The Macro Story as Told by Gold, Copper and Oil

Wednesday, May 22nd, 2013

By EconMatters

Gold’s been on a wild ride. After reaching a peak of $1,920 an ounce in September 2011, gold has tumbled 28% to the current ~$1,380 level forcing John Paulson to take a 47% loss in his gold fund during the first four months of this year, according to Bloomberg.

Unlike Paulson who maintained his positions in gold, other big players like George Soros and BlackRock cut their gold ETF holdings, while Goldman Sachs issued a sell recommendation on gold right before the yellow metal plunged 13% through April 15, the biggest drop in three decades. And by looking at the futures curve (chart below), market does not seem to expect gold to come back roaring any time soon.

Chart Source: S&P Capital IQ

QEs Not Hitting the Real Economy

Historically, gold is regarded as a good inflation hedge and store of value, typically thriving in an environment of high inflation, and/or weak U.S. dollar (currency debasement). With U.S. Federal Reserve’s three rounds of QE, the never-ending debt crisis in the Eurozone, hyperinflation and dollar debasement seem inevitable and supportive of gold for the long run, right?

Theoretically, Fed’s QE and near zero fed funds rate is supposed to encourage borrowing and spending from the private sector thus injecting money into the real economy. However, theory and reality don’t always see eye to eye.

Since the 2008 financial crisis, banks have significantly tightened the credit standard and are reluctant to lend. On the other hand, corporations are making money mostly from “streamlined” headcount and structure, but instead of the intended wealth distribution effect expected by the Fed such as investing back to the economy, or increase employee pay which would in turn increase consumer spending, most corporations are hoarding cash or use profits for dividend, share buybacks, or mergers & acquisitions with limited impact on the real economy.

Copper & Oil Indicating Weak Demand

The weak demand is also reflected in part of the commodity market fundamental. WTI crude oil inventory climbed to 82-year high and copper inventory at LME hit a 10-year high in April, while Goldman Sachs cut its “near-term” outlook for commodities.

Although some have argued oil and copper have lost their significance primarily due to increasing domestic oil production, and“temporary” excess copper supply. While the abundance of domestic shale oil production may have distorted the historical supply and demand relationship, but with the U.S. becoming the world’s largest fuel exporter, the fast and furious oil inventory build is nevertheless still an indication of a weak world economy. And I can’t imagine how the “temporary” buildup of copper inventory is not a sign of weak global economic condition?

Further Reading – Oil Market Manipulation Reaches Absurd Levels

Massive QEs, Limited Inflation?

On top of the overall weak spending and demand in the private sector, most of the developed countries are undergoing some shape or form of austerity with reduced government spending. China, the growth engine of the world, is having some problems of its own. The old-fashioned massive infrastructure building QE program got China through the 2008 financial crisis, and was the main driver behind commodity prices. But Beijing can’t afford another QE due to inflation concern (plus China has probably run out of things to build). Low wage levels means China consumers can’t really pick up the spending slack, coupled with bad credit problem (i.e., NPL: Non-Performing Loans), andrecent capital flight, which had many analysts worried enough to downgrade China’s growth prospect.

The simultaneous pullback from both the private and government sectors in U.S. Europe, and China is a major factor why Fed’s massive QEs have resulted in only limited inflationary pressure and increasing signs of deflation.

Dollar and Carry Trade Kills Gold

Nonetheless, when compared with Europe, China or any other regions in the world, the U.S., seems relatively more stable, and has been able to retain the “safe haven” status despite its own debt problem. With investors pouring money into U.S. equity and bond propping up the dollar, and weak demand suppressing inflation, two of the main conditions for a strong gold price — high inflation and a weak US dollar — are basically non-existent in the current macro environment. Furthermore, there was already a bit of disconnect between gold and the other commodity prices such as copper, and oil. So eventually, gold had to come to grip with the macro reality.

Chart Source: Stockcharts.com

Another major factor against gold right now is that gold has no yield and is out of favor with the huge yield-seeking yen carry trade crowd (borrowing yen to invest in higher yield options) since bond and equity now are offering much better returns. Unless there’s a shock to the system such as a war breaking out in the Middle East, or an eventual debt crisis in Japan when people start seeking safety, there’s not much upside momentum for gold.

Gold’s Volatility Game

For now, the prevalent view is that the Fed will slow or exit QE3, and gold is out of favor under the the current macro trend. For example, Lim Chow Kiat, the chief investment officer of the Government of Singapore Investment Corp (GIC), thinks gold still looks overpriced as the usage of gold for industrial or consumer products doesn’t quite justify the prices. GIC is one of the world’s largest sovereign wealth funds.

As long as dollar maintain its strength and inflation remains tame, gold prices most likely will see considerable volatility swinging between rumors and speculation (e.g., some central banks may need to unload some of their holdings due to debt crisis), and Asia retail buying on the dip (South China Morning Post reported that many shops in Hong Kong were running out of the precious metal for the first time in decades.)

