Sunday, May 13th, 2012
Gold Market Radar (May 14, 2012)
For the week, spot gold closed at $1,579.48 down $62.74 per ounce, or 3.82 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 3.81 percent. The U.S. Trade-Weighted Dollar Index gained 1.0 percent for the week.
- The Indian government caved to pressure from local gold retailers which had been on a 21-day strike and decided to withdraw the levy of 1 percent excise duty that it had imposed. With this move gold is set to become cheaper for consumers in India and traders expect a revival in demand in the coming crucial months. Particularly, June and July are the important months for weddings and also for rural India as the monsoon rolls in across the country and cash crops are harvested. Importantly, the government has also decided to raise the threshold limit for cash purchases of jewelry whereby purchases below this level do not require the buyer to cite their income tax related PAN number.
- Another very positive news story was that mainland China’s gold imports from Hong Kong surged more than six-fold in the first quarter. Imports were 135.53 tons between January and March. Demand has climbed in the world’s second-largest economy as rising incomes and curbs on property speculation boosted purchases. The country is already the world’s top consumer of copper and biggest producer of steel. The purchases through Hong Kong may signal that the mainland is accumulating reserves.
- China’s rapid economic development has completely changed the market for gold over the years. Consumption was 203.1 tons in 2001 and, by 2011 the figure had more than tripled to 769.8 tons according to the World Gold Council. Rising incomes in China have boosted purchasing power and citizens are turning to the precious metal as an investment and a store of value, especially given the weakness of the country’s real estate sector. There is also a strong sentiment for China to increase its official holdings in gold: A senior official was recently quoted by local newspapers as saying that China should further diversify its foreign exchange portfolio and make more gold purchases when the price slips.
- On Osisko Mining, Mike Curran, gold mining analyst at RBC, noted in his summary of quarterly results that investors were waiting for the Malartic Mine to ramp up, not heat up. It was a tough day for Osisko as the overnight fire at their mill will likely curtail the processing of ore for the next three weeks and the company’s operating results were weak. Osisko missed its guidance on both gold production and anticipated ore grades to be put through the mill.
- Calculating the all in costs to produce an ounce of gold by taking net income minus the revenue and dividing by the number of ounces produced showed Osisko’s all in cost to produce an ounce of gold was $1,399 and this number was even higher than the average costs in 2011 of $1,366. The company ended the quarter with $144 million of cash and equivalents but one analyst, Daniel Earle of TD Securities, noted the balance sheets looks tight. Given the obvious risks the analyst expects the company’s cash balance to decline to $47 million in the third quarter with $245 million in long-term debt.
- Gold Resource Corporation released earnings and held its conference call on Friday. Unfortunately, investors were only allowed to email in their questions to the company and management was able to pick and choose what questions they were willing to address.
- A couple weeks back we mentioned that Bob Hoye of Institutional Advisors published a report noting that gold’s consolidation was approaching an end and that the price performance of gold mining shares relative to the price of gold was at extremes only seen five times in the past 100 years. On Wednesday, May 9, we had a strong divergence in the price of gold, down 1 percent, while the mining shares were up close to 2 percent on good volume setting up a bullish divergence. This rally may have been the first wave of short covering by some faster money players. As TD Securities noted at the start of the week, May is historically the second strongest month of the year for gold equities with an average return of 4.6 percent and the probability of a positive return is 75 percent. Institutional Advisor reported on Friday that the last three bullish divergences occurred in July 2010, January 2011, and June 2011 and that within the next four months gold had rallied greater than 20 percent with silver putting in even stronger gains.
- The Shanghai Futures Exchange started trading silver futures this week. Liberalization of precious metal trading in China has been a big driver of gold over the last decade and China has been a net importer of silver for investment and fabrication demand. Given that silver is a much smaller market than gold any pick up in demand could prove to have quite a substantial price impact. China is a country which has a long association with the metal, having had a silver-related currency standard up until the 1930s.
