Saturday, July 30, 2011

Debt Ceiling Deadlock/USA set for Downgrade/Huge gold and silver standing at comex

Good evening Ladies and Gentlemen:

Before commencing, let me introduce you to the latest financial entities who have entered our banking morgue having taken their last breath last night:

1. Integra Bank  Evansville Ind.

2. Bank Meridian,  Columbia SC

3. Virginia Business Bank of Richmond Virginia

4. Landmark Bank of Florida, Sarasota Florida

5. Bank of Choice, Greeley Colorado.

May they rest in piece.

There were many developments occurring yesterday including the House voting for a revised Boehner bill
but defeated by the Senate.  This weekend Washington will be busy trying to get a deal.  While this was going on all attention was diverted from the comex which saw a massive amount of gold and silver standing for delivery.  Without further ado let us head over to the comex and see the wild events of yesterday.

The price of gold finished the day at $1628.30 having risen most of the day.  The bankers tried to quell its advance but to no avail.  The price of silver finally made it above the 40 dollar mark, rising to $40.09 for a gain of 31 cents.  These prices are comex closing prices at 1:30.

In the access market, here are the final prices for gold and silver:

gold:  $1627.20
silver: $39.90

The total gold comex open interest fell marginally by 200 contracts to 517,831 as the bankers supplied the paper and speculators piled into the metal.  A few bankers covered their shorts fearing the debt ceiling debacle.  Now comes the exciting part.  The front delivery month of August saw a massive 12,124 contracts of open interest and this is the amount of gold standing for August representing 1.212 million oz of gold.
The next front month of October which is generally the weakest delivery month of the year for gold saw an open interest of only 24,705 contracts.  The very big December month saw its OI climb big time from 347,752 to 370,297 contracts.  If the comex gets by August, there is no doubt that December will be the battle royale in gold especially as we judge the huge number of gold standing in August.  The estimated volume at the gold comex was quite good at 151,054 as all the rollovers have occurred already.  The confirmed volume on Thursday was very good at 254,429 but it contained the many rollovers.

The total silver comex open interest continues to hover around the 119,000 mark.  On Friday, the OI rests at 119,654 down about 300 contracts from Thursday.  The front August options exercised month saw an OI fall slightly from 319 to 312.  This represents the number of silver ounces standing (1.56 million oz) which is very large for a non delivery month.  It is almost 30% of the total of July's silver oz standing.  The next delivery month of September saw its OI fall slightly from 59,833 to 58905.   The estimated volume at the silver comex on Friday was quite subdued at 42,264.  The confirmed volume on Thursday was better at 59,060.

Here is the chart for 7/30/2011 regarding deliveries and inventory changes at the comex.  This will be the opening August gold report:

Withdrawals from Dealers Inventory
Withdrawals fromCustomer Inventory
707 (Manfra, HSBC)
Deposits to the Dealer Inventory
Deposits to the Customer Inventory
No of oz served (contracts)  today
332,500  (3325)
No of oz to be served  (notices)
 879,900 (8799 )
Total monthly oz gold served (contracts) so far this month
 332,500 (3325)
Total accumulative withdrawal of gold from the Dealers inventory this month
Total accumulative withdrawal of gold from the Customer inventory this month

Let us begin with the gold inventory movements.

We basically had no movements whatsoever.  No gold entered the dealer and no gold was withdrawn
We only had a tiny 707 oz of gold removed from a customer at HSBC and Manfra.
We had an adjustment whereby 4693 oz of gold was removed from the dealer to the customer.

Thus to start the August month we officially have only 2.027 million oz of registered gold but I will bet that most of it is encumbered. (registered = dealer gold)

The comex notified us that a massive 12,124 contracts stood in line for metal Friday, the first day notice.
This of course represents 1.2124 million oz of gold.  I am sure that Blythe Masters has her work cut out for her this weekend as does Washington.  To obtain what is left to be served, I take the OI standing (12,124 contracts) and subtract out Friday notices for delivery  (3325) which leaves me with 8799 notices or 879,900 oz left to be served upon for the entire month.

Thus for this delivery month of August it seems that the following is standing for delivery:

332500 (oz already served)  +   879900 (oz left to be served upon)  =  1,212,400 oz.
Expect massive cash settlements as the comex does not have anywhere close to this in unencumbered gold.

And now for silver 

First the chart:

Withdrawals from Dealers Inventory nil
Withdrawals fromCustomer Inventory 17,027 (HSBC, Delaware)
Deposits to theDealer Inventory nil
Deposits to theDustomer Inventory 1,208,710 oz (Brinks,)
No of oz served (contracts) 1,375,000  (275)
No of oz to be served  (notices) 175,000  (35)
Total monthly oz silver served (contracts) 1,375,000  (275)
Total accumulative withdrawal of silver from the Dealers inventory this month nil
Total accumulative withdrawal of silver from the Customer inventory this month 17,027
The silver comex saw another massive deposit into the vaults to the tune of
1,208,710 oz entering the Brinks customer.  

There were two customer withdrawals:

1.  12,022 oz from HSBC
2.  5005 oz from Delaware.

total withdrawal:  17,027 oz.
we also witnessed a 19,876 oz of silver repaid from the dealer to the customer.

Thus the total registered silver fall to an all time low of 26.729 million oz of silver inventory.  However the total silver inventory rises to 104.17 million oz.

The comex folk notified us that a total of 275 notices were filed for delivery as these were options exercised by investors and standing for the metal.  This represents a total of 1,375,000 million oz.  To obtain what is left to be served, I will take the OI standing (312) and subtract out the notices (275) which will leave me with 35 notices or 175,000 oz left to be served upon.  No doubt that this will rise as the month nears its end.

Thus the total number of silver oz standing in this non delivery month is as follows:

1,375,000 oz (served already)  +  175,000 oz (to be served)  =  1,550,000
which is very high for a non delivery month.
Blythe will be busy in the silver arena as well.


Let us now proceed to our ETF's SLV and GLD and then our physical gold and silver funds:
Sprott and Central Fund of Canada.

