Posts Tagged ‘Gold Bugs’

Which Way Will the Pendulum Swing for Gold?

Saturday, August 11th, 2012

Which Way Will the Pendulum Swing for Gold?

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

One of the most fascinating aspects when watching a sporting event like the Olympics is the historical statistics highlighting the tremendous advances in athleticism over the years. In the spirit of the events this summer, BTN Research compared gold’s advancement from the beginning of the games in Beijing to the London Olympics.

On the day of China’s auspicious opening ceremonies on August 8, 2008, gold was $857.80 an ounce. By the time the world watched the opening ceremonies of the 2012 London Summer Olympic Games, the precious metal had climbed to $1,617.90 an ounce. This represents a remarkable increase of 89 percent in four years.

Athletes are often asked if they can keep improving their outstanding performance; I’m asked if gold can continue climbing. As I like to remind investors, gold isn’t always on an upward path. When looking at the average monthly returns over the past decade, you can see that short-term setbacks are normal throughout the year. The yellow metal has historically declined in value in March and June; gold stocks see much greater fluctuations from month-to-month.

So while gold has its monthly ups and downs, you can see that, on a historical basis, we have arrived at gold’s peak performance period of the year. Based on 10 years of data, gold bullion has historically increased 2 percent in August and 4 percent in September.

Gold stocks, as measured by the NYSE Arca Gold BUGS Index (HUI), have historically performed even better in these two months. Over the past 10 years, gold companies have climbed 8 percent and almost 3 percent in August and September, respectively.

Since the beginning of August, gold and gold stocks are already following their historical pattern, as we’ve seen just a hint of an increase in the price of gold, but a significant bounce in gold companies.

Spot gold has only climbed 0.4 percent, compared to the HUI, which has increased about 5 percent since August 1. This boost in gold stocks helps to close the gap between gold companies and their underlying commodity, as I discussed last week. I indicated that the disparities meant that the cheapest resources are not found in the ground—they’re listed.

Since then, it was announced that Endeavor Mining would purchase Canada’s Avion Gold Corporation in an effort to consolidate the West African gold space. This acquisition represented a 56.4 percent premium to the trading day prior to the announcement and illustrates how extremely undervalued gold companies have been.

“Beaten-down gold stocks are an incredible fundamental bargain,” says Adam Hamilton from Zeal Intelligence. His research indicates that gold companies are “super-cheap” relative to not only the price of gold, but also on a price-to-earnings basis. When he weighted the price-to-earnings ratios of the stocks in the HUI by market capitalization, he found that gold stocks are at the lowest levels than they have been during gold’s entire bull market. Gold companies are also cheaper than the overall stock market, as “a dollar of gold-stock profits costs investors $12, but the same dollar is going for $18 in the general markets,” according to Zeal’s research.

Hamilton says, “Like the rest of the markets, sentiment flows and ebbs in the gold stocks. Sometimes investors love them and bid them up to dizzying heights as greed reigns. But then the great sentiment pendulum starts swinging towards the opposite extreme of fear. And gold stocks are crushed to ridiculous unsustainable lows like we saw last month. Realize neither excessive greed nor excessive fear can persist for long.”

There is a caveat for gold stock investors in the short-term, though. As Investor Alert readers know, I frequently look at presidential cycle trends to determine where stocks may be heading. From 1984 through 2008, the performance of the Philadelphia Stock Exchange Gold and Silver Index (XAU) has historically been weak during the year of a presidential election. The silver lining is that the year following the election, the XAU has historically bounced back.

So which way will the pendulum swing this fall for gold and gold stocks? The market may wait to see the policy actions by the Federal Reserve and the European Central Bank. Credit Suisse thinks it will likely “be critical in determining the path of the U.S. dollar and equities, and by association, gold.”

If the market sees progress on structural and fiscal reforms from Europe and additional easing from the Fed, these actions would have the “potential to be powerfully bullish for equities” and might “drive renewed investor enthusiasm for gold that could see the metal trade up to and beyond the $1,700 mark,” says Credit Suisse.

 

Copyright © U.S. Global Investors

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Natural Gas Tightens on Japan’s Nuke Shutdown and U.S. Utilities Switch from Coal (May 28, 2012)

Sunday, May 27th, 2012

 

Energy and Natural Resources Market Radar (May 28, 2012)

Commodity Scorecard

Strengths

  • Global mining equities recovered from last week’s sell off with an average gain of 6.5 percent in the NYSE Arca Gold BUGS (HUI) and S&P/TSX Metals & Mining indices.
  • The global LNG market has tightened considerably since Japan’s nuclear industry was shut down in 2011 after a serious nuclear power accident.  Japan’s LNG imports grew 14.9 percent to 6.91 million tons in April from a year earlier according to the finance ministry.

Will Truckers Ditch Diesel?

Weaknesses

  • Natural gas futures closed lower this week after a 6-week rally.  Weekly inventory data from the Department of Energy knocked down prompt futures by about 18 cents per mmbtu from the prior week to close under $2.58 per mmbtu.
  • Steel output in China declined in April from a record as buyers sought to defer imports of raw materials such as iron ore and coking coal, Bloomberg reported. China’s crude-steel production declined 1.6 percent to 60.57 million metric tons after soaring to a record 61.58 million tons in March, the World Steel Association said.

Opportunities

  • The shale gas boom in the U.S. has led to a big drop in the country’s carbon emissions, as power generators switch from coal to cheap gas.  According to the International Energy Agency, U.S. energy-related emissions of carbon dioxide, the main greenhouse gas fell by 450 million tons over the past five years.
  • The Financial Times reported that China is moving to accelerate investment in major infrastructure projects. The official China Securities Journal said that the government was stepping up approvals for infrastructure projects. “Some projects that were to have started in the second half of the year are being shifted to the first half, with the allocation of central government funding being brought forward,” the newspaper quoted a “related person” as saying. “There is a clear acceleration of the allocation of investment from the government budget this year compared with the last two years,” it said.
  • Xstrata expects copper demand in China to recover in the second half of 2012 as it takes steps to boost its economy, Bloomberg reports. “The commentary from China that they’re going to look to re-stimulate the economy in some areas is positive,” Bloomberg reported citing Charlie Sartain, CEO of the company’s copper unit. Demand for white goods and household appliances, as well as continuing year-over-year growth in China’s power generation sector, will benefit from China’s stimulus efforts, Sartain said. “We see those parts of the economy in China as still pretty robust,” he said. “This decade we are going to see generally tight conditions in the copper market” he said, adding that higher costs related to new sources of production will help to keep copper prices at historically elevated levels in the future.