- With the contraction of gold equities valuations back down to 2009 levels, they are essentially reflecting gold price closer to $950, yet the price of gold is close to 70 percent higher. Central bank buying in March was very strong and China’s demand for gold is showing signs of continued strength in its import numbers. However, U.S. investors are fearful that if financial markets swoon such as in 2008 they will see a sell off in commodities. Don Coxe, a well known financial historian, reminded investors on Friday that unlike today, in 2008 when Lehman went bankrupt it had a portfolio of $65 billion in commodities that J.P. Morgan aggressively liquidated.
- In the broader markets, companies that are hitting earnings expectations are getting pummeled if there is any hint of a weaker outlook. Investors are obviously concerned with the pending increase in tax rates and scripted cuts in spending that are set to take place in 2013. Some estimate the changes could trim 4 percent off GDP.
- Europe is still a mess, socially, politically, economically, and fiscally. Its long-term refinancing operations (LTRO) program bought banks some time but also locked the banks’ balance sheets to the performance of the government bonds they were encouraged to buy. The public is not happy with austerity and in less than two years, eight or so European leaders or ruling parties have been forced out of office. Youth unemployment is big problem in Europe and even college graduates in the U.S. are having difficulty getting full time jobs a year after graduation.
- Globally, since the start of the recession which took hold in 2008, the total value of government debt backed with AAA-ratings has declined from over a 50 percent share of total outstanding sovereign credit to less than 10 percent.
Tags: Cash Crops, Cash Purchases, Dollar Index, Excise Duty, Gold Imports, Gold Market, Gold Miners, Gold Retailers, gold stocks, Mainland China, Market Radar, Nyse Arca, Pan Number, Property Speculation, Rapid Economic Development, Real Estate Sector, S Real Estate, Spot Gold, Threshold Limit, World Gold Council
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Sunday, April 15th, 2012
Gold Market Radar (April 16, 2012)
For the week, spot gold closed at $1,657.35 up $21.12 per ounce, or 1.6 percent from Thursday’s close before Good Friday. Gold stocks, as measured by the NYSE Arca Golds BUGS Index, rose 2.7 percent. The U.S. Trade-Weighted Dollar Index declined 0.3 percent for the week.
- On again, off again speculation that the Federal Reserve may need to intervene with more stimulus to shore up the economy led gold to a relatively good week. Both China and the U.S. posted weaker economic data. China’s trade surplus came in at $5.35 billion, substantially greater than the median projection of a $3.15 billion deficit. The weak numbers raised concerns that the world’s second-largest economy faces a deeper slowdown than originally forecasted. In the U.S., nonfarm payrolls rose 120,000 in March, well below market forecasts and a possible sign that momentum in the job market is slowing.
- Randgold Resources jumped 9 percent on Monday on news that a political settlement appears to have been brokered in Mali. Leaders of the recent coup have come to an agreement with the military junta to reinstate the country’s constitution.
- In other positive news, jewelers in India called off their three-week strike over the prior weekend. The Indian government said it would consider scrapping a budget proposal to levy an excise duty on unbranded jewelry. Industry representatives said that if the tax rollback does not materialize the strike would resume on May 11.
- Technically, silver prices are not following through with the same price strength as gold. Analysts cite record-high mine supply and demand concerns. In addition, the huge price volatility last year, when the metal crashed 35 percent in a matter of days on two occasions, has dampened silver’s appeal to investors as a cheaper alternative to gold.
- For the second time since February, the CME Group, the largest operator of futures exchanges in the U.S., announced a cut in margin requirements for COMEX silver futures in an attempt to boost liquidity. However, analysts note that margins are still higher than they were last year and it would take some significant interest from investors to drive the price higher.
- The latest Gold Fields Mineral Services (GFMS) report noted that gold prices are expected to be driven by eurozone debt concerns and the prospects of additional monetary stimulus. In their view, gold has the potential to breach the $2,000 per ounce level in 2013. The report also said total cash costs increased 15 percent in 2011 to $643 per ounce, up from $560 per ounce in 2010. Declining mine grades are the largest contributing factor to the increase, contributing $28 of the $83 per ounce net increase. All-in costs (including depreciation as well as general and administrative charges) increased 22 percent.