 The two ETF's that I follow are the GLD and SLV. You must be very careful in trading these vehicles as these funds do not have any beneficial gold or silver behind them. They probably have only paper claims and when the dust settles, on a collapse, there will be countless class action lawsuits trying to recover your lost investment.
There is now evidence that the GLD and SLV are paper settling on the comex.
Thus a default at either of the LBMA, or Comex will trigger a catastrophic event.

First GLD inventory changes:  July 30.2011. 

Total Gold in Trust

Tonnes: 1,263.58
Value US$:

Total Gold in Trust:  July 28.2011

Tonnes: 1,262.97
Value US$:

Total Gold in Trust: July 27.2011:

Tonnes: 1,244.80
Value US$:

we gained  another .61 tonnes of gold which moved over from the Bank of England's cubby hole to the GLD cubby hole in a swap deal (gold for dollars).  The problem here is that the swap can be unwound at any time by the B. of E.
Interestingly enough, the gold is not even the Bank of England's gold but wealthy depositors who placed their gold there for safekeeping.  When this charade blows up, there will be many bankruptcies including the GLD, the Bank of England, the LBMA and finally the Comex.

Now let us see inventory movements in the SLV:  July 30:2011

Ounces of Silver in Trust318,802,192.100
Tonnes of Silver in Trust Tonnes of Silver in Trust9,915.86

July 28.2011:

Ounces of Silver in Trust318,802,192.100
Tonnes of Silver in Trust Tonnes of Silver in Trust9,915.86

July 27.2011

Ounces of Silver in Trust318,802,192.100
Tonnes of Silver in Trust Tonnes of Silver in Trust9,915.8

we neither gained nor lost any silver.

1. Central Fund of Canada: it is trading at positive 3.1  percent to NAV in usa funds and positive 3.4% in NAV for Cdn funds.  ( July 30.2011).   .
2. Sprott silver fund  (PSLV):  Premium to NAV rose  to a  positive 19.1% to  NAV (July 30.2011
3. Sprott gold fund (PHYS): premium to NAV fell slightly to a  1.79 to NAV  (July 30..2011).


Note that the Central Fund of Canada is now firmly back into positive territory in the CEF fund which is half silver and half gold.  Please note the huge premium in the silver Sprott fund as investors believe that they have the real stuff and SLV is void of any real physical silver.


At 3:30 the comex releases the COT report which shows the major positions of traders.
It was quite telling this week:

Let us now see the gold COT.

Gold COT Report - Futures
Large Speculators
Change from Prior Reporting Period

Small Speculators

Open Interest



non reportable positions
Change from the previous reporting period

COT Gold Report - Positions as of
Tuesday, July 26, 2011

Please remember that this report is for positions at last Tuesday the 26th of July.
All COT reports are from Tuesday to Tuesday.

Here those large speculators that have been long gold added to their positions by 981 contracts and were not fooled by the antics of the bankers.

Those large speculators that have been short gold saw the light and covered a massive 15,339 contracts.  They are very happy that they did.

And now for our commercials:

Those commercials that are long in gold and close to the physical scene covered a massive 4,135 contracts of gold.

And our famous commercial shorts like JPMorgan and fellow bandits:

these criminal entities added another huge 15,024 contracts to their short positions.
No wonder we had the raid on Wednesday and Thursday of this week.

Look at our small specs as they are trying to take on the bankers:

those small specs that are long gold added a huge 7733 contracts to their longs.
those small specs that have been short added a huge 4894 contracts to their shortfall and are very sorry that they did.

Conclusion:  this is not a bullish report for gold as the bankers continue to supply the non backed paper as our regulators are quite oblivious to the situation. The Fed continues to supply these doorknobs with cash to hold as collateral for their massive shortfall.
What a crooked arena!!

Let us have a look at the silver COT:

Silver COT Report - Futures
Large Speculators

Small Speculators

Open Interest



non reportable positions
Change from the previous reporting period

COT Silver Report - Positions as of
Tuesday, July 26, 2011

Those large speculators that have been long silver added a very tiny 80 contracts to their longs as the constraints on the huge margin requirements is having their toll on these guys.

Those large speculators that have been short silver covered a minuscule  54 contracts.

And now for our commercials.

Those commercials that are close to the physical scene and are always long silver covered a small 1,019 contracts.

Those commercials that have been short silver from the year 4 BCE and onward added another 2241 contracts to their shorts courtesy of the largess of the Fed (supplying the needed capital)
and the regulators (who continue to allow this nonsense to continue)

Forgot about the small specs as they have been blown out since May.

Conclusion:  again not a bullish report as the bankers increase their shorts.  No wonder we had a raid on Wednesday and Thursday.  We will probably have others this week.


Let us now see the big news stories relevant to gold and silver.

Late last night we got this story from Bloomberg where we learned that the Boehner plan was defeated by the Senate.  Both sides were work throughout the weekend trying to get a plan passed.  Remember that it is far worse to have a debt downgrade than a temporary default as this adds huge amounts of interest to the debt bill: (courtesy: Bloomberg)