Threats

  • U.S. manufacturers have attacked JP Morgan Chase’s plans to launch an exchange traded fund backed by physical copper, arguing that the ETF would drive up the cost of the metal and be detrimental to the global economy.
  • China stainless steel demand growth this year will probably be the slowest since 2001, said Lu Ping, assistant general manager of Baosteel Stainless Steel. Demand in China may only rise 3 percent to 5 percent to about 10 million metric tons as a result of the slowdown in economic growth, Lu said. Output of stainless steel in China is likely to grow 3 percent to 5 percent to 12 million to 12.5 million tons.

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Trade Idea of the Week: Gold Rush … To The Exit

Tuesday, May 22nd, 2012

 

Gold Rush … to the Exit

by Wade Guenther, Horizons ETFs
Gold bullion was the poster child for lofty returns in 2011, boasting a 10.06% increase over the tumultuous period, December 31, 2010 to December 30, 2011. Surprisingly, the gold producer returns lagged gold bullion returns in 2011 with the NYSE Arca Exchange Gold BUGS Index and the S&P/TSX Global Gold™ Index achieving -13.01% and -14.32% returns respectively over the same period.

How can we profit from understanding the gold bullion and the gold producer relationship?

Gold Spot, NYSE Arca Exchange Gold BUGS and S&P/TSX Global Gold™ Index Returns: 2007 – 2012 (Click to enlarge)


Source: Bloomberg, between May 7, 2007 and May 8, 2012.

Gold bullion experienced daily increases 54.16% of the time over the measurement period, May 7, 2007 to May 8, 2012. The NYSE Arca Exchange Gold BUGS Index and the S&P/TSX Global Gold™ Index had daily increases 49.23% and 46.89% of the time, respectively over the same period.

The difference between gold bullion and gold producer returns became exacerbated when gold bullion returns were negative. Gold bullion experienced daily decreases of -1.00%, or less, 16.90% of the time between May 7, 2007 and May 8, 2012. However, the NYSE Arca Exchange Gold BUGS Index and the S&P/TSX Global Gold™ Index had daily decreases of -1.00%, or less, 32.90% and 31.53% of the time respectively, over the same period. The frequency of daily losing periods for gold producers was almost 2 times greater than the frequency of losing periods for gold bullion.

Over the shorter reference period, of August 22, 2011 to May 8, 2012, gold bullion reached a high $1897.60 $USD/oz. on August 22, 2011 and had a -13.32% return and an annualized standard deviation of 18.97%.

Gold Spot, NYSE Arca Exchange Gold BUGS and S&P/TSX Global Gold™ Index Returns: August 22, 2011 to May 8, 2012 (Click to enlarge)

Source: Bloomberg, between August 22, 2011 and May 8, 2012.

There is a noticeable divergence between gold bullion and the gold producer returns over this shorter gold bullion downtrend. The NYSE Arca Exchange Gold BUGS Index and the S&P/TSX Global Gold™ Index experienced -30.77% and -27.82% returns respectively between August 22, 2011 and May 8, 2012. The volatility of the indices were significantly higher than gold bullion with a 30.36% and 29.82% annualized standard deviation for the NYSE Arca Exchange Gold BUGS Index and the S&P/TSX Global Gold™ Index respectively, over the same measurement period.

There is a positive outlook, from analyst’s consensus, for the gold producers with higher expected earnings per share in the second and third quarters of fiscal 2012.

NYSE Arca Exchange Gold BUGS and S&P/TSX Global Gold™ Index Fiscal 2012 Actual and Estimated Quarterly Earnings and Dividends


Source: Bloomberg, as of May 8, 2012.

Actual = Trailing 3 month actual weighted average earnings for the index members
Q Est = Index weighted average of the member estimates for the current quarter
Q+1 Est = Index weighted average of the member estimates for the next quarter
Q+2 Est = Index weighted average of the member estimates for the two quarters forward

Generally, analysts are forecasting dividends to decrease which could be considered a growth indicator because companies may use the retained dividends to invest in higher yielding investment opportunities versus distributing cash to the public.

The ratio between the gold producers and gold bullion also becomes an interesting metric.

Gold Producer-to-Gold Bullion Ratio: 2007 – 2012 (Click to enlarge)


Source: Bloomberg, between May 7, 2007 and May 8, 2012.

The gold producer-to-gold bullion ratio was 0.178, as of May 8, 2012. The last significant low gold producer-to-gold bullion ratio was a value of 0.215 on October 27, 2008. Following the October 2008 low gold producer-to-gold bullion ratio, the S&P/TSX Global Gold™ Index increased 120.36% between October 27, 2008 and February 18, 2009 whereas gold bullion increased by only 34.77% over the same period.

If you believe that gold bullion returns will be positive and gold producer returns will be negative:
- HUG (1x): 100% exposure to gold bullion
- HBU (2x): 200% leveraged exposure to gold bullion
- HIG (1x): 100% inverse exposure to the S&P/TSX Global Gold™ Index
- HGD (2x): 200% leveraged inverse exposure to the S&P/TSX Global Gold™ Index

If you believe that gold bullion returns will be negative and gold producer returns will be positive:
- HBD (2x): 200% leveraged inverse exposure to gold bullion
- HGU (2x): 200% leveraged exposure to the S&P/TSX Global Gold™ Index

If you believe that gold producers will experience higher volatility than gold bullion:
- HEP (1x): Exposure to a portfolio of gold producer securities with a buy-write covered call strategy

If you believe that the price of gold bullion will experience higher volatility than gold producers:
- HGY (1x): Exposure to gold bullion with a buy-write covered call strategy

The views expressed herein are of a general nature and this Trade Idea is not and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

ETF Performance as of April 30, 2012

Wade Guenther, CFA
ETF Research Analyst
Horizons Exchange Traded Funds

HUG Investment Objective
The Horizons COMEX® Gold ETF (“HUG”) seeks investment results, before fees, expenses, distributions, brokerage commissions and other transaction costs, that endeavour to correspond to the performance of the COMEX® gold futures contract for a subsequent delivery month. Any U.S. dollar gains or losses as a result of the HUG’s investment will be hedged back to the Canadian dollar to the best of the HUG’s ability. If HUG is successful in meeting its investment objective, its net asset value should gain approximately as much, on a percentage basis, as any increase in the COMEX® gold futures contract for a subsequent delivery month when the COMEX® gold futures contract for that delivery month rises on a given day. Conversely, HUG’s net asset value should lose approximately as much, on a percentage basis, as the COMEX® gold futures contract for a subsequent delivery month when the COMEX® gold futures contract for that delivery month declines on a given day.

