Near-Term Caution Warranted for Gold and Silver? (SIA)

Thursday, April 18th, 2013

by SIACharts.com

In this week’s version of the SIA Equity Leaders Weekly, we are going to concentrate on the commodity crash that happened this past week by looking at the Gold and Silver Continuous Contracts. If you have been following us for a while, you will have noticed we have stayed away from Commodities as an asset class for the past 19 months and warning of the relative weakness along the way.

Gold Continuous Contract (GC.F)

The commodity crash finally happened after we have continued to highlight the external influences at play with the strength of the 30-Year Yield and the U.S. Dollar that was continuing to put downward pressure on Gold. Gold had been stuck in a channel for the past two years but has broken through to the downside with the biggest move since 2008 closing underneath the prior support level at $1407. If the weakness reverses, resistance can be found at $1464.39 and at $1554.02, which was a prior support level at the bottom of the channel but now serves as a resistance level.

So where is the support for Gold in the future if it continues to drop? Support can be found at $1300.33 and at the $1201.31 level. With the SMAX at 2, Gold continues to show near-term weakness against the other asset classes.

Currently the SIA Asset Allocation Model is showing Commodities in the 7th position (out of 7) and the Metals and Mining sector is ranked 31st (out of 31) and these areas continue to be a higher risk relatively.

Click on Image to Enlarge

Silver Continuous Contract (SI.F)

Similar to Gold, Silver’s weakness has continued on its downward move and taken an even bigger hit than Gold moving to 2-year lows. SI.F has broken through an upwards trendline that has been in place since May of 2009 and continues to weaken relative to other commodities and opportunities. Resistance can now be found at $25.45 and $27.55.

You can see in the Silver chart to the right that the downwards sloping black trendlines are providing even more information about the possible future downwards direction of the channel it is currently in.  Support can be found next at $20.88, which is also the high from March of 2008. Further support can be found at $19.29. The near-term strength SMAX score is 1 out of 10 showing weakness against all asset classes.

Click on Image to Enlarge

Copyright © SIACharts.com

Tags: Gold, Sia, Silver
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Bill Gross: Investment Outlook (April 2011)

Wednesday, March 30th, 2011

Investment Outlook

by William H. Gross, April 2011

Skunked

• Medicare, Medicaid and Social Security now account for 44% of total federal spending and are steadily rising.
• Previous Congresses (and Administrations) have relied on the assumption that we can grow our way out of this onerous debt burden.
• Unless entitlements are substantially reformed, the U.S. will likely default on its debt; not in conventional ways, but via inflation, currency devaluation and low to negative real interest rates.

That adorable skunk, Pepé Le Pew, is one of my wife Sue’s favorite cartoon characters. There’s something affable, even romantic about him as he seeks to woo his female companions with a French accent and promises of a skunk bungalow and bedrooms full of little Pepés in future years. It’s easy to love a skunk – but only on the silver screen, and if in real life – at a considerable distance. I think of Congress that way. Every two or six years, they dress up in full makeup, pretending to be the change, vowing to correct what hasn’t been corrected, promising discipline as opposed to profligate overspending and undertaxation, and striving to balance the budget when all others have failed. Oooh Pepé – Mon Chéri! But don’t believe them – hold your nose instead! Oh, I kid the Congress. Perhaps they don’t have black and white stripes with bushy tails. Perhaps there’s just a stink bomb that the Congressional sergeant-at-arms sets off every time they convene and the gavel falls to signify the beginning of the “people’s business.” Perhaps. But, in all cases, citizens of America – hold your noses. You ain’t smelled nothin’ yet.

I speak, of course, to the budget deficit and Washington’s inability to recognize the intractable: 75% of the budget is non-discretionary and entitlement based. Without attacking entitlements – Medicare, Medicaid and Social Security – we are smelling $1 trillion deficits as far as the nose can sniff. Once dominated by defense spending, these three categories now account for 44% of total Federal spending and are steadily rising. As Chart 1 points out, after defense and interest payments on the national debt are excluded, remaining discretionary expenses for education, infrastructure, agriculture and housing constitute at most 25% of the 2011 fiscal year federal spending budget of $4 trillion. You could eliminate it all and still wind up with a deficit of nearly $700 billion! So come on you stinkers; enough of the Pepé Le Pew romance and promises. Entitlement spending is where the money is and you need to reform it.

Even then, the situation is almost beyond repair. Check out the Treasury’s and Health and Human Services’ own data for the net present value of entitlement liabilities shown in Chart 2.

Tags: Bill Gross, Budget Deficit, Bushy Tails, Cartoon Characters, Currency, Currency Devaluation, Debt Burden, Federal Spending, Female Companions, French Accent, Future Years, Gross Investment, Infrastructure, Investment Outlook, Medicare Medicaid, Overspending, Promising Discipline, Sergeant At Arms, Silver, Stink Bomb, Trillion Deficits, White Stripes, William H Gross
Posted in Infrastructure, Markets, Outlook, Silver | Comments Off

Gold Market Cheat Sheet (March 28, 2011)

Sunday, March 27th, 2011

Gold Market Cheat Sheet (March 28, 2011)

For the week, spot gold closed at $1,429.75, up $10.84 per ounce, or 0.76 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, rose 5.07 percent. The U.S. Trade-Weighted Dollar Index moved slightly higher, up 0.62 percent for the week.

