Eric Sprott: Gold Alert (June 8, 2012)

Friday, June 8th, 2012

 
By Eric Sprott & Shree Kargutkar

June 8, 2012

There have been key developments in the physical gold market over the last few weeks which we feel are worth highlighting:

1) The Chinese gold imports from Hong Kong in April, 2012 surged almost 1300% on a YoY basis. Total gross imports for the month of April were 103.6 tonnes and the net imports were 66.3 tonnes¹. It is not the data for April alone which has caught our eye. There has been a stunning increase of gold imports through Hong Kong for export into China over the past 2 years. Between May 2010 and April 2011, China imported a net 66 tonnes of physical gold through Hong Kong. Between May 2011 and April 2012, that number jumped to 489 tonnes. This represents an increase of 640%.

HONG KONG GOLD EXPORTS TO CHINA (KG)

Source: Census and Statistics Department of Hong Kong

2) Central banks from around the world bought over 70 tonnes of gold in April, 2012. Data from the IMF showed developing countries such as the Philippines, Turkey, Mexico and Sri Lanka were significant buyers of gold as prices dipped².

3) Iran purchased $1.2B worth of gold in April, 2012 through Turkey. As the developed nations continue devaluing their currency at the expense of developing nations, countries such as Iran, China and Mexico are forced to look at alternative stores of value³.

4) After twenty years of lackluster returns and stagnant bond yields, Japanese pension funds have finally discovered the value of investing in gold. The $500M Okayama Metal and Machinery pension fund placed 1.5% of its assets into gold bullion-backed ETFs in April in order to “escape sovereign risk”⁴.

5) Bill Gross writes⁵, “Soaring debt/GDP ratios in previously sacrosanct AAA countries have made low cost funding increasingly a function of central banks as opposed to private market investors. Both the lower quality and lower yields of previously sacrosanct debt therefore represent a potential breaking point in our now 40-year-old global monetary system. […] As they (investors) question the value of much of the $200 trillion which comprises our current system, they move marginally elsewhere – to real assets such as land, gold and tangible things, or to cash and a figurative mattress where at least their money is readily accessible”. Is the bond king recommending gold? YES, YES YES!

6) The Gold Mining ETF, GDX, has seen strong inflows in the past 3 months. The number of units outstanding have increased from 162.5M⁶ to roughly 187M⁷ between March 1, 2012 and May 31, 2012. This represents an increase in assets of almost $1.2B in a span of 3 months. It is worth pointing out that for a majority of this three months period, GDX, and by extension the gold mining companies were experiencing significant declines in their market values.

We believe there has been a material change in the gold investing landscape. The HUI, which is the Gold Bugs Index, is now up over 20% from its lows since May 16th, 2012. The slide in gold equities seems to be subsiding as a foundation for a strong move upwards is set. New buyers, represented by the Chinese, central banks, Japanese pension funds and the Iranians, bought almost 140 tonnes of gold in April alone. To put this into perspective, the annual gold production is approximately 2600 tonnes⁸. China and Russia produce around 500 tonnes of gold annually, which never makes it to the open market. This leaves about 2100 tonnes of gold production annually for the rest of the world.

When buyers representing 140 tonnes of new demand enter a market which only has 175 tonnes of monthly supply, we are left wondering about two things:

1) In a balanced market, where is the source of supply to the new buyers going to come from?

2) How can a new buyer of size get into the gold market, which is already balanced, without significantly impacting the price of gold?

The answer is fairly obvious. When demand outstrips supply, prices move higher. These significant macro changes in the supplydemand dynamic of the gold market should propel the price of gold to new highs.

1. HK Gov statistics website: http://www.censtatd.gov.hk/

2. IMF website: http://www.imf.org/external/data.htm

3. http://www.resourceinvestor.com/2012/06/05/irans-gold-imports-from-turkey-surgedin-april?ref=hp

4. Financial Times: http://www.ft.com

5. http://www.pimco.com/EN/Insights/Pages/Wall-Street-Food-Chain.aspx

6. http://www.forbes.com/sites/etfchannel/2012/02/28/notable-etf-inflow-detected-gdx-abx-gg-nem-3/

7. http://www.forbes.com/sites/etfchannel/2012/05/29/noteworthy-etf-inflows-gdx-abx-gg-nem-3/

8. GFMS – www.gold.org

Tags: Bill Gross, Bond Yields, Buyers Of Gold, Central Banks, China, Developed Nations, Eric Sprott, ETF, ETFs, Gold, Gold Bullion, Gold Exports, Gold Imports, Gold Market, Gross Imports, Investing In Gold, Key Developments, Market Investors, Month Of April, Private Market, Shree, Sovereign Risk, Sprott, Sprott Gold, Statistics Department
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Is it 2010 and 2011 All Over Again?

