The purchases represent only 3 percent of the University of Texas Investment Management Co.’s $22.3 billion in investment funds, but it indicates how deeply the fund managers are concerned about the global financial future.

With the state’s endowment funds designed to generate a 5.1 percent distribution each year to the University of Texas and Texas A&M University, it’s rare for the investment managers to put large sums of money into a commodity whose value usually grows only through inflation.

“If there’s no inflation, that dollar today in gold a year from now should be worth a dollar, UTIMCO CEO Bruce Zimmerman told the University of Texas board of regents Wednesday. “If there is inflation, then a dollar of gold should be worth a dollar plus inflation,” he said.

“Recently we’ve added 3 percent ... of our portfolio, into gold as a protection against inflation, but even more as a lack of confidence in financial markets due to extraordinary government fiscal and monetary stimulus,” Zimmerman said.

“I wish I could tell you the future looked rosy. Unfortunately, that’s not our view. At best, we believe the future is uncertain.”

Two of Texas’ other large state investment funds, the Teacher Retirement System of Texas and the Permanent School Fund for the public schools, haven’t bought gold recently, according to spokesmen.

Other UTIMCO executives suggested the endowments have begun to recover from the staggering losses of 2008 and early 2009.

UTIMCO manages investments for all UT system schools and for the Permanent University Fund, which provides money to both UT and A&M. Its assets dropped by almost $3 billion, to $20.5 billion, in 2009.

It’s now back up to $22.3 billion.

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Problem bank list hits 775

NEW YORK (CNNMoney.com) -- The government's list of troubled banks climbed to its highest level since 1992 in the first quarter, although the pace of growth moderated, according to a government report published Thursday.

The numbers, published as part of a broader survey on the nation's banking system by the Federal Deposit Insurance Corporation, revealed that the number of banks at risk of failing climbed to 775 during the first quarter.

That figure stood at 702 in the fourth quarter of 2009. A year ago, the number of banks on the FDIC's watch list was 305. Loan losses, particularly in areas like commercial real estate, have hit many lenders hard.

Still, the fact that the number of problem banks rose by just 10% from the end of the year may suggesting that some of the festering troubles in the industry are starting to subside.

That figure stood at 702 in the fourth quarter of 2009. A year ago, the number of banks on the FDIC's watch list was 305. Loan losses, particularly in areas like commercial real estate, have hit many lenders hard.

Still, the fact that the number of problem banks rose by just 10% from the end of the year may suggesting that some of the festering troubles in the industry are starting to subside.

"You can clearly see the rise in problem institutions moderated in the first quarter," said FDIC Chairman Sheila Bair.

Banks that end up on the problem list are considered the most likely to fail. But few of the lenders on the list actually reach the point of failure. On average, just 13% of banks on the FDIC's problem list have been seized and shuttered by regulators.

The names of the banks on the list are never made available to the general public by regulators out of fear that depositors at those institutions may prompt a so-called "run on the bank.

Problems peaking? The FDIC also reported a much-needed increase in its deposit insurance fund, which covers customer deposits when a bank fails.

The fund grew by $145 million during the quarter -- the first increase in two years. It still continues to operate in the red however, reporting a deficit of $20.7 billion. That number also takes into account money the agency set aside in anticipation of future bank failures.

So far this year, 72 banks have failed. Bair said Thursday she expected that number to continue to climb, with smaller institutions among the most likely victims.

She noted however, that the agency was expecting the number of failures to peak at some point this year given that there are signs of improvement in some loan categories. She added that many troubled firms have been helped after locating new sources of capital.

Overall, the report painted a more healthy picture of the banking industry than a year ago.

Banks and other institutions insured by the FDIC collectively earned approximately $18 billion during the quarter. That's the highest profit since the first quarter of 2008 and was a more than three-fold increase from a year ago.

Much of that jump was attributed to big banks like Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500), who returned to profitability in the latest quarter.

Another notable aspect of the latest quarterly report was a decline in the number of institutions insured by the FDIC to below 8,000. That's the first time that's happened in the agency's 76-year history. Two decades ago, the FDIC insured more than 16,000 institutions nationwide.

The latest reading on the health of the industry provided little boost to bank stocks Thursday, however.

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By Rodrigo Campos

NEW YORK (Reuters) - Federal Reserve Chairman Ben Bernanke's dour assessment of the U.S. recovery hit stocks on Wednesday, as his comment that the economy faced "unusually uncertain" prospects rattled investors.

Stocks tumbled after Bernanke acknowledged the labor market's continued weakness while offering few specific options to stimulate lending and investment.

"The market sold off because unfortunately there is no remedy provided in Bernanke's commentary to the rising threat of deflation, the excess capacity in the economy and the malfunctioning of the credit system," said Joe Battipaglia, market strategist at Stifel Nicolaus in Yardley, Pennsylvania.

"We are now giving up on the notion of a standard recovery in the U.S. economy."

The Dow Jones industrial average (DJI:^DJI - News) lost 109.51 points, or 1.07 percent, to 10,120.45. The Standard & Poor's 500 (^SPX - News) fell 13.91 points, or 1.28 percent, to 1,069.57. The Nasdaq Composite (Nasdaq:^IXIC - News) dropped 35.16 points, or 1.58 percent, to 2,187.33.

Bernanke spoke to the Senate Banking Committee in the first of two days of his semiannual testimony to Congress.

His downbeat remarks sapped most of the buying interest even after a spate of strong earnings reports prior to the market's open. Morgan Stanley (NYSE:MS - News) was one of the day's few big winners after it reported stronger-than-expected profit, lifted by new business. Its stock shot up 6.3 percent to $26.80.