- Positive economic signs and the rollover of bad European debts through their long-term refinancing operations (LTRO) program pushed the S&P 500 to good returns in the first quarter. However, it is unlikely the recent bright spots are enough for the world’s two great fiat currencies to regain trust from Asia, Russia and the Persian Gulf states. Short-term liquidity issues have been addressed but unsustainable levels of sovereign debt still remain. Western central banks will likely have to keep printing money for some time and those countries with surpluses will have to find a suitable place to park their growing foreign reserves. Currency devaluation has historically been a major policy tool for extinguishing national debt but it also leads to a higher gold price.
- Russia has publicly stated it is raising its gold weighting to 10 percent of its reserves. China, which would like to raise the renminbi to reserve currency status, is eying large gold reserves as well. With official gold reserves sitting at 1,054 tons, China has a long way to go before it can catch up to the 8,000 tons of gold held by the U.S. and the 11,000 tons of gold held by the eurozone. China would likely need to boost the country’s gold holdings in a significant way in order to make its currency competitive in world markets.
- HSBC gold analyst James Steel says that the marginal cost for mining gold, when miners leave low-grade ore in the ground, is about $1,450. Despite a four-fold increase in investment, a lack of great new gold discoveries has made peak gold production a closer reality than peak oil. With world gold output stuck at 2,700 tons for a decade, this creates a natural floor, of sorts, for gold prices.
- David Rosenberg had some interesting comments on incomes and prospects for a strong recovery in the household sector. The sector has recently been going through the healing process, but is still far from healed. Rosenberg also notes that current real disposable incomes are actually lower than in May 2008 on a per capita basis, $32,600 today versus $34,631 then. Rosenberg says, “You can see why it is that for most people, it is very difficult to talk about economic recovery when real personal incomes have done so poorly and for so long.”
- A recent paper from the African Development Bank (ADB) titled “Gold Mining in Africa: Maximizing Economic Returns for Countries,” points out that gold mining is significant activity in at least 34 of the continent’s 54 countries. The paper notes Africa’s annual gold production is 480 metric tons, 20 percent of annual global output, but concession agreements signed by the governments are unfair. This particularly applies to the royalty rate stated in these agreements. Despite spiraling prices for precious metals, the ADB believes Africa is not cashing in enough from its large gold resources. These agreements severely limit gains from gold mining activity in gold producing countries. However, only a limited number of African countries have actually taken equity stakes in the mines within their borders. It’s worth pointing out that one can only gain access to market returns by risking capital to invest.
Tags: Budget Proposal, Comex Silver, Dollar Index, Excise Duty, Futures Exchanges, Gold Market, gold stocks, Jewelry Industry, Margin Requirements, Market Forecasts, Market Radar, Military Junta, Nonfarm Payrolls, Nyse Arca, Political Settlement, Price Strength, Price Volatility, Randgold Resources, Silver Prices, Spot Gold, Tax Rollback, Two Occasions
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Sunday, April 8th, 2012
Managing Expectations: Why Gold Should Thrive
By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors
It’s been a challenging week for gold investors. As I often say, investing, like life, is about managing expectations. Over the past 11 years during gold’s spectacular bull run, investors should remember that price action can go both ways. What helps is to look at the historical rise and fall of gold. For example, looking at the past decade of one-day 5 percent drops in gold, you can see that this event is pretty rare. In 2006, gold dropped more than 5 percent in a day only two times. In 2008, there were three such events. Another one occurred at the end of this February.
The 1.7 percent drop experienced over the past month shouldn’t surprise gold investors given the seasonal pattern for gold. Whereas gold rises nearly 2 percent in both January and February, over the past 11 years, it’s been a non-event for gold to correct in March.