Thursday, April 26th, 2012

Following a string of weaker than expected economic reports over the last few weeks and today’s much larger than expected drop in Durable Goods Orders, investors are increasingly asking if the market is setting itself up for a repeat of 2010 and 2011.  In the chart below, we highlight the annual performance of the S&P 500 so far this year, as well as in 2010 and 2011.  As shown in the chart, in both 2010 and 2011 the S&P 500 rallied in the first four months of the year.

In 2010, the S&P 500 was up 9.2% when it reached its first half peak on 4/23.  From there, the index dropped sharply and was down as much as 10% YTD before rallying when the Fed stepped in with QE2.  In 2011, we saw a similar pattern.  When the S&P 500 reached its first half peak on April 29th, the index was up 8.4% on the year.  From there, it was a downward slide as the index fell roughly 20% through October.  Then late in the year, the market once again rallied when the Summer ended and the Fed stepped in with ‘Operation Twist.’

This year, the market finds itself in a similar position as the month of April comes to a close.  At its peak on 4/2, the S&P 500 was up 12.8% on the year, but it has since seen a minor pullback.  This pullback coupled with recent weakness in economic data and the on-going European debt crisis has investors worried that this could be a long hard Summer.

Will 2012 turn out a lot like last year?  Only time will tell, but while there are some similarities between now and then, there are also some key differences.  For starters, the economy is at a higher level now than it was then.   Additionally, while most global Central Banks had a bias towards tightening early last year, this year the bias is towards easing.  Finally, last year’s peak in the market and economic activity came just weeks after the earthquake in Japan.  As we noted back then, when the world’s third largest economy essentially grinds to a halt, the global economy will feel an impact.

Tags: Amp, Bias, Central Banks, Debt Crisis, Downward Slide, Durable Goods Orders, Earthquake In Japan, Economic Activity, Economic Data, Economic Reports, Four Months, Global Economy, Half Peak, Investors, Month Of April, Months Of The Year, Pullback, Qe2, Starters, Ytd
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Consumer Confidence Weaker Than Expected (Bespoke)

Wednesday, April 25th, 2012

Today’s report of Consumer Confidence for the month of April came in at 69.2, which was slightly weaker than expected (69.6) and down modestly from last month’s downward revised reading of 69.5.

One interesting aspect of the Consumer Confidence report is the spread between those Americans making more than $50K per year and those making between $35K and $50K per year.  It is no surprise that Americans with higher incomes are typically more confident than Americans with lower incomes.  What is noteworthy, however, is the growing divergence in confidence between the two groups.  Although the current six month average reading is down sharply from last May’s record high reading, since the early 1990s there has been a clear trend higher in this spread.

The two charts below show the historical levels of the percentage of Americans expecting higher and lower stock prices and interest rates.  Currently, 35.7% of those asked expect stock prices to rise, while 29.1% see stock prices falling.  For those looking for comparisons to last year, this marks the second straight month where more people expect stock prices to rise than decline.  The last time this occurred was back in April 2011.  The lower chart shows the percentage of consumers expecting higher and lower interest rates.  Just as more Americans expect higher stock prices than lower prices, more Americans also see interest rates rising versus falling.  It has now been 36 straight months that at least 40% of consumers have been expecting higher interest rates.  The last time this number was less than 40% was back in April 2009 when the 10-Year US Treasury was yielding about 3.2%.  Today the 10-year is yielding under 2%.

Tags: 35k, Consumer Confidence Report, Consumer Report, Consumers, Decline, Divergence, Early 1990s, Incomes, interest rates, Last Time, Month Of April, Stock Prices, Surprise, Treasury
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Eric Sprott: Investment Outlook (June 2011)

Thursday, June 30th, 2011

Caveat Venditor!

by Eric Sprott & Andrew Morris

The recent bear raid on silver has left many concerned about the sustainability of its historic run. Silver, being a relatively obscure market for most mainstream commentators, attracted much attention in the ensuing days following the May 1 takedown. Indeed, though the 30% drop in silver occurred over only four days, seemingly all eyes were on silver, with commentators who could’ve cared less about the silver market only a couple of months ago, suddenly tripping all over one another to make the bubble call. Silver bubble 2.0? Hardly. Anyone who has been fortunate to have been invested in silver over the past few years would unfortunately be used to such blatant takedowns. The Chinese don’t call it the “Devil’s Metal” for no good reason. With so much talk these days about the risks of investing in silver, we think that perhaps it may be timely for us to weigh in on the matter. The silver market is riskier than ever, but for reasons the vast majority of pedestrian commentators have failed to grasp.