Apple Inc (NasdaqGS:AAPL - News) rose 0.9 percent to $254.24 after it posted robust quarterly results, but the company's conservative margin forecast limited gains.

Another financial stock showing strength was Wells Fargo & Co (NYSE:WFC - News), which rose 0.6 percent to $26.06 after rising loan demand helped lift its earnings more than analysts had expected.

After the closing bell, cellphone chip supplier Qualcomm Inc (NasdaqGS:QCOM - News) rose 4 percent to $37.59 on news its quarterly earnings and revenue beat Wall Street's estimates on strong smartphone demand.

Online marketplace eBay Inc (NasdaqGS:EBAY - News) added 4.1 percent to $20.99 in extended-hours trading as it beat Wall Street's quarterly profit estimates, helped by a record performance at its PayPal service.

The benchmark S&P 500 found support during the regular session at its 14-day moving average and held above 1,060, a critical level according to some technical analysts.

Investors have been reluctant to make big commitments in equities due to growing worry about the economic outlook, sparked by disappointing economic data.

"Considering everything the (Fed has) done already, it will be alarming when the time comes that they feel they need to do more," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.

Weighing on the Nasdaq were shares of Internet company Yahoo (NasdaqGS:YHOO - News), down 8.5 percent to $13.91 a day after it posted revenue that missed Wall Street's estimates.

About 8.68 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below last year's estimated daily average of 9.65 billion.

Declining stocks outnumbered advancing ones on the NYSE by a ratio of about 2 to 1, while for every stock that rose on the Nasdaq, about three fell.

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The causes may have been different, but the collapse of the U.S. markets in early 2008 followed the same behavioral patterns as the collapse in 1929. The recovery pattern seen in 2010, is also very similar to that developed in 1930.

Dow Monthly 1929-1930

The crash of the Dow Jones Industrials in 1929 was signaled by the development of a well defined head and shoulder pattern, seen most clearly in its monthly chart. It is a reliable pattern that captures the behavior of investors who are becoming increasingly disillusioned about the future prospects for economic growth.

The downside pattern targets in the 1929 Dow were exceeded with a fall of around 49% before the market recovered in 1930. The 2008 dow pattern targets were also exceeded with a market fall of around 52%.

In 1930, the market developed an inverted head and shoulder rebound pattern recovery that led to a 46% rise in the market.  The Dow rebound in 2009 also developed from an inverted head and shoulder pattern. This was a powerful rise of around 69%.

The historical development of the recovery in the DOW in 1930 ended with a new head and shoulder pattern. This was followed by a rapid market decline that created the first part of a long term double dip pattern. This retreat also exceeded the pattern projection targets with a fall of 28%.

Fast forward to today, we're seeing the Dow is developing a new head and shoulder pattern which indicates a beginning of a bear market. The rally peaks in the Dow appear in January and May and June. The downside projection taken from the neckline of the pattern sets a target at 8,400, or a 25% decline.

A very bearish analysis using the pattern of retreat behavior in 1930 suggests the Dow could retreat to around 7,500 in 2010.

The head and shoulder pattern in the Dow and its downside targets, are invalidated with a sustainable rise above 10,600.  A move above this level does not signal a resumption of the uptrend, but it does reduce the probability of a double dip.

It must be noted that while the behavioral patterns in 1930 and 2010 are similar, they don't necessary point to the same result. But it does sound a warning that markets could continue to stand on the edge of a precipice. 

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com . He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

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The number of N.C. state-chartered banks in trouble increased 74 percent since October, as delinquent loans and declining real estate values took a toll.

Nearly half of North Carolina's 86 state-chartered banks are on N.C. regulators' list of troubled institutions, up 74 percent in less than a year and a grim record that underscores the strain of the multiyear downturn.

The tally of 40 troubled banks compares with 23 in October 2009. Typically, there are only two or three on the list.

Regulators are legally barred from disclosing individual bank names or ratings. Doing so could risk a "run" on deposits, which could prevent banks from working through problems.

However, banks where conditions have deteriorated significantly are made public. In North Carolina, there are seven of those, according to state and federal regulators' records.

"We work hard every day to try to resolve those situations without failure," said N.C. banking commissioner Joseph Smith. "I can't promise you they're all going to work out."

However, he expects the number of failures to come will "be low, if we have any."

Mergers are one way to avert failure. On Friday, a Virginia bank announced plans to buy one of the seven most distressed N.C. banks, The Bank of Currituck. The bank has six branches in the state's northeastern area, including three on the Outer Banks. The deal is expected to close this fall.

Banks, struggling through the national economic crisis, are plagued by plunging real estate values, delinquent loans and weak loan demand. Locally and nationwide, job losses, weak consumer spending and struggling businesses have made it harder for people to repay mortgages, credit cards and other debt.

Harry Davis, an economist for the N.C. Bankers Association, was surprised by the growth in the number of troubled banks. However, like Smith, he doesn't anticipate a large number of failures.

"The reason there are so many problem banks right now isn't because they were poorly managed," said Davis, who is also an Appalachian State University banking professor. "It's because the absolute bottom has fallen out of the economy."

So far, North Carolina has had only two bank failures, both last year in Wilmington. Some states have lost many more banks. Georgia has accounted for 41 of the 288 failures nationwide since Jan. 1, 2008, according to the Federal Deposit Insurance Corp.