In addition, it’s a good reminder that bullion has historically been less volatile than the stock market: the 12-month rolling volatility over the past 10 years for gold was 13 percent. For the S&P 500 Index, the 12-month rolling volatility over the same period was 19 percent.
This March, there seemed to be one main driver eight thousand miles away negatively affecting gold prices. I often say that government policy is a precursor to change, and fiscal government policy strongly affected the Love Trade in India last month. To trim its current account deficit, India’s finance minister proposed doubling the customs tax on the precious metal. It was soon reported that jewelers closed shops in protest.
As a result, gold imports into the world’s largest gold market fell 55 percent.
It’s not the customs tax that has the gold shops boycotting, says UBS Investment Research firm. Jewelers’ “prime gripe is with the new 1 percent excise duty on unbranded jewelry” leading to a greater recording of gold transactions, which means more regulation and red tape. What’s so egregious to jewelers is the excise tax will be retroactive so those shop owners holding old gold stocks will have to pay duty on those as well, says UBS.
I believe this is only a temporary sell-off for India. As I often discuss in my presentations, traditional festivals and holidays drive gold demand in India because of their strong history with gold. With their love for the yellow metal, Indians hold the belief that gold “will perpetually rise,” although there are certain buyers that wait for a “psychologically important $1,600 level,” keeping in mind the strength of the rupee, says UBS.
While the seasonal Love Trade period for gold generally falls between August and February, an important holiday is coming up which has historically driven higher sales of gold. Akshaya Tritiya festival occurs on April 24 this year. This is an important occasion for Hindus, celebrated annually in late April or early May, depending on the Hindu calendar. Buying and wearing of gold jewelry is important on this day, as UBS says it’s one of the two “biggest gold buying events” in the Hindu calendar. The second event is Dhanteras, which occurs during the peak seasonality period for the yellow metal.
How important is this festival for the gold market? UBS analyzed the buying data from India last year when Indians celebrated Akshaya Tritiya festival on May 6. It found that “physical sales to India peaked four days beforehand.” Also, “sales were consistently above average for 13 working days” before the festival because local banks and jewelers restocked their inventory.
Two factors need to change to help sales in India this year, warns UBS. The firm says the jewelers’ strike needs to end, and, according to one local who talked with UBS, it would help gold sales if the price of oil would reverse—this would “relieve some of the current account pressure and perhaps allow for more flexibility with regard to gold imports.”
What won’t change over the long-term is Indians’ gold-buying behavior: Indians “have an extensive cultural tie to gold” and this “is not changing,” says UBS.
Fear Trade for Gold is Still Alive
The world has been experiencing the largest liquidity boom, as the central banks’ seven-month easing binge continues. Over this time, ISI counted 127 different stimulative policies, such as printing money, lowering interest rates and other easing measures, taken by governments around the world.
The policy shifts helped carry the equity market a long way from the low on March 9, 2009. At the time, we noted in a special Investor Alert that there were significant government policy changes that signaled the market had hit rock bottom. According to USA Today, from the 2009 bottom through the end of the first quarter, the S&P 500 Index increased more than 100 percent. No wonder U.S. equity investors are singing.
However, the side effect of the abundance of printing by the central banks in the U.S., Europe, Japan and England has bloated balance sheets amounting to nearly $9 trillion. This is double the amount that it was three and a half years ago, says Ian McAvity in his recent Deliberations on World Markets, as the printing presses have pumped our monetary system full of liquidity. This is merely “kicking the can down the road,” as central banks will have to deal with the overhang later, says Ian.
This has historically been a strong positive catalyst for gold. An analyst at the Economics and Finance Fanatic blog put together a visual that illustrates just how strong of a catalyst the nonstop printing of money is. The chart compares the U.S. adjusted monetary base since 1990 with the “surging” price of gold. As you can see below, the amount of money in the U.S. system climbed to extraordinary heights since 2008, with gold following the same path.