HEP Investment Objective
The investment objective of the Horizons Enhanced Income Gold Producers ETF (“HEP”) is to provide unitholders with: (a) exposure to the performance of an equal weighted portfolio of North American based gold mining and exploration companies; and (b) monthly distributions of dividend and call option income. Any foreign currency gains or losses as a result of HEP’s investment in non-Canadian issuers will be hedged back to the Canadian dollar to the best of its ability.

HEP invests primarily in a portfolio of equity and equity related securities of North American companies that are primarily exposed to gold mining and exploration and that, as at each semi-annual rebalance date, are amongst the largest and most liquid issuers on the TSX in that sector. HEP will rebalance, on an equal weight basis, the portfolio of constituent securities on each semi-annual rebalance date.

To mitigate downside risk and generate income, HEP will generally write covered call options on 100% of its portfolio securities. Covered call options provide a partial hedge against declines in the price of the securities on which they are written to the extent of the premiums received.

HGY Investment Objective
The investment objective for Horizons Gold Yield ETF (“HGY”) is to provide Unitholders with: (i) exposure to the price of gold bullion hedged to the Canadian dollar, less the ETF’s fees and expenses; and (ii) tax-efficient monthly distributions, and (iii) in order to mitigate downside risk and generate income, exposure to a covered call option strategy on 33% of the securities of the Gold Portfolio. The level of covered call option writing to which HGY is exposed may vary based on market volatility and other factors.

HIG Investment Objective
The Horizons BetaPro S&P/TSX Global Gold Inverse ETF (“HIG”) seeks daily investment results, before fees, expenses, distributions, brokerage commissions and other transaction costs, that endeavour to correspond to one times (100%) the inverse (opposite) of the daily performance of the S&P/TSX Global Gold™ Index.

HBU and HBD Investment Objectives
The Horizons BetaPro COMEX® Gold Bullion Bull Plus ETF (“HBU”) and the Horizons BetaPro COMEX® Gold Bullion Bear Plus ETF (“HBD”) seek daily investment results equal to 200% the daily performance, or inverse daily performance, of COMEX® Gold Bullion, before fees and expenses. HBU and HBD are denominated in Canadian dollars, as the U.S. dollar exposure of the underlying index is hedged daily.

HGU and HGD Investment Objectives
The Horizons BetaPro S&P/TSX Global Gold Bull+ ETF (“HGU”) and the Horizons BetaPro S&P/TSX Global Gold Bear+ ETF (“HGD”) seek daily investment results equal to 200% the daily performance, or inverse daily performance, of the S&P/TSX Global Gold™ Index, before fees and expenses. The Index consists of securities of global gold sector issuers listed on the TSX, NYSE, NASDAQ and AMEX.

The views expressed herein may not necessarily be the views of AlphaPro Management Inc., Horizons ETFs Management (Canada) Inc. or Horizons Exchange Traded Funds Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

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India’s Temple of Gold

Wednesday, May 16th, 2012

 

Via Nic Colas of ConvergEx,

Summary: India is known for its historically high per capita demand for gold, particularly before festivals and the wedding season, which peaks in the months of October to December. With more than ¼ of the entire global world market for the metal, the country has long been leading world demand, though fellow BRIC member China is catching up. But recent developments in India have gold bugs stirring – protests, boycotts, and a proposal for a tax on the sale on gold jewelry has severely dampened demand ahead of one of the most lucrative festivals in the country. And with global gold prices down more than 10% since their February high of $1,787.75, there seems to be good reason to worry about India’s role in the decline. But a longer-term analysis of Indian demand, global gold prices, and global GDP yield some surprising results about the country’s connection to the metal. While acceleration in gold prices and Indian GDP seem to link up as do Indian demand and global GDP growth, increases in demand have little correlation to gold price growth. Similarly, rampant inflation has almost no role in stifling demand for the metal. If these correlations hold true in 2012, gold investors might be able to sleep a little easier.

Gold trend-adjusted seasonal performance…


Note from ZH: We did a little seasonality check (chart above – black dotted line) and noted three things: 1) 2012 (orange) so far is looking a lot like 2009 (green) – which neared its trough around this period; 2) Trend adjusted, the period from late February to early June is a weak cycle (red arrow on regression channel) which is followed by a trend-adjusted upwards bias through the summer; and 3) Trend adjusted, the period from mid-October to early December is a very strong cycle

Note from Nic:  A recent article in The New Yorker about a surprising find in an ancient Indian temple got me thinking about gold, the subcontinent, and Charlie Munger’s recent comment that “Civilized people” don’t buy precious metals, but rather financial assets like stocks.  Gold has, in fact, been in a bit of a freefall of late, so I asked Sarah to pick up these disparate thoughts and see where they lead.  Her note, on Indian gold demand, follows here…

In the summer of 2011, while U.S. politicians were hotly debating the latest increase in the Federal debt ceiling, Indian authorities were facing quite the opposite situation: what to do with $22 billion worth of gold and rare jewels discovered under a temple in the southern state of Kerala. Rumors that the Sree Padmanabhaswamy temple sat on top of a horde of riches go back centuries, the result of millennia of donations to the gods, but the stories were only confirmed after a former Indian Police Service officer petitioned the Indian Supreme Court to order the opening of the temple to ensure “transparency in the running of the Trust” which overseas temple finances. The discovered wealth – which exceeds the annual education budget for the entire country – is now in limbo as two parties face off for ownership of the fortune. The Travancore Royal House, charged with the maintenance of the temple since the 18th century, assert that the riches belong to the gods they were offered to – and many Hindus in the region support their cause. Others think the wealth should be distributed to the poor; that $22 billion (and it could be far more once definitely valued) could potentially feed, clothe, and shelter every citizen of the region for years to come. The decision is ultimately up to the Indian Supreme Court, who have already stationed two dozen police officers around the temple for 24/7 surveillance. Just in case.