There is no doubt that speculative dollars have been flowing into the silver market. We note that in April record trading volumes were registered in the SLV¹, Comex futures², LBMA transfers³, and the Shanghai Gold Exchange futures⁴. In fact, converting the average daily trading volume in the aforementioned silver instruments to the amount of ounces of silver they are supposed to represent, there were on average, over 1.1 billion ounces worth of silver traded every day in the month of April⁵. Truly a staggering number when contrasted against the actual amount of silver available for investment. To wit, the world will only supply about 979 million ounces this year from mine and recycling of scrap, of which it is estimated that 657 million ounces will be used up for non-investment purposes⁶. So in effect, that leaves roughly only 322 million ounces available this year for investment purposes. Converting to days (recall that at least 1.1 billion ounces traded each day) it leaves only about 1.3 million ounces per trading day of available supply. So, we are essentially trading the amount of physical silver actually available for investment, 891 times over each day! It really begs the question; just what are people trading in these markets?

Consider the largest and most prominent of those markets – the Comex, which we believe has owned an effective monopoly on silver price discovery for decades. In fact, the Comex churned over 800 million ounces of silver futures and options on average each day in April⁷. Indeed, notwithstanding the massive but very opaque over-the-counter silver derivatives market, trading on the Comex dwarfs both the physical and the other (known) paper silver markets, combined. Despite its dynamics being relatively complex and generally not well understood by most, the world’s financial community continues to view trading on the Comex as representative of the fundamentals for the physical silver markets. A market built on a high amount of leverage, both the buyers and sellers of Comex futures and options contracts are able to establish a position in “silver” with pennies on the dollar in collateral and even more astonishingly, no physical silver backing the contracts at all. The following charts illustrate just how unreal these markets have become.

Chart A:

Source:  Bloomberg, Sprott Asset Management

Chart B:

Source:  Bloomberg, Sprott Asset Management

In chart A, we compare the total open interest in Comex futures and option contracts to the actual amount of silver held in registered inventories able to be delivered against those contracts, since 2009. In chart B, with the steeply-sloping line shows the ratio of open interest (i.e. paper silver ounces) per ounce of physical silver held in inventory. We believe the historical trend of rising open interest and falling inventories deserves considerable attention from anyone attempting to understand the silver market. And though we do note that since October 2010 the trend of rising open interest appears to have abated, the inventories have been evaporating steadily and thus the ratio of the two measures has continued to trend higher. In fact, since 2009 the ratio of paper silver to physical silver has increased fourfold from approximately 8 times to almost 33 times, where it stands today.

Tags: Andrew Morris, Bubble 2, Canadian, Caveat Venditor, Comex, Eric Sprott, Futures, Gold Exchange, Good Reason, India, Investing In Silver, Investment Outlook, Investment Purposes, Lbma, Mainstream Commentators, Month Of April, No Doubt, Silver Market, Slv, Staggering Number, Takedown, Takedowns
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Energy and Natural Resources Market Cheat Sheet (May 16, 2011)

Saturday, May 14th, 2011

Energy and Natural Resources Market Cheat Sheet (May 16, 2011)

Strengths

• Coal prices at Richards Bay Coal Terminal rose to the highest level in almost a month, gaining 0.3 percent to $123.93 a ton last week. The price climbed 45 percent in April from a year earlier and 1.6 percent from March.
• China released its oil trade data this week that implied total oil demand growth for the month of April was up a robust 12 percent year-over-year. China’s crude oil imports increased 1.8 percent year-over-year to 5.26 million barrels per day.
• In Indonesia, tin surveyed for export prior to shipment increased by 23 percent year-over-year to 9,708 tons in April, the highest monthly total recorded in the last two years. It’s the highest figure for April since the export licensing system was first introduced in 2007.
• China Iron and Steel Association said this week that China’s daily crude steel output reached 1.93 million tons in April, up 1 percent month-over-month.