The economic challenges of the U.S. and eurozone “promise to be a prolonged one with sluggish economic growth,” says the blog, and easy monetary policies will likely be the remedy for awhile. I believe this provides a strong case that any pullback in the gold price appears to be a buying opportunity. Ian says, “Tax uncertainty, festering toxic debt that’s out there but out of sight and impossible debt service ability looming? I’ll stick with gold and sleep better at night.”
U.S. investors might sleep better at night with an allocation to gold in the face of continued negative real interest rates. The chart below shows how gold has historically climbed when interest rates fell below zero percent, with a “strong correlation from 1977-84, and again recently when rates turned negative in early 2008,” according to Desjardins Capital Markets.
The U.S. has not made any cuts in entitlements which make up 60 percent of the deficit. There have been no changes in fiscal policy and no change in current monetary policy. Ian McAvity says these factors together make “the most powerful argument in favor of converting that paper into gold.”
What would have to change to make me turn bearish? I believe the following three actions would need to be taken:
- Real interest rates would have to increase 2 percent above the CPI in the U.S. and Europe
- GDP per capita in Chindia would need to fall, negatively affecting the Love Trade
- Substantial fiscal cuts would need to be made in entitlement programs in the U.S. and Europe
I believe there is a low probability of these events occurring any time soon, so in this environment, gold should thrive.
Tags: Bull Run, Bullion, Chief Investment Officer, China, Current Account Deficit, Driver Eight, Excise Duty, Finance Minister, Frank Holmes, Gold, Gold Imports, Gold Investors, Gold Market, Gold Prices, Government Policy, India, Investment Research, Managing Expectations, Precious Metal, Seasonal Pattern, Thousand Miles, U S Global Investors, Volatility
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Friday, February 26th, 2010
Markets give thumbs up to Budget 2010
Courtesy of Equitymaster.com
The Union Budget 2010 brought some cheers to the Indian markets, which had been reeling under fear for the past few days with respect to the government’s stimulus withdrawal. However, the Finance Minister did not tinker much with the stimulus but for partially rolling back some excise duty benefits. However, much of this seemed in line with what the markets had been expecting. Anyways, realty, auto, and metals stocks led today’s gains.
The BSE Sensex and NSE Nifty closed with gains of around 175 points (1.1%) and 65 points (1.4%) respectively. Mid and small cap stocks also closed with gains. The BSE Midcap and BSE Smallcap indices closed higher by 1.5% and 1.1% respectively. On the broader BSE, one stock lost today for every two that closed in the positive.
Among other key Asian markets, while China closed marginally in the red, Hong Kong (up 1%) and Japan (up 0.2%) were among the gainers. European markets have opened today on a positive note.
Apart from just a small rollback of the stimulus, one of the key reasons for today’s gains was the clear roadmap announced by the government with respect to reducing its fiscal deficit over the next 3-4 years. As against an estimated figure of 6.9% and 5.5% of GDP in FY10 and FY11 respectively, the rolling targets for fiscal deficit are pegged at 4.8% and 4.1% for FY12 and FY13 respectively. Also, as the Budget notes, taking into account the various other financing items for fiscal deficit, the actual net market borrowing of the government in FY11 would be around Rs 3,450 bn, which would leave enough space to meet the credit needs of the private sector.
Auto stocks gained strongly today, Key gainers here included Bajaj Auto, Tata Motors, and Ashok Leyland. A lower than expected rollback of excise duty seemingly enthused investors in these stocks. Then there was the lowering of personal income taxes that we believe might foster increased spending by consumers on discretionary items like automobiles. But for the increase in the ad valorem component of excise duty on large cars and multi-utility vehicles by 2% points to 22%, today’s was a positive budget for the auto sector as a whole. We also believe that the extension of R&D benefits will encourage more investments in the sector and will make it competitive in the long run.