The $22 billion treasure found in Kerala is astounding, to say the least, but it represents barely half of the $46.4 billion Indians spent on gold in 2011. And while you may have read about Western central banks, Chinese citizens, and scores of other buyers for the yellow metal, India in fact outpaces every other country on the planet in gold consumption:

  • In 2011, India was the clear leader in global gold demand with 27.1% of the market, according to the World Gold Council’s statistics.
  • 61% of this spending went to jewelry, while 39% went to coins, bars, and other investments. This ratio has been converging for several years: in 2006 73% went to jewelry and 27% to other investments.
  • China has been slowly closing in on the lead, however, with 22.3% of the global gold market last year. 67% of this went to jewelry and 33% to other investments.
  • Gold ETFs got their start in India in 2007, and the seven such funds on offer to Indian citizens now have $1.9 billion in assets under management.
  • The next closest country in the ranks after India and China is the US, representing a much smaller 5.7% of global demand.

Clearly, India and China together are imperative to the global gold trade, as they account for almost half of all global demand.

In fact, as we show in the charts following above and below and the few data points below, the gold trade is a useful proxy for Indian economic growth, and demand from both of these countries is strongly connected to global GDP acceleration.

  • Annual Indian GDP acceleration or deceleration has a 0.4 inverse correlation with acceleration or deceleration in gold prices. In other words, when gold prices increase by a greater amount than the year before, it’s likely that Indian GDP will decelerate that same year. We’ve used the last six years as the baseline for this comparison, encompassing both the turmoil of the Financial Crisis in western economies and India’s volatile GDP growth rates of anywhere from 6-10% over the period in question.
  • China’s acceleration, on the other hand, is virtually unconnected to gold prices with a 0.03 R² over the same period. Clearly India is significantly more dependent on gold’s price appreciation than their neighbors to the East.
  • When this same correlation is lagged by one year – 2011 gold price acceleration matched up with 2010 GDP acceleration, for example – the correlation is essentially perfect: 0.9965. So if the Indian economy accelerated in 2011, you can probably expect gold prices to follow suit in 2012, and vice versa. In China, this correlation is much weaker at 0.53, but still significant for a one variable economic analysis.
  • Annual acceleration and deceleration in Indian and Chinese gold demand also have an almost perfect correlation to annual global GDP growth: 0.94 and 0.95, respectively. Essentially, when demand in these two countries drops, based on this correlation you might see global GDP fall as well.

Given this data, it is understandably concerning to fans of the yellow metal that Indian gold demand has not been as robust as expected so far this year. Part of the slowdown is due to a series of shutdowns by gold merchants, who closed shop for 20 days at the end of March to protest a rise on an excise tax on gold jewelry sales and a doubling of the import duty on the metal to 4%. And though the excise tax is now off the table, by one estimate (from the Bombay Bullion Association) gold merchants were seeing 50% less volume than the year ago period just before the Akshay Tritiya festival in late April, a traditionally strong period for gold sales. Some of the decline can also be attributed to rising inflation, according to some analysts: at 7.18% year-over-year so far in 2012, the rupee is down 8% in dollar terms and therefore represents a diminished source of gold purchases which are dollar-based.

But there are several reasons not to be pessimistic about gold prices even with the recent relative decline in Indian demand:

  • Gold prices are heavily correlated to the U.S. dollar – a strong greenback hurts gold demand around the world by lifting local prices.  The Indian Rupee has fallen victim to the global “Risk off” trade in recent weeks, falling below 54/dollar for the first time since last December.  At the same time, the Reserve Bank of India has reportedly launched aggressive interventions in the currency market to support the local currency.  And while we’re reluctant to base any investment analysis on the counter-market moves of any central bank’s activities, there is a lot at stake for the RBI in this case.  India, you see, has very little in the way of energy reserves and must import most of its oil – 80% by some counts – from overseas.  And those products are also priced in dollars, just like gold.  A stronger Rupee is therefore critical to continued economic growth, with gold demand in India an incidental beneficiary of this dynamic.
  • China is more than making up for the loss. Indian demand dropped by -7.2% in 2011, from 1,006.3 total tons in 2010 to 933.4. Chinese demand increased 21.7%, from 666.8 to 811.2. That’s a net gain of 71.5 tons. And with an annualized demand increase of 22.9% since 2006, it’s likely that China may surpass India as the largest gold consumer in the world in the next few years.

There is even cause to be bullish, if our Indian GDP correlation can be believed. The IMF projects that the Indian economy will decelerate by -0.9% this year, to 6.9% from 7.8% in 2011. If we plug in this -0.9% deceleration into the formula derived from “Change in annual Indian GDP growth vs. change in annual gold price growth”, we find that gold prices may actually accelerate by 2.8% in 2012 – meaning they will grow an additional 2.8% to the 27.2% appreciation from last year, resulting in a 30% increase. Based on yesterday’s closing prices, that puts the metal at $2,022.15 – just above the $2,000 mark some analysts have forecast.

The thought that a decline in the rate of Indian economic output would cause an increase in local demand is not as tortured as it might seem.  The appeal of gold is largely based on its long-proven value as a store of wealth.  The vaults at the Indian temple where we started this note weren’t filled with IOUs from Roman traders or shares of stock from the old East India Company.  That’s good news for the Hindu gods that first received these gifts, as well as their modern adherents who may benefit from the centuries of donations.  Gold does hold its value over long periods of time, and no country has a better case study of that fact at the moment than India.  So even if the economy there does slowdown in 2012, the resultant uncertainty doesn’t preordain a decline in gold demand.  It may even help.

While none of this guarantees that gold will experience some kind of meteoric rise to $2k, especially given all the other factors that contribute to prices, I think it’s safe to say that the supposed softening demand in India shouldn’t be too concerning. China is emerging as a critical consumer of gold on the world stage, and may even surpass India this year if trends continue. The country has more than offset declines in demand from their southeastern BRIC partner, and has helped drive up world consumption at a time when many other countries – particularly our own – are dropping out. The US has bought 42% less gold than it did in 2006. So when it comes to declining gold prices, don’t jump to blame India. After all, it isn’t even wedding season yet…

 

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Gold Standard for All, From Nuts to Paul Krugman (Guest Post)

Friday, May 4th, 2012

Via Amity Shlaes’ Bloomberg News Column,

Nut cases. That’s what they are. And if you take an interest in them, you are a nut case, too.