Weaknesses

• Coal sales at South Gobi are being threatened by supply side disruptions as the Russian suppliers, from whom Gobi had been buying its diesel needs, are facing shortages.
• Even after constant tightening efforts by the Chinese government, the statistics bureau reported China’s consumer prices rising 5.3 percent on a year-over-year basis in April. This would exceed the government’s full-year target of 4 percent. The gain was more than consensus estimate of 5.2 percent and producer prices increased 6.8 percent.
• Turkey’s chrome ore exports fell by 13 percent month-over-month and 53 percent year-over-year in April 2011. The main driver was lower shipments to China, which saw a 37 percent decrease from April 2010.
• Imports of unwrought copper and products fell by 14 percent on a month-over-month basis and 40 percent year-over-year basis to 263 kilotons, according to Chinese import data reported this week. The General Administration of Customs reported inbound movements of copper and products down to 262,676 metric tons from 304,299 metric tons in March.
• The U.S. gasoline demand for May was extremely weak, running lower year-over-year by 391 thousand barrels per day. Total U.S. oil demand was lower on a year-over-year basis by a massive 663,000 barrels per day.

Opportunities

• According to the Ministry of Industry and Information Technology, China plans to cut 291,000 metric tons of so-called outdated capacity for copper, close 600,000 tons of outdated aluminium capacity, 585,000 tons of lead-making capacity, and 337,000 tons of zinc production capacity this year.
• The Japanese government reported a likely dip in Japan’s crude steel output in April through June despite the impact of the March earthquake, as higher demand for construction steel will be partially offset by a plunge in demand from the auto sector.
• At least 11 Chinese provinces are now facing varying degrees of power shortages. This year, power tightness has come well ahead of the usual summer months in July and August.
• German Chancellor Angela Merkel recently said that Germany will end its reliance on nuclear energy. She said the only question was how long an overlap will be needed before other power sources can fill the gap. Over 22 percent of Germany’s electricity needs are supplied by nuclear energy, 42 percent by coal, 13.6 percent by natural gas and 16.5 percent by renewables.
• Brazil may become a net importer of aluminum in 2012 as supply lags behind demand fueled by the hosting of the World Cup and the Olympic Games. The country will most likely import 50,000 metric tons of aluminum next year in net terms. Based on that estimate, shipments will rise to 350,000 tons in 2015.

Threats

• Standard and Poor’s warned this week that “Indonesia’s mining industry is undergoing a regulatory overhaul that is likely to weaken the operating and financial performance of domestic mining companies.” S&P highlighted that existing producers are “grandfathered” but the agency remains concerned that new supplies will be impacted.
• The Chinese economic data for April showed signs of slowing momentum, with industrial production at 13.4 percent year-over-year from 14.8 percent year-over-year in March. New loan growth was down 5 percent year-over-year to RMB 740 billion. Power generation was weaker, slowing to 10.5 percent year-over-year, largely due to a sharp year-over-year slowdown in hydro generation, which was up only 1.2 percent.
• Executives from five of the largest oil companies faced questions about tax deductions in U.S. Senate hearings this week.

Tags: Brazil, Chinese Import, Chrome Ore, Coal Prices, Coal Sales, Consensus Estimate, Crude Oil, Crude Oil Imports, Crude Steel, Import Data, Licensing System, Month Of April, Oil Demand, Oil Trade, Producer Prices, Richards Bay, Russian Suppliers, South Gobi, Statistics Bureau, Steel Association, Steel Output, Target
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ETF Trends: April ETF Performance Report

Friday, May 1st, 2009

Each month ETF Trends publishes a useful performance round-up of ETFs (non-leveraged) trading on American stock exchanges.

“The markets and exchange traded funds (ETFs) in April had their fair share of ups and downs, but in the end, it was a positive month for several sectors and the major indexes.

The Dow Jones Industrial Average rose 7.3% for the month. The Nasdaq gained 12.7%, and the S&P 500 increased 9.4%. While there are some areas that are still struggling, a few sectors are also showing signs of improvement and crossing above their long-term trend lines (200-day moving average). This includes retail (up 20.9% in April), Taiwan (up 26.6%) and networking (up 29.7%).

The strongest sector this month was REITs, which rose about 32%.

For a complete look at the month of April, click through to see our April ETF Performance Report.”

Source: Tom Lydon, ETF Trends

Tags: American Stock Exchanges, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, ETF, Etf Performance, Exchange Traded Funds, Fair Share, Indexes, Month Of April, Moving Average, Nasdaq, Performance Report, Reits, Report Source, Sectors, Term Trend, Trend Lines, Ups, Ups And Downs
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