Strengths

• The gold price rose to a record $1,447 per ounce, as unrest in Libya and the Middle East and Portugal’s possible $100 billion bailout spurred demand for the precious metal.
• Last week, the Utah legislature passed a bill allowing gold and silver coins to be used as legal tender in the state, according to the true value of the metal in the coins and not by the face value stated on the coin. Similar proposals have been developed in Colorado, Georgia, Indiana, Iowa, Missouri, Montana, New Hampshire, Oklahoma, South Carolina, Tennessee, Vermont, and Washington.
• In India, standard 24-carat gold coins have been selling extremely well at more than 466 post offices throughout the country. Despite the high price, Indian consumers have been buying small quantities of coins to give during the festival season.

Weaknesses

• The Association of Mining & Exploration Companies (AMEC) reiterated its opposition of Australia’s Minerals Resource Rent Tax. AMEC’s chief executive said it was extremely disappointing that concerns of member companies have not been considered by the federal government. “Suggestions by Treasurer Swan that the industry has agreed with the Minerals Resource Rent Tax are incorrect, as agreement was only reached with three large multi-national multi-commodity conglomerates and not other junior-tiered mining companies that will be affected by this additional tax.”
• The Las Vegas Review-Journal reported that Assemblywoman Peggy Pierce will introduce a bill that will cap the value of legally deductible expenses at 40 percent, which could cost the state’s mining industry more than $2 billion in tax deductions.
• Nevada State Senate Majority Leader Steve Horsford asked the Nevada Tax Commission to embark on an emergency rule-making proceeding that he hopes will fix the “inconsistencies” and “loopholes” that exist in Nevada’s net proceeds of mines tax law. Rather than changing Nevada’s Constitution or removing the cap on net proceeds tax limits, Horsford seeks amendments to current allowable deductions for operating costs, salaries, employee recruitment costs, marketing, and converting minerals into money. The Nevada lawmaker would also eliminate deductions for consulting services, and, ironically, mine reclamation costs, which Horsford says should not be deducted because Nevada tax law did not provide for mine reclamation deductions.

Opportunities

• Texas Representative Ron Paul has scheduled an April 1 hearing of the U.S. House Subcommittee on Domestic Monetary Policy to examine the bullion programs at the U.S. Mint. Last week Paul introduced H.R. 1098, the Free Competition in Currency Act of 2011 that would repeal legal tender laws in order to prohibit taxation on gold, silver, platinum, palladium and rhodium bullion. The Coin Modernization, Oversight and Continuity Act of 2010 gives the U.S. Mint greater flexibility in meeting the demand for bullion coins as well as meeting the demand for gold and silver which Paul’s bill would change.
• Goldman Sachs said it forecast gold prices rallying to a record $1,480 an ounce in three months on declining U.S. real interest rates. The bank said it still expects gold prices to reach a peak in 2012 as U.S. interest rates are set to rise as the economy continues to recover. Goldman has a six-month gold view at $1,565 an ounce, and a 12-month forecast of $1,690 an ounce.
• In a bubble, market players seek to supply the market with as much as they can possibly sell at inflated prices. The price of gold has quadrupled in the past ten years and the gold industry struggles to sustain new mine production of bullion at the same level it was in 2001.

Threats

• Even as gold miners report stronger cash flows and good profits, costs are increasingly becoming an area of concern and some worry about the impact costs will have on capital expenditure. Miners are worried that capital spending on new projects will become unmanageable as labor, steel and energy costs keep pushing higher.
• On top of that, gold miners have suffered as the Canadian dollar, Australian dollar, Chilean peso and Mexican peso strengthened against the U.S. dollar (sales of most miners are typically denominated in U.S. dollars, while costs are often based in local “commodity” currencies).
• Mining executives at the Reuters Global Mining and Steel Summit noted that countries threatening to seize a bigger share of mining returns risk alienating investors and adding another layer of expense to an already increasing cost line.

Tags: 24 Carat Gold, Canadian, Canadian Market, Currency, Deductible Expenses, Dollar Index, energy, Exploration Companies, Georgia Indiana, Gold, Gold And Silver, Gold Coins, Gold Equities, Gold Market, Gold Price, India, Indian Consumers, Las Vegas Review Journal, Legal Tender, Philadelphia Gold, Silver, Silver Coins, Silver Index, Small Quantities, Spot Gold, Utah Legislature, Vegas Review Journal
Posted in Canadian Market, Gold, India, Markets, Silver | Comments Off

Gold Market Cheat Sheet (March 21, 2011)

Saturday, March 19th, 2011

Gold Market Cheat Sheet (March 21, 2011)

For the week, spot gold closed at $1,418.90, up $1.45 per ounce, or 0.10 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, fell 1.21 percent. The U.S. Trade-Weighted Dollar Index slid 1.49 percent for the week.

