Paper Assets

The Three-Part Case for Commodities (Koesterich)


Tuesday, May 22nd, 2012

 

With both gold and broader commodity indices down significantly month to date, many investors are asking if they should lower or even remove their commodity exposure. I believe the answer is no.

First, it’s useful to put the recent weakness in perspective. Both gold and a broad basket of commodities are down roughly 10% over the past three months. While the losses represent a significant correction, they are in line with the performance of equity markets over the same time period. Even more importantly, here are three reasons for maintaining a strategic exposure to commodities.

1.) Diversification: Commodities typically behave differently from paper assets like stocks and bonds even as correlations between all risky assets have risen in recent years. In fact, based on historic relationships, it doesn’t take a large allocation to commodities – it typically takes less than 10% – to improve the risk-adjusted returns of a strategic portfolio.

2.) Inflation: Commodities tend to perform best when inflation is rising. As I mentioned last week, while I see little risk of double-digit inflation in the near-term, inflation is not completely dead. Core inflation in the United States is rising at 2.3% year over year, a 3 ½-year high. Given the US fiscal position and the unconventional nature of recent monetary policy, there is a non-trivial risk that we may see more than 2.3% inflation over the next decade. Over the long term, even modest inflation would erode purchasing power. Commodities can offer an effective hedge against this scenario.

3.) Potential tailwind from monetary policy: While commodities have suffered recently, the performance hasn’t been awful. The S&P Goldman Commodities Index is down roughly 5% year to date. Meanwhile, gold was up around 2% through the end of last week, returns that still compare favorably with most equity markets outside of the United States.

One reason for the resilience, as I’ve written before, is that commodities and gold generally benefit when real interest rates are negative. In such a rate environment, there’s no opportunity cost for holding commodities, and commodity returns tend to be higher. At least historically, the level of real interest rates has been far more important to commodity returns than either inflation or the dollar. In fact, over the past twenty years, the variation in real interest rates explains roughly 60% of the variation in the annual return of gold. To the extent the Fed, and most other major central banks, are determined to keep real rates negative for the foreseeable future, we’ll be in an environment supportive of commodities, particularly gold.

To be sure, commodity prices are likely to remain volatile – along with just about every other risky asset – in the near term as investors worry about the potential for a disorderly default by Greece impacting the global economy. However, for investors, especially those currently underweight commodities, now may very well be a good long-term buying opportunity (potential iShares solution: NYSEARCA: IAU).

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.

Source: Bloomberg



Past performance does not guarantee future results. Diversification and asset allocation may not protect against market risk.
iShares Gold Trust (“Trust”) has filed a registration statement (including a prospectus) with the SEC for the offering to which this communication relates. Before you invest, you should read the prospectus and other documents the Trust has filed with the SEC for more complete information about the issuer and this offering. You may get these documents for free by visiting www.iShares.com or EDGAR on the SEC website at www.sec.gov. Alternatively, the Trust will arrange to send you the prospectus if you request it by calling toll-free 1-800-474-2737.

Investing involves risk, including possible loss of principal. The iShares Gold Trust (“Trust”) is not an investment company registered under the Investment Company Act of 1940 or a commodity pool for purposes of the Commodity Exchange Act. Shares of the Trust are not subject to the same regulatory requirements as mutual funds. Because shares of the Trust are intended to reflect the price of the gold held by the Trust, the market price of the shares is subject to fluctuations similar to those affecting gold prices. Additionally, shares of the Trust are bought and sold at market price not at net asset value (“NAV”). Brokerage commissions will reduce returns.
Shares of the Trust are intended to reflect, at any given time, the market price of gold owned by the Trust at that time less the Trust’s expenses and liabilities. The price received upon the sale of the shares, which trade at market price, may be more or less than the value of the gold represented by them. If an investor sells the shares at a time when no active market for them exists, such lack of an active market will most likely adversely affect the price received for the shares. For a more complete discussion of the risk factors relative to the Trust, carefully read the prospectus.
Following an investment in shares of the Trust, several factors may have the effect of causing a decline in the prices of gold and a corresponding decline in the price of the shares. Among them: (i) Large sales by the official sector. A significant portion of the aggregate world gold holdings is owned by governments, central banks and related institutions. If one or more of these institutions decides to sell in amounts large enough to cause a decline in world gold prices, the price of the shares will be adversely affected. (ii) A significant increase in gold hedging activity by gold producers. Should there be an increase in the level of hedge activity of gold producing companies, it could cause a decline in world gold prices, adversely affecting the price of the shares. (iii) A significant change in the attitude of speculators and investors towards gold. Should the speculative community take a negative view towards gold, it could cause a decline in world gold prices, negatively impacting the price of the shares.
Shares of the iShares Gold Trust are not deposits or other obligations of or guaranteed by BlackRock, Inc., and its affiliates, and are not insured by the Federal deposit Insurance Corporation or any other governmental agency.
BlackRock Asset Management International Inc. (“BAMII”) is the sponsor of the Trust. BlackRock Investments, LLC (“BRIL”), assists in the promotion of the Trust. BAMII and BRIL are affiliates of BlackRock, Inc.