Congress Deadlocked on Plan to Avert Default as Obama Calls for Compromise

Senate Majority Leader Harry Reid, a Democrat from Nevada, speaks during a news conference with fellow Democratic senators Charles Schumer of New York, left, Richard Durbin of Illinois, second from right, and Patty Murray of Washington, in Washington, D.C., U.S., on Friday, July 29, 2011. Photographer: Joshua Roberts/Bloomberg
July 28 (Bloomberg) -- The debt-ceiling proposals put forth by Senate Majority Leader Harry Reid of Nevada and House Speaker John Boehner of Ohio would each cut about $750 billion over the next 10 years, according to Bloomberg Government analyst Scott Anchin. To get to a ratio of 60 percent debt to GDP, $4.9 trillion in deficit reduction measures would be needed in the next 10 years, says Bloomberg Government analyst Christopher Payne. (Source: Bloomberg)
July 29 (Bloomberg) -- David Addington, vice president at the Heritage Foundation, talks about the U.S. debt debate. House Republican leaders scrapped a vote on the debt ceiling bill late yesterday, indicating that House Speaker John Boehner is short of votes needed to pass his bill amid a vow by Senate Democrats to defeat the measure. Addington, who was former Vice President Dick Cheney's chief of staff, speaks with Deirdre Bolton on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
July 29 (Bloomberg) -- Richard Bove, an analyst at Rochdale Securities, talks about the political standoff over the U.S. debt ceiling and budget deficit, and the likely impact of a downgrade of the government's credit rating on the value of bank assets. Bove, speaking with Tom Keene on Bloomberg Television's "Surveillance Midday," also discusses bank stocks. (Source: Bloomberg)
House Speaker John Boehner of Ohio prepares to speak during a news conference on Capitol Hill. July 28, 2011. Photographer: Susan Walsh/AP
House Speaker John Boehner of Ohio, center, walks out of a caucus meeting on Capitol Hill, July 29, 2011. Photographer: Susan Walsh/AP
Congress headed into the final weekend before a threatened U.S. default deadlocked over legislation to raise the debt limit as PresidentBarack Obama appealed to party leaders to reach a compromise.
The Senate yesterday rejected a plan the Republican- controlled House passed hours earlier with no Democratic support. It would have required congressional approval of a constitutional amendment to balance the budget and forced another debt-limit vote by lawmakers in about six months to continue the nation’s borrowing authority beyond early 2012.
Congressional leaders “need to start working together immediately to reach a compromise that avoids default and lays the basis for balanced deficit reduction,” White House Press Secretary Jay Carneysaid in a statement after the two votes.
Senate Majority Leader Harry Reid, a Nevada Democrat, who offered modifications to a Democratic plan that he said are designed to attract Republican support, accused GOP leaders of rebuffing his efforts to negotiate.
Reid said when he attempted to engage Senate Republican leaderMitch McConnell of Kentucky in talks, “we had no one to negotiate with.”

Missing Republicans

“We’re missing Republicans,” said Senator Chuck Schumer, a New York Democrat, though with just days left to a possible Aug. 2 default, “that could change.”
House Speaker John Boehner, an Ohio Republican, speaking before the House vote, said his party has “done everything we can to find a common-sense solution.”
Shortly after the Senate rejected Boehner’s plan, the House scheduled a preemptive vote for today on Reid’s proposal -- planning to defeat it even before the Senate takes it up.
Financial markets were restrained in reacting to the Washington impasse yesterday. Treasuries rallied, sending yields on 10-year notes to the lowest level since November. The yield on 10-year Treasury note yields declined 15 basis points to 2.79 percent in New York. Stocks fell as economic growth trailed forecasts. The Standard & Poor’s 500 Index slipped 0.7 percent and tumbled 3.9 percent this week for its worst slide in a year.
Lawmakers are working through the weekend. Senate procedures would allow an initial vote on Reid’s plan at about 1 a.m. tomorrow. A Senate vote then could be held at about 7 a.m. on Aug. 1, allowing the measure to return to the House before the Aug. 2 deadline.

Moving Toward McConnell

The modifications Reid proposed in his plan yesterday bring it closer to one McConnell proposed earlier this month.
Borrowing authority would be provided in two separate $1.2 trillion installments, one immediately and one in several months as the nation again nears its borrowing limit.
All but the first $416 billion could be blocked through a joint resolution of Congress, though opponents would have to muster supermajorities in both chambers to override a veto.
The new plan would yield debt savings of $2.2 trillion -- about the same as the total borrowing authority extended -- and call on a 12-member bipartisan congressional committee to draft legislation to lower the deficit to 3 percent or less of gross domestic product.
Senator Scott Brown, a Massachusetts Republican, said his staff has been working with Reid’s to put “more teeth” in the joint committee plan.

‘On the Brink’

Senator Lisa Murkowski, an Alaska Republican, said “absolutist” lawmakers aligned with the Tea Party have put the U.S. “on the brink.”
“I am really worried about where we are standing, and I think part of that has come about because you have individuals that say, ‘It is my way or the highway,’” Murkowski said in an interview at Bloomberg’s Washington office. “That is not how you govern.”
Obama may invite congressional leaders back to the White House for more talks, according to a Democratic official. No decision has been made about further discussions between Obama and Democratic and Republican congressional leaders, said the official, who wasn’t authorized to speak publicly about the administration’s strategy.
While Obama and Vice President Joe Biden have been in contact with lawmakers, as of late yesterday the president hadn’t spoken with Boehner for days, the official said.

Losing AAA Rating

“If we don’t come to an agreement, we could lose our country’s AAA credit rating, not because we didn’t have the capacity to pay our bills -- we do -- but because we didn’t have a AAA political system to match our AAA credit rating,” Obama said earlier yesterday at the White House.
Obama said with Democrats and Republicans in “rough agreement” on plans to raise the nation’s debt limit within days of a threatened default, the time for compromise is “now.” The president and the Republicans used their weekly addresses on the Internet and radio to continue the debate.
The House-passed plan was “unacceptable” and would mean another debt-ceiling extension in less than a year, Obama said today. “There are plenty of ways out of this mess,” he said, noting the parties aren’t that far apart on spending or how to tackle entitlements and the tax code. “But there is very little time.”
Jon Kyl of Arizona, the second-ranking Republican in the Senate, said in the Republican address that Obama and the Democrats are “too committed to the European style of big government.”

Retirement Savings

Still, he said, the consequences of missing the Aug. 2 deadline could be “severe,” with markets dropping in value and hurting Americans’ retirement savings. “Republicans believe we must solve our debt crisis, and we believe we can solve it if Democrats will work with us,” he said. “If we don’t do something about our spending problem now, the scenes we’ve seen playing out all across Europe could happen in America.”
The Treasury Department has said the U.S. will breach its borrowing limit and run out of options for avoiding default if the $14.3 trillion debt ceiling isn’t raised by Aug. 2.
Senate Budget Committee Chairman Kent Conrad expressed confidence that lawmakers will head off a default.
“Work expands to fill the time. We certainly know that’s true here,” Conrad, a North Dakota Democrat, said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend. “Leaders on both sides are sufficiently responsible that they understand if there were a default, it would be a disaster for this country.”

