Gold jumps after Empire State Index plummets

In the Lead: “When, then, Mr. Wen?”

The US dollar picked up a significant amount of steam on Wednesday and its rise helped push precious metals values back down following their tepid attempt at a gain recorded on Tuesday. The main impetus for the greenback’s gains came from the on-going European dawdling on the issue of how to tackle the pesky Greek debt situation. The additional upward driver of the dollar was the lack of notable change being recorded in US inflation levels in the month of May.

At the core of the impasse seen among Europe’s various leaders is the idea (pushed by the ECB and France) that private sector involvement in the resolution of the Greek debt crisis would be desirable (which is something that Germany does not quite seem to be cozying up to). The stalemate depressed the euro and the US currency advanced by 0.70 on the trade-weighted index (reaching the 75.17 level by early this morning). As for Greece, the domestic situation only aggravated this morning as that country’s third and largest general strike brought thousands into the streets in protest of additional austerity plans. Clashes between striking workers and police forces were reported in Athens.

Violent encounters between ordinary folks and police were not confined to Greece however. Reports indicate that “scary” riots in China’s Guangzhou area have put leaders of that country on-edge as they came on the heels of several weeks’ worth of intensification of such unrest. Chinese society currently witnesses untold numbers of protests and riots each year as the ire over government corruption and social inequality appears to be boiling at a disturbingly high level.

Yesterday’s higher-than-anticipated reading of China’s inflation levels (edging ever closer to 6%) only adds fuel to the fires of Chinese discontent and has shown that perhaps Premier Wen’s three-month pause in raising interest rates (following four such hikes since last September) was a gamble that went sour at this point. The markets are all but ruling out an extension of this hiatus by the Chinese government in raising interest rates (it did raise bank margin requirements on Monday) now that inflation temperature readings are about as uncomfortable as the readings being recorded in the social mood temperature in that country.

Speaking of inflation, the US Fed’s efforts to stimulate economic growth while reducing joblessness levels and at the same time averting an increase in inflation to dangerous levels appears to be not only on track (despite way too many vocal critics’ assertions) and could pick up speed in coming months. This, as there is now quasi-official talk that the US central bank might set an explicit inflation target and then go about carrying out policy that results in its’ execution and sustainment.

Inflation targeting has long been an effective policy practiced by several central banks around the world – Canada’s and New Zealand’s among them. Mr. Bernanke and several Fed Presidents have in fact recently argued that such targeting might very well bolster the Fed’s credibility as well as finally silence the crowd that alleges the “imminence of hyperinflation” and the corresponding “death of the US dollar” in the US.

We have pointed to the benefits of so-called “desirable levels of inflation” concept that is taking hold among central banks numerous times in these columns and noted that it was first visible as a concept in Japan, circa 2003. Japan, up to this point anyway, has not quite succeeded in lifting inflation to the BOJ’s “desirable” target but observers feel that the Fed could succeed not only in approaching an as-yet-to-be-set inflation target but also maintain an orbit around it.

While on the subject of the Fed, we must also note that Chairman Bernanke has once again warned US lawmakers not to play with the debt ceiling hand-grenade since the pin has already been pulled and time is running out on options. Mr. Bernanke reminded Congress that not raising the US’ debt limit could have an extremely damaging effect on the country’s economy. August 2 now looms as the deadline by which the US government could arrive to a point where it might not be able to pay its bills. Meanwhile, Messrs. Boehner (Speaker of the House) and Reid (Senate majority leader) continue their WWF-like display of posturing and politicizing the issue.

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