Technically speaking, gold’s next support level should be $1,330 range with $1,320 as the major support when most physical retail buyers would rush in. If gold breaks below $1,300 hard, expect a major liquidation when even Paulson could be forced to sell and everybody piles in.

©EconMatters All Rights Reserved

Tags: Commodities, Copper, energy, Gold, Oil and Gas
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Gold Market Radar (May 21, 2013)

Tuesday, May 21st, 2013

Gold Market Radar (May 21, 2013)

For the week, spot gold closed at $1,359.55, down $88.65 per ounce, or 6.12 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 11.4 percent. The U.S. Trade-Weighted Dollar Index gained 1.27 percent for the week.

Strengths

click to enlarge

• The chart above shows the price action of key commodities since 2007 plotted on the back of the Reuters’ Continuous Commodity Index (CCI). In the chart, the four commodities and the commodity index are equalized to 100 on April 2011, the time when the commodity index peaked. In comparison, gold’s performance is remarkable in relation to the other commodities following the April 2011 peak. Not only has gold outperformed, it is the only commodity that is close to its April 2011 value. Comparatively, the commodity index has lost roughly 23 percent, while copper declined by 30 percent. As such, despite the negative publicity gold has drawn in 2013, it appears it continues to be king among commodities when it comes to storing value.
• The World Gold Council issued its first quarter 2013 Gold Demand Trends report. The council reports demand for gold bars and coins was 10 percent higher in the first quarter compared to a year earlier, while demand for jewellery increased 12 percent. Similarly, central banks’ net purchases exceeded 100 tonnes for the seventh consecutive quarter. It is worth mentioning that these numbers provide evidence of strong physical demand from all sectors, even prior to the widely disseminated news of the skyrocketing demand for physical gold that followed the April 15 price drop.
• New Gold announced that it unwound a legacy gold hedge book at its Mesquite mine in California. The company paid $67.5 million to retire the hedge which called for delivery of 5,500 ounces of gold per month at a fixed price of $801 per ounce until the end of 2014. The remaining delivery totaled 110,000 ounces gold. The transaction was completed at an average gold price of $1,396 per ounce. By eliminating the hedged position, the company is now completely unhedged and fully levered to benefit from future upside in the gold price.

Weaknesses

• The U.S. dollar continues to gain against most other currencies, which traditionally translates into lower commodity prices. The dollar index, which measures the value of the greenback against a basket of six major currencies, surged to the highest levels since 2010. The strength was revived by a news article last Friday which speculated that the Fed may have already devised an exit from its $85 billion monetary easing program. This week, the dollar also received support from data showing that consumer sentiment rose to its highest level after the fall of 2008. The dollar has risen at an annualized rate of 25 percent so far this year.
• Money managers withdrew $1.27 billion from gold and precious-metals funds in the week ended May 8, according to analysts tracking money flows. This year’s outflows have reached $20.8 billion, the largest redemptions since the data began to be collected.
• Barrick Gold Corp reached a preliminary agreement with the Dominican Republic government to increase the share of profits from its Pueblo Viejo gold mine going to the Caribbean nation. President Medina of the Dominican Republic had demanded in February that the company renegotiate the contract signed with a previous government for the Pueblo Viejo mine, as he threatened to impose a windfall tax on profits. The tentative agreement would add to roughly $1.5 billion being directed to the nation over the project’s 30 year life. The company will be handing around half the cash flow obtained from the project to the government for the next three years, further straining the firm’s working capital. Although we welcome the resolution of the dispute, we believe the terms upon which the deal was reached are only to the benefit of the nation and do not present a symmetric share of the downside risk.

Opportunities

• In a Form 13F release of May 16, it was reported that Soros Fund Management LLC, the hedge fund founded by George Soros, significantly increased its gold related holdings. The most notable addition was the purchase of over $25 million worth of call options on the GDXJ Junior Gold Miners Index. In addition, the fund reportedly owns more than $239.2 million in gold related financial assets. The release contrasts the fund’s February release in which gold related exposure had declined significantly. Back then we reported that Soros being a savvy investor would have likely swapped his gold exposure to yen denominated positions, rather than outright selling. Regardless, this recent move by one of the world’s most closely followed hedge funds should help draw appetite for gold stocks and bode well for a surge in gold equities.
• The sell-off of Dundee Precious Metals subsequent to the Bulgarian elections is overdone according to Leon Esterhuizen of CIBC World Markets. The company issued a statement noting that it’s “business as usual” at all of its operations, after the company’s share price fell 15 percent following the elections on Sunday. The already contentious elections have become more controversial after Bulgaria’s biggest political party said it will seek to have the result of Sunday’s deadlocked election cancelled on grounds of a violation. As per the company, neither the Chelopech operation or Krumovgrad project are likely to be materially impacted by this political turmoil. We agree with Leon in that Dundee Precious is very attractive at current valuations as it remains an acquisition target for anyone needing access to its unique smelter in Namibia, one of a handful in the world that can treat high-arsenic-content concentrates.
• Additional exploration and metallurgical sampling performed by Klondex Mines on its Fire Creek project has revealed significant visible mineralization with grades as high as 496.6 grams per ton. Similarly, Gran Colombia Gold shared some of its recent exploration success during its first quarter earnings’ conference call. The company reported multiple intercepts of visible gold, as high as 663.32 grams per ton at its Segovia project. Encountering such high gold mineralization allows greater operational/development flexibility for miners, increases the likelihood of the project becoming a successful and profitable venture, and adds to the overall excitement around the project.