A Potential Deal

Behind the scenes, Democratic officials said, talks on a potential deal centered on how to force future deficit-cutting by Congress, by setting up consequences -- such as automatic spending cuts or tax increases, or some combination of the two - - if the savings aren’t achieved.
“If we need to put in place some kind of enforcement mechanism to hold us all accountable for making these reforms, I’ll support that, too, if it’s done in a smart and balanced way,” Obama said.
The Treasury is preparing contingency plans to pay the government’s obligations should Congress fail to raise the borrowing limit in time. Carney said Treasury officials may reveal the plans this weekend.
Federal Reserve Bank of St. Louis President James Bullard said a resolution of the debt-ceiling impasse may remove a key unknown that has restrained economic growth in the U.S. “Once this last uncertainty is resolved, the path to faster growth may be open,” Bullard said, according to prepared remarks for a speech yesterday in Jackson HoleWyoming.

Short-Term Fix

Carney reiterated that Obama would accept a short-term debt ceiling extension of a few days only if needed to finish work on legislation lifting the limit for a longer period.
House Republican leaders revised their bill after failing to win enough support for a vote the previous night. It would allow a debt-limit increase now and require Congress to work out a second increase agreement within months. The second debt-limit increase would occur only if a balanced-budget constitutional amendment is passed by Congress and sent to the states.
Representative Mo Brooks, an Alabama Republican, said the decision to include the balanced-budget amendment turned 10 to 20 Republican votes in favor of the measure.
The House approved the measure 218-210, with no Democrats voting in favor. In the Senate, the measure was tabled 59-41, with all 51 Democrats joined by two independents and six Republicans in opposition to the plan.
To contact the reporters on this story: Julie Hirschfeld Davis in Washington; Mike Dorning in Washington at
To contact the editor responsible for this story: Mark Silva at


I found this report from Econophile over at zero hedge super as he discusses both plans
by the Republicans and Democrats and the fraud that it represents.  (courtesy zero hedge)

The Budget Debate Fraud

Econophile's picture

This article originally appeared in the Daily Capitalist.
The chaos that is our federal government never ceases to please. If you ask me what will happen, I will admit to not having a clue. I wrote a piece two weeks ago on this and my views haven’t changed (U.S. Default? Why Are We Surprised?“). The entire thing is a charade and thus my heart is with the Tea Party Caucus who are holding out for greater cuts and a balanced budget amendment. I have got to hand it to Boehner though for using the crisis to get Obama defeated in 2012 by causing the debt limit issue to come up again just before the elections. But let us not be fooled that the Republicans are actually cutting the deficit.
I listened to O’Reilly anchor Laura Ingram while I was doing my workout this afternoon, and she kept throwing back the argument to Tea Party Congressmen that, hey you’ve gotten what you can get, don’t risk another financial collapse. That is hyperbole. We, the U.S.A., have de facto already met the requirements for a credit downgrade, so it’s going to happen anyway because there are no real cuts proposed. Getting knocked down a minus tick on our rating another $43 billion per year of Treasury interest payments if rates shoot up 500 bps. That is not going to take us down. Yes, I know, it will impact other rates, etc., etc. It reminds me of the Panic of ’08 when Hank Paulson cried wolf and Ben Bernanke was kind enough to remind us that we had a Great Depression once. Those guys still don’t have a clue.
Ask yourself what will happen if they don’t truly cut spending? It will either be inflation or taxes that will result, probably both in my opinion. Either way it will cause long-term stagnation and permanent high unemployment. My vote: shut it down.
Before you think that the solution is for those nice people in D.C. to “just get along” read this from Cato which reveals that the cuts are just a mirage:

by Michael D. Tanner | Michael Tanner is a senior fellow at the Cato Institute

“It is clear we must enter an age of austerity,” House minority leader Nancy Pelosi mourned as she endorsed Harry Reid’s proposal for raising the debt ceiling. Austerity? Really?

The Reid plan would theoretically cut spending by $2.7 trillion over ten years. Even if that were true, it would still allow our national debt to increase by some $10 trillion over the next decade. But, of course, the $2.7 trillion figure is mostly fiction. About $1 trillion of the savings would come from the eventual end of the wars in Iraq and Afghanistan, savings that were going to occur anyway. Senator Reid might just as well have added another $1 trillion in savings by not invading Pakistan.

Another $400 billion comes not from cuts but from assuming reduced interest payments. And, of course, there are $40 billion in unspecified “program-integrity savings,” meaning the “waste, fraud, and abuse” that is the last refuge of every phony budget cutter. The plan rejects any changes to Medicare and Social Security, despite the fact that the unfunded liabilities from those two programs could run as high as $110 trillion. But those liabilities generally fall outside the ten-year budget window, so Reid — unlike our children and grandchildren — doesn’t have to worry about them.

That leaves about $1.2 trillion in discretionary and defense spending reductions over the next ten years. Let’s put that in perspective. This year the federal government will spend $3.8 trillion. Our deficit is roughly $1.6 trillion. Our national debt exceeds $14.3 trillion, not counting unfunded entitlement liabilities. We are talking about raising the debt ceiling to $16.9 trillion. This month alone the federal government will borrow $134 billion. Reid’s cuts would average roughly $120 billion per year.

This is austerity?

Of course, the House Republican plan as announced by Speaker John Boehner is only marginally more austere.