Strengths

• In a chaotic week of fears over a nuclear plant meltdown and a new war front opening up in Libya, gold held up and the U.S. dollar fell.
• Even when gold sold off on Tuesday due to liquidity needs of certain investors to cover other losses, there turned out to be a net positive accumulation of gold bullion by exchange-traded funds.
• Across several Asian markets, premiums for gold bars and coins rose due to investor demand.

Weaknesses

• Platinum and palladium fell on expected curtailments in auto production in Japan, and renewed economic worries over a collapse in U.S. housing starts and rising fuel prices pinching economic growth.
• A recent report by the Bureau of Land Management appeared to show there was no economic contribution from hardrock mining on federal lands.

Opportunities

• Hong Kong’s Chinese Gold & Silver Exchange Society, a century old bullion trading bourse, announced plans to start trading gold quoted in yuan in May. The plan is to expand the role of the yuan in global trade as China works to reduce its dependence on the dollar as its functional foreign exchange currency.
• Historically, gold demand is about 3,000 tons per year, with new mine supply providing 2,400 tons, scrap supply about 200 tons and central bank sells supplying the balance of roughly 400 tons.
• China replaced South Africa as the world’s largest producer of gold back in 2007. However, the gold produced in China is purchased entirely by their central bank. In addition, during the first two months of 2011, China imported more gold than all its imports in the last year. At their current rate of buying, Chinese consumers could buy half of the new mine supply produced this year. Meanwhile, more than 400 tons historically supplied by Western central banks has fallen to zero.

Threats

• In the upcoming presidential race in Peru, several of the candidates are talking about imposing windfall profit taxes on miners operating within the country.
• In South Africa, Minister of Mining Susan Shabangu has conveyed that she is looking at the tax template Australia tried to implement on its mining industry last year.
• In response to China recognizing it may have to limit its exports of rare earth metals, four U.S. Senate Democrats sent the U.S. Treasury and the Secretary of the Interior a letter urging them to block Chinese mining projects in the U.S. and internationally.

Tags: Bureau Of Land Management, China, Chinese Consumers, Chinese Gold, Currency, Economic Contribution, Economic Worries, Exchange Society, Foreign Exchange Currency, Gold, Gold Bars, Gold Bullion, Gold Demand, Gold Equities, Gold Market, Hardrock Mining On Federal Lands, Investor Demand, Old Bullion, Philadelphia Gold, Silver, Silver Exchange, Silver Index, Spot Gold, Trading Bourse
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Silver Lining Fades (Andrews)

Monday, March 14th, 2011

Silver Lining Fades

David Andrews, CFA – Director, Investment Management and Research, Richardson GMP

Up until this week, Canadian stock market investors had been relatively immune to the confluence of risks developing in the world around them. No matter what, it always seemed, there was a positive that would neutralize or offset a negative. Rising crude oil prices, due to Arab world uncertainty was generally good for a stock market largely influenced by energy producers. The rising threat of global inflation in turn supported the share prices of the Canadian gold miners and just when the thrill of another strong earnings season was about to wane, the Canadian banks followed up with strong performances of their own. This week, it appears our luck and our timing turned for the worse.
The TSX fell for three consecutive days for a weekly decline of 4.06%. The index began the week well above the 14,000 level but crude oil prices declined following an the 8.9 magnitude earthquake and subsequent 7-metre tsunami that washed over parts of Japan and closed many of the refineries of the world’s third largest consumer of crude. In addition, Friday’s ‘Day of Rage’ in Saudi Arabia turned out to be anything but ‘raging’. Brent crude had its first weekly loss in the past seven weeks.

Gold had its first weekly loss since January, declining from its March 7th all time high of $1444.95/oz. Profit taking, falling crude oil prices and a stronger U.S. dollar weighed on Gold this week. The escalation of ongoing hostilities in Libya could help gold get back to setting new all time highs very soon.

Economic data was poor this week with higher than expected unemployment gains in the U.S. and a February trade deficit for China souring the economic outlook. Moody’s cut Spain’s credit rating by another notch, escalating the ongoing debt crisis in the Eurozone. Spain’s rating was downgraded to Aa2, Moody’s third highest rating, as the agency warned that the country had under- estimated the cost of rescuing its banking sector.

The Canadian dollar touched its lowest level in two weeks as Canada added fewer jobs in February than the prior month and crude oil, our biggest export, fell below $100 after the earthquake in Japan. The Loonie closed the week at U.S.$1.0280.

Is Copper a Canary in the Mine?

Gold is often viewed as a store of value and a hedge against economic Armageddon, but “Dr. Copper” is said to be the metal with a Ph.D. in economics for its ability to presage the future of the global economy.

Prices have moved from a steep premium to a discount recently. February copper shipments into China fell 35% from one month earlier; the lowest level in 2 years. Stockpiled inventory is 16% higher so far in 2011.Prices will likely continue to slide until the Chinese buyers return. After such a steep fall, many began to wonder if the metallic professor is warning of trouble. Fortunately, this doesn’t appear to be the case. The current slide appears to be a temporary setback, presenting those on the sidelines with a chance to get in on the action.