Threats

• Japan is helping create disinflationary growth around the world, according to the analysts at Cornerstone Macro. In their Portfolio Strategy report for this week, they argue that the fresh rounds of monetary easing, and in particular the actions by the Bank of Japan are a huge surplus for U.S. consumers, at least in the short run. One of their main arguments is that weak yen policies have provided support for the dollar, which has allowed equities to rise without a comparable rise in commodity prices. They argue that the outperformance of the S&P 500 relative to a commodity index is strongly, negatively correlated to the value of the Japanese yen. This correlation has been particularly strong since November when the Bank of Japan monetary easing program was announced.
• Nomura currency guru Jens Nordvig has turned very bullish on the U.S. dollar. He argues the U.S. dollar real effective interest rates are trading close to multi-decade lows, making them very likely to increase sharply. In addition, the rising likelihood of domestic energy independence, the overall decline of commodities, and the shrinking trade deficit should all bode well for the greenback. Nordvig is calling for meaningful gains by year end, which is consistent with many bulls’ call for the return of king dollar.
• Gold premiums in India, the world’s biggest buyer, more than doubled as the Reserve Bank of India limited imports by banks, on a consignment basis, to only those required to meet the genuine needs of exporters. The restrictions on bullion imports by banks are aimed at restraining a record current-account deficit. As a result, bullion dealers are not accepting fresh orders, and it remains to be seen if there will be another route to import the precious metal. Bloomberg reports the trade deficit widened in April to $17.8 billion from $10.31 billion in March as gold and silver imports more than doubled to $7.5 billion from a year ago.

Tags: Gold, Gold Market
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Visualizing the Great Gold Rout

Friday, May 17th, 2013

After a decade long rally, gold recroded its biggest two-day drop in 30 years during April. What caused this sudden decline? Is the gold cycle over, or is this just a dip in the market?

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SPDR GOLD TRUST (GLD) AMEX – May 17, 2013

Friday, May 17th, 2013

SIA Charts Daily Stock Report (siacharts.com)

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Note: Subscribers can screen all Canadian and U.S. stocks and mutual funds, or as components of equally weighted mutual fund sectors indices (e.g. Income Trusts, Precious Metals), and fund groups by issuer (eg. AGF, Dynamic, Franklin Templeton), all Canadian ETFs, ETF Families by issuer (iShares, Horizons, BMO) or as components of Equally Weighted ETF Sector Indices (e.g. 2020+ Target date, Cdn Equity Lg Cap), and create and monitor their own, or SIA’s existing model portfolios. Finally, subscribers benefit from being able to generate BUY-WATCH-SELL Signals on demand with SIA Charts proprietary Favoured/Neutral/Unfavoured, SMAX scoring algorithm (see green-yellow-red graph 1 below).

SPDR GOLD TRUST (GLD) AMEX – May 17, 2013

GREEN – Favoured / Buy Zone
YELLOW – Neutral / Hold Zone
RED – Unfavoured / Sell / Avoid Zone

SPDR GOLD TRUST (GLD) AMEX – May 17, 2013

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Three Reasons to Buy Gold Equities Today

Monday, May 13th, 2013

Three Reasons to Buy Gold Equities Today

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

May 10, 2013

A strong stomach and a tremendous amount of patience are required for gold stock investors these days, as miners have been exhibiting their typical volatility pattern.

That’s why I often say to anticipate before you participate, because gold stocks are historically twice as volatile as U.S. stocks. As of March 31, 2013, using 10-year data, the NYSE Arca Gold BUGS Index (HUI) had a rolling one-year standard deviation of nearly 35 percent. The S&P 500’s was just under 15 percent.

I believe the drivers for the yellow metal remain intact, so for investors who can tolerate the ups and downs, gold stocks are a compelling buy. Here are three reasons:

1. Gold Companies are Cheap.

According to research from RBC Capital Markets, Tier I and Tier II producers are inexpensive on historical measures. Based on a price-to-earnings basis, RBC finds that “shares are currently trading not far from the recent trough valuations observed during the 2008 global financial crisis.”