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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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Warren Buffet: Recession Not Over


Monday, September 27th, 2010

This article is a guest contribution by Trader Mark, of the FundMyMutualFund Blog.

Until we take a break between QE2 and QE3 all discussions of economics and reports will simply be for theoretical and intellectual reasons.  In the end, any market is made up of supply and demand.  If you have a relatively fixed supply of stock certificates (or sugar, coffee, whatever commodity) being chased by an ever increasing amount of fiat money, anyone who took Economics 101 and lasted through day 2 of class knows what happens to price.  The U.S. market was able to rally some 70%+ during QE1 even as Americans actually withdrew (on a net basis) money from the market – so you can see the power of “the not so invisible hand”.  [Jan 6, 2010: Charles Biderman of TrimTabs Claims US Government Supporting Stock Market]

This is the template everyone is working on – again to repeat what I say each time, QE has very little to do with the real economy (don’t believe the lies coming out of that mouth) and everything to do with goosing assets of all types.  Some portion of those gains in paper assets can then be rolled into the real economy I suppose over time via the ‘wealth effect’… so the Fed simply is trying to repeat 1999 NASDAQ as the attempt to repeat 2005-2007 housing looks to be impossible.  (although we are trying mightily with record low mortgage rates, the return of 0% down mortgages – now government sponsored, paying people to buy homes via credits, and the like)

Whatever the case, this mantra has changed psychology and half the battle in the market is animal spirits.  If everyone believes act A will lead to outcome B, then it self reinforces to a great degree.  QE2 has not even begun but everyone is in a rush to front run the perceived asset inflation of all type, hence it has been self fulfilling.  Somewhere Ben is laughing watching the rat’s lemming’s in his lab experiment scurry.  So as I said, anything I post about economics go forward is to be read, processed and then discarded immediately since none of it matters until we take a break from QE2. (which again – has not even STARTED)  At which point Ben can start hinting about QE3 which should get speculators in a lather, front running assets once more… and we can keep this game going forever and ever (and ever!) Who needs a real economy anymore?  Manipulation of assets is so much easier.

To that end today around 10 AM came a very poor existing home sales number.  The market paused for a second… should it react to reality?  Nah, a permanent open market operation of dollars was going to be flooding in the market in 15 minutes, so let’s start a new leg up … and so we did.

(My only question to this “we can’t lose” idea is why did the Japanese stock market not surge to all time highs with the amount of QE they did for a decade+?)

——————————————

This story on Buffet refuting the economy is out of recession is interesting not so much for his words but some of the statistics he gave on his businesses.  The railroad companies are acting as if we are back to 2007 global trade highs (in terms of stock action) but apparently economic activity is still far below peak levels.  That said, does it matter?  There is only so much supply of railroad stock certificates with ever increasing fiat money chasing it… you get the picture right?

  • Billionaire Warren Buffett says the economy remains in a recession, by his definition, because most people and businesses still aren’t doing as well as they were before the financial crisis.  Buffett’s assessment of the economy contradicts the view of experts who announced this week that the recession officially ended in June 2009. But Buffett says he uses a commonsense standard to evaluate the economy.
  • “On any commonsense definition, the average American is below where he was before, or his family, in terms of real income, GDP,” (gross domestic product) Buffett said on CNBC. “We’re still in a recession. And we’re not gonna be out of it for awhile, but we will get out of it.”
  • He said the government is running a federal deficit equal to 9 percent of the nation’s gross domestic product, which is providing quite a lot of stimulus.  ”It doesn’t depend on calling it the stimulus bill to be stimulating. I mean, if the government is spending $3 for every $2 it takes in, that is, that is fiscal stimulus,” Buffett said.