The Trading Week Ahead
Trading volumes may indeed be a little lighter than usual with the peak of the March Break vacation season upon us. Many institutional trade desks will be have lighter staffing than normal as many traders will be off enjoying the renewed purchasing power of the strong Canadian dollar. Notwithstanding, investors will have the latest inflation data to consider as the week unfolds. Rising commodity prices and energy costs are expected to show signs of building which could potentially pressure corporate profit margins. Investors will gauge to see how fast these costs are rising and to see if businesses have begun to pass these rising costs on to their customers.

The Federal Open Market Committee congregates but no major news is expected to emerge in the statement on Tuesday. The FOMC is expected to maintain the Fed Fund Rate between 0 and 0.25% and will announce the continuance of the asset purchase program, or QE2 as originally planned. The Fed may indicate in the statement the improvement in economic activity in early 2011, especially as regards the labour market, and the increase in inflationary pressures. However the latest data are not likely to force the Fed to remove the expansionary monetary policy anytime soon.

The Middle East and North Africa are expected to push volatility higher once again next week. Energy and precious metals will continue to be a main focus and will give directional cues to equity and bond markets.
Earnings announcements are few and far between this week with only Federal Express likely to be market moving. Fedex is a proxy and measure of general business activity for both North America and Europe.

Tags: Canadian, Canadian Market, China, energy, Gold, oil, Silver
Posted in Canadian Market, Credit Markets, Energy & Natural Resources, Gold, Markets, Oil and Gas, Outlook, Silver | Comments Off

The Pimco Treasury Sale Conundrum…Or Is It?

Sunday, March 13th, 2011

The PIMCO Treasury Sale Conundrum…Or Is It?

03/11/2011

By The Golden Truth

By now everyone knows that Bill Gross/PIMCO has sold down his/its Treasury exposure to zero.  Rather than ask “why,” quite frankly, my question has been “why did it take so long?”   In other words, anyone who knows anything about the bond market knows that it would be sheer stupidity to own Treasury bonds in a rising interest rate, inflationary and dollar devaluation environment.  Furthermore, there’s way too many “analysts” out there reading way too much into the decision.  And speculation that Gross has some kind of insight into whether or not the Fed will move onto QE3 is absurd.  I even laughed at the letter from the former PIMCO employee posted on zerohedge.com explaining how serious and complicated this decision was.  That commentary was grandiosity at its epitome.  Again, as a total rate of return fund manager and a former junk bond trader in The Show on Wall Street, the decision to own a big position or to not own a particular position is nothing more than making a decision as to whether or not that position has better return/risk potential vs. every other alternative or vs. holding just cash.

Please keep in mind that the flagship PIMCO fund is a “total rate of return” fund, which means that the objective is to maximize return and minimize risk in the context of managing fixed income investment risk.  In order to achieve the first objective, total rate of return, it requires having concentrated positions – i.e. big bets – vs. having a highly diversified portfolio.  I’ve never believed in having diversified holdings unless you just want to achieve average returns, and below average after all the fund managers and brokers take their cut.  Diversification does nothing more than diversify away total rate of return and any potential to outperform.

Any fund manager who manages for return will “tilt” – or overweight – his holdings at any given time within the context of the asset class objective of the fund.  Over time, Gross will shift the weightings in his fund largely between mortgages and Treasuries, overweighting one vs. the other depending on his market view.

With that in mind, let’s look at why Gross might have – or more like “likely has” - unloaded all of his Treasuries.  Reasons 1-10 have to do with his view of the total rate of return potential of holding a big Treasury position.  And this is why I was wondering why it took so long for him to dump everything.  With rates where they are, the probabilty that rates will go lower are close to zero.  This interest rate cycle has been in place since like 1990 or so.  In a historical context, not only is the bull market in bonds (i.e. rates going lower) not only over, the probability is very high that interest rates are going to start moving a lot higher.  This is pure cyanide for fixed income securities, since the price of a bond goes lower when interest rates rise.  Even if you have a high coupon bond, the total rate of return for a bond in a rising rate environment is going to be negative.  I would suggest that this simple determination was the primary reason Gross unloaded all of his Treasuries.

To me this is a very obvious decision because clearly inflation is accelerating and with the Fed spending 100′s of billions to buy Treasuries, interest rates can not be held down – period.  Why own any bond in this context?  So the only sure thing we know about Gross’ decision is that he thinks interest rates/inflation are headed higher.  Doesn’t take a rocket scientist to conclude that.  Only an idiot would hold Treasuries in that case.