Boehner proposes a two-stage increase in the debt ceiling, with each stage accompanied by spending cuts. The first $1 trillion debt increase would be accompanied by $1.2 trillion in spending cuts over ten years, pretty much the same as Senator Reid’s plan. The big difference is that instead of Sen. Reid’s phony Iraq and Afghanistan savings, the speaker’s plan would appoint a commission — now there’s an exciting new idea — to propose $1.8 trillion in savings from entitlement programs. To be fair, Senator Reid would also appoint a commission — because that’s what Washington does — to recommend additional deficit reductions, presumably including entitlement changes. The difference is that the Boehner commission has teeth. If Congress rejects its recommendations, the president doesn’t get a second $1.6 trillion hike in the debt ceiling.
But $1.8 trillion in entitlement savings over ten years is still too small to encompass real structural reforms of the type envisioned by Rep. Paul Ryan and others. It is much more likely to simply be more tweaking around the edges, perhaps raising the eligibility age or changing the way the cost-of-living formula is calculated. True, changes such as these will have a real impact out beyond the ten-year budget window, but they fall far short of what is necessary to deal with the shortfalls to come.

Making matters worse, both Reid and Boehner are using the time-honored Washington dodge of “baseline budgeting,” meaning that the proposed cuts are not actual reductions in spending from year to year, but cuts from projected future increases. Thus, under both the Reid and Boehner plans, actual federal spending will continue to rise.

With the clock running out, we are now down to fifth- or sixth-best options. But let’s not pretend that this is austerity.


Yesterday news came that the GDP was faltering badly in the second quarter as the new GDP  came in at an annual 1.3%  rise  instead of 1.8%. Even more shocking was the first quarter was revised down to .4% from 1.9%.  This sent the Dow southbound and gold/silver rising:

(courtesy Reuters)

Economic growth tepid as spending flat

(Reuters) - The economy grew less than expected in the second quarter as consumer spending barely rose amid higher gasoline prices, and growth braked sharply in the prior quarter, a government report showed on Friday.
Growth in gross domestic product -- a measure of all goods and services produced within U.S. borders - rose at a 1.3 percent annual rate, the Commerce Department said. First-quarter output was sharply revised down to a 0.4 percent pace from 1.9 percent.
Economists had expected the economy to expand at a 1.8 percent rate in the second quarter.
In addition, fourth-quarter growth was revised down to a 2.3 percent pace from 3.1 percent, indicating that the economy had already started slowing before the high gasoline prices and supply chain disruptions from Japan hit.
Economists had expected the economy would show signs of perking up by now with Japan supply constraints easing and gasoline prices off their high, but data has disappointed. This and the sharp downward revisions to the prior quarters suggest a more troubling and fundamental slowdown might be underway.
There is also heightened uncertainty over the outlook because of the impasse in talks to raise the nation's borrowing limit and avoid a damaging government debt default.
The Treasury says the government will soon run out of money to pay all its bills.
Economists have warned that a debt default could push the fragile economy over the edge.
"The implications of more rancorous foot dragging would be bad for an economy already in a precarious state," said Julia Coronado, chief North America economist at BNP Paribas in New York. "Uncertainty continues to tax an already fragile recovery."
Data released on Friday showed the 2007-2009 recession was much more severe than prior measures had found, with economic output declining a cumulative of 5.1 percent instead of 4.1 percent.
The annual revisions of U.S. GDP data from the Commerce Department showed the economy contracted at an annual average rate of 0.3 percent between 2007 and 2010. Output over that stretch had previously been estimated to have been flat.
The economy needs to grow at a rate of 2.5 percent or better on a sustained basis to chip away at the nation's 9.2 percent unemployment rate.
The March earthquake in Japan severely disrupted U.S. auto production. The resulting shortage of motor vehicles weighed on retail sales as consumers were unable to find the models they wanted. That combined with high gasoline costs to curb spending.
Consumer spending, which accounts for about 70 percent of U.S. economic activity, decelerated sharply to a 0.1 percent rate -- the weakest since the recession ended two years ago.
Spending grew at a 2.1 percent pace in the first quarter.
Motor vehicle production subtracted 0.12 percentage point from gross domestic product growth in the second quarter, after adding 1.08 percentage points to first-quarter GDP growth.
The composition of growth in the April-June quarter was weak and could prompt economists to dial down their expectations for a quick and solid rebound in the third quarter.
A smaller trade deficit , as imports slowed, was one of the main contributors to the rise in second-quarter growth, with businesses spending and inventory investment also adding to output.
Government spending declined again in the second quarter as state and local authorities continued to pare their budgets, even though defense expenditures rebounded at 7.3 percent rate after contracting at a 12.6 percent rate in the first three months of the year.
Home building rose at a 3.8 percent pace, while investment in nonresidential structures increased at an 8.1 percent rate.
The easing of the auto parts disruptions and a drop in gasoline prices could be a tail wind to third-quarter growth, but economists are concerned that June data was rather weak.
"All the data we got for June thus far suggest that as we entered the third quarter, we did not gain any momentum setting up for a good third quarter," said Christopher Probyn, chief economist at State Street Global Advisors in Boston. "We are not starting the third quarter on a positive note," said Probyn, speaking before the GDP report was released.
The report also showed a moderation in inflation pressures, with the personal consumption expenditure price index rising at a 3.1 percent rate after rising 3.9 percent in the first quarter. Excluding food and energy, the core PCE index rose 2.1 percent, the fastest since the fourth quarter of 2009, after rising 1.6 percent in the first quarter. It overshot the Federal Reserve's preferred 2.0 percent level.


Joe Lavorgna of Deutsche bank threw in the towel and suggests that the USA is ready for lowering of their debt ratings.  He discusses the new GDP releases:  (courtesy zero hedge)