On Friday, two S.C. lenders failed, bringing the state's loss tally to three. All have been federally chartered firms, including the Myrtle Beach bank that failed in April. Friday's casualties were First National Bank of The South in Spartanburg and a coastal S.C. thrift, Woodlands Bank, near Hilton Head.

South Carolina, with 49 state-chartered banks, doesn't maintain "a bank watchlist or a list of banks we're concerned about," said Scott Malyerck, the deputy state treasurer. An Observer review of federal regulatory websites found five state-chartered banks identified as operating under greater regulatory scrutiny.

State-chartered banks are typically community, midsize and regional banks. North Carolina's largest is BB&T, based in Winston-Salem, which passed the federal government's worst-case scenario stress test last year and repaid federal bailout dollars.

National firms, such as Bank of America, are not regulated by the state and so could not be on its troubled list.

The most troubled Carolinas banks - those publicly disclosed - are all smaller banks, which are most likely to lend in their immediate area. That means local woes can quickly yield losses. They also are less likely than large banks to have other revenue, such as investment banking fees, to make up for consumer and small business slumps.

Bank of Granite, for example, is heavily concentrated in Caldwell and Catawba counties, which have been hurt by job losses in the furniture and textile industries. The bank, once lauded by Warren Buffett as one of the nation's best-run community banks, has been operating under a so-called "cease-and-desist" order since August 2009. Those regulatory orders typically direct banks to take specific steps to improve their financial health.

Adding to the pressure, new overdraft fee regulations are expected to reduce what can be an important income stream for small banks.

The last time North Carolina had a lot of troubled banks was about 1990, when 18 of 44 were on the state regulators' watch list. That was 41 percent of the state-chartered tally, compared with 47 percent now. Back then, only one bank failed.

What's next for the industry?

UNC Chapel Hill banking professor Lissa Broome has heard bankers and bank directors talking about declining scores this year.

"We've been relatively blessed," Broome said, noting there have been only two failures. "We're going to have to figure out how to fix the troubled banks."

That's a tough assignment because real estate lending, a key income source for smaller banks, isn't likely to bounce back for a year, maybe several. Commissioner Smith's agenda for getting banks back to health includes helping them generate loan demand, raise capital and pursue mergers.

He faces a delicate balance of not overstepping his role as regulator and becoming a consultant.

"We're not in the business of telling people exactly what to do," he said. However, "we want to encourage banks to keep them healthy."

Smith is working with bankers and the state's small business task force to encourage greater use of government-guaranteed loans, such as U.S. Small Business Administration offerings. Those loans, largely backed by the government, can enable banks to spread around scarce dollars.

Smith, like other experts, also says there are deep-pocketed investors seeking bargains.

"Without apology, I've been working with our banks to attract capital into North Carolina," he said.

Those efforts could lead to consolidation, which Smith views with mixed feelings. He wants to maintain a diversity of banking statewide, including community banks, but smaller banks may be more likely investor targets. Smith says the current investment discussions could be "laying the foundations for some regional banks" that would serve the Carolinas and Virginia.

Smith, a lawyer who has been the state's banking commissioner since 2002, empathizes with the plight of bankers today but calls the problems "resolvable." He sees banks strengthening over the next three to four years.

"I persist in the belief that our system has integrity, and people should trust the banks," he said. "We're trying like heck to help them restructure their business plans."

He also cautions bank customers not to panic. N.C. regulators have said no customers lost money in the state's two failures of this downturn, although investor stakes were wiped out.

Depositors are insured up to $250,000, with higher limits for certain business accounts. There's no similar protection for investors.

"If you're over the insurance deposit limits, get under them," Smith said. "If you're under, you're safe."

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By Ambrose Evans-Pritchard, International Business Editor
Published: 8:52PM BST 15 Jul 2010

Rarely before have a few coded words in the minutes of the US Federal Reserve caused such an upheaval in the global currency system, or such a sudden flight from the dollar.

The US workforce has shrunk by a 1m over the past two months as discouraged jobless give up the hunt Photo: AP

by Matt Day of Dow Jones Newswires, July 15, 2010

NEW YORK (Dow Jones)--Gold futures ended with small gains, but were largely unchanged as a set of mixed U.S. and Chinese indicators clouded an already hazy economic picture.

The most actively traded contract, for August delivery, settled up $1.30, at $1,208.30 an ounce on the Comex division of the New York Mercantile Exchange.

Futures closed within $15 of the $1,200 an ounce mark for the tenth consecutive day Thursday, as the uncertain economic outlook has provided little direction for precious metals prices.

"We're in a sort of holding pattern," said Caesar Bryan, portfolio manager of GAMCO's Gold Fund. "The commentators seem to be somewhat cautious about gold, but the price doesn't seem to want to go down."

Futures were supported Thursday by a falling dollar, as the greenback fell to two-month lows against the euro following successful European debt auctions. Gold prices have historically moved inversely to the dollar. Some invest in the metal as an alternative currency or as a hedge against inflation.

Gold prices rose to record highs in May and June as the euro-zone sovereign debt crisis and sluggish U.S. economic recovery sent investors rushing to buy the precious metal, which is thought by some to hold its value better than other assets during economic turmoil. But gold has struggled to find direction as Europe's fiscal situation has shown signs of stabilizing and the U.S. has entered corporate earnings season.

There is "a lack of clarity about what direction the economy is going," said Bart Melek, global commodity strategist with BMO Capital Markets. He said markets didn't find any clarity Thursday, as investors weighed largely disappointing economic data from the U.S. and China against some strong earnings reports.