I read with amusement on clusterstock.com that Gross is making a bet on a huge rally in the dollar because he’s holding so much cash.  That view is retarded.  Right now I’m sure Gross is just happy to have maneuvered a big Treasury position to zero without the market knowing until it was disclosed and now he will take time to decide how to redeploy the cash in order to maximize return and minimize risk.  Gross has actually publicly stated that he thinks the dollar is going a lot lower.  Again, rocket science is not required to figure that out.  So, if the dollar goes lower and inflation moves higher, that’s a double-whammy for holding Treasuries vs. holding just cash (although holding dollars is not good either lol).  But at least in that context, cash will outperform Treasuries since the price of Treasuries goes lower and you get less cash for them if you have to sell them before maturity vs. just holding cash now.  Everyone got that concept?  If not, think about owing a car that just sits in your garage vs. owning a car that you drive hard everyday.  Time value will decay the value of the car that just sits, but time plus hard road usage will act on the car the same way higher rates and dollar devaluation acts on Treasuries.

Finally, QE3.  Let’s keep this one simple.  I’m sure Gross has his view on whether or not QE3 will happen.  But to think that just because Greenspan is a paid advisor to PIMCO gives Gross special insight to the Fed is ridiculous.  Greenspan has proved to be a senile old man now with less than half a brain.  Not that he had much of a brain as Fed Chairman, but he’s gone off the deep-end in his old age.  Regarding whether or not QE is to be or not to be, answer me this:  if PIMCO and the Chinese are not buying the 100′s of billions in new Treasuries that will be issued this year, and if the Fed stops buying them, then who the hell will buy all this new paper?  Seriously.  The Fed HAS to keep printing and buying Treasuries or our Government/system will financially collapse.  It’s absurd to think that the Government will let this happen as long as it has the ability to keep printing paper.  So unless Bill Gross has some kind of insight into a conspiracy to let the our system collapse, I doubt he has any doubt about whether or not QE3 will occur.  And more QE will hasten the devaluation of the dollar and accelerate inflation, thereby completely hammering bond prices – bonds of all flavors and credit risks.  So the Gross/PIMCO decision again circles back to the binomial decision of “rates higher or rates lower?”

Again, to make a big bet on fixed income securities is nothing more complicated than deciding whether or not interest rates will be go higher or lower, especially since default risk with Treasuries is not in play for the reason I just gave (we will not include the complication of debating wether or not a determined, motivated currency devaluation constitutes a “de facto” default in order to keep this discussion focused on the binomial decision process of owning or not owning Treasuries).  In fact, right about now I bet Gross is wishing that he had the abilty to buy a lot of physical gold and silver for his fund, because in this environment gold and silver will continue to provide the best total rate of return of any asset class.  And I bet Gross also wished that mining companies were not throwing off so much cash flow right now and that they had to issue a lot of bonds in which he could throw that cash hoard into…

Source: The PIMCO Treasury Sale Conundrum…Or Is It?

Tags: Currency, Gold, Silver
Posted in Credit Markets, Gold, Markets, Silver | Comments Off

Gold Market Cheat Sheet (March 14, 2011)

Saturday, March 12th, 2011

Gold Market Cheat Sheet (March 14, 2011)

For the week, spot gold closed at $1,417.45 per ounce, down $13.45 per ounce, or 0.94 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, fell 4.19 percent. The U.S. Trade-Weighted Dollar Index gained 0.38 percent for the week.

Strengths

• In the World Exploration Trends 2011 report, Halifax, Nova Scotia-based Mineral Economics Group (MEG) reported a combined 2010 exploration budget of $11.2 billion. This was a 45 percent increase over the 2009 exploration budget. MEG predicts exploration budgets will experience another healthy increase this year, “rising to a new high-water mark for worldwide nonferrous exploration spending.”
• Acquiring firms from Canada continue to top the list in mining M&A, at 36 percent of all resource M&A transactions. The U.S. and Australia tied for second at 16 percent, according to PwC’s Mining Deals report. Chinese firms represented only 6 percent of global mining mergers and acquisitions in 2010, but the country will take a more aggressive approach to mergers and acquisitions this year, PwC said.
• Australia’s Resource Minister noted that Chinese firms should be more successful in getting investments in Australia’s mining sector approved because they now know how to navigate the process.

Weaknesses

• Peru’s mining society warned on Wednesday that political campaign talk about mining royalties and taxes could scare away investors. The Fraser Institute, a Canadian research group, recently released a survey of 494 global mining companies that ranked Peru 48 out of 79 countries or jurisdictions, down from its 2009 ranking of 39.
• A scarcity of skilled labor is forcing junior miners and developers to dig deeper to attract and retain talent, a trend that is likely to accelerate cost increases, squeeze profit margins and threaten some marginal projects. To make matters worse, rising oil prices can lead to deep-pocketed energy companies poaching workers from the mining side.
• Mining companies within Brazil say they believe their government is overcharging for mineral royalties, taking away billions of dollars from the companies.

Opportunities

• Li Yining, a member of the Chinese People’s Political Consultative Committee, an advisory body to the national parliament, said that China should use the gold to hedge against risks of foreign currency devaluations. “China should increase its gold reserves appropriately, and China must take every chance to buy, especially when gold prices fall,” said Li, as quoted by the official Xinhua news agency.
• Federal Reserve Bank of Atlanta President, Dennis Lockhart, stated on Monday that the Fed cannot rule out further asset purchases following the end of QE2 on June 30 of this year. Lockhart also noted that despite the falling unemployment rate and improving levels of job creation, “it is premature to declare a jobs recovery firmly established.”
• Doug Casey, founder of Casey Research, noted at the Prospectors & Developers Association of Canada convention in Toronto that, “Central banks all over the world are creating trillions of currency units and that, in turn, is creating lots of bubbles. It’s very probable that they’re going to ignite a bubble in gold and they’re going to ignite a really wild bubble in small resource stocks.”