And on a price-to-cash-flow basis, gold stocks are trading at bargain basement prices. The chart below shows that average annual cash flow multiples for North American Tier I gold companies have fallen to lows we haven’t seen in years. Since January 2000, forward price-to-cash-flow multiples have climbed as high as 26 times. This year, we see multiples at the high end that are less than half of that.

On the low end, today’s price-to-cash-flow of 6.5 times hasn’t been seen since 2001.

click to enlarge

Tier I and Tier II companies “offer investors an attractive entry point from an absolute valuation perspective with respect to the broader market,” says RBC.

2. Gold companies are increasing their dividends.

With the Federal Reserve suppressing interest rates, investors have had to adapt and reallocate investments to generate more income.

That’s where gold companies come in. I have discussed how miners have become much more sensitive toward the needs of their investors as they compete directly with bullion-backed ETFs and bar and coin buying programs.

In response to shareholders’ desire to get paid while they wait for capital appreciation, gold companies have rolled out dividend programs and increased payouts. “The growth in dividend payout has been spectacular when looking at the industry as a whole,” says my friend Barry Cooper from CIBC World Markets.

His data shows that over the past 15 years, the world’s top 20 gold companies have increased their dividends at a compound annual growth rate of 16 percent. By comparison, gold only rose 12 percent annually.

click to enlarge

Not only are gold companies increasing their payouts, the yields offer a tremendous income value to investors compared to government bonds today. Whereas investors receive a 1.5 percent yield on a 10-year Treasury, the stocks in the Philadelphia Stock Exchange Gold and Silver Index (XAU) are paying a full percentage point more!

This is a significant change from the past: In April 2008, the Treasury yield was nearly 3 percent more than the dividend yield of the XAU.

In addition, the yields of gold stocks have been climbing over the past year while the 10-year Treasury remains low.

click to enlarge

3. Enhanced returns in a diversified portfolio.

We have long advocated a conservative weighting of 5 to 10 percent in gold and gold stocks because of the inherent volatility you are seeing today. But despite the extreme moves, there’s a way to use gold stocks to enhance your portfolio’s returns without adding risk.

Take a look at the efficient frontier chart below, which creates an optimal portfolio allocation between gold stocks and the S&P 500, ranging from a 100 percent allocation to U.S. stocks and no allocation to gold stocks, and gradually increasing the share of gold stocks while decreasing the allocation to U.S. equities.

The blue dot shows that from September 1971 through March 2013, the S&P 500 averaged a decent annual return of 10.34 percent.

What happens when you add in gold stocks? Assuming an investor rebalanced annually, our research found that a portfolio holding an 85 percent of the S&P 500 and 15 percent in gold stocks increased the return with no additional risk. This portfolio averaged 10.96 percent over that same period, or an additional 0.62 percent per year, over holding the S&P 500 alone. Yet the average annual volatility was the same.

click to enlarge

Although 0.62 percent doesn’t seem like much, it adds up over time. Assuming the same average annual returns since 1971 and annual rebalancing every year, a hypothetical $100 investment in an S&P 500 portfolio with a 15 percent allocation in gold stocks would be worth about $7,899. This is greater than the $6,246 for the portfolio solely invested in the S&P 500 while adding virtually zero risk.

Case Study: Alamos Gold (AGI)

Not all miners are worthy of your investment, and the task of picking quality gold company candidates isn’t simple. One company we currently like is Alamos Gold, which reported first-quarter 2013 results last week.

To the delight of many mining analysts, the company beat analysts’ expectations on both the top and bottom line. Alamos grew its production to 55,000 ounces of gold from 40,500 ounces in the same quarter last year.

In addition, AGI boasts an 8.76 percent free cash flow yield, allowing executives to build the business through paying off debt, making acquisitions or returning money to shareholders. In Alamos’ case, the company announced a stock repurchase of 10 percent of its float over the next 12 months.

While the company trades at a premium to most junior producers, it may be well worth the extra coin, as its low cost profile, cash generation and self-funding capabilities, as well as its discipline in returning capital to shareholders fit our growth at a reasonable price (GARP) model.

Copyright © U.S. Global Investors

Tags: Gold, Gold Equities
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Gold Market Radar (May 6, 2013)

Saturday, May 4th, 2013

Gold Market Radar (May 6, 2013)

For the week, spot gold closed at $1,470.75 up $8.66 per ounce, or 0.59 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 0.59 percent. The U.S. Trade-Weighted Dollar Index lost 0.46 percent for the week.