That’s the consensus among credentialed economists who describe advocates of a return to the monetary regime known as the gold standard. In fact, the economic pack will marginalize you as a weirdo faster than you can say “Jacques Rueff,” if you even raise the topic of monetary policy in relation to gold.

An example of such marginalizing appears in a recent issue of the Atlantic magazine. Author Adam Ozimek lists four rules upon which economists overwhelmingly agree. Right away, that puts readers on guard; they don’t want to be the only one to disagree with eminences.

The first rule Ozimek offers is that free trade benefits economies. So obvious. That makes the penalty for disagreement higher. Then you read down to the final principle: “The gold standard is a terrible idea.” By putting the proposition in such strong terms, the author raises the penalty for disagreeing. If you don’t subscribe to this view, you risk both being classed as the kind of genuine nut case who believes in protectionism, and enduring the disdain of other economists — “all economists,” as the Atlantic headline writer summarized it.

But “all economists” is not the same as “all economies.” The record of gold’s performance in all economies over the past century is not all “terrible.” Especially not in relation to areas that concern us today: growth, inflation or the frequency of bank crises. The problem here may lie not with the gold bugs but with those who work so hard to isolate them.

Gold’s Real Record

Conveniently enough, the gold record happens to have been assembled recently by a highly credentialed team at the Bank of England. In a December 2011 bank report, the authors Oliver Bush, Katie Farrant and Michelle Wright review three eras: the period of a traditional gold standard (1870-1913); the period of a gold-standard variant, the Bretton Woods gold-exchange standard (1948 to 1972); and a period of flexible exchange rates (1972-2008).

The report then looks at annual real growth per capita worldwide, over many nations. Such growth, they find, was stronger in the recent non-gold-standard modern period, averaging an annual increase of 1.8 percent per capita, than in the classical gold-standard period before 1913, when real per- capita gross domestic product increased 1.3 percent annually. Give a point to the gold disdainers.

But the authors also find that in the gold exchange standard years of 1948 to 1972 the world averaged annual per- capita growth of 2.8 percent, higher than the recent gold-free era. The gold exchange standard is a variant of the gold standard. That outcome doesn’t tell you we must go back to the gold exchange standard yesterday. But it does suggest that figuring out how the standard worked might prove a worthy, or at least not a ridiculous, endeavor.

Gold shone in other ways. In a gold-standard regime, money is backed by gold, so it’s impossible, or at least more difficult, for governments to inflate. Naturally the gold standard and Bretton Woods years therefore enjoyed lower rates of inflation compared with the most recent era. The gold standard endures a reputation for causing more banking crises than other monetary regimes. The Bank of England paper suggests gold stabilizes banks: The incidence of banking crises in the non-gold-standard period is higher than the incidence in the two gold periods.

“Overall the gold standard appeared to perform reasonably well against its financial stability and allocative efficiency objectives,” wrote Bush, Farrant and Wright.

Stable Markets

Markets and countries enjoyed relative stability in gold- standard years, and capital in those years flowed to worthy growth-generating projects. The main sacrifice in gold regimes that the authors identify is that governments lose authority to micromanage domestic economies. But given governments’ records, that may not be such a bad thing, either.

It all suggests that contempt for old gold hands such as Congressman Ron Paul of Texas might not be warranted. And that it might be interesting to peruse the numerous gold-related currency plans outside the door of the academic salon. Plenty of people, many former bankers, think it is time to pass laws returning the U.S. to some version, strong or weak, of the gold standard.

Lewis Lehrman, financier and founder of the Gilder-Lehrman Institute, which focuses on history, recently published a plan to take the world back to gold, “The True Gold Standard.” Charles Kadlec, another former Wall Streeter, co-wrote his own proposal, “The 21st Century Gold Standard,” with Ralph Benko. The case for gold as a mandatory metric for the Federal Reserve in setting interest rates is made in new legislation offered by Congressman Kevin Brady, another Republican from Texas. Dozens of state legislatures are introducing their own gold- or silver-related currency legislation.

One reason people slap the nut-case label on others with impunity is that for the past 30 or 40 years most economic education has systematically excluded the gold standard and its exponents from the classroom. It’s easy to call something your professors never respected the work of a nut case. But it’s also worthwhile to ask why the professors white out the gold standard from the books. Perhaps it is because the systems they raved about in their dissertations, systems of flexible exchange rates, subsequently underperformed.

This inconsistency in their own modeling is of course hard to acknowledge. Recently Bloomberg Television drew enormous attention when co-anchor Trish Regan moderated a debate between Ron Paul and Paul Krugman, the Nobel prize-winning New York Times columnist.

Krugman’s Nostalgia

Krugman sought to hold the middle ground, noting that all he sought, through his recommendation that federal debt rise to 130 percent of gross domestic product, was a return to the kind of America in which his parents lived. The professor treated the congressman’s remarks as unscholarly; in a blog post afterward, Krugman wrote “everything Paul said about growth after World War II was wrong.”

But Krugman too has some sorting through to do. The years when his parents lived were gold years, the Bretton Woods gold exchange standard, a time when the federal government, except in world war, would never had considered raising debt to 130 percent of the economy, as Krugman suggested in the debate.

If we are going to speak of consensus, let’s not forget one that is truly universal: Our economic system stands a good chance of breakdown in coming years. The only way to limit damage from such a breakdown is to ready ourselves to choose other models by learning about them now.

Not to do so would be nuts.

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Gold Market Radar (April 9, 2012)

Sunday, April 8th, 2012

Gold Market Radar (April 9, 2012)

For the week, spot gold closed at $1,631.23 down $37.12 per ounce, or 2.2 percent. Gold stocks, as measured by the NYSE Arca Gold BUGS Index, fell 6.8 percent. The U.S. Trade-Weighted Dollar Index jumped 1.3 percent for the week.

