ounce, after falling as low as $605 in electronic trading. Those are its weakest intraday and closing levels since April 13. On Friday, the contract closed out the week down 4.4%. Silver for July delivery finished down 14.5 cents at $11.065 an ounce, falling to a low under $11 for the first time since late March. July platinum lost $18.80 to end at $1,171.40 an ounce and September palladium lost $9.80 to close at $315.75 an ounce."

"'As before, the firmer dollar and concerns about a combination of slowing U.S. growth and further Fed tightening are likely to keep gold and other commodity prices pressured,' said economists at research firm Action Economics. The dollar touched a six-week high against the euro on growing expectations the Fed will continue to raise interest rates."

"Canada's dollar rose for a second day on speculation an economy that added almost five times the number of jobs forecast in May will prompt the Bank of Canada to raise its benchmark interest rate at least once more this year. Canada's dollar rose 0.7 percent to 91.05 U.S. cents at 4:01 p.m. in Toronto, from 90.39 U.S. cents on June 9 when the currency increased 1.5 percent. One U.S. dollar buys C$1.0984. The Canadian dollar advanced against all 16 of the most actively traded currencies tracked by Bloomberg today."

"'The Canadian dollar is still trading on its own domestic momentum,' said Marc Levesque, chief strategist at TD Securities in Toronto. 'After super unemployment numbers, investors are expecting that the Bank of Canada may end up raising interest rates' on July 11 at the central bank's next meeting, from 4.25 percent to 4.5 percent."

"China said Monday that its trade surplus reached a record $13 billion in May, raising the prospect of renewed trade friction with the United States and Europe. The huge trade gains are just the latest evidence of China's remarkable economic boom and the figures could create new pressure on Beijing to allow its currency, the yuan, to appreciate against other world currencies as a way of balancing global trade."

"After posting a record $100 billion trade surplus in 2005, much of it with the United States and Europe, China said Monday that its surplus had already reached nearly $47 billion in the first five months of this year, a period that is traditionally slower for exports than the second half of the year."

"Plans to encourage domestic consumption and bolster imports as a way of better balancing trade, have not been able to keep pace with export growth. 'The economy is cooking along,' says Jonathan Anderson, an economist in Hong Kong at UBS. 'Still, they have excess capacity, so that's slowing down imports.'"

"There are also some signs of inflationary pressure, economists said. While inflation grew at a mild 1.4 percent in May, several economists said inflationary pressure could be building and might show up more clearly in 2007 or 2008, after a lag period. They are also worried about the enormous rise in bank loans."

"Trading was suspended on the Colombian Stock Exchange on Monday after risk- wary investors fled toward U.S. markets, depressing share prices in the Andean country by more than 10 percent. It was the steepest one-day fall in the five-year history of the exchange."

"Trade was cut off in the afternoon after the bourse dropped 10.46 percent to 6,749.73, due in part to rising global interest rates that are making safer markets more attractive to international investors, traders in Bogota said. The exchange, set up in 2001 with the combination of bourses in Colombia's three main cities, soared to about 9,500 at the end of last year from 1,500 at the start of 2003."

"'The exit of capital from the stock market is being driven this year by foreign funds, as well as individual investors,' one trader said."

"As global investors have become more risk averse in recent weeks, the U.S. dollar is emerging as the main beneficiary. The greenback rose to one-month highs against a basket of major currencies on Monday, after central banks in the euro zone, India, South Africa and South Korea raised rates last week."

Danielle DiMartino looks at inflation and deflation. "Stacy Richardson, a Tulsa reader, recently asked a most intriguing question: Which is the lesser of economic evils, hyperinflation or deflation? You may be wondering, why bother with such musings, if the United States is not at risk of succumbing to either? I'd venture that some of the powers that be in Washington would privately disagree."

"Hyperinflation is defined as inflation run amok, when prices increase unchecked and the currency gets pummeled. The most severe case on record was in post-World War II Hungary when prices doubled every 15 hours."

"Deflation is the opposite. The general direction of prices is downward. The currency, in other words, buys more. That's great if you've got loads of dough. But deflation can be accompanied by falling incomes, which is disastrous if you hold debt. Your payments stay constant while your income falls."

"A quick and dirty survey of the economists I speak with regularly revealed that hyperinflation is overwhelmingly the greater of two evils."

"It comes down to the sovereignty of the United States of America and its claim to the world's reserve currency, a distinction that would be threatened in the event of runaway inflation. If the dollar isn't worth the paper it's printed on, why would any country be inclined to hold dollar assets? By extension, we'd be in a world of pain in the event that hyperinflation took hold because foreign investors hold half our debt."

"The good news is, we're at little to no risk of inflation spiking to untenable levels. In today's globalized world, there are simply too many offsetting disinflationary forces working against inflation. Why then, has every last Federal Reserve official within a microphone's reach sung as hawkish a tune as humanly possible in the last week?"

"After all, as Merrill Lynch chief economist David Rosenberg (he voted hyperinflation) pointed out, the Fed itself took down inflation expectations when it met in May. In March, Fed staffers predicted inflation would be 'slightly higher in 2006.' But by the time May rolled around they were expecting inflation to 'decelerate later this year.'"

"Yes, the data that followed the May meeting showed inflation at the core level was heating up. But a third of the rise was tied to house prices being excluded from the consumer price index in lieu of rental prices. Fewer people can afford to buy, so they're renting, sending rent prices up, at least temporarily."

"Something else is definitely at work here and I'll be the first to admit I don't know what it is. What I do know is the Fed is dangerously close to triggering deflation. Maybe not of the Great Depression variety, but certainly of an ilk nasty enough to make a lot of us regret that record $12 trillion in debt we've accumulated, much of it in the name of the roofs over our heads."

"If you doubt housing can drag overall prices down, just ask anyone who has lived through the deflation that's plagued Japan for the better part of the last 15 years. The catalyst, they will tell you, was real estate. 'We've seen what this did to Japan,' said Doug Ingram of Dallas-based SAMCO Capital Markets. 'If people are borrowing money to spur the economy and they can no longer do this because home prices have stopped rising, that alone will cause prices to decline.'"

"It's hard to argue that our economy has evolved from one based in agriculture, to one that manufactured goods to one that today occupies itself creating debt. The only explanation I can come up with is the Fed is trying to load up the bullet chamber to fight deflation if housing does get ugly and trigger a recession. The more ammunition they have to lower rates, something Ingram predicts will happen before the year is out, the greater the chance of staving off deflation."

"It may come down to a being able to put up a fight. The Fed can conquer inflation all day long at its current level. But deflation is another story. Fed policy is essentially defunct as the real cost of borrowing, that is, the level of interest rates minus the inflation rate, actually rises when the inflation rate drops Below zero."

"I have to agree with Ingram that the Fed is playing a no-win game. But if it comes down to a recession Fed officials can lick or deflation, something that would end a lot worse than a recession, which would you choose?"