Lights Out For The US Economy As Its Biggest Cheerleader Hangs Up The Towel

Tyler Durden's picture

When Deutsche Bank's Joey perma-LaWronga finally gives up on his call that has been wrong for about 3 years now, it may be time to i) panic or ii) buy everything with three hands (thank you Fukushima). We are leaning to the former, especially after the upcoming downgrade forces the Fed to launch QE3 in about a month.
From Joseph LaVorgna, Deutsche Bank
Growth recession confirmed; H2 dims; waiting to see jobs
Commentary for Monday: Previously, we highlighted the possibility that the economy was on the brink of a growth recession—a sustained period of below trend growth typically accompanied by rising unemployment. The disappointing Q2 GDP results and downward revisions to the prior three quarters lead us to believe that this indeed is the case. Real GDP in Q2 rose just 1.3%, as personal consumption virtually stalled (+0.1% vs. +2.1% previously). The prior quarters were revised as follows: Q3 2010 (2.5% vs. 2.6% as previously reported), Q4 2010 (2.3% vs. 3.1%) and Q1 2011 (0.4% vs. 1.9%). In light of the softer first half performance of just +0.8% AR, we are making adjustments to our outlook for the second half. We are lowering our estimate of Q3 GDP by a full percentage point to 2.5%; and we are reducing Q4 from 4.3% to 3.0%. These estimates will be subject to further revision pending a couple of near term developments, namely the resolution of the debt ceiling impasse and the outcome of the July employment report. (Although the coming week’s data on ISM manufacturing, construction spending and motor vehicle sales will also be important gauges of activity.) Hence, we are likely to make additional adjustments—potentially sizeable ones—in the relatively near term. For example, if financial conditions tighten significantly in response to a sovereign ratings downgrade or there is a Federal government shutdown, we would make more drastic cuts to growth. We estimate that a 2-3 week shutdown could subtract 1.5% from Q3 GDP growth. A lengthier shutdown could have a significantly more deleterious effect, although we continue to believe that this will not be the case.
Following our discussion from late last week, we estimate the most likely path forward for the debt ceiling at this point in time is a “sweetened” version of the Reid plan, which would presumably entice a sufficient number of moderate Republicans (and most Democrats) to support it—possibly through enhanced spending cuts. In the event that a resolution is not reached, there are a few policy options remaining. It is possible that President Obama could authorize the Treasury to exceed the $14.3 Trillion debt ceiling without congressional approval, potentially citing the 14th Amendment. The President has expressed a strong preference to not use this option, but he has not ruled out the possibility in a crisis scenario. Conversely, if the borrowing limit is not raised, then the Treasury would have to prioritize its payment obligations based on the available funds. Following recent public comments, we expect debt service payments to be at the top of the list—so as to avoid an actual default, which could roil financial markets. Following debt service, there would be some combination of military funding, social security, Medicare/Medicaid, defense contractors, etc. The remaining components would be subject to furlough in a partial shutdown scenario.
The July jobs report takes on heightened significance given the reduced economic momentum now apparent in the GDP data, particularly in light of the soft profile of consumer spending last quarter. We project a +50k increase in nonfarm payrolls (+75k private) and no change to the unemployment rate (currently 9.2%).


We then got this report and that sealed the Dow's fate as costs to firms rise:
(courtesy Reuters)

US Q2 employment cost rise biggest in almost 3 years

WASHINGTON, July 29 (Reuters) - U.S. civilian employment costs surged a steeper-than-expected 0.7 percent in the second quarter, the biggest gain since September 2008, on a jump in benefits costs, Labor Department data showed on Friday.
Analysts polled by Reuters had expected the Employment Cost Index to increase 0.5 percent in the three months ending in June, after a 0.6 percent rise in the prior quarter.
Benefits costs, which make up about 30 percent of compensation, grew 1.3 percent in the quarter, the biggest gain since June 2007. Wages and salaries expanded by 0.4 percent in the second quarter after increasing by the same amount in the first quarter.
Over 12 months, compensation costs rose 2.2 percent, the sharpest annual increase since December 2008.


Dave from Denver weighs in on the lousy GDP numbers  (The GoldenTruth)

FRIDAY, JULY 29, 2011

Obviously the GDP Number Was A Lot Worse Than Expected

by the overpaid geniuses on bubblevision TV and Wall Street.  Most of them really missed the boat badly on this one.  If a REAL inflation number was used to adjust nominal GDP into the number that was reported, I'd bet my last 1 oz. silver eagle that real GDP was negative by quite bit.

Here's a couple of other real economy news reports that should explain just how weak the economy is and just how imminent QE3 is:

Container-Ship Plunge Signals U.S. Slowdown - Plunging rates for chartering container vessels that carry sneakers, furniture and flat-screen TVs may signal a U.S. consumer slowdown and losses for shipping lines in what is traditionally their busiest time of the year.  LINK

Juniper Sends Grim Signal - Juniper Networks Inc. offered some new clues that the U.S. economy is stalling, warning of slowing sales growth that sent its stock plunging 21% in trading Wednesday.  LINK

Merck to Cut Up to 13,000 Jobs - Merck is cutting costs, expanding in emerging markets and spending on research and development...LINK

Good to see that Merck is following the example set by Obama's jobs Czar - GE's Jeffrey Immelt - and cutting jobs here and shifting the workforce to emerging markets.  I'm guessing this is Obama's implicit yet official jobs policy now.

And here is what a former Chinese central banker is now advising Chinese policy-makers:  Yu Yongding Says China Needs to Hold Less Treasuries as Safety a ‘Mirage’ - “U.S. bonds are not safe, but people think they are safe,” Yu, a researcher at a Beijing institute under the Chinese Academy of Social Sciences, told reporters at a briefing in Mumbai, India, today. “That is a mirage.”  LINK

It will be just wonderful if we get a new debt-limit deal - and we will.  But who the hell is going to buy all the new Treasury bonds that have to issued if our largest financier - the Chinese - decide to stop being the monetary crack dealer for our abusively reckless Government?  Are you?  I'm not...

Anyone not moving most of their investible money into gold and silver right now is an idiot.  I have 90% of my net worth in the physical metal and in mining stocks.  Everyone needs to understand that the dollar is going a LOT lower.  Knowing that, why on earth would you want to own anything denominated in dollars?  And that includes any metals ETF other than PHYS and PSLV.  Yes, technically mining stocks are dollar assets, but I anticipate that because their business is gold and silver, the price performance of mining stocks will far outpace the rate of decline in the dollar.

Here's a good illustration of my point, with a chart from Sharelynx that shows how the value of your house is declined when you price it in terms of gold:


Off to play in a tennis tournament - have a great weekend everyone!