The most-active silver contract settled higher for a third consecutive day. Comex September silver settled up 7.2 cents, or 0.4%, at $18.362 an ounce.

Nymex October platinum settled up $13.10, or 0.9%, at $1,533.70 an ounce. September palladium rose $1.40, or 0.3%, to $467.20 an ounce. 

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Capital Gold Group CEO, Jonathan Rose, RFC, announced the achievement at their headquarters in Woodland Hills, California, USA, and congratulated the members of the collaborative team responsible for the design and content. "We know that owning real gold is essential to a balanced portfolio, but it is a new concept to most investors. Our goal was to create a website that would help the beginner gain an immediate understanding of real gold and how it can help them protect and preserve their long-term wealth. I believe we have achieved that, and the judges apparently agreed," said Mr. Rose.

Honorees were selected from more than 1,700 entries received from organizations and individuals in more than 40 countries.

Nicknamed the "Stevie(R)" for the Greek word "crowned," the awards will be presented to honorees at a gala dinner on Monday, September 27, 2010, at the Ritz-Carlton Hotel in Istanbul, Turkey.

Organizations all over the world are eligible to compete in The International Business Awards and can enter in any of more than 40 categories from Multinational Company of the Year and Best New Product of the Year to Corporate Social Responsibility Program of the Year and Executive of the Year.

Honorees were determined through two rounds of judging by professionals worldwide. Capital Gold Group's new website, www.StartWithGold.com, was named a Stevie Distinguished Honoree after receiving high scores in the pre-judging and final judging rounds.

"It is obviously a huge honor to have your work recognized by the judges of The International Business Awards," said Brenda Whitman, creator of CGG's marketing communications and member of the collaborative team at Capital Gold Group along with CEO Jonathan Rose. "We are very grateful to the judges for recognizing our joint effort, and I want to acknowledge Mr. Rose for his clear vision and guidance, as well as our partners at Adaptium, a Technology and Branding Company, for their invaluable contribution in design and functionality."

Complete lists of honorees and other details are available at www.stevieawards.com/iba.

Capital Gold Group, Inc. is one of America's leading providers of physical gold and other precious metals for direct delivery and in Precious Metals IRAs. CGG helps individual investors, financial advisors, broker-dealers and institutions across the United States protect the value of their long-term savings and reserve assets by transferring value out of declining or volatile assets into the safety of physical gold.

Capital Gold Group, Inc. is headquartered in Woodland Hills, California, USA, a suburb of Los Angeles, and can be reached at 800-510-9594 or through www.StartWithGold.com.

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US trade deficit widens to $42.3 billion in May, largest gap in 18 months, as imports rise

WASHINGTON (AP) -- The U.S. posted solid gains in exports in May, a positive sign for the economy. And while imports grew even faster, some economists saw that as a hopeful sign because it suggests companies are betting that consumers will spend more in coming months.

The surging value of imports caused the trade deficit to reach an 18-month peak. It rose 4.8 percent to $42.3 billion, the largest deficit since November 2008, the Commerce Department said Tuesday.

U.S. exports of goods and services rose 2.4 percent to $152.3 billion. It was the largest monthly total since September 2008, the month the financial crisis struck with force. Leading the strength in exports were heavy machinery, medical equipment, power generators and commercial planes.

Imports grew even faster. They rose 2.9 percent to $194.5 billion. That gain reflected higher demand for foreign-made cars and consumer goods such as clothing, furniture and electronic appliances. The surge came even though the value of oil imports sank 9.1 percent to $27.6 billion as both the price and the volume of oil shipments declined.

Economists said the widening trade deficit would likely reduce overall growth, as measured by the gross domestic product, in the April-June quarter. But in the long run, analysts hold out hope that the gains in both exports and imports point to higher business investment and consumer spending.

"This will certainly prove supportive to economic growth in the months to come," Martin Schwerdtfeger, an economist at TD Economics, wrote in a research note.

Through May, the U.S. trade deficit is running at an annual rate of about $475 billion, up more than 25 percent from a $374.9 billion deficit for all of 2009. That had been the lowest annual trade gap since 2001, another year when the country was in recession.

The wider May deficit was a surprise to analysts, who had expected the gap to decline slightly because of the fall in oil imports. The larger trade gap caused some economists to trim their forecasts for overall growth in the April-June quarter, though many said they expected less of a drag in coming quarters.

GDP is the value of all goods and services produced in the United States. U.S. exports add to GDP because the products are made in the United States and shipped abroad. By contrast, imports reduce GDP because the government considers imports a substitute for what could have been produced in the United States.

Mike England, an economist at Action Economics, said he believed a widening trade deficit would trim nearly 2 percentage points off GDP in the second quarter. He put second-quarter growth at around 2.2 percent and projected a GDP growth rate of around 2.8 percent in the current July-September quarter. Other private economists are forecasting a smaller reduction from the higher trade deficit: Around 1 percentage point off second quarter GDP.

But many economists saw the rise in imports as a sign of increased business optimism about the future. They said U.S. companies were importing more goods in anticipation of higher consumer spending later in the year.

"The strong increases in both export and import volumes are far more important as a sign of continued growth at home and abroad than the widening trade gap," economists at forecasting firm RDQ Economics wrote in a research note. "It seems to us that the expansion of world trade has a robust momentum."

American manufacturing has been a standout performer during the recovery, benefiting from a global rebound. Those gains risk being diminished by the European debt crisis, which has slowed growth in Europe and raised the value of the dollar 14 percent this year versus the euro. A stronger dollar against the euro makes U.S. goods costlier and less competitive in Europe.