Strengths

  • Following the release of Fed minutes that indicated sentiment towards renewed stimulus programs was not immediately pressing, the pullback in bullion prices stimulated strong physical demand from India on Wednesday. Dealers reported that buying demand was the strongest since March 14. Historically, Indian buyers have been fairly price-sensitive to buying when they perceive pricing is at bargain levels.
  • Randgold Resources, Mali’s largest investor, and AngloGold Ashanti, Africa’s largest gold producer, said on Wednesday they had enough supplies of fuel to sit out any immediate changes in the way they do business with respect to the coup d’état in Mali.
  • Mark Bristow of Randgold Resources said the company, which sources two-thirds of its gold from Mali, had no problem bringing in fuel and shipping gold despite border closures by the 15-state Economic Community of West African States designed to squeeze Mali’s economy. Gold companies with mines in Mali are playing down the risk of border closures and fallout from sanctions imposed on the West African nation after a coup last month.

Weaknesses

  • Gold’s recent decline has also been based on India’s nationwide jeweler’s strike to protest a tax on non-branded ornaments. The strike is in its 19th day today. The country was the world’s second-largest bullion consumer in the fourth quarter.
  • Gold imports into India tumbled more than 55 percent in March. The president of the Bombay Bullion Association notes that the country imported just 15 to 20 tonnes of gold in March as compared to the 45 to 55 tonnes that is usually imported on a monthly basis. He added that the high price of the precious metal also deterred fresh purchases in the first quarter.
  • The combined jewelers strike in India plus the comments that the Federal Reserve was unlikely to provide more stimuli for the economy, sent many gold stocks to 52-week lows this week. In addition, this situation was exacerbated by a large fund complex in Canada that had a change in ownership, with the new management instituting wholesale changes for many of the firm’s portfolios, dumping millions of shares of gold-mining and oil stocks.

Opportunities

  • An upcoming Hindu festival, Akshaya Tritiya, held on April 24, may be the catalyst that brings the jeweler’s strike in India to an end and moves gold prices higher in April. In terms of important festivals, the Akshaya Tritiya festival and Dhanteras are the two biggest gold-buying events in the Hindu calendar. These are essential buying occasions that jewelers won’t want to miss, especially after the strike-inflicted drop in revenues in March.
  • According to an analysis of the Chinese gold market, growth in aggregate demand from jewelry buyers, private investors, and the People’s Bank of China will continue to outpace growth in total supply from mine production and secondary sources. Furthermore, it suggests that the country’s gold production and consumption are both far higher than figures suggest, but also that this gold will not find its way back on to the global marketplace.
  • With both domestic supply and demand relatively price inelastic, the market will require a growing stream of imports, which will be available only at higher prices. Despite bullion prices having moved up from $300 to more than $1,600 over the last decade, world gold mine production is essentially unchanged.

Threats

  • The Mozambican government is seeking to guarantee that the sale of shares in mining companies whose assets are in the country should bring financial benefits to the country. A team of officials from the Ministries of Mineral Resources and of Finance has been set up to work on how to tax these sales. The new law, which is expected to be submitted to the country’s parliament, will stipulate that the transmission of mining rights and titles must obligatorily take place in Mozambique and any public offer of shares must be announced in the Mozambican press.
  • Ongoing conflicts in Eritrea and the threat of additional sanctions pose significant risks to the country’s mining sector and those companies operating within the borders. The country is currently the target of U.N. sanctions, its hostilities with neighboring Ethiopia have reignited in recent months, it faces serious infrastructure issues (particularly with regards to water), and its authoritarian government’s military and geopolitical ambitions are unsustainable. So while Eritrea’s mineral deposits are attractive, it will remain one of the riskier mining jurisdictions in Africa for the foreseeable future.
  • A Romanian court annulled a zoning plan that further delayed the development of Gabriel Resources’ Rosia Montana project. The project has been a favorite for a number of non-governmental organizations to rally around to prevent the development of the mine. Reacting to the news today, Gabriel’s share price plunged 23 percent.

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Gold Market Radar (April 2, 2012)

Sunday, April 1st, 2012

Gold Market Radar (April 2, 2012)

For the week, spot gold closed at $1,668.90 up $6.45 per ounce, or 0.4 percent. However, gold stocks, as measured by the NYSE Arca Gold BUGS Index, fell 0.4 percent. The U.S. Trade-Weighted Dollar Index slid 0.5 percent for the week.

Strengths

  • Early in the week, comments from Federal Reserve Chairman Ben Bernanke suggested the need for continued accommodative monetary policy. This brought prospects of QE3 back onto the horizon and helped provide a floor to the recent downswing in gold prices.
  • Queenston Mining sold their joint venture property to Kirkland Lake Gold for $60 million and a royalty this week. Factoring in this $60 million, the company now has $120 million in cash and cash equivalents on their balance sheet. This will be used to fund exploration and advance the feasibility study of the Beaver Creek project. The market reacted positively to this and the stock outperformed the major gold indexes for the week.
  • AuRico Gold sold two small gold mines in Australia to Crocodile Gold this week. This came as no surprise to the market as AuRico had been talking about the sale of their assets before. The total amount of the sale is $105 million (Canadian), or $0.32 per share. In our eyes, AuRico sold their mines for too little, but when you consider the increasing operating costs for the company’s Australian assets, it was the right thing to do strategically.

Weaknesses

  • Following 12 days of protests by gold traders across India, the Indian government has said that it will review the tax on ‘unbranded’ gold jewelry. Former finance minster Yashwant Sinha pressed for a rollback of the excise duty on nonbranded jewelry, and called for doing away with the newly required Permanent Account Number (PAN) card to document any gold jewelry purchases worth greater than roughly $4000. The PAN card allows the government to track significant gold purchases and would have to be documented on an individual’s income tax returns.
  • Speaking to the Indian parliament, Pranab Mukherjee said, “I know it (gold) is part of our culture … but the import of gold of such magnitude strains balance of payments and affects exchange rate of the rupee through impacting supply-demand balance of foreign exchange.” He went on further to express his concern over the outflow of precious foreign exchange on the import of “dead assets that cause problems in the country.” We think Mukherjee may be confused as to which is asset, gold or the rupee, is the “dead” one.
  • Centerra Gold took a hit this week, down 15 percent on Tuesday alone, on news that ice and waste movement has halted production at their Kumtor mine. In response to the disruption, the company revised and reduced its 2012 gold production by 33 percent to 570,000-625,000 ounces. The news proved to be a great buying opportunity as Centerra finished the week only down 1.8 percent.