The Consumer confidence report provided more evidence that the economy is sinking rapidly:

(courtesy Jillian Berman Bloomberg)

Michigan Consumer-Sentiment Index Fell to 63.7 in July From 71.5 in June

By Jillian Berman - Jul 29, 2011 10:01 AM ET Fri Jul 29 14:01:18 GMT 2011Confidence among U.S. consumers dropped more than forecast in July to the lowest level in two years, which may hold back the biggest part of the economy.
The Thomson Reuters/University of Michigan final index of consumer sentiment fell to 63.7, the weakest since March 2009, from 71.5 in June. The gauge was projected to decline to 64, according to the median forecast of economists surveyed by Bloomberg News. The preliminary June reading was 63.8.
Limited payroll gains, reduced home values and higher gas prices may dissuade Americans from stepping up spending, which expanded in the second quarter at the slowest pace since 2009 when the economy was in recession. Partisan wrangling over cutting the nation’s budget deficit in time to raise the debt ceiling could also be souring moods.
"We have to see a pickup in job growth at the very least before the consumer shows a little more enthusiasm to spend," Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, said before the report. "It doesn’t inspire much confidence in a consumer-led economic recovery, at best the consumer will lag the recovery."
Estimates of the 63 economists surveyed for the confidence measure ranged from 61.5 to 68, according to the Bloomberg survey. The index averaged 89 in the five years leading up to the recession that began in December 2007.
The economy grew at a 1.3 percent annual pace in the second quarter, less than forecast, Commerce Department figures showed today. Household purchases, about 70 percent of the economy, rose 0.1 percent.


I thought that this paper on what happens when paper fails is a great piece for you.
It discusses in detail what happened in Yugoslavia in the 1990's when this communist nation went into hyperinflation.  Please pay attention to all details as this will come to all nations as each nation tries to hyper inflate their way out of their mess:  (courtesy the trader, Zero Hedge)

What Happens When A Paper Currency Fails?

thetrader's picture

Once upon a time there was a really nice country, Yugoslavia,but due to huge Economic and Religious problems, the country eventually was divided into smaller countries. Tito used to run the country successfully, balancing between the West and the East. It all worked well for Tito, who financed debt with printing money. Eventually, reality caught up, and Yugoslavia experienced one of the biggest Hyperinflation periods the World has ever seen. Sounds familiar?

Full Fiat Currency Map, click here.

Under Tito, Yugoslavia ran a budget deficit that was financed by printing money.  This led to a rate of inflation of 15 to 25 percent per year.  After Tito, the Communist Party pursued progressively more irrational economic policies. These policies and the breakup of Yugoslavia (Yugoslavia now consists of only Serbia and Montenegro) led to heavier reliance upon printing or otherwise creating money to finance the operation of the government and the socialist economy.  This created the hyperinflation.
By the early 1990s the government used up all of its own hard currency reserves and proceded to loot the hard currency savings of private citizens.  It did this by imposing more and more difficult restrictions on private citizens’ access to their hard currency savings in government banks.

The government operated a network of stores at which goods were supposed to be available at artificially low prices.  In practice these store seldom had anything to sell and goods were only available at free markets where the prices were far above the official prices that goods were supposed to sell at in government stores.  All of the government gasoline stations eventually were closed and gasoline was available only from roadside dealers whose operation consisted of a car parked with a plastic can of gasoline sitting on the hood.  The market price was the equivalent of $8 per gallon. Most car owners gave up driving and relied upon public transportation.  But the Belgrade transit authority (GSP) did not have the funds necessary for keeping its fleet of 1200 buses operating.  Instead it ran fewer than 500 buses.  These buses were overcrowded and the ticket collectors could not get aboard to collect fares.  Thus GSP could not collect fares even though it was desperately short of funds.
Delivery trucks, ambulances, fire trucks and garbage trucks were also short of fuel.  The government announced that gasoline would not be sold to farmers for fall harvests and planting.
Despite the government’s desperate printing of money it still did not have the funds to keep the infrastructure in operation.  Pot holes developed in the streets, elevators stopped functioning, and construction projects were closed down.  The unemployment rate exceeded 30 percent.

The government tried to counter the inflation by imposing price controls.  But when inflation continued, the government price controls made the price producers were getting so ridiculous low that they simply stopped producing.  In October of 1993 the bakers stopped making bread and Belgrade was without bread for a week.  The slaughter houses refused to sell meat to the state stores and this meant meat became unvailable for many sectors of the population.  Other stores closed down for inventory rather than sell their goods at the government mandated prices.  When farmers refused to sell to the government at the artificially low prices the government dictated, government irrationally used hard currency to buy food from foreign sources rather than remove the price controls.  The Ministry of Agriculture also risked creating a famine by selling farmers only 30 percent of the fuel they needed for planting and harvesting.
Later the government tried to curb inflation by requiring stores to file paperwork every time they raised a price.  This meant that many store employees had to devote their time to filling out these government forms.  Instead of curbing inflation this policy actually increased inflation because the stores tended to increase prices by larger increments so they would not have file forms for another price increase so soon.
In October of 1993 they created a new currency unit. One new dinar was worth one million of the “old” dinars.  In effect, the government simply removed six zeroes from the paper money. This, of course, did not stop the inflation.
In November of 1993 the government postponed turning on the heat in the state apartment buildings in which most of the population lived.  The residents reacted to this by using electrical space heaters which were inefficient and overloaded the electrical system.  The government power company then had to order blackouts to conserve electricity.

In a large psychiatric hospital 87 patients died in November of 1994.  The hospital had no heat, there was no food or medicine and the patients were wandering around naked.
Between October 1, 1993 and January 24, 1995 prices increased by 5 quadrillion percent.  This number is a 5 with 15 zeroes after it.  The social structure began to collapse. Thieves robbed hospitals and clinics of scarce pharmaceuticals and then sold them in front of the same places they robbed.  The railway workers went on strike and closed down Yugoslavia’s rail system.
The government set the level of pensions.  The pensions were to be paid at the post office but the government did not give the post offices enough funds to pay these pensions.  The pensioners lined up in long lines outside the post office.  When the post office ran out of state funds to pay the pensions the employees would pay the next pensioner in line whatever money they received when someone came in to mail a letter or package.  With inflation being what it was, the value of the pension would decrease drastically if the pensioners went home and came back the next day.  So they waited in line knowing that the value of their pension payment was decreasing with each minute they had to wait.