The deficit with the European Union rose 7.5 percent to $6.2 billion as imports rose 3.2 percent, outpacing a 1.9 percent rise in U.S. exports to that region.

The deficit with China rose to $22.3 billion. It was the largest imbalance since last October and a 15.4 percent jump from the April deficit. So far this year, the U.S. deficit with China, the largest with any individual country, is up 10.2 percent from the same period a year ago. That deficit is putting pressure on the Obama administration and Congress to adopt a tougher stance in trade disputes with China.

"The widening trade deficit is not only an alarming trend, but also represents wealth and jobs heading overseas," said Scott Paul, executive director of the Alliance for American Manufacturing, who called on Congress to pass legislation to impose trade sanctions on China for its currency policies.

Last week, the Obama administration declined to cite China in a report to Congress as a country that was unfairly manipulating its currency to gain trade advantages. That disappointed American manufacturers who say the Chinese yuan is undervalued by as much as 40 percent.

On June 19, just before leaders of the Group of 20 major industrial countries met in Toronto, China announced it would allow more flexibility in its currency. But critics note that the yuan has risen in value only slightly since then.

Sen. Charles Schumer, D-N.Y., has vowed to push for an early Senate vote on legislation that would impose sanctions on Chinese imports to the United States if Beijing doesn't accelerate its currency reforms.

Some analysts warned that the widening trade deficit, and its impact on GDP, come at a bad time for the economy, which has been losing momentum.

"The widening trade gap is putting downward pressure on U.S. GDP when it is most vulnerable," said Stuart Hoffman, chief economist at PNC Financial.

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LOS ANGELES, July 6 /PRNewswire/ -- "Gold was named the best-performing major asset of the second quarter after recording a 12% increase," stated Capital Gold Group CEO, Jonathan Rose, RFC.  "As Americans begin to understand the impact of inflation and unsustainable debt both here and abroad, they're converting their low-yielding, long-term funds into gold for protection."

Driven by quantitative easing and Europe's debt crisis, increased money supplies have weakened not only the U.S. dollar, but also the euro and British pound.  Year-to-date figures for gold increases are 13% in the U.S. dollar, 19% in the British pound, and 24% in the euro.  

"Our clients are the vigilantly watching what's happening globally – central bank buying, the bond ratings of various European countries being downgraded, gold production decreasing and physical gold demand increasing.  These reasons and more are all contributing to the repeated record highs we've seen in gold over the last 18 months," Rose said.  

In 2009, foreign central banks were net buyers of gold for the first time since 1997.  India, China, and Russia have been the biggest buyers according to the data released by the World Gold Council on Thursday, each hoping to decrease their risk by diversifying their reserve assets beyond paper currencies.  After the U.S. dollar and the euro, gold is the most popular reserve currency.

In addition to the sovereign debt crisis, an almost  1500 point loss in the DOW in the last two months is driving a record number of investors to Capital Gold Group, Inc., one of American's leading providers of physical gold and other precious metals for both direct delivery and in Precious Metals IRAs.  

However, with gold prices rallying 13% so far in 2010, traders, under pressure to book profits for the first half of 2010, sold off gold positions creating a buying opportunity for new investors as we headed into the Independence Day weekend.

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With stock prices spiraling downward and treasury yields tanking, the market has been sending a clear message this week: The fragile economic recovery is in trouble. But just how bad is the outlook? In the aftermath of a bleak second quarter, experts are still divided about the likelihood of a double-dip recession. What's becoming clearer with each new report, though, is that the economy--even if it doesn't double dip--is steadily losing ground.

The economic souring is, of course, being spearheaded by a familiar cast of characters: An anemic labor market, a skeptical consumer base, a weak housing market, and a global debt crisis that threatens to overwhelm national governments, just to name a few. Further deterioration in even one of these arenas could be enough to trigger a double-dip, which is loosely defined as a period during which a recovery is interrupted by economic contraction, usually in the form of negative GDP growth.  

For some experts, the prospect of a double-dip still seems distant. "I still think it's very unlikely that the economy will fall into a double-dip," says John Ryding, a cofounder of RDQ Economics. "Double-dip fears are quite prevalent right now and have been ... but I find the situation very similar to the last two so-called jobless recoveries where feelings of double-dip constantly bubbled up to the surface but never materialized."

Peter Morici, a professor at the University of Maryland's Robert H. Smith School of Business, is less optimistic. Morici says the likelihood of a double-dip is at least 50 percent. "What's going to happen here is either the economy is not going to collapse, or it's going to avalanche. Because once you start cycling down, then it develops a momentum of itself. And if it goes down a second time, then it becomes very difficult to resuscitate [it]," he says.

For investors, a double-dip, if it materializes, would be a throwback to 2008, with a floundering economy punishing stock returns. Jeff Tjornehoj, Lipper's research manager for the United States and Canada, says the Dow Jones industrial average could touch 9,000 by the close of 2010. "Is it reasonable to expect it? I think it's reasonable to put some odds on it," he says.

With that in mind, U.S. News has examined eight phenomena which, given the right conditions, could send the economy--and the financial markets--reeling.