Here are some of the very interesting metrics:

  • Buffett gets insight into the health of the economy through the performance of Berkshire’s subsidiaries.   Buffett said Berkshire’s businesses are improving but at a slow rate.
  • He said Berkshire’s Burlington Northern Santa Fe railroad, for instance, is probably doing better than many U.S. businesses, and it’s only about 61 percent of the way back to its peak shipping volumes from the bottom of the recession.
  • And Berkshire’s Shaw Carpet used to sell about 13 million yards of carpet a week. Buffett said that fell to about 7 million yards during the recession, so Shaw eliminated 6,500 jobs. Buffett said Shaw won’t start hiring back until the business gets back to selling at least 10 million yards a week, and so far it’s only selling about 9 million yards a week.

Copyright (c) FundMyMutualFund

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Bill Gross: Investment Outlook September 2009


Friday, September 4th, 2009

Bill Gross, co-chief at PIMCO, has just published his latest missive, On the “Course” to a New Normal.

You may listen to the newsletter in Bill Gross’ own voice here: Click play to listen:

http://media.pimco-global.com/audio/Investment_Outlook_Podcast_09_09.mp3

Gross asks, “Is a hole-in-one a hole-in-one if no one sees it?” He makes a humorous and interesting point. If no one witnesses your hole-in-one, its not a hole-in-one. On one hand, perhaps Gross’ point here is that economic policy makers need us to believe they’ve have hit a hole-in-one, and while many of us want to believe this, we’re still standing there with that funny look in our eye, like Gross’ wife, when he explained to her that he hit a hole-in-one, one hot June day, when he was out at the links by himself.

Or is it on the other hand, the hole-in-one was real, and though no one believes it, it is real, like the “new” normal.

For the better part of this year, Gross and El-Erian, his co-chief, have presented their “New Normal” thesis, suggesting that the world as we know it is changing, and that we need to re-tool for it. Will we change with the times, or be changed by them?

Gross says that the DDRs – Delevering, Deglobalization, and Reregulation – will be the new molds that shape our world over the next ten to twenty years.

“D,D, and R lead to a number of broken business or economic models that may forever change the world we once knew,” as follows

  1. American-style capitalism and the making of paper instead of things. Inherent in the “great moderation” of the past 25 years was the acceptance of a sort of reverse mercantilism. America would consume, then print paper assets and debt in order to pay for it. Developing (and many developed) countries would make things, and accept America’s securities in return. This game is over, and unless developing countries (China, Brazil) step up and generate a consumer ethic of their own, the world will grow at a slower pace.
  2. Private vs. public-driven growth. The invisible hand of free enterprise is being replaced by the visible fist of government, a temporarily necessary, but (if permanent) damnable condition itself in terms of future growth and profits. The once successful “shadow banking system” is being regulated and delevered. Perhaps a fabled “110-pound weakling” may be an exaggeration of where our financial system is headed, but rest assured it will not be looking like Charles Atlas anytime soon. Prepare to have sand kicked in your face, if you believe you are a “child of the bull market!”
  3. Global economic leadership. It’s premature to award the 21st century to the Chinese as opposed to the United States, but if the last six months have been any example, China is sort of lookin’ like Muhammad Ali standing over Sonny Liston in 1964 yelling, “Get up, you big ugly bear!” Not only has China spent three times the amount of money (relative to GDP) to revive its economy, but it has managed to grow at a “near normal” 8% pace vs. our “big R” recessionary numbers. Its equity market, while volatile and lightly regulated, has almost doubled in twelve months, making ours look like that ugly bear instead of a raging bull.
  4. United States housing and employment. Old normal housing models in the U.S. encouraged home ownership, eventually peaking at 69% of households as shown in Chart 1. Subsidized and tax-deductible mortgage interest rates as well as a “see no evil – speak no evil” regulatory response to government Agencies FNMA and FHLMC promoted a long-term housing boom and now a significant housing bust. Housing cannot lead us out of this big R recession no matter what the recent Case-Shiller home price numbers may suggest. The model has been broken if only because homeownership is declining, not rising, sinking to perhaps a New Normal level of 65% as opposed to 69% of American households.

Here are Gross’ conclusions:

As of now, PIMCO observes that the highest probabilities favor the following strategic conclusions:

  1. Global policy rates will remain low for extended periods of time.
  2. The extent and duration of quantitative easing, term financing and fiscal stimulation efforts are keys to future investment returns across a multitude of asset categories, both domestically and globally.
  3. Investors should continue to anticipate and, if necessary, shake hands with government policies, utilizing leverage and/or guarantees to their benefit.
  4. Asia and Asian-connected economies (Australia, Brazil) will dominate future global growth.
  5. The dollar is vulnerable on a long-term basis.

Read the complete letter here.

Listen to it here, click play:

http://media.pimco-global.com/audio/Investment_Outlook_Podcast_09_09.mp3

Source: PIMCO, September 2009

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