Realty stocks were amongst the biggest gainers on the broader markets today. The BSE-realty index closed up by almost 3%. Key gainers here included HDIL, DLF, and Unitech. These gains were on the back of some relief provided by the Budget to real estate companies. As the Finance Minister announced, with a view to provide one time interim relief to the housing and real estate sector that was impacted by the global recession, the government has allowed pending projects to be completed within a period of five years instead of four years for claiming a deduction on their profits. The Budget has also proposed to relax the norms for built-up area of shops and other commercial establishments in housing projects to enable basic facilities for their residents. The realty firms couldn’t have asked for more!
This is given that these companies have already been amongst the biggest beneficiaries of the government’s fiscal stimulus programme that has helped them restructure their strained balance sheets. The interesting thing is that these realty companies have come back to their greedy ways by not lowering property prices by keeping them artificially inflated through hoarding. Some like Deepak Parekh of HDFC have come out heavily on these companies’ tactics. But now, given that the Finance Minister has allowed them some more time to relax, real estate companies and their investors are making merry.
Key India Budget Highlights
Courtesy of L&T Mutual Funds, India, here are the budgetary highlights for FY11.
- Total expenditure proposed for FY11 stands at Rs.1108749 cr (US$239.6-billion) up by 8.6%. Plan expenditure up by 15%. Non plan expenditure up by 6%.Fiscal Deficit estimated at 5.5% for FY11 (from 6.9%FY10), 4.8% in FY12 and 4.1% in FY13.Direct tax proposals in form of lower income tax slabs would lead to a loss of Rs.26,000cr. (US$5.6-billion)
- Indirect tax proposals would lead to a gain of Rs.46,500 cr. (US$9.8-billion)
- Total tax revenue and other receipts would lead to Revenue Gain of Rs.20,500cr. (US$4.4-billion)
- Corporate Tax: MAT increased from 15% to 18%
- Surcharge on corporate tax reduced from 10% to 7.5%.
- Need to review stimulus, move to fiscal prudence, says FM
- Partial withdrawal of fiscal stimulus measures through roll back of excise duties
- Excise duty on all non oil products increased from 8% to 10%.
- GST and DTC to be introduced together by April 2011.
- Service Tax rate retained at 10%
- Subsidy to oil companies to be given in cash and included in budgetary estimates.
- Subsidy on Fertilisers to be reduced.
- Divestment receipts expected to be more than Rs.25,000 cr (US$5.39375-billion) in FY10. Disinvestment targets for FY11 to the tune of Rs. 40000 crs. (US$8.63-billion)
- To provide Rs 165 bln (US$3.58-billion) to PSU (Public Sector Undertaking, or State-run) banks
- Infrastructure spending pegged at Rs. 1,73,552 crs (US$37.4-billion), which is 46% of plan outlay.
- Net borrowing for FY11 set at Rs 3,45,000 cr (US$74.4-billion) ; Gross borrowing at Rs 4,57,000 cr (US$98.6-billion)
- Hike in excise duty has been on expected lines.
- Increase in MAT would impact some corporates.
- Increase in tax slabs for individuals will give more in hand of consumers, key positive as it would enhance consumption.
- Hike in petrol prices by ~Rs. 2.50 on account of increase in duties would lead to inflation spike in near term.
- Overall we believe budget would push higher consumption and over period private capex would pick up. Economy would thrive without the requirement of large government expenditure over medium term.
Fixed Income View
- Net borrowing number of Rs 3.45 lakh crores (US$74.4-billion) a reasonable number. Bond markets expected to take it positively.
- However divestment and 3G auction revenue estimates on higher side for FY11. There could be risk of not meeting these targets as planned. Risk of fiscal deficit slippage (increasing from budgeted 5.5%) exists.
- Discontinuing practice of issuing bonds for oil and fertilizer companies and giving cash a positive fiscal consolidation measure. Will reduce interest burden in the long run.
- Fuel price hike due to increase in duties lead to inflationary effect and negative for bonds
- Continued support to PSU banks through capital infusion to help maintain their credit quality for issuance of CDs and Bonds.
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