Unemployment. In the aftermath of a recession that wiped out 8 million jobs, the lackluster labor market has perhaps been the biggest thorn in the side of a sustainable economic recovery. June's job report, which is due out Friday, will likely dampen the mood even further. Notably, the consensus prediction is that the report will indicate the economy shed jobs for the first time since last year. In 2008 and 2009, payrolls contracted in 23 out of the 24 months, but year-to-date through May, each month had seen positive jobs growth. Still, the losses expected in Friday's report will largely stem from a drawdown in the number of census workers employed by the federal government. Since these jobs were always expected to be temporary, their disappearance from the payrolls isn't much of a negative indicator. The bigger problem, economists say, is that even in months in which there was net job creation, the rate of growth has been too slow. Without robust job creation in the coming months, the weak labor market could help thrust the economy into a double-dip recession. "By the end of 2011, we can get into the low teens if things really come apart," Morici says of the unemployment rate.

Housing. In early 2009, President Obama introduced a first-time home buyer tax credit of $8,000 that was later extended to any qualified buyers who signed a sales contract by April 30 of this year. That tax credit, like other stimulus programs, has expired, and it's left many experts wondering whether or not the upsurge in home buying will continue. So far, the numbers don't look promising. Sales of new homes in May fell to an all-time low since numbers were first recorded in 1963. The concern is that now that the tax credit has expired, where will the demand come from? "We have a bit of an unknown ahead," says Keith Gumbinger of HSH.com. "To the extent that that falloff in demand diminishes economic growth, we pull ourselves a little bit closer to what could be the double-dip scenario." Chances are, prospective home buyers rushed to sign contracts before the tax credit deadline, so Gumbinger is concerned that demand could slow over the next few months.

Expiration of stimulus. One of Obama's first acts as president was to authorize a massive stimulus package that cost $787 billion. It included a number of provisions that were intended to help jumpstart the economy. Some economists are concerned that the stimulus plan is the only thing driving GDP growth in the United States. "Absent fiscal and monetary stimulus, there's been no recovery; it's been at best an ['L-shaped'] recovery, not a ['V-shaped'] recovery, except for the sugar rush of stimulus. " says Rob Arnott, chairman of Research Affiliates. "When you give a kid with ADHD a big bowl of M&Ms, they get a sugar rush, and if you take away the bowl of M&Ms, they get a sugar crash. So what we have is an economy on a sugar rush." With many stimulus programs wearing off, there are concerns that the private sector is not ready to support itself yet.

Spending cuts. At last week's G-20 summit, countries from around the world pledged to cut their deficits over time. Everyone agrees that it's a noble goal, but experts are torn over when it's appropriate to begin cutting spending. Many countries in Europe, most notably Greece and Spain, have already begun instituting austerity programs (through a combination of spending cuts and tax hikes) because of their enormous budget deficits. Here in the United States, deficit hawks voted down a bill last week that would have extended unemployment benefits and offered some aid to state and local governments. Politicians in developed nations are caught choosing between cutting spending now to begin to chip away at their massive deficits and risk stunting growth, or authorizing further stimulus to pump life back into the fragile global recovery. "The question is how long is it appropriate for the authorities to hold off before engaging," says Brian Gendreau, market strategist for Financial Network. "It's a danger of getting what you wish for." It's estimated that over the next year, spending cuts throughout the developed world will chop a full percentage point off of GDP growth, according to Gendreau. That's a big number given that many European countries are projected to grow at a very slow rate.

Tax hikes. Most experts say it's not a question of whether taxes will go up in the United States, it's more a question of when. The Bush tax cuts will expire at the end of the year. If they lapse, taxes will go up. Research has shown that there is a 3 to 1 ratio that can be applied to how tax hikes affect GDP growth, according to Arnott. For instance, if taxes go up by 1 percent of GDP, then GDP will fall by 3 percent. When the tax cuts expire, Arnott says, that will be equivalent to a 2 percent jump in taxes as a percentage of GDP. That means GDP growth next year should be 6 percent lower than it would be without the tax hike. "So that is really the big issue that we think creates a catalyst which can make a second dip pretty high odds and reasonably imminent," he says.

Consumer confidence. A recent report by the Conference Board shows that consumer confidence is plummeting. In June, the group's Consumer Confidence Index dropped by nearly 10 points, its second-biggest one-month decrease in a year. The report also shows that consumers' assessments of their current situations and their future job prospects are turning increasingly negative. This has touched off concerns that a skeptical consumer base could stand in the way of a recovery. Still, Lynn Franco, director of the Consumer Research Center at the Conference Board, says she hasn't seen evidence that sentiment is bad enough to spark a double-dip recession. "It doesn't look like it's an indication of a double-dip. It's really just the fact that until consumers see more proof--and that being more growth in the labor market--we're likely to continue at these levels," she says. Also, consumer confidence is by no means easy to measure. Just a few days before the Conference Board released its numbers, a Thomson Reuters/University of Michigan survey indicated that consumers are actually quite content. In stark contrast to the Conference Board's results, this survey showed consumer sentiment at its best levels since January 2008.

Consumer spending. Poor consumer sentiment generally translates into stagnant spending levels. Recent data from the Commerce Department suggests that Americans are dialing back their spending and tucking more money away in savings accounts. Notably, spending levels increased by a meager 0.2 percent in May, and chances are good that more substantial growth is a ways off. "The fact that confidence is so low, the fact that consumers are concerned about the labor market outlook--and combine that with the fact that regarding their incomes, the pessimists still outnumber the optimists--it doesn't suggest that there's going to be any significant pickup in spending in the near term," says Franco. To complicate matters, the stock market's recent plunge may put a further strain on spending. "It might affect people's psychological views, particularly for people in a position of influence in business as to whether they want to expand--or whether consumers spend," says Tjornehoj.