Threats

• Bank of America Merrill Lynch lowered their outlook on free cash within the North American precious metals industry. They estimate the industry will generate $6.3 billion of free cash flow in 2011, which is down by more than half compared to their prior 2011 free cash flow estimate of $13.1 billion. This is due to companies reporting higher than anticipated capital spending plans for 2011, strong commodity prices leading companies to advance development projects more rapidly, and expanding existing mines.
• The decline in free cash flow may restrain some companies from making acquisitions this year absent a boost in metal prices.

Tags: Brazil, Canadian Market, China, Currency, energy, Gold, oil, Silver
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Canadian Banks are Cash Machines

Monday, March 7th, 2011

Canadian Banks are Cash Machines
by Gareth Watson, CFA – Vice President, Investment Management and Research, Richardson GMP

It was a good week to be a TSX investor. When three quarters of that index are exposed to commodities and financials, investors can’t help but smile when banks post solid earnings and commodity prices continue to climb. Such was the case over the past 5 days. The biggest story domestically had to be the continuation of bank earnings season after CIBC and National Bank reported last week. Bank of Montreal managed to just beat expectations on Tuesday, while TD Bank and Royal Bank easily surpassed consensus estimates on Thursday. TD Bank raised its quarterly dividend by 5 cents to $0.66/share. Bank of Montreal actually fell in price on the day it reported as higher expectations had been built to the market, but TD Bank and Royal’s easy beat caused their stock prices to rally 3.8% and 5.2% respectively. While Royal Bank has underperformed all of its peers over the past 52 weeks, it is outperforming all Canadian banks on a year-to-date basis.

While banks were certainly at the forefront, commodity prices were not willing to take a back seat as events in the Middle East and North Africa continued to influence oil and precious metal prices. In fact, WTI crude oil prices advanced by another US$7.00 per barrel since last Monday which has caused nothing but further pain at the gas pumps. While the gains were not as strong, the uncertainty of geopolitical events and the uncertainty of the U.S. Budget caused precious metal prices to move higher with silver spot prices adding another US$2.00 per ounce.

While the ongoing budgetary debate dominated talk on Capitol Hill in Washington, Apple’s unveiling of the iPad 2 was one of the top corporate stories of the week as Steve Jobs decided to make an appearance to reveal the new and improved device which will be shipped in the United States on March 11 and to 26 other countries, including Canada, on March 26. While no official launch date for the Research In Motion Playbook has been released, April 10 is the date being discussed around the water cooler. And it wasn’t just stocks making headlines this week as the Canadian dollar reached a level not seen since early 2008. The loonie was getting closer and closer to the US$1.03 level by week’s end.

Banks Like Trading Revenue

Before Royal Bank reported earnings this week, the stock had vastly underperformed its peers over the past year with an essentially flat 52 week return. Its underperformance was likely a result of its poor trading revenues in the third fiscal quarter of 2009. Royal Bank’s Q1/11 earnings easily surpassed  expectations on Thursday and a return of trading revenue above the $1 billion mark is one of the reasons. As the chart to the left shows, it’s hard for a bank stock to rally when market conditions are poor and trading revenue falls. While the past quarter’s results were certainly positive, it’s also important to remember that trading revenues are a function of market conditions, so improving EPS results thanks to stronger markets in the past do not guarantee positive results in the future.

The Trading Week Ahead
From a corporate and economic news perspective, next week is shaping up to be relatively quiet in the United States as the bulk of Q4/10 reporting season is over and economic releases will be low in quantity. If anything, we will find out what the “US consumer” is thinking with retail sales for February to be announced on Friday along with the University of Michigan Consumer Confidence Index. The budgetary squabbles in Washington will persist which could add more pressure to the Greenback as the U.S. trade weighted dollar finds itself at its lowest level since last November.

Corporate earnings will continue to flow out of Canada with the Bank of Nova Scotia being the last of the big banks to report on Tuesday. Considering that all the other banks have either met or beaten expectations, there is no reason to think that Scotia will be different. And while there are few economic releases coming out of Canada next week, the employment data on Friday will be material as economists are expecting our job growth to continue and our  unemployment rate to fall. This data will follow a stronger than expected employment report out of the U.S. this morning where 192,000 jobs were created.

It’s unlikely that events in the Middle East will be resolved over the weekend, so investors are likely to see continued volatility in commodity markets with energy and precious metals being the main focus. While Libya has dominated the news headlines from the Middle East region, this was the first week in many where we did not see demonstrations flare up in a new country. And the volatility in the commodity markets can only mean continued volatility for the Canadian dollar. Admittedly, this volatility has only caused an upward trajectory for the loonie since Tunisia began its protests, but any indication that the region could settle down in the near future could take some wind out of the sails of the Canadian dollar. Whether or not that will happen is certainly the subject of debate.