Strengths

click to enlarge

• For the week, spot gold closed at $1,470.75 up $8.66 per ounce, or 0.59 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 0.59 percent. The U.S. Trade-Weighted Dollar Index lost 0.46 percent for the week.
• INK Research reports insider buying on the TSX Venture exchange is nearing record highs, led by the mining sector. The company’s proprietary insider buying indicator hit 715 percent, meaning there are seven stocks with insider buying for each stock with insider selling. The recent surge bodes well for mining junior stocks as the insider buying indicator correctly foreshadowed the recovery in prices following the 2008 crash says David Kwan of Salman Partners. It appears physical gold buyers are not the only gold bulls in the market today.
• During a recent panel discussion David Franklin of Sprott and Frank Holmes discussed the recent sell off in gold and agreed that gold sentiment has bifurcated with financial buyers reducing their allocation to gold while physical investors have increased their purchases. As a result, Frank stated that as uneducated buyers get shaken out of the market, and educated buyers jump in gold, ownership is effectively transferred from weak hands to strong hands.

Weaknesses

• Evy Hambro, manager of BlackRock’s commodities funds was very critical of recent gold stocks performance at a private event in London this week. Hambro placed the blame on poor execution on the part of managers, and noted their poor job at delivering value to shareholders. These comments are not new, but they do serve to remind investors of the difficulty in picking the best stocks among an industry with rapid rising costs, recent weak pricing, and high execution risk.
• The reporting season started with some previous underperformers confirming their status. Newmont Mining disappointed with its high costs and lower grades which make its full year cost guidance now difficult to achieve. Goldcorp also battled lower grades as it announced lower by-product numbers at Penasquito. Kinross anticipated its reporting to announce its widely expected prefeasibility study of Tasiast. The project has only an 11 percent internal rate of return at $1,500 dollar gold. No sensitivities were given to see what could happen in a bad pricing scenario to a project that has already seen multi-billion dollar write-downs. And lastly, George Topping of Stifel Nicolaus shared the news that Barrick/Goldcorp’s gold exports from Pueblo Viejo in Dominican Republic apparently have been halted againas the companies are reportedly required to pay an unsubstantiated and unlikely $992 million in fines and penalties.
• New Gold Inc. reported weak earnings this week. The company missed earnings and production guidance based on lower than expected production from its New Afton mine as low grade open pit waste material had to be removed to reach the high grade ore. The company also reported lower production at CSP and Mesquite based on lower grades at the leach pads.

Opportunities

• A symbolic change in sentiment happened this week as Allied Nevada was able to complete a bought deal this week led by Dundee Securities. Dundee Securities President Ned Goodman is a widely respected in the mining industry and his company stepped up and raised equity for a gold company amid negative investor sentiment. The deal, valued at $150 million is by no means small, and demonstrates capital markets are healthier than initially thought; at least in the presence of strong leadership with a proven record of success.
• The Arizona State Senate approved legislation to make gold and silver coins legal tender in the state. The bill was eventually vetoed by the Governor who cited the lack of coordination with Federal agencies tasked with overseeing these transactions for her inability to pass the legislation. Despite this fact, it has become evident there is a lack of confidence in the monetary system. The push to establish gold as currency in the United States has become increasingly popular, with more than ten states currently drafting similar legislation.
• The addition of two words to the latest Federal Open Market Committee communication issued on Wednesday has given us more reasons to believe the Fed is not likely to taper purchases as early as some economists anticipate. The sentence now reads that not only is the Fed ready to reduce asset purchases when it deems it necessary, it is now also ready to increase those purchases to maintain appropriate policy accommodation. The correlation between the size of the Fed’s balance sheet and the price of gold continues to be strong despite a recent divergence. Further easing, even the sole possibility of it, should bode well for gold prices.

Threats

• Dundee Capital Markets studied the three-year annualized percent increase in per tonne costs for 99 mines around the world. The results are staggering; their estimates talk of a median annualized rate of cost inflation of 11 percent over the last three years. It is evident mining cost inflation is widespread, but when comparing these costs with a 2 percent annual CPI, one can conclude costs are out of control. With gold prices showing weakness in recent months, margin compression is a genuine threat for those companies that cannot control their cost inflation.
• Dundee Capital Markets also looked at the recent developments that have changed the fiscal risk panorama for both seniors and juniors in the space. The regulatory instability of developing countries is not at all surprising, with at least eight documented cases of added fiscal pressure to miners. Countries such as Ghana, Romania, Senegal, and Armenia among others increased or sought to increase royalty payments from miners in the last 12 months. As if these risks were not enough, traditional mining friendly jurisdictions in developed countries have also turned their back on miners recently. Australia’s super profits tax, Nevada’s proposed changes to royalty rates, and Quebec’s potential windfall tax, and Mexico’s recently discussed new royalty system are only a few of the frontal attacks miners have been subject to in recent months.
• Financial media outlets have convinced investors that the gold sell off in mid April is broad based and that gold has lost its fundamental value. An interesting report was published this week in which it became evident that only a few players have parted with their physical gold in the last three months. What is most interesting is the fact that JP Morgan accounts for 99.3 percent of the gold delivered in the Comex market since February 1. This is the same bank that was investigated in connection with a possible silver price manipulation after whistleblowers alerted the Commodities Futures Trading Commission in November 2009. Back then it was speculated that the bank was acting as an agent of the Federal Reserve, holding down the price of silver, to buoy confidence in the U.S. dollar.