European debt crisis. For the time being, the European Union faces the most imminent sovereign debt threat. Spain, Portugal, and Greece have all seen their debt downgraded in recent months. Greek debt is now valued at "junk" status. To calm fears throughout the world that Greece could potentially default on its debt, members of the European Union have set up a $1 trillion bailout fund. Still, this fund doesn't guarantee that countries like Greece will be able to fix their budget woes, and that has implications for the state of the U.S. economy. "It weighs a lot on the financial system because what we're really talking about is the health of European banks, and our banks are going to have a lot of exposure to them," Tjornehoj says.

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June 30 (Bloomberg) -- U.S. stocks swung between gains and losses, with the Standard & Poor’s 500 Index set for its first quarterly decline in more than a year after Moody’s Investors Service Inc. said it may downgrade Spain’s Aaa credit rating.

Kraft Foods Inc. and Verizon Communications Inc. lost more than 1 percent to lead losses in the Dow Jones Industrial Average. Ford Motor Co. rallied after saying it will pay into a union health-care fund.

The S&P 500 rose 0.1 percent to 1,042.23 at 3:09 p.m. in New York. It has declined 11 percent since March 31, breaking a four-quarter winning streak that drove the benchmark index for U.S. stocks up 47 percent. The Dow gained 0.91 points, or less than 0.1 percent, to 9,871.21. About six stocks advanced for every five that declined on U.S. exchanges.

“Investors still don’t have a major conviction right now,” said John Carey, Boston-based money-manager at Pioneer Investment Management, which oversees more than $200 billion. “Spain has been under scrutiny for quite some time. People have been concerned about a possible credit downgrade for awhile. It’s just a confirmation of what people suspected was the case. However, we still don’t know the full extent of the sovereign debt exposure and how this whole issue is going to be solved.”

Equities had rallied earlier following a report that business activity grew for a ninth month and signs that European lenders are stronger than investors speculated. The European Central Bank said it will lend the region’s banks less money than economists had forecast. The Institute for Supply Management-Chicago Inc.’s business barometer showed manufacturing is overcoming turmoil in financial markets.

Weakness in China

The S&P 500 plunged 3.1 percent yesterday to its lowest level since Oct. 30, on concern over weakening growth in China and a slump in American consumer confidence. The decline pushed the gauge to its cheapest valuation relative to expected company earnings since March 2009, when an 80 percent rally followed.

The ADP data came as investors awaited a Labor Department report July 2 that will show the U.S. lost jobs for the first time this year, reflecting a drop in federal census workers as the population count began to wind down, economists said.

European Bank Loans

U.S. futures rallied in trading before the open of exchanges after the European Central Bank said banks sought 131.9 billion euros ($161.8 billion) in three-month loans as a yearlong facility expires. The figure amounts to about half the level the market was expecting to be borrowed from the central bank, said Jacques Porta, a fund manager at Ofi Patrimoine.

“This amounts to the stress test the U.S. banking industry had last year and we didn’t,” said Paris-based Porta, who oversees about $425 million in stocks. “European banks are one of the weakest links in global equities. Investors were afraid the ECB would confirm this, so it’s good news.”

The S&P 500 is valued at 15.1 times projected profits, according to Bloomberg data, after falling 11 percent this quarter. Shares of raw-material producers, financial and energy companies led the decline, dropping at least 12 percent. Alcoa Inc., Microsoft Corp., and General Electric Co. led the Dow’s losses in the second quarter, declining at least 19 percent.

S&P’s Decline

The index has tumbled 14 percent from this year’s high on April 23 on concern a sovereign-debt crisis in Europe and China’s moves to slow the world’s largest emerging economy will dent global growth.

Stocks are the cheapest relative to bonds in three decades, a sign it’s time to buy, Michael Darda, the chief economist for MKM Partners LLC, said in a phone interview.

“From a risk-reward standpoint these are good entry prices,” said Robert Doll, who helps oversee $3.36 trillion as vice chairman and chief equity strategist at New York-based BlackRock Inc. “I think the risk of a double-dip recession is low.”

The S&P 500 tested levels watched by analysts who study charts and patterns. S&P 500 futures rebounded at 1,035 in May and at 1,038 earlier this month. The S&P 500 fell as low as 1,035.18 in the final hour of trading yesterday, the lowest price since Nov. 3, 2009, according to data compiled by Bloomberg. The S&P 500’s decline in the past two weeks started after the index failed to stay above a level identified by chart analysts as bullish: its average price in the past 200 days.

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By Bradley Davis

Central banks pared their euro holdings in the first quarter of the year and likely cut them even further in the second quarter as the euro-zone sovereign-debt crisis worsened.

The euro's share of global central-bank holdings slipped slightly from the last quarter of 2009, according to data published Wednesday by the International Monetary Fund, indicating the fiscal woes of European nations started to have a small impact on these large investors.

Bloomberg News

"The European debt crisis is going to have [a] major impact" on the second quarter's data, said Win Thin, senior currency strategist at Brown Brothers Harriman in New York.

As the euro-zone has grappled with the debt crisis, the value of the common currency has dropped 15% versus the dollar since the start of 2010. The sharpest drop, though—to the $1.1876 registered in early June—wasn't seen until the second quarter.

The dollar, whose share of global reserve holdings also slipped, should gain at the euro's expense, Mr. Thin said.

Total world-wide foreign-exchange holdings measured $8.295 trillion in the first quarter, up from a revised $8.165 trillion in the fourth quarter, according to preliminary numbers from the IMF. In the first quarter of 2009, total foreign-exchange holdings stood at $7.164 trillion. According to the IMF, 139 countries contributed to the data. The data detailing holdings of individual currencies don't include China's $2.4 trillion in reserves.