Copyright (c) Richardson GMP

Tags: Canadian Market, CIBC, Commodities, energy, oil, Silver
Posted in Canadian Market, Commodities, Energy & Natural Resources, Markets, Oil and Gas, Silver | Comments Off

Gold Market Cheat Sheet (March 7, 2011)

Sunday, March 6th, 2011

Gold Market Cheat Sheet (March 7, 2011)

For the week, spot gold closed at $1,430.90 per ounce, up $20.30 per ounce, or 1.44 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, rose 1.72 percent. The U.S. Trade-Weighted Dollar Index fell 1.12 percent for the week.

Strengths

• The price of gold reached a new all-time high of $1,434.50 an ounce as crude oil prices rose and settled at their highest levels since September 2008 on investor fears of supply disruptions and possible international intervention in the Middle East.
• China was the number one gold producer with reported production of 341 tonnes. Australia maintained its number two ranking with production of 266 tonnes and the United States ranked third with an output of around 240 tonnes as miners dug deeper to cash in on high bullion prices, according to Melbourne-based Surbiton Associates.
• Canadian provinces occupied three of the top four rankings for mining exploration and investment in the latest version of the Fraser Institute’s Survey of Mining Companies 2010/2011. Alberta is the top-ranked place in which mining and exploration companies can do business, according to the latest edition of the Fraser Institute annual survey of international mining companies. While Canadian provinces occupied three of the top four rankings, Nevada came in second, followed by Saskatchewan and Quebec, which had previously been ranked first for three consecutive years.

Weaknesses

• South Africa’s mining community has been rocked by the latest global mining rankings published by the Toronto-based Fraser Institute, which placed the country 67 out of 79 jurisdictions across the world. Over the past five years, South Africa has fallen precipitously from 37th place in the rankings. Zimbabwe is placed at 71, just behind South Africa, yet Botswana, a neighbor of both, ranked 14th, and the top spot for the African continent.
• Egypt on Sunday banned the export of gold for the next four months, a measure bankers said seemed aimed at preventing business people and former government officials who acquired capital illegally from transferring it abroad. A decree banning the export of gold in all its forms, including jewelry and ornaments, was issued by newly appointed Trade Minister Samir el-Sayyad. It takes effect immediately and continues until June 30, the official news agency MENA reported. “This decision, which comes in light of the exceptional circumstances the country is passing through …, is to preserve the country’s wealth until the situation stabilises,” MENA said. The MENA statement made no mention of whether the ban included exports of gold from mining.
• Holdings of the world’s largest gold-backed exchange traded fund, the SPDR Gold Trust, fell for the fifth consecutive month in February which is the longest run of outflows since the trust’s inception.

Opportunities

• There were 52 initial public offerings (IPOs) in the mining sector across the TSX and TSX Venture exchange, which raised more than $1.3 billion, and the sector as a whole raised more than $17.7 billion in IPOs, public offerings and private placements, Ernst & Young said. “Strong commodity prices and the fundamental need to develop long-term reserves will continue to drive activity into 2011, particularly in the gold sector,” E&Y national mining and metals leader Tom Whelan said.
• Chinese gold demand has exceeded 200 tonnes in the first two months of this year. Only a couple of months ago China reported its gold imports for the first ten months of 2010 totaled 209 tonnes. If the pace continues China would purchase close to half of world mine production in 2011.
• The world’s biggest commodities trader, Glencore International, is bullish on the outlook for the asset class, expecting last year’s buoyant trends based on growth in emerging nations such as China to persist this year. “Their outlook is basically a continuation of the trend we’ve had this year. The mega-trend for the mining sector is still in place and will continue next year. We’ll continue to see recovery in developed markets,” said Henri Alexaline, a credit analyst at BNP Paribas.

Threats

• Battle lines are once again being drawn between Australia’s minerals sector and the Federal Labor Government over taxation measures, this time over the introduction of a carbon tax as a so-called prelude to introducing an emissions trading scheme several years down the track. The industry already pays income tax to the Federal Government; a myriad of taxes and royalties to State and Territory governments; and some miners are faced with the Minerals Resource Rent Tax,” chief executive of the Association of Mining & Exploration Companies (AMEC), Simon Bennison said.” A carbon tax will have an inflationary impact on the Australian economy, detrimentally affect Australia’s international competitiveness and attractiveness as a safe place in which to invest.
• Branded gold and silver jewellery items are set to get more expensive in India. India’s finance minister Pranab Mukherjee announced the government would levy a nominal 1 percent central excise duty on jewellery made of gold, silver and precious metals that are sold under a brand name. Of the 130 items that are to be covered by the new levy, gold and silver branded jewellery items have entered the tax net. The new levy is set to deal a body blow to precious metal and stone jewellers in India
• Legislation before the Securities and Exchange Commission is designed to stop the trafficking of “conflict gold” among other metals from the Democratic Republic of Congo is implemented in its current form, it is going to be “Pretty problematic” for the gold industry at large, says World Gold Council CEO, Aram Shishmanian. Although the World Gold Council fully supports the intention of the legislation, it believes in its current form it will have “perverse and risky unintended consequences.”