Many Yugoslavian businesses refused to take the Yugoslavian currency, and the German Deutsche Mark effectively became the currency of Yugoslavia.  But government organizations, government employees and pensioners still got paid in Yugoslavian dinars so there was still an active exchange in dinars.  On November 12, 1993 the exchange rate was 1 DM = 1 million new dinars.  Thirteen days later the exchange rate was 1 DM = 6.5 million new dinars and by the end of November it was 1 DM = 37 million new dinars.
At the beginning of December the bus workers went on strike because their pay for two weeks was equivalent to only 4 DM when it cost a family of four 230 DM per month to live.  By December 11th the exchange rate was 1 DM = 800 million and on December 15th it was 1 DM = 3.7 billion new dinars.  The average daily rate of inflation was nearly 100 percent. When farmers selling in the free markets refused to sell food for Yugoslavian dinars the government closed down the free markets.  On December 29 the exchange rate was 1 DM = 950 billion new dinars.
About this time there occurred a tragic incident.  As usual, pensioners were waiting in line. Someone passed by the line carrying bags of groceries from the free market.  Two pensioners got so upset at their situation and the sight of someone else with groceries that they had heart attacks and died right there.
At the end of December the exchange rate was 1 DM = 3 trillion dinars and on January 4, 1994 it was 1 DM = 6 trillion dinars.  On January 6th the government declared that the German Deutsche was an official currency of Yugoslavia.  About this time the government announced a NEW “new” Dinar which was equal to 1 billion of the old “new” dinars.  This meant that the exchange rate was 1 DM = 6,000 new new Dinars. By January 11 the exchange rate had reached a level of 1 DM = 80,000 new new Dinars.  On January 13th the rate was 1 DM = 700,000 new new Dinars and six days later it was 1 DM = 10 million new new Dinars.
The telephone bills for the government operated phone system were collected by the postmen.  People postponed paying these bills as much as possible and inflation reduced their real value to next to nothing.  One postman found that after trying to collect on 780 phone bills he got nothing so the next day he stayed home and paid all of the phone bills himself for the equivalent of a few American pennies.
Here is another illustration of the irrationality of the government’s policies:  James Lyon, a journalist, made twenty hours of international telephone calls from Belgrade in December of 1993.  The bill for these calls was 1000 new new dinars and it arrived on January 11th.  At the exchange rate for January 11th of 1 DM = 150,000 dinars it would have cost less than one German pfennig to pay the bill.  But the bill was not due until January 17th and by that time the exchange rate reached 1 DM = 30 million dinars.  Yet the free market value of those twenty hours of international telephone calls was about $5,000.  So despite being strapped for hard currency, the government gave James Lyon $5,000 worth of phone calls essentially for nothing.
It was against the law to refuse to accept personal checks.  Some people wrote personal checks knowing that in the few days it took for the checks to clear, inflation would wipe out as much as 90 percent of the cost of covering those checks.
On January 24, 1994 the government introduced the “super” Dinar equal to 10 million of the new new Dinars.  The Yugoslav government’s official position was that the hyperinflation occurred “because of the unjustly implemented sanctions against the Serbian people and state.” (Watkins)

Further mega Inflation periods, click here.


I will finally leave you with this Christopher Donville Bloomberg report which suggests that gold demand is growing like gangbusters in both India and China.  With the onset on the new futures arena in gold and silver in Hong Kong, the writing is on the wall with respect to the antics of the bankers.

You will enjoy this release courtesy of Bloomberg and Mr Donville.  The article references Goldcorp as to their belief in gold demand.

China Gold Demand May Surpass India This Year, Goldcorp Says

By Christopher Donville - Jul 29, 2011 12:09 AM ET Fri Jul 29 04:09:37 GMT 2011
Demand for physical gold in China may exceed consumption in India by the end of this year, said Chuck Jeannes, chief executive officer of Goldcorp Inc. (G), the world’s No. 2 producer of the metal by market value.
"Three or four years ago there was no one who would have expected Chinese physical demand for gold to surpass India," Jeannes said yesterday in a telephone interview from New York. "Now it looks like that could happen as early as the end of this year. And that’s while Indian demand is increasing."
While global demand for gold is advancing on concerns about financial turmoil in the U.S. and some European countries, consumers in China are buying larger amounts of the metal as an inflation hedge, Jeannes said.Investment demand in China more than doubled in the first quarter to 90.9 metric tons as the nation overtook India to become the largest market for coins and bars, the World Gold Council said in May. India was the largest consumer of gold jewelry last year, according to data compiled by Bloomberg.
Gold reached a record $1,631.20 an ounce on July 27 in New York on concern about a potential U.S. default and is heading for an 11th straight annual increase.Consumer prices in China advanced 6.4 percent in June from a year earlier, the biggest gain since June 2008 and exceeding the government’s target of 4 percent. The central bank has raised interest rates five times and the reserve-requirement ratio 12 times since the start of 2010 to stem inflation.

Deliveries Jump

Deliveries on the Shanghai Gold Exchange jumped 20 percent in the first six months to 483.7 tons, according to Song Yuqin, deputy chairman of the exchange.
Demand for gold in both China and India may help lift the price of the precious metal, said Jeannes, who said he expects gold to advance to $1,700 an ounce by the end of the year.
"I predicted a $1,600 gold price at the beginning of the year, and am happy to see it there now," Jeannes said. "I wouldn’t be surprised to see it move significantly higher by the end of the year."
Gold may be $1,510 an ounce in the December quarter, according to the median of 19 analyst estimates compiled by Bloomberg.
Goldcorp, based in Vancouver, is second by market value after Toronto-based Barrick Gold Corp. (ABX), the world’s largest gold producer.

I hope you all have a wonderful weekend and I will see you on Monday.


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