Opportunities

  • Goldman Sachs urged traders to buy gold in a research note this week. The company’s research shows U.S. real interest rates as the primary driver of U.S. dollar-denominated gold prices. Their models suggest the current level of real interest rates would be consistent with the current trading range of gold prices. As they look forward however, their U.S. economists expect subdued growth and further easing by the Federal Reserve in 2012. They forecast this would push the market’s expectations of real interest rates back down near zero and gold prices back to $1,840 an ounce.
  • Franco-Nevada Corp CEO David Harquail said that with share prices lagging, miners are wary of turning to equity markets to raise money and are exploring all alternatives such as stream deals or royalties. The latter are at an all-time high, but with most deals happening in the mid-tier market, ones over $500 million will be few and far between. We have a feeling there will be a number of royalty streams locked-in this upcoming year.
  • In an interview with the Gold Report, Brent Cook commented on some trends he has noticed gold sector. He emphasized that companies are starting to recognize that quality of a mineral deposit supersedes size. “Grade, or more succinctly margin, is getting more and more important … These junior companies with these large, low-grade, low-margin deposits are then doomed to build.” On a supply-demand basis though, all signs point to gold going up. Brent says that 83 million ounces are being mined annually right now while only 20-30 million ounces are being found per year. This gap between production and discovery is not being filled and can only point to a better gold environment.

Threats

  • Still no conclusion or real progression out of Mali, but Randgold Resources CEO Mark Bristow said that the Bamako airport has reopened and the borders are open for all traffic. He maintained that the company’s Loulo complex was replenished with fuel supplies over the weekend and that all three of the Randgold mines in Mali were operating in full.
  • RenCap Securities held a special conference call on the situation in Mali. Their consultant expects economic pressure–primarily in the form of sanctions and suspended Western aid–to be the primary outside intervention in Mali. This could hamper import and export activity, though the rebels have promised to transition to new elections.
  • However, no timetable exists for the transition and given the rebels’ lack of organization; they may be tempted to stay in power for a period of months in order to found a political party. This could mean that sanctions have the time to truly bite. Any such sanctions, however, would be leaky by virtue of the lack of bureaucratic capability to enforce them among Mali’s neighbors.

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Gold Market Radar (March 12, 2012)

Sunday, March 11th, 2012

Gold Market Radar (March 12, 2012)

For the week, spot gold closed at $1,713.65 up $1.05 per ounce, or 0.06 percent. Gold stocks, as measured by the NYSE Arca Gold BUGS Index, fell 2.98 percent. The U.S. Trade-Weighted Dollar Index rose 0.70 percent for the week.

Strengths

  • Buying interest in gold still seems to be running strong. Despite a stronger U.S. dollar, a sell off early in the week, and a brief plunge in prices on Friday morning with the release of the employment report, gold rallied back to finish the week slightly higher.
  • On the stock side, Continental Gold announced drilling and underground sampling results from its Burtica project in Colombia which show high-grade drill hits outside their resource boundaries and continuity of gold mineralization within veins. The stock was up over 7 percent on this news. Other stocks which had strong moves this week include Chesapeake Gold (up 22 percent) and Endeavour Mining (up 8 percent).
  • The Silver Institute demonstrated that a steady increase in demand has driven the price of silver up 20 percent in the first 10 weeks of the year, ahead of gold, platinum and palladium. The strength in silver demand has come via a surge in buying of silver-based ETFs, which now represents 586 million ounces of silver, up 10 million ounces year-to-date. In addition, there has also been increased demand for physical silver bars. Global industrial silver demand is expected to contribute to strong silver demand going forward.

Weaknesses

  • Despite strong sales of American Eagle gold and silver coins in January, sales numbers plunged 83 percent in February. Sales of 127,000 ounces were reported for January, while only 21,000 ounces were reported for February. The U.S. Mint reports they sold 156,600 ounces of gold and 7,872,000 ounces of silver year-to-date, also below sales from this period last year.
  • So far no satisfactory answer has been put forth to explain the five-minute plunge in gold prices last week. Some speculate that perhaps it was end of month rebalancing or even a sell by a central bank that was under pressure to come up with proceeds immediately.
  • No responsible private investor would have undertaken such an irresponsible liquidation of their position when such an order could have easily been executed with much less market impact.

Opportunities

  • Zerohedge reports that Germany is growing concerned over the security of the 3,400 tons of gold the country has stored in the U.S. A Swiss initiative sponsored by four members of the Swiss parliament has proposed that the Swiss people have the right to vote on three simple principals: 1.) Keeping the Swiss gold physically within Switzerland, 2.) Forbidding the Swiss National Bank from selling any more of their gold reserves, and 3.) Requiring the Swiss National Bank to hold at least 20 percent of their assets in gold bullion. Such a move to secure delivery of Germany and Swiss gold from storage within the U.S. would further raise the profile of gold.
  • The China Development Bank is pushing forward with an agreement to offer renminbi-denominated loans to other BRICS (Brazil, Russia, India, China and South Africa nations) as a step to internationalize its currency and compete directly with trade normally conducted only in U.S. dollars. Already, Chile and oil-rich Nigeria have begun to make moves to include the renminbi in their reserve base.
  • Getting delivery of physical gold appears to be rather tight. One mining company in West Africa says they have been approached about buying their gold mine production directly from the company versus going through the established channels for purchasing gold. There is too much of a backlog in these conventional outlets to acquire bullion en masse.

Threats

  • Indonesia announced that it will take more of the profits from its mineral resources by limiting foreign ownership of mines in a move that has been speculated to scare off new investments. Under the new rules, Indonesia will require foreign companies to sell stakes in mines and increase domestic ownership to at least 51 percent by the tenth year of production. This is yet another move towards resource nationalization we have been seeing worldwide.
  • During the PDAC conference held this week in Toronto, Colombia announced that they may revoke and reassign mining titles to boost revenue from mineral-rich properties. Currently, 60 out of 9,000 titles contribute 80 percent of government’s royalty fees from mining. The move to overhaul the mining title licensing system aims to create a reliable database, weeding out speculators, while keeping mineral-rich land idle for future sales and attracting new investments in a competitive way.
  • While the first half of the year is looking relatively strong there will be headwinds coming in the second half and it is unclear whether the right policy decisions will be reached with a lame duck session of Congress, according to a recent Bank of America-Merrill Lynch report. They note the potential dangers of a policy mistake with the ending of the “Bush tax rates”, mandated debt ceiling spending cuts, a reinstatement of the payroll tax, extended unemployment benefits, the alternative minimum tax, and the Obama Health Care tax all coming back on to the table.