Tags: Gold, Gold Equities, Gold Market
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Beyond Gold: 4 Reasons to Think Energy

Friday, May 3rd, 2013

by Russ Koesterich, Chief Investment Strategist, Blackrock Investments / iShares

While the selloff in gold has dominated headlines lately, another commodity – oil – has also experienced price declines in recent months.

The main US benchmark for crude prices is down roughly 5% from a February peak. But despite this drop, here are four reasons why I’m still a fan of energy stocks.

The Outlook for Oil Prices: While the price of oil has slid in recent months, it’s starting to inch higher and is currently up significantly from its April low of $85 a barrel. Looking forward, given that expected growth in oil demand is in line with likely new production, I expect oil prices to remain in a stable range between the high $80s and the mid $90s absent a Middle East supply shock, which would arguably drive prices higher.

Cheap Valuations: Though range bound oil may not be that exciting, it may be enough to support an energy sector that has dramatically underperformed the broader market so far this month. US energy companies are now trading at a 20% discount to the broader market and at just 12.5x trailing earnings, the lowest valuation of any sector.

High Dividend Yields: The large integrated oil companies are now offering dividend yields of around 3%, likely welcome news to yield hungry investors.

A Potential Hedge Against Inflation: The energy sector, at least historically, has had a positive correlation with inflation. In other words, energy stock prices have actually gone up as inflation has risen. This means that, though I don’t expect inflation to be a worry until at least next year, energy stocks can potentially provide some purchasing power protection over the long term, albeit with more volatility than traditional inflation hedges.

In short, with oil prices likely to remain relatively stable going forward, the energy sector has become an interesting value play, especially considering energy companies’ attractive yields and correlation with inflation. One way to access the sector is through the iShares S&P Global Energy Sector Fund (IXC).

The author is long IXC

Source: Bloomberg

Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist and a regular contributor to the iShares Blog.  You can find more of his posts here.

Past performance does not guarantee future results.

In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.  Narrowly focused investments typically exhibit higher volatility.  The energy sector is cyclical and highly dependent on commodities prices. Companies in this sector may face civil liability from accidents and a risk of loss from terrorism and natural disasters.

Copyright © Blackrock Investments / iShares

Tags: energy, Gold
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Gold Market Radar (April 29, 2013)

Monday, April 29th, 2013

Gold Market Radar (April 29, 2013)

For the week, spot gold closed at $1,462.09 up $58.24 per ounce, or 4.15 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 3.15 percent. The U.S. Trade-Weighted Dollar Index lost 0.30 percent for the week.

Strengths

• On Friday last week, the Chinese Gold & Silver Society in Hong Kong reported it had sold out of all of its spot gold and placed orders to Switzerland four times larger than normal to keep up with demand. On Monday, the U.S. Mint suspended sales of its smallest American Eagle gold coin after it sold off all of its inventory. The surge in gold demand in Turkey is causing delays in coin deliveries by the Istanbul-based mint, while Standard Chartered Plc said its gold shipments to India last week exceeded the previous record by 20 percent.
• Gold is not in a bubble according to Commerzbank’s strategists. Their latest chart plots gold starting in 2002 together with crude oil starting in 1998 and tech stocks from 1990. In their discussion they note that immediately following their record highs, both tech stocks and oil went on a sharp decline. Within nine months, tech stocks had halved in price, while it took only three months for oil to lose half its price. The picture for gold does not resemble these two events; after 19 months from its peak, gold has fallen only about 25 percent. A comparison between the current situation in gold and the former bubbles is superfluous at best, in their opinion.

click to enlarge

• Alamos Gold reported its first-quarter 2013 results earlier in the week to the delight of many mining analysts. The company beat analysts’ expectations on both top and bottom line, and grew its production to 55,000 ounces of gold from 40,500 ounces in the same quarter last year. Furthermore, the company is currently boasting an 8.76 percent free cash flow yield. A company with strong free cash flow yield can build its business through paying off debt, making acquisitions, or returning money to shareholders. In this case, the company announced a stock repurchase of 10 percent of its float over the next 12 months. Even though the company trades at a premium to most junior producers, its low cost profile, cash generation and self-funding capabilities, as well as its discipline in returning capital to shareholders fit our growth at a reasonable price (GARP) model rightly.