Central banks form the backbone of the currencies markets. Their slow and steady shifts out of the dollars they generally receive from trade or commodities exports, and into other currencies, play a big role in determining exchange rates.

Because they invest for the long term, they seek stable, robust currencies and typically tweak holdings at a glacial pace

As the euro zone continues to struggle with budget deficits and the U.S. faces fiscal problems of its own, central banks likely will be searching for other currencies liquid enough in which to park reserve holdings, said Alan Ruskin, global head of currency strategy for RBS Securities in Stamford, Conn.

This likely explains the increase in the data's "other" category, which includes the Canadian and Australian dollars and the Norwegian krone. This category of currencies closely aligned with global growth registered the strongest gains in reserve allocations, jumping to 3.65% in the first quarter of 2010 from 3.12% in the fourth quarter of 2009.

"People are looking for the next set of liquid markets where the fundamentals are more supportive and where you're not dealing with the same degree of sovereign concern," Mr. Ruskin said.

The first-quarter data don't show a rush to diversify out of the euro. The euro's share of reserves declined slightly, with a 27.19% share in the first quarter, from 27.3% in the fourth quarter. Its first-quarter share remains higher than the 26.4% from the fourth quarter of 2008, when the world financial crisis roiled currency markets.

The U.S. dollar accounted for 61.54% of global allocated reserve holdings, a small decrease from its 62.14% share in the fourth quarter.

The data break out only 55.6% of total global reserve holdings into specific currencies, Mr. Thin said, with the remaining 44.4% "unallocated," a category that includes China, the largest holder of reserves, thought to account for about 30% of total global holdings.

Global allocated reserves stood at $4.61 trillion in the first quarter, up from $4.56 trillion in the fourth quarter. The amount of allocated reserves in dollars stood at $2.838 trillion, an increase from $2.836 trillion in the fourth quarter, the IMF data showed.

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NEW YORK (CNNMoney.com) -- Foreign governments have been getting in on the recent gold rush, driven by continued fears about Europe's debt crisis and the pace of the global economic recovery.

Those concerns have been propelling the precious metal to record highs over the past 18 months. In fact, gold posted a new intra-day high Friday, when it reached $1,260.90 an ounce. A day earlier, it reached a fresh record high closing price of $1,248.70 an ounce.

Last year, foreign central banks were net buyers of gold for the first time since 1997. India, China and Russia have been the biggest buyers. And more recently, the Philippines and Kazakhstan jumped into the fray with big purchases of the precious metal during the first quarter, according to data released by the World Gold Council Thursday.

Each country has its own unique reasons, but there are a few broad trends that unite them all, said Natalie Dempster, director of government affairs for the World Gold Council.

Like many individual investors, foreign governments prefer to spread their wealth around to decrease their risk.

The U.S. dollar is typically the main reserve asset because it's considered to be more stable than other holdings, while the euro comes in as the second most popular reserve currency. But gold is not far behind. The precious metal plays an important role as a hedge against inflation, which could devalue paper currencies.

Unlike paper currencies, gold has a tangible value and that value is not dependent on any one country's economic policies.

When the financial crisis drove down the dollar's value in 2009, and Europe's debt woes pushed the euro to fresh four-year lows earlier this month, investors and foreign central banks flocked to safe-haven assets like gold.

Add rising deficits in both Europe and the United States to the mix, and currencies have become increasingly questionable assets, said Jeffrey Nichols, managing director of American Precious Metals Advisors and senior economic advisor to Rosland Capital.

That's why it's no surprise that foreign central banks overall have turned from sellers into buyers of gold in the last year, he said.

Russia and Kazakhstan: As far as public records show, Russia appears to be the largest buyer of gold among central banks so far this year. In the first quarter of 2010, Russia's central bank increased its gold reserves by 26.6 metric tonnes, or about $1.2 billion at today's price, according to World Gold Council data. That's in addition to the 117.63 tonnes that Russia added in 2009.

Russia has been adding to its gold reserves steadily for more than three years, partly through buying its own domestic mine production. It considers gold both a symbol of prestige as well as a way to bolster the country's credit worthiness, Nichols said.

Kazakhstan, the third largest buyer so far in 2010, has a similar strategy, although at a much lesser level. The former Soviet-controlled country bought 3.1 tonnes, or $137 million, of the precious metal in the first quarter.

Philippines: After Russia, the Philippines falls a distant second as a buyer, after purchasing 9.6 tonnes, or about $424 million, of gold earlier this year.

The Philippines also buys its domestic production as a way of supporting local industry and as an inflation hedge, but its reserves usually fluctuate more than Russia's because the country often sells it at a later date on the open market.

India: While India has yet to publicly announce any major gold buys this year, the country bought a massive 200 tonnes, or what amounts to about $8.8 billion at current prices, from the International Monetary Fund in November.

The move, which multiplied India's reserves by 55%, was seen as a way for the country to diversify its reserves and reinforce the perception among Indian consumers that the metal is a reliable and safe asset, the World Gold Council said.

China: China is considered a stealth buyer of gold, said Boris Schlossberg, director of currency research at Global Forex Trading. As the world's largest producer of the metal, China often buys gold from its own mines and doesn't report those sales publicly. But in April 2009, China did admit to having added 454 tonnes, or a 76% increase, to its reserves since 2003.

Analysts suspect the country is continuing to buy gold and could in fact, be the world's largest buyer consistently. It simply doesn't reveal it's pro-gold stance proudly, however, because China is also the world's largest holder of U.S. Treasurys.

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