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The ‘Crude’ Reality of Unrest

Monday, February 28th, 2011

The ‘Crude’ Reality of Unrest

by David Andrews, CFA-Director, Investment Management and Research, Richardson GMP

Investor sentiment turned decidedly more cautious this week with major North American indexes retreating amid the growing pro-democracy movement in the Arab world. Following the mostly peaceful demonstrations in Tunisia and Egypt, the pro-democracy rallies in Libya turned ugly as protesters were met with a stiff and inhumane response from pro-Gaddafi supporters. Mercenaries and Militia were reportedly firing on unarmed crowds amidst the incoherent ramblings of embattled leader, Muammar Gaddafi. Gaddafi went so far to suggest the protesters were being drugged and under the influence of Al Qaeda. The unstable situation saw the price of Brent crude oil surge to 2-1/2 year highs near $120 a barrel.

As a result, Canadian commuters felt the sting at the gasoline pumps this week as prices seemed to increase a few cents a litre each night. Stock market investors also felt the pinch with the TSX slipping below the recently attained 14,000 level. Three consecutive down sessions on the holiday shortened week (Canadian and U.S. exchanges were closed Monday) were followed by a Friday reprieve as Saudi Arabia announced it would increase its crude oil production in an attempt to offset any global supply disruption from Libya. The influential Materials and Financial stocks surged and helped boost the index by 1.25% on the day and back above 14,000. For the week, the TSX lost a little more than half of one percent. The major U.S. indexes fell about 2 percent on the week as investors bet higher oil costs may unseat the early stages of the economic recovery.

Speaking of the economy, there were a few positive signs of things getting better with U.S. consumer confidence at 3 year highs in February despite higher food and fuel costs. U.S. weekly employment data also showed fewer Americans filed for jobless claims suggesting the employment situation is continuing the slow process of healing. If employment and confidence are a silver lining, housing continues to be the dark cloud. January new home sales were again below already depressed expectations. In Canada, retail sales in December fell but most of that was due to the auto sector. Ex autos, retail sales were up 0.6% which was expected.

IS Gold Set To Rally?

Despite the fact that Gold is trading near its record high, some suggest that Bullion will outperform Oil as surging inflation will underscore the metal’s role as an investment hedge. The chart to the left shows the price of both Gold and Oil since 2008. The chart below is the ratio of Gold to Oil, or how many barrels an ounce of gold will buy. At its peak in late 2008, an ounce of gold bought you about 28 barrels of crude oil. Currently, oneounce buys about 15 barrels. Notwithstanding OPEC’s spare production capacity, energy markets have priced in a considerable risk premium. If tensions ease and or production comes on stream, oil prices could drop rather quickly. Gold has fallen 1.6% this year following a 30% rally in 2010. Crude is up about 5% this year following last year’s 15% rise.

The Trading Week Ahead

Canadian stock market investors are expecting the rest of the Big Banks will be able to follow the solid start to bank earnings season set by CIBC and National Bank. Following a softer second half of 2010, the banks are poised to benefit from better market conditions for their retail and wholesale lending businesses. Investors looking for dividend increases will have to wait on National and Commerce but they may not have to wait on the others. Bank of Montreal reports Tuesday and is followed by TD and Royal on Thursday. (Scotia reports March 8th).

U.S. reporting season has concluded with another upbeat quarter and substantial positive earnings surprises. The biggest positive surprises were in the Materials sector where elevated commodity prices boosted the bottom line. Consumer goods, specifically Automobiles, provided the biggest earnings disappointment in the fourth quarter on the S&P500.

The economic calendar will likely continue with the theme of improving consumer and business confidence but scant signs of improvement in the U.S. housing market. Pending homes sales in January are expected to once again come in lower. The February employment report is released on Friday. For the past three months we have overlooked disappointing results and explained them away by bad weather. We did not have weather issues of significance this month so the non farm payrolls on Friday could be significant.

Commodities prices, specifically oil & gold, will be influenced by the evolving and volatile demonstrations in the Middle East and North Africa. Risk premiums for both oil and gold remain rather elevated helping to push the loonie higher. Watch for no move in policy by the Bank of Canada on Tuesday, but the wording of the statement will be scrutinized for signs of their next move likely around mid 2011.

Copyright (c) Richardson GMP

Tags: Brent Crude Oil, Canadian Market, CIBC, Commodities, Consumer Confidence, Crude Oil Production, Democracy Movement, Employment Data, Employment Situation, energy, financial stocks, Food And Fuel, Gasoline Pumps, Global Supply, Gold, Incoherent Ramblings, Investor Sentiment, Jobless Claims, Muammar Gaddafi, oil, Oil Costs, Peaceful Demonstrations, Positive Signs, Silver, Stock Market Investors, Supply Disruption, Unstable Situation
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