Weaknesses

• Following the atrocious sell-off in commodities that caused so much market chaos last week, commodity funds lost 1.3 percent of total assets under management to redemptions; precious metals funds alone recorded $2.3 billion in outflows. That is 11 straight weeks of outflows from precious metals funds, the longest streak on record according to BofA Merrill Lynch strategist Michael Hartnett.
• Harmony Gold reported an underground fire at its Phakisa mine which left one employee dead and led to a halt at two operations that account for 19 percent of its output. The last official report stated the cause of the fire is still unknown and the efforts to extinguish the underground blaze are ongoing.
• Technical analysts have resumed the calls on gold to fall further following the price recovery over the last week. It looks like gold has broken below the trend line from the 2008 low in Auerbach Grayson’s modeling. Its belief is that gold can fall to $1,150 based on a purely technical analysis. While we commonly use this type of analysis as part of our investment recommendations, we believe conclusions stemming from these studies must be backed by adequate fundamental analysis. As of late, we believe the majority of the technical analysis commentaries calling for gold falling further do not have convincing fundamental support.

Opportunities

• The Swiss Peoples Party launched an initiative to prevent the Swiss National Bank from selling any of its gold reserves and to force it to hold at least 20 percent of its assets in the precious metal. The initiative has gathered the required 100,000 signatures necessary for a national referendum, the government said last week. At the end of 2012, the SNB’s gold reserves represented around 10 percent of its total assets.
• Barrick Gold’s shareholders openly criticized the firm’s executive compensation arrangements at the company’s annual general meeting in Toronto on Wednesday. The criticism was exacerbated by the board’s decision to pay $17 million to newly appointed co-chairman John Thornton. The company lost more than $10 billion of its market capitalization in 2012 and has lost nearly 50 percent of its market capitalization so far this year. Despite the fact that the compensation vote is non-binding, we welcome this type of shareholder activism and its intention of tackling a problem that has become endemic in the gold mining industry.
• On May 11, the Colombian government will revert to the previous mining code under which most current mining licenses were granted. The move comes as the constitutional court failed to revalidate the new mining code proposed in 2011. The government will now have to decide whether it stays with the old code, which proved friendly to foreign investment and saw exponential growth in the domestic mining industry, or drafts a new code and takes it through the legislative process. While we admit this process will bring some political uncertainty to the sector in the short term, we see an opportunity for the government to allow mining companies to operate under the old code while it drafts a proper, well-documented mining code to be implemented prospectively. The move may also prove vital to unlocking the moratorium on mining licenses the central government has had in place since 2011.

Threats

• U.S. inflation may appear low for historical standards at 1.5 percent, but this is not stopping it from eroding citizens’ real wealth. On Friday, the yields of U.S. Treasuries up to the seven-year term closed below the inflation rate, which is effectively the same as paying the government to accept your loan. This is especially worrisome for savings and pensions that will barely, if at all, struggle to offer positive real returns. But the story is also affecting workers, as the Wall Street Journal reports wages are rising at a rate of 0.5 percent a year, much lower than the pace of inflation. In times like this, investments in hard assets, and especially in gold, could be beneficial for their inflation protection features.
• Political instability has returned to the young nation of Kyrgyzstan as local nationalists threaten to return to the streets to topple yet another government unless Prime Minister Zhantoro Satybaldiyev agrees to expropriate Centerra Gold’s Kumtor gold mine. The nation’s parliament has set a June 1 deadline to renegotiate or repudiate the 2009 agreement under which Centerra is operating the mine. The company currently pays a 14 percent gross revenue royalty to the country, which in 2011 accounted for 12 percent of the country’s GDP. Despite the strong pressures by the nationalists, the office of the Prime Minister remains committed to resolving the issue without dashing the country’s hopes of attracting more foreign direct investment.
• Kitco contributor and leading precious metals commenter David Levenstein notes in his last piece that it has become abundantly clear that the price decline in gold last week was engineered by speculative action on the futures market of Comex. Furthermore, he commented on how this artificial manipulation of paper gold has nothing to do with the physical market, which is skyrocketing. Eventually, this will lead to a major dislocation in the price of the physical and the price of the paper markets, with the risk being that some issuers of paper gold will not be able to deliver the promised bullion.

Tags: Gold, Gold Market
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Goldman Closes Gold Short

Tuesday, April 23rd, 2013

It appears Goldman (together with virtually everyone else focused on physical not paper gold) has bought enough gold from its clients. Now, there is only upside.

Goldie on gold:

We closed our short trading recommendation on gold

We have closed our recommendation to short COMEX Gold, as prices moved above the stop at $1,400/toz. We have exited the trade significantly below our original target of $1,450/toz, for a potential gain of 10.4%. The move since initiation was surprisingly rapid, likely exacerbated by the break of well-flagged technical support levels. Our bias is to expect further declines in gold prices on the combination of continued ETF outflows as conviction in holding gold continues to wane as well as our economists’ forecast for a reacceleration in US growth later this year.