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Gold Market Radar (March 5, 2012)

Sunday, March 4th, 2012

Gold Market Radar (March 5, 2012)

For the week, spot gold closed at $1,712.60 down $59.85 per ounce, or 3.38 percent. Gold stocks, as measured by the NYSE Arca Gold BUGS Index, rose 3.05 percent. The U.S. Trade-Weighted Dollar Index rose 1.40 percent for the week.

Strengths

  • Silver prices leapt to a 7-month high in India on the same day that prices fell 7 percent in the international market.  Traders in India have said that investors have turned bullish on silver since the metal has posted an 18 percent gain in the last eight weeks, and expect a 35 percent rise by the end of 2012.
  • China continued as the world’s largest platinum consumer in 2011, confirmed by data released by the Platinum Guild International.  Global recession or not, Chinese net demand for platinum was up 10 percent from the previous year, at 1.325 million ounces.
  • Despite a nearly $60 fall in gold this week, gold ETF buying was strong, with investors adding 338,000 ounces on Wednesday, the largest daily increase to global holdings since late January. The SPDR Gold Shares ETF accounted for the bulk of ETF flows, having increased by just less than 300,000 ounces this week. Gold ETF holdings currently sit at an all-time high of 80,030,000 million ounces after about 900,000 ounces of additions last month, in line with January inflows. So far this year, investors have increased gold ETF investment by 1,860,000 ounces, showing investors’ confidence in the metal and a distrust of paper assets.

Weaknesses

  • Gold dropped by an alarming $90 this Wednesday, as a reported 31 tonne sell order on the CME took spot gold prices down from $1,784 to $1,697.  This dip unravels approximately half of gold’s gains since the beginning of the year. A drop of over 6 percent has not happened since December 2008.
  • Scotia Capital, despite being bullish on gold, is not expressing a similar enthusiasm for silver, citing a growing mine surplus and the necessity for industrial and investment demand.
  • The Scotia Capital analysts say their biggest concern is increased mine silver supply that is driven by non-primary producers, such as base metals companies that secure silver as a by-product of mining copper, zinc or lead. According to Scotia, “As these companies make development decisions, the silver price is often immaterial to their project economics, and thus new sources of silver can come onto the market regardless of the silver price environment.”

Opportunities

  • The recent pullback in gold could provide an opportunity to purchase gold and gold equities at a slightly cheaper level.  The net accumulation of bullion by gold ETFs when there is a large selloff is a positive signal that investors are on the sidelines, ready to add to their holdings on any weakness.
  • Japan has joined the ranks with the American and Europeans who want a weak currency so they can get a competitive advantage in trade.  With Japan finally capitulating on this front, there are few options, other than hard assets, for an investor to hold and protect wealth.  Since the start of the year, the Japanese yen has fallen 6 percent relative to the dollar.  When investors realize that governments are not committed to respecting the value of their assets, investors lose trust that the purchasing power of paper assets can be relied upon as a store of value.
  • In an interview on the Gold Report, Lawrence Roulston confirmed that there is optimism within the resource sector, and that the smart money is looking for deals that have real upside potential, such as the junior sector.  Looking forward, the devalued currencies resulting from governments worldwide throwing trillions of dollars in bailouts to prop up failing companies and countries, should prove positive for gold and silver, serving as long-term hedges against currency devaluation.  Additionally, with growing trading volumes and prices for the equities, the trend remains positive.  All these factors point to an opportune moment to be getting into the market in junior mining companies which have been beaten down to the point where the major risk factors have been more or less put aside.

Threats

  • A report written by a team at Chatham House proposed that a return to a gold standard could be damaging.  The team determined that as the dominance of the U.S. in the global financial system weakened and other powers emerged, the likelihood for greater financial volatility and uncertainty would grow. “In such an environment, gold is likely to continue playing a useful role as an effective hedge and safe haven. But despite gold’s positive attributes, the evidence which emerged from the taskforce’s deliberations led to the conclusion that in today’s world there is little scope for gold to play a more formal role in the international monetary system,” they said.
  • While listening to mining company presentations this past week at the BMO Global Metals and Mining Conference, it was disconcerting to note how many companies continue to boast about low cash-costs as a metric to communicate their high profitability.  Thinking that rock-bottom cash costs will attract investors is short-sighted; instead, the companies are essentially placing a target on themselves for tax and royalty increases from the countries in which they operate.
  • Now that Impala Platinum is set to restart operations next week, this could mean that platinum no longer deserves the supply-risk premium it has been enjoying in the last several weeks. Impala reported that 13,500 workers out of the 17,200 that were dismissed have now reapplied for their jobs, and the company aims to start ramping up production on Monday. However, it may take some time to get back to full production due to the safety measures that have to be in place before work can resume. The company has lost 100,000 ounces as a result of the strike, which may be unrecoverable. This somewhat improves platinum’s supply/demand balance at the present moment, but could still be a headwind to watch out for.

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Markets’ Performance Year to Date

Thursday, March 1st, 2012

The WSJ details:

Treasury and gold investors were rocked out of their recent torpor on Wednesday as a series of large trades in the futures markets sent prices tumbling.

At the Chicago Mercantile Exchange, an unusually big sale of more than 100,000 futures on U.S. government debt cascaded across traders’ screens shortly after 10 a.m.

The selling spread to the cash markets where 10-year Treasury yields, which rise as prices fall, spiked to 1.99% from 1.93% in minutes.

The trades came just after the release of congressional testimony from Federal Reserve Chairman Ben Bernanke. Some traders said Mr. Bernanke appeared less focused on the prospect for a third round of asset purchases, known as QE3, than the market expected.

Not a good day for gold bugs.


Despite the huge sell-off in gold shown above (the largest in 3 years), gold (and other asset classes) are doing just fine. The only asset down year to date that EconomPic regularly reports on is long Treasuries (which were up more than 30% in 2011).

Source: Yahoo Finance

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