Explains the rip in gold this morning, and why it will continue to do so consider Goldman’s “bias” to keep buying more gold from its clients (especially since any forecasts of “reaccelerating” growth now merely spark bouts of uncontrollable laughter). Buy until Goldman says to go long.

Tags: Gold
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Gold Buyers Get Physical As Coin and Jewelry Sales Surge

Monday, April 22nd, 2013

Gold Buyers Get Physical As Coin and Jewelry Sales Surge

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

I  was honored to be in St. Paul’s Cathedral attending Margaret Thatcher’s funeral this week. It was quite a special opportunity to pay tribute to Britain’s longest-serving prime minister in person, and the ceremony provided a reflective occasion on her influential leadership and unwavering conviction.

As her country faced an economic crisis with high inflation, high tax rates and hundreds of mining strikes, the lady’s iron courage helped her make the difficult decisions that steered the United Kingdom to a more sustainable path.

A steely resolve seems to be lacking in many of our world leaders today. Maggie led the U.K. down the path of privatization, encouraging entrepreneurship and free markets because her belief was that “Socialist governments traditionally do make a financial mess. They always run out of other people’s money.”

In his recent webcast, Global Portfolio Strategist Don Coxe points out the effectiveness of this privatization path, showing the rise in the U.K.’s real GDP from the time she was elected Leader of the Opposition in 1975 through today.

click to enlarge

Buyers Move from Gold ETFs to Physical Gold
After spending a few short days in London, I flew back to the U.S., landing in New York City to work with the International Crisis Group. U.S. Global Investors has been a strong supporter of the ICG, which works to resolve conflicts around the world and promote peace and prosperity.

I also met with several business leaders while in The Big Apple. For those of us in the investment business, we all have the same question on our minds: What’s going on with gold? How can governments’ balances sheets continue to expand like we’ve never seen before in history, yet the price of the metal melt so quickly?

We noted numerous reports indicating that there’s a shift taking place in the gold market, with investors discarding the gold ETF, preferring physical gold instead. Take a look at Zero Hedge’s chart. On one day alone, April 17, buyers scooped up a record 63,500 ounces from the U.S. Mint. This is equivalent to 2 tons of gold, “more than the previous two months combined,” according to Zero Hedge. This is a drastic move compared to recent history.

click to enlarge

The U.S. Mint is generally the last place gold shoppers buy their ounces because they have to pay “a hefty premium” for gold. It’s like going to 7-Eleven on Christmas to buy AA batteries for the electronic toy Santa left under the tree.

However, gold shops such as Apmex or Gainesville Coins aren’t closed; rather, gold customers end up buying from the U.S. Mint because “nobody else has any physical [gold] at a lower premium to spot (or any metal in inventory),” says Zero Hedge.

So, even with the gold price dropping, why are gold coins selling at a premium? It’s Economics 101: The coin supply is limited and the demand is high.

This buying trend isn’t only occurring in the U.S. In Bangkok, Thailand, for example, crowds of buyers were filling stores, eagerly waiting in multiple lines to purchase gold jewelry and coins. According to The Wall Street Journal, “Gold shops from Tokyo to Dubai have witnessed frantic buying of the coins, alongside other items such as gold wedding bracelets. The surge has been triggered by cheaper prices.”

China Daily reported a similar buying enthusiasm occurring in jewelry stores in Beijing, Shanghai and Guangzhou. Shanghai’s newspaper reported that “while gold markets in the United States and Europe saw panic selling, sales of gold bars and jewelry jumped in China as buyers viewed the lower prices as an opportune moment to invest.”

To put it simply, for retail investors in the west and east, gold went on sale. A Black Friday special for the yellow metal in spring.

Moderation is Gold Investors’ Guide
We believe the yellow metal is experiencing a short-term correction during its long-term secular bull market. Compare today’s gold bull run to the spectacular gold bull market in the 1970s. From February 1975 to August 1976, gold fell 44 percent. However, those investors who held tight to their gold were rewarded: From August 1976 to January 1980, gold rose an astounding 700 percent.

This time around, gold fell 28 percent over nearly the same period.

click to enlarge

This chart holds a mixed message for investors. On the one hand, if history repeats itself, gold could fall as far at $1,050. The positive message, though, is that history teaches us that gold can withstand a 44 percent decline and rebound substantially.

As Roman philosopher, Marcus Tullius Cicero, wisely said, “Never go to excess, but let moderation be your guide.” Cicero’s advice applies to life as well as when investing in gold. What I wrote in The Goldwatcher back in 2008 remains valid today:

“We put a lot of messages into the marketplace, but the one we stress most when it comes to gold is moderation. Don’t try to get rich with gold because the corresponding risk is simply too high. Gold is a volatile asset whose daily price action can be far more dramatic than blue-chip stocks and many